Candlestick Basics

If you prefer a video explaination of candlesticks, then please see Candlestick Charts Explained.
Candlestick charts are an effective way of visualizing price movements. There are two basic
candlesticks:
Bullish Candle: When the close is higher than the open (usually green or white)
Bearish Candle: When the close is lower than the open (usually red or black)

Candlestick Parts
There are three main parts to a candlestick:
Upper Shadow: The vertical line between the high of the day and the close (bullish candle) or
open (bearish candle)
Real Body: The difference between the open and close; colored portion of the candlestick
Lower Shadow: The vertical line between the low of the day and the open (bullish candle) or
close (bearish candle)
Candlestick Patterns
The power of Candlestick Charts is with multiple candlesticks forming reversal and continuation
patterns. OnlineTradingConcepts.com has many detailed explanations of these candlestick
patterns; the links are given below:
Bullish Engulfing Pattern
Bearish Engulfing Pattern
Dark Cloud Cover
Doji
Dragonfly Doji
Evening Star
Gravestone Doji
Hammer
Hanging Man
Harami
Inverted Hammer
Morning Star
Piercing Pattern
Shooting Star
Tweezer Tops & Bottoms
Windows
Bearish Engulfing Pattern
The Bearish Engulfing Candlestick Pattern is a bearish reversal pattern, usually occuring at the
top of an uptrend. The pattern consists of two Candlesticks:
Smaller Bullish Candle (Day 1)
Larger Bearish Candle (Day 2)

Generally, the bullish candle real body of Day 1 is contained within the real body of the bearish
candle of Day 2.
The market gaps up (bullish sign) on Day 2; but, the bulls do not push very far higher before
bears take over and push prices further down, not only filling in the gap down from the
morning's open but also pushing prices below the previous day's open.
With the Bullish Engulfing Pattern, there is an incredible change of sentiment from the bullish
gap up at the open, to the large bearish real body candle that closed at the lows of the day. Bears
have successfully overtaken bulls for the day and possibly for the next few periods.
The chart below of Verizon (VZ) stock shows an example two Bearish Engulfing Patterns
occuring at the end of uptrends:
:



Bearish Engulfing Sell Signal
Three methodologies for selling using the Bearish Engulfing Pattern are listed below in order of
most aggressive to most conservative:
1. Sell at the close of Day 2. An even stronger indication to sell is given when there is a
substantial increase in volume that accompanies the large move downward in price (see:
Volume).
2. Sell on the day after the Bearish Engulfing Pattern occurs; by waiting until the next day
to sell, a trader is making sure that the bearish reversal pattern is for real and was not just
a one day occurance. In the chart above of Verizon, a trader would probably entered on
the day after the Bearish Engulfing Pattern because the selling continued.
3. Usually trader's wait for other signals, such as a price break below the upward support
line (see: Support & Resistance), before entering a sell order. However, in the case of
Verizon above, the Bearish Engulfing Pattern occured at the same time as the trendline
break below support.
An example of what usually occurs intra-day during a Bearish Engulfing Pattern is presented
next.
Intra-day Bearish Engulfing Pattern
The following 15-minute chart of Verizon (VZ) is of the 2-day period comprising the Bearish
Engulfing Pattern example on the prior page:

Day 1: As is seen in the chart above, Day 1 was an up day, closing near the day's high
(bullish sentiment).
Day 2: The open was a gap up, a very bullish sign; nevertheless, the bulls ran out of
buying pressure and prices fell the rest of the day, closing near the day's lows (bearish
sentiment) and lower than Day 1's lows.
The Bearish Engulfing Pattern is one of the strongest candlestick reversal patterns. Its opposite is
the Bullish Engulfing Pattern (see: Bullish Engulfing Pattern).
Bullish Engulfing Pattern
The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern, usually occuring at the
bottom of a downtrend. The pattern consists of two Candlesticks:
Smaller Bearish Candle (Day 1)
Larger Bullish Candle (Day 2)

The bearish candle real body of Day 1 is usually contained within the real body of the bullish
candle of Day 2.
On Day 2, the market gaps down; however, the bears do not get very far before bulls take over
and push prices higher, filling in the gap down from the morning's open and pushing prices past
the previous day's open.
The power of the Bullish Engulfing Pattern comes from the incredible change of sentiment from
a bearish gap down in the morning, to a large bullish real body candle that closes at the highs of
the day. Bears have overstayed their welcome and bulls have taken control of the market.
The chart below of the S&P 500 Depository Receipts Exchange Traded Fund (SPY) shows an
example of a Bullish Engulfing Pattern occuring at the end of a downtrend:


