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Candlestick Patterns Light the WayUse GPC, CNDL and G to track supply and demand.By Greg Byrnes

candlestick analysis, a form of technical analysis of security pric-es, involves patterns with colorful names such as Evening Star, Three Black Crows and Abandoned Baby that illustrate something quite basic: sup-ply and demand. More-familiar bar charts track a securitys opening, high, low and closing prices for a specific period using vertical and horizontal bars. Candle charts, which were invent-ed in 17th-century Japan, track similar data in a more visual way.

A candle has two parts: the real body and the shadows. The so-called real body is the thick or fat bar portion of the candle and represents the opening and closing prices for a specific period such as 10 minutes, daily or weekly. The shadows are the vertical lines above and below the real body and represent the high and low prices for the time period. You can tell by the color of the thick por-