Bullish Engulfing Buy Signal
There are three main times to buy using the Bullish Engulfing Pattern; the buy signals that are
presented below are ordered from the most aggressive to most conservative:
1. Buy at the close of Day 2 when prices rallied upwards from the gap down in the morning.
A strong indication that the rally on Day 2 was significant and truly a reversal of market
sentiment, is if there was a substantial increase in volume that accompanied the large
move upward in price (see: Volume).
2. Buy on the day after the Bullish Engulfing Pattern occurs; by waiting until the next day to
buy, a trader is making sure that the bullish reversal and enthusiasm of the prior day is
continuing and was not just a one day occurance like a short covering rally. In the chart
above of the SPY's, a trader would likely not enter the market long on the day after the
Bullish Engulfing Pattern because the market gapped down significantly and even made
new lows. A trader using methodology #2, would likely wait for a more concrete buy
signals such as the one presented in method #3 next.
3. After a trader sees the Bullish Engulfing Pattern, the trader would wait for another signal,
mainly a price break above the downward resistance line (see: Support & Resistance),
before entering a buy order.
An example of what usually occurs intra-day during a Bullish Engulfing Pattern is presented
next.
Intra-day Bullish Engulfing Pattern
The following 15-minute chart of the S&P 500 exchange traded fund (SPY) is of the 2-day
period comprising the Bullish Engulfing Pattern example on the prior page:

Day 1: As is seen in the chart above, Day 1 was a down day, even closing the day at the
low (bearish sentiment).
Day 2: The open was a gap down, very bearish sign; but the bulls appeared to have had
enough because the price of the SPY's went up the rest of the day, closing near the day's
highs (bullish sentiment) and higher than Day 1's high.
The Bullish Engulfing Pattern is one of the strongest candlestick reversal patterns. Its opposite is
the Bearish Engulfing Pattern (see: Bearish Engulfing Pattern).
Dark Cloud Cover
Dark Cloud Cover is a bearish candlestick reversal pattern, similar to the Bearish Engulfing
Pattern (see: Bearish Engulfing Pattern). There are two components of a Dark Cloud Cover
formation:
Bullish Candle (Day 1)
Bearish Candle (Day 2)

A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the middle of
Day 1's candle.
In addition, price gaps up on Day 2 only to fill the gap (see: Gaps) and close significantly into
the gains made by Day 1's bullish candlestick.
The rejection of the gap up is a bearish sign in and of itself, but the retracement into the gains of
the previous day's gains adds even more bearish sentiment. Bulls are unable to hold prices
higher, demand is unable to keep up with the building supply.
Dark Cloud Cover Candlestick Chart Example
The chart below of Boeing (BA) stock illustrates an example of the Dark Cloud Cover Pattern:


Dark Cloud Cover Sell Signal
Traders usually suggest not selling exactly when one sees the Dark Cloud Cover Pattern (Day 1
& Day 2) until other confirming signals are given such as a break of an upward trendline or other
technical indicators. One reason for waiting for confirmation is that the Dark Cloud Cover
Pattern is a bearish pattern, but not as bearish as it could be: part of the gains from Day 1 have
still been preserved.
A more bearish reversal pattern is the Bearish Engulfing Pattern (see: Bearish Engulfing Pattern)
that completely rejects the gains of Day 1 and usually closes below the lows of Day 1.
Also of interest, the bullish equivalent of the Dark Cloud Cover Pattern is the Piercing Pattern
(see: Piercing Pattern).

Doji
The Doji is a powerful Candlestick formation, signifying indecision between bulls and bears. A
Doji is quite often found at the bottom and top of trends and thus is considered as a sign of
possible reversal of price direction, but the Doji can be viewed as a continuation pattern as well.

A Doji is formed when the opening price and the closing price are equal. A long-legged Doji,
often called a "Rickshaw Man" is the same as a Doji, except the upper and lower shadows are
much longer than the regular Doji formation.
The creation of the Doji pattern illustrates why the Doji represents such indecision. After the
open, bulls push prices higher only for prices to be rejected and pushed lower by the bears.
However, bears are unable to keep prices lower, and bulls then push prices back to the opening
price.
Of course, a Doji could be formed by prices moving lower first and then higher second,
nevertheless, either way, the market closes back where the day started.
The chart below of General Electric (GE) stock shows two examples of Doji's:


In a Doji pattern, the market explores its options both upward and downward, but cannot commit
either way. After a long uptrend, this indecision manifest by the Doji could be viewed as a time
to exit one's position, or at least scale back. Similarly, after a long downtrend, like the one shown
above of General Electric stock, reducing one's position size or exiting completely could be an
intelligent move.
It is important to emphasize that the Doji pattern does not mean reversal, it means indecision.
Doji's are often found during periods of resting after a significant move higher or lower; the
market, after resting, then continues on its way. Nevertheless, a Doji pattern is a great sign that a
prior trend is losing its strength, and taking some profits might be well advised.
Two intra-day examples of how a daily Doji formation is created is presented next.
Intra-day Doji Formation
The first Doji outlined on the daily chart of General Electric on the previous page was a high-low
Doji, where prices made the highs for the days first, and the lows for the day second. The intra-
day chart (15-minute) of this occurance is given below:


At the opening, the bulls were in charge; however, the morning rally did not last long before the
bears took charge. From mid-morning until late-afternoon, General Electric sold off, but by the
end of the day, bulls pushed GE back to the opening price of the day.
The second Doji daily chart on the previous page is shown next. In the intra-day chart below
(Doji B), the Doji was created the exact opposite way as the chart shown above (Doji A) was
created; Doji B made its day's lows first, then highs second.

At the opening bell, bears took a hold of GE, but by mid-morning, bulls entered into GE's stock,
pushing GE into positive territory for the day. Unfortunately for the bulls, by noon bears took
over and pushed GE lower. By the end of the day, the bears had successfully brought the price of
GE back to the day's opening price.
As was presented above, the Doji formation can be created two different ways, but the
interpretation of the Doji remains the same: the Doji pattern is a sign of indecision, neither bulls
nor bears can successfully take over.
Two powerful versions of the Doji formation are linked below:
Dragonfly Doji
Gravestone Doji

Dragonfly Doji
The Dragonfly Doji is a significant bullish reversal candlestick pattern that mainly occurs at the
bottom of downtrends.

The Dragonfly Doji is created when the open, high, and close are the same or about the same
price (Where the open, high, and close are exactly the same price is quite rare). The most
important part of the Dragonfly Doji is the long lower shadow.
The long lower shadow implies that the market tested to find where demand was located and
found it. Bears were able to press prices downward, but an area of support was found at the low
of the day and buying pressure was able to push prices back up to the opening price. Thus, the
bearish advance downward was entirely rejected by the bulls.
Dragonfly Doji Candlestick Chart Example
The chart below of the mini-Dow Futures contract illustrates a Dragonfly Doji occuring at the
bottom of a downtrend:


In the chart above of the mini-Dow, the market began the day testing to find where demand
would enter the market. The mini-Dow eventually found support at the low of the day, so much
support and subsequent buying pressure, that prices were able to close the day approximately
where they started the day.
The Dragonfly Doji is an extremely helpful Candlestick pattern to help traders visually see where
support and demand is located. After a downtrend, the Dragonfly Doji can signal to traders that
the downtrend could be over and that short positions should probably be covered. Other
indicators should be used in conjunction with the Dragonfly Doji pattern to determine buy
signals, for example, a break of a downward trendline.
The bearish version of the Dragonfly Doji is the Gravestone Doji (see: Gravestone Doji).

Evening Star
The Evening Star Pattern is a bearish reversal pattern, usually occuring at the top of an uptrend.
The pattern consists of three candlesticks:
Large Bullish Candle (Day 1)
Small Bullish or Bearish Candle (Day 2)
Large Bearish Candle (Day 3)

The first part of an Evening Star reversal pattern is a large bullish green candle. On the first day,
bulls are definitely in charge, usually new highs were made.
The second day begins with a bullish gap up. It is clear from the opening of Day 2 that bulls are
in control. However, bulls do not push prices much higher. The candlestick on Day 2 is quite
small and can be bullish, bearish, or neutral (i.e. Doji).
Generally speaking, a bearish candle on Day 2 is a stronger sign of an impending reversal. But it
is Day 3 that is the most significant candlestick.
Day 3 begins with a gap down, (a bearish signal) and bears are able to press prices even further
downward, often eliminating the gains seen on Day 1.
Evening Star Candlestick Chart Example
The chart below of Exxon-Mobil (XOM) stock shows an example a Evening Star bearish
reversal pattern that occured at the end of an uptrend:


Day 1 of the Evening Star pattern for Exxon-Mobil (XOM) stock above was a strong bullish
candle, in fact it was so strong that the close was the same as the high (very bullish sign). Day 2
continued Day 1's bullish sentiment by gapping up. However, Day 2 was a Doji, which is a
candlestick signifying indecision. Bulls were unable to continue the large rally of the previous
day; they were only able to close slightly higher than the open.
Day 3 began with a bearish gap down. In fact, bears took hold of Exxon-Mobil stock the entire
day, the open was the same as the high and the close was the same as the low (a sign of very
bearish sentiment). Also, Day 3 powerfully broke below the upward trendline that had served as
support for XOM for the past week. Both the trendline break and the classic Evening Star pattern
gave traders a signal to sell short Exxon-Mobil stock.
The Evening Star pattern is a very powerful three candlestick bearish reversal pattern. The
bullish equivalent of the Evening Star is the Morning Star pattern (see: Morning Star).

Gravestone Doji
The Gravestone Doji is a significant bearish reversal candlestick pattern that mainly occurs at the
top of uptrends.

The Gravestone Doji is created when the open, low, and close are the same or about the same
price (Where the open, low, and close are exactly the same price is quite rare). The most
important part of the Graveston Doji is the long upper shadow.
The long upper shadow is generally interpreted by technicians as meaning that the market is
testing to find where supply and potential resistance is located.
The construction of the Gravestone Doji pattern occurs when bulls are able to press prices
upward.
However, an area of resistance is found at the high of the day and selling pressure is able to push
prices back down to the opening price. Therefore, the bullish advance upward was entirely
rejected by the bears.
Gravestone Doji Example
The chart below of Altria (MO) stock illustrates a Gravestone Doji that occured at the top of an
uptrend:


In the chart above of Altria (MO) stock, the market began the day testing to find where support
would enter the market. Altria eventually found resistance at the high of the day, and
subsequently fell back to the opening's price.
The Gravestone Doji is an extremely helpful Candlestick reversal pattern to help traders visually
see where resistance and supply is likely located. After an uptrend, the Gravestone Doji can
signal to traders that the uptrend could be over and that long positions should probably be exited.
But other indicators should be used in conjunction with the Gravestone Doji pattern to determine
an actual sell signal. A potential trigger could be a break of the upward trendline support.
The reverse of the Gravestone Doji is the bullish Dragonfly Doji (see: Dragonfly Doji).

Hammer
The Hammer candlestick formation is a significant bullish reversal candlestick pattern that
mainly occurs at the bottom of downtrends.

The Hammer formation is created when the open, high, and close are roughly the same price.
Also, there is a long lower shadow, twice the length as the real body.
When the high and the close are the same, a bullish Hammer candlestick is formed and it is
considered a stronger formation because the bulls were able to reject the bears completely plus
the bulls were able to push price even more past the opening price.
In contrast, when the open and high are the same, this Hammer formation is considered less
bullish, but nevertheless bullish. The bulls were able to counteract the bears, but were not able to
bring the price back to the price at the open.
The long lower shadow of the Hammer implies that the market tested to find where support and
demand was located. When the market found the area of support, the lows of the day, bulls began
to push prices higher, near the opening price. Thus, the bearish advance downward was rejected
by the bulls.
Hammer Candlestick Chart Example
The chart below of American International Group (AIG) stock illustrates a Hammer reversal
pattern after a downtrend:


In the chart above of AIG, the market began the day testing to find where demand would enter
the market. AIG's stock price eventually found support at the low of the day. In fact, there was so
much support and subsequent buying pressure, that prices were able to close the day even higher
than the open, a very bullish sign.
The Hammer is an extremely helpful candlestick pattern to help traders visually see where
support and demand is located. After a downtrend, the Hammer can signal to traders that the
downtrend could be over and that short positions should probably be covered.
However, other indicators should be used in conjunction with the Hammer candlestick pattern to
determine buy signals, for example, waiting a day to see if a rally off of the Hammer formation
continues or other chart indications such as a break of a downward trendline. But other previous
day's clues could enter into a traders analysis. An example of these clues, in the chart above of
AIG, shows three prior day's Doji's (signs of indecision) that suggested that prices could be
reversing trend; in that case and for an aggressive buyer, the Hammer formation could be the
trigger to go long.
The bearish version of the Hammer is the Hanging Man formation (see: Hanging Man). Another
similar candlestick pattern to the Hammer is the Dragonfly Doji (see: Dragonfly Doji).
Hanging Man
The Hanging Man candlestick formation, as one could predict from the name, is a bearish sign.
This pattern occurs mainly at the top of uptrends and is a warning of a potential reversal
downward. It is important to emphasize that the Hanging Man pattern is a warning of potential
price change, not a signal, in and of itself, to go short.

The Hanging Man formation, just like the Hammer, is created when the open, high, and close are
roughly the same price. Also, there is a long lower shadow, which should be at least twice the
length of the real body.
When the high and the open are the same, a bearish Hanging Man candlestick is formed and it is
considered a stronger bearish sign than when the high and close are the same, forming a bullish
Hanging Man (the bullish Hanging Man is still bearish, just less so because the day closed with
gains).
After a long uptrend, the formation of a Hanging Man is bearish because prices hesitated by
dropping significantly during the day. Granted, buyers came back into the stock, future, or
currency and pushed price back near the open, but the fact that prices were able to fall
significantly shows that bears are testing the resolve of the bulls. What happens on the next day
after the Hanging Man pattern is what gives traders an idea as to whether or not prices will go
higher or lower.
Hanging Man Candlestick Chart Example
The chart below of Alcoa (AA) stock illustrates a Hanging Man, and the large red bearish candle
after the Hanging Man strengthens the bears thinking that a downward reversal is coming:



In the chart above of Alcoa, the market began the day testing to find where demand would enter
the market. Alcoa's stock price eventually found support at the low of the day. The bears'
excursion downward was halted and prices ended the day slightly above the close.
Confirmation that the uptrend was in trouble occured when Alcoa gapped down the next day and
continued downward creating a large bearish red candle. To some traders, this confirmation
candle, plus the fact that the upward trendline support was broken, gave the signal to go short.
It is important to repeat, that the Hanging Man formation is not the sign to go short; other
indicators such as a trendline break or confirmation candle should be used to generate sell
signals.
The bullish version of the Hanging Man is the Hammer formation (see: Hammer) that occurs
after downtrends.
Harami
The Harami (meaning "pregnant" in Japanese) Candlestick Pattern is a reversal pattern. The
pattern consists of two Candlesticks:
Larger Bullish or Bearish Candle (Day 1)
Smaller Bullish or Bearish Candle (Day 2)

The Harami Pattern is considered either bullish or bearish based on the criteria below:
Bearish Harami: A bearish Harami occurs when there is a large bullish green candle on Day 1
followed by a smaller bearish or bullish candle on Day 2. The most important aspect of the
bearish Harami is that prices gapped down on Day 2 and were unable to move higher back to the
close of Day 1. This is a sign that uncertainty is entering the market.
Bullish Harami: A bullish Harami occurs when there is a large bearish red candle on Day 1
followed by a smaller bearish or bullish candle on Day 2. Again, the most important aspect of the
bullish Harami is that prices gapped up on Day 2 and price was held up and unable to move
lower back to the bearish close of Day 1.
Harami Candlestick Chart Example
The chart below of the Nasdaq 100 E-mini Futures contract shows an example of both a bullish
and bearish Harami candlestick pattern:


The first Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a bullish
reversal Harami. First there was a long bearish red candle. Second, the market gapped up at the
open. In the case above, Day 2 was a bullish candlestick, which made the bullish Harami even
more bullish.
Harami Candlestick Buy Signal
A buy signal could be triggered when the day after the bullish Harami occured, price rose higher,
closing above the downward resistance trendline. A bullish Harami pattern and a trendline break
is a potent combination resulting in a strong buy signal.
The second Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a
bearish reversal Harami. The first candle was a long bullish green candle. On the second candle,
the market gapped down at the open. The chart above of the e-mini shows that Day 2 was a
bearish candlestick; this made the bearish Harami even more bearish.
Harami Candlestick Sell Signal
A sell signal could be triggered when the day after the bearish Harami occured, price fell even
further down, closing below the upward support trendline. When combined, a bearish Harami
pattern and a trendline break is a strong indication to sell.
A somewhat opposite two candlestick reversal pattern is the Bearish Engulfing Pattern (see:
Bearish Engulfing Pattern) and the Bullish Engulfing Pattern (see: Bullish

nverted Hammer
The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and is a
warning of a potential reversal upward. It is important to note that the Inverted pattern is a
warning of potential price change, not a signal, in and of itself, to buy.

The Inverted Hammer formation, just like the Shooting Star formation, is created when the open,
low, and close are roughly the same price. Also, there is a long upper shadow, which should be at
least twice the length of the real body.
When the low and the open are the same, a bullish Inverted Hammer candlestick is formed and it
is considered a stronger bullish sign than when the low and close are the same, forming a bearish
Hanging Man (the bearish Hanging Man is still considered bullish, just not as much because the
day ended by closing with losses).
After a long downtrend, the formation of an Inverted Hammer is bullish because prices hesitated
their move downward by increasing significantly during the day. Nevertheless, sellers came back
into the stock, future, or currency and pushed prices back near the open, but the fact that prices
were able to increase significantly shows that bulls are testing the power of the bears. What
happens on the next day after the Inverted Hammer pattern is what gives traders an idea as to
whether or not prices will go higher or lower.
Inverted Hammer Candlestick Chart Example
The chart below of the S&P 500 Futures contract shows the Inverted Hammer foreshadowing
future price increases:


In the chart above of e-mini future, the market began the day by gapping down. Prices moved
higher, until resistance and supply was found at the high of the day. The bulls' excursion upward
was halted and prices ended the day below the open.
Confirmation that the dowtrend was in trouble occured the next day when the E-mini S&P
500 Futures contract gapped up the next day and continued to move upward, creating a bullish
green candle. To some traders, this confirmation candle, plus the fact that the downward
trendline resistance was broken, gave the signal to go long.
It is important to repeat, that the Inverted Hammer formation is not the signal to go long; other
indicators such as a trendline break or confirmation candle should be used to generate the actual
buy signal.
The bearish version of the Inverted Hammer is the Shooting Star formation (see: Shooting Star)
that occurs after an uptrend.
Morning Star
The Morning Star Pattern is a bullish reversal pattern, usually occuring at the bottom of a
downtrend. The pattern consists of three candlesticks:
Large Bearish Candle (Day 1)
Small Bullish or Bearish Candle (Day 2)
Large Bullish Candle (Day 3)

The first part of a Morning Star reversal pattern is a large bearish red candle. On the first day,
bears are definitely in charge, usually making new lows.
The second day begins with a bearish gap down. It is clear from the opening of Day 2 that bears
are in control. However, bears do not push prices much lower. The candlestick on Day 2 is quite
small and can be bullish, bearish, or neutral (i.e. Doji).
Generally speaking, a bullish candle on Day 2 is a stronger sign of an impending reversal. But it
is Day 3 that holds the most significance.
Day 3 begins with a bullish gap up, and bulls are able to press prices even further upward, often
eliminating the losses seen on Day 1.
Morning Star Candlestick Chart Example
The chart below of the S&P 400 Midcap exchange traded fund (MDY) shows an example a
Morning Star bullish reversal pattern that occured at the end of a downtrend:


Day 1 of the Morning Star pattern for the Midcap 400 (MDY) chart above was a strong bearish
red candle. Day 2 continued Day 1's bearish sentiment by gapping down. However, Day 2 was a
Doji, which is a candlestick signifying indecision. Bears were unable to continue the large
decreases of the previous day; they were only able to close slightly lower than the open.
Day 3 began with a bullish gap up. The bulls then took hold of the Midcap 400 exchange traded
fund for the entire day. Also, Day 3 broke above the downward trendline that had served as
resistance for MDY for the past week and a half. Both the trendline break and the classic
Morning Star pattern gave traders a signal to go long and buy the Midcap 400 exchange traded
fund.
The Morning Star pattern is a very powerful three candlestick bullish reversal pattern. The
bearish equivalent of the Morning Star is the Evening Star pattern (see: Evening Star).
Piercing Line Pattern
The Piercing Pattern is a bullish candlestick reversal pattern, similar to the Bullish Engulfing
Pattern (see: Bullish Engulfing Pattern). There are two components of a Piercing Pattern
formation:
Bearish Candle (Day 1)
Bullish Candle (Day 2)

A Piercing Pattern occurs when a bullish candle on Day 2 closes above the middle of Day 1's
bearish candle.
Moreover, price gaps down on Day 2 only for the gap to be filled (see: Gaps) and closes
significantly into the losses made previously in Day 1's bearish candlestick.
The rejection of the gap up by the bulls is a major bullish sign, and the fact that bulls were able
to press further up into the losses of the previous day adds even more bullish sentiment. Bulls
were successful in holding prices higher, absorbing excess supply and increasing the level of
demand.
Piercing Pattern Candlestick Chart Example
The chart below of Intel (INTC) stock illustrates an example of the Piercing Pattern:

Piercing Pattern Candlestick Buy Signal
Generally other technical indicators are used to confirm a buy signal given by the Piercing
Pattern (i.e. downward trendline break). Since the Piercing Pattern means that bulls were unable
to completely reverse the losses of Day 1, more bullish movement should be expected before an
outright buy signal is given. Also, more volume than usual on the bullish advance on Day 2 is a
stronger indicator that bulls have taken charge and that the prior downtrend is likely ending.
A more bullish reversal pattern is the Bullish Engulfing Pattern (see: Bullish Engulfing Pattern)
that completely reverses the losses of Day 1 and adds new gains.
For further study, the bearish equivalent of the Piercing Pattern is the Dark Cloud Cover Pattern
(see: Dark Cloud Cover).

Shooting Star
The Shooting Star candlestick formation is a significant bearish reversal candlestick pattern that
mainly occurs at the top of uptrends.

In the chart above of CSCO, the market began the day testing to find where supply would enter
the market. CSCO's stock price eventually found resistance at the high of the day. In fact, there
was so much resistance and subsequent selling pressure, that prices were able to close the day
significantly lower than the open, a very bearish sign.
The Shooting Star is an extremely helpful candlestick pattern to help traders visually see where
resistance and supply is located. After an uptrend, the Shooting Star pattern can signal to traders
that the uptrend could be over and that long positions should probably be reduced or completely
exited.
However, other indicators should be used in conjunction with the Shooting Star candlestick
pattern to determine sell signals, for example, waiting a day to see if prices continued falling or
other chart indications such as a break of an upward trendline.
For aggressive traders, the Shooting Star pattern illustrated above could be used as the sell
signal. The red portion of the candle (the difference between the open and close) was so large
with CSCO, that it could be considered the same as a bearish candle occuring on the next day.
However, caution would have to be used because the close of the Shooting Star rested right at the
uptrend support line for Cisco Systems.
Generally speaking though, a trader should wait for a confirmation candle before entering.
The bullish version of the Shooting Star formation is the Inverted Hammer formation (see:
Inverted Hammer) that occurs at bottoms. Another similar candlestick pattern in look and
interpretation to the Shooting Star pattern is the Gravestone Doji (see: Gravestone Doji).
Tweezer Tops and Bottoms
The Tweezer Top formation is a bearish reversal pattern seen at the top of uptrends and the
Tweezer Bottom formation is a bullish reversal pattern seen at the bottom of downtrends.
Tweezer Top formation consists of two candlesticks:
Bullish Candle (Day 1)
Bearish Candle (Day 2)
Tweezer Bottom formation consists of two candlesticks:
Bearish Candle (Day 1)
Bullish Candle (Day 2)

Sometimes Tweezer Tops or Bottoms have three candlesticks.
A bearish Tweezer Top occurs during an uptrend when bulls take prices higher, often closing
the day off near the highs (a bullish sign). However, on the second day, how traders feel (i.e.
their sentiment) reverses completely. The market opens and goes straight down, often
eliminating the entire gains of Day 1.
The reverse, a bullish Tweezer Bottom occurs during a downtrend when bears continue to take
prices lower, usually closing the day near the lows (a bearish sign). Nevertheless, Day 2 is
completely opposite because prices open and go nowhere but upwards. This bullish advance on
Day 2 sometimes eliminates all losses from the previous day.
Tweezer Bottom Candlestick Chart Example
A Tweezer Bottom is shown below in the chart of Exxon-Mobil (XOM) stock:


The Shooting formation is created when the open, low, and close are roughly the same price.
Also, there is a long upper shadow, generally defined as at least twice the length of the real body.
When the low and the close are the same, a bearish Shooting Star candlestick is formed and it is
considered a stronger formation because the bears were able to reject the bulls completely plus
the bears were able to push prices even more by closing below the opening price.
The Shooting Star formation is considered less bearish, but nevertheless bearish when the open
and low are roughly the same. The bears were able to counteract the bulls, but were not able to
bring the price back to the price at the open.
The long upper shadow of the Shooting Star implies that the market tested to find where
resistance and supply was located. When the market found the area of resistance, the highs of the
day, bears began to push prices lower, ending the day near the opening price. Thus, the bullish
advance upward was rejected by the bears.
Shooting Star Candlestick Chart Example
The chart below of Cisco Systems (CSCO) illustrates a Shooting Star reversal pattern after an
uptrend:


Intra-day Tweezer Tops and Bottoms
The bullish Tweezer Bottom formation shown on the last page of the daily chart of Exxon-Mobil
is shown below with a 15-minute chart spanning the two days the Tweezer Bottom pattern was
emerging:

Notice how Exxon-Mobil (XOM) stock went downwards the whole day on Day 1. Then on Day
2, the bearish sentiment of Day 1 was completely reversed and XOM stock went up the whole
day. This sudden and drastic change of opinion between Day 1 and Day 2 could be viewed as an
overnight transfer of power from bears to bulls.
The 15-minute chart below of the E-mini Russell 2000 Futures contract shows how a three day
Tweezer Top usually develops:

On Day 1, the bulls were in charge of the Russell 2000 E-mini. On Day 2, however, the bulls
began the day trying to make a new high, but were rejected by the overhead resistance created by
the prior day's highs. The market then sank quickly only to recover halfway by the end of the
close on Day 2. Day 3 opened with a spectacular gap up, but the bulls were promptly rejected by
the bears at the now established resistance line. The Russell 2000 E-mini then fell for the rest of
the day. Many classic chartists will recognize this triple Tweezer Top as a Double Top formation
(see: Double Top).
The Tweezer Top and Bottom reversal pattern is extremely helpful because it visually indicates a
transfer of power and sentiment from the bulls and the bears. Of course other technical indicators
should be consulted before making a buy or sell signal based on the Tweezer patterns.
Windows (Gaps)
Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are called in the
west, are an important concept in technical analysis. Whenever, there is a gap (current open is
not the same as prior closing price), that means that no price and no volume transacted hands
between the gap.

A Gap Up occurs when the open of Day 2 is greater than the close of Day 1. Contrastly, a Gap
Down occurs when the open of Day 2 is less than the close of Day 1.
There is much psychology behind gaps. Gaps can act as:
Resistance: Once price gaps downward, the gap can act as long-term or even permanent
resistance.
Support: When prices gap upwards, the gap can act as support to prices in the future, either
long-term or permanently.
Windows Example - Gaps as Support & Resistance
The chart below of eBay (EBAY) stock shows the gap up acting as support for prices.



Often after a gap, prices will do what is referred to as "fill the gap". This occurs quite often.
Think of a gap as a hole in the price chart that needs to be filled back in. Another common
occurance with gaps is that once gaps are filled, the gap tends to reverse direction and continue
its way in the direction of the gap (for example, in the chart above of eBay, back upwards).
The example of eBay (EBAY) above shows the gap acting as support. Traders and investors see
anything below the gap as an area of no return, after all, there was probably some positive news
that sparked the gap up and is still in play for the company.
The chart below of Wal-Mart (WMT) stock shows many instances of gaps up and gaps down.
Notice how gaps down act as areas of resistance and gaps up as areas of support:

Gaps are important areas on a chart that can help a technical analysis trader better find areas of
support or resistance. For more information on how support and resistance work and how they
can be used for trading, (see: Support & Resistance). Also, Gaps are an important part of most
Candlestick Charting patterns; (see: Candlestick Basics) for a list of candlestick pattern charts
and descriptions.

Head and Shoulders
Watch the Head and Shoulders Video and the Inverse Head and Shoulders Video. The Head and
Shoulders chart pattern is a heavily used and quite profitable charting pattern, giving easily
understood buy and sell signals.
The chart of Home Depot (HD) below shows a Head and Shoulders pattern:



Head and Shoulders Components
1. Left Shoulder: Bulls push prices upwards making new highs; however these new highs
are short lived and prices retreat.
2. Head: Prices don't retreat for long because bulls make another run, this time succeeding
and surpassing the previous high; a bullish sign. Prices retreat again, only to find support
yet again.
3. Right Shoulder: The bulls push higher again, but this time fail to make a higher high.
This is very bearish, because bears did not allow the bulls to make a new higher or even
an equal high. The bears push prices back to support (Confirmation line); this is a pivotal
moment - Will bulls make another push higher or have the bears succeeded in stopping
the move higher.
Head and Shoulders Sell Signal
If prices break the confirmation support line, it is clear that the bears are in charge; thus, when
price closes below the confirmation line, a strong sell signal is given.
Note that a downward sloping confirmation line is generally seen as a more powerful Head &
Shoulders pattern, mainly because a downward sloping confirmation line means that prices are
making lower lows.
Reverse Head and Shoulders
The opposite of the Head & Shoulders pattern is the Reverse Head & Shoulders pattern which is
another strong pattern, this time a bottoming pattern.

Reverse Head and Shoulders Components
The reasoning behind a Head & Shoulders pattern is as follows:
1. Left Shoulder: Bears push prices downwards making new lows; however, bulls begin to
return and push prices slightly higher.
2. Head: Price gains don't last long before bears return and push prices even lower than
before; a bearish sign. Prices then find buyers at the new lower prices.
3. Right Shoulder: The bears push downward again, but this time fail to make a lower low.
This is generally seen as bullish sign, bears were unable to push prices further down.
Decision time occurs when the price is pushed higher back to support (Confirmation
line); either bears will push prices back down or bulls will push prices higher, regaining
control of the stock, future, or currency pair.
Reverse Head and Shoulders Buy Signal
When price closes above the confirmation line, a strong buy signal is given.
Usually an upward sloping confirmation line is seen as a more powerful Reverse Head &
Shoulders pattern, mainly because an upward sloping confirmation line means that prices are
making higher highs.
Volume analysis is important when using the Head & Shoulders chart pattern. How to
incorporate volume into the study of the Head & Shoulders pattern is discussed next.
Volume and Head and Shoulders
When the confirmation line of a Head & Shoulders pattern breaks to the downside, a large
amount of volume should occur as well.
The chart below of General Electric (GE) shows a sharp increase in volume when the
confirmation line of the Head & Shoulders pattern was broken:

In addition to the sharp increase in volume, the gap down on the chart of GE also gave strong
indication to sell when the confirmation line was pierced.
The same concept applies to a Reverse Head & Shoulders pattern, the break of the
confirmation line should be accompanied by an increase in volume.
The chart below of Gold futures illustrates a rise in volume when the confirmation line was
pierced:

The Head & Shoulders pattern is a highly effective classic charting pattern. Other similar chart
patterns are the Double Top formation (see: Double Top) and the Double Bottom formation (see:
Double Bottom).
Support and Resistance
For videos on Support and Resistance chart patterns, please see the Rectangle Chart Pattern
Video and the Trendlines Chart Pattern Video. Support and Resistance is one of the most
important and fundamental part of technical analysis:
Support: Prices should rise after touching support.
Resistance: Prices should fall after hitting resistance.
An example of price respecting support and resistance lines is given next in the chart of the
Semiconductor HOLDRS (SMH):

When support and resistance has been firmly established: Buy Signal - Price touches support
Buy Signal
Buy when price touches the support line
Sell Signal
Sell when price touches the resistance line.
Breaking Support & Resistance
Another fundamental concept of support and resistance is listed next and is shown in the chart
below of Alcoa (AA) stock:
If price breaks below support, then that support level becomes the new resistance level.
If price breaks above support, then that resistance level becomes the new support level.


Support and Resistance are basic yet vitally important technical analysis tools. On every time frame,
intra-day, daily, weekly, and monthly, Support and Resistance levels are respected by traders.
Knowledge of these levels helps keep a trader on the correct side of the market, thus helping the trader
profit.



Triangles
For a more detailed description of the triangle chart pattern in a video format, see Symmetrical,
Ascending, & Descending Triangle Chart Pattern Video. The Triangle is a continuation pattern
using the concepts of support and resistance and price breakouts.
The chart below of Amazon.com (AMZN) shows the Triangle continuation pattern:

Generally, when prices make significant moves, they go through a period of resting. Usually
with a Triangle pattern, the price consolidation period consists of higher lows and lower lows,
forming the shape of a "triangle". When the resistance and support lines (see: Support &
Resistance) begin converging, price will usually burst out of the consolidation area and resume
trending in the direction that prices have been moving previously.
Triangle Breakout Buy Signal
The signal to buy is given when the resistance line is penetrated to the upside. The signal is
generally stronger if prices have been in an uptrend prior to the upside breakout.
Triangle Breakout Sell Signal
A sell signal occurs when the support line is penetrated to the downside. Usually the sell
signal is considered stronger if prices have been in a downtrend prior to the downside breakout.
Two other closely related variants of the Triangle pattern are the Ascending and Descending
Triangle pattern; these two patterns are shown next.
Ascending & Descending Triangles
Two closely related variants of the Triangle pattern are the Ascending and Descending Triangle
pattern; these two patterns are shown below in the chart of the 100 ounce Gold futures:

Ascending Triangle
An Ascending Triangle is viewed as being more bullish than the regular Triangle patterns. With
an Ascending Triangle, higher lows are being made (bullish sign) and sometimes higher highs
are being made (also a bullish sign).
Ascending Triangle Buy Signal
As with the regular Triangle formation, the Ascending Triangle gives a buy signal when the
resistance line is penetrated to the upside. Also, the signal is generally stronger if prices have
been in an uptrend prior to the Ascending Triangle and upside breakout.
Descending Triangle
The Descending Triangle is viewed as being more bearish than the regular Triangle patterns.
When a Descending Triangle is formed, lower lows are being made (bearish sign) and quite
often, lower highs are being made (generally seen as bearish).
Descending Triangle Sell Signal
With the Descending Triangle formation, a sell signal occurs when the support line is
penetrated to the downside. Traders usually view the sell signal as being stronger if prices have
been in a confirmed downtrend prior to the Descending Triangle formation and downside
breakout.
The Triangle formation is an effective chart analysis tool for placing buy and sell orders. A
similar chart formation is the Flag pattern (see: Flag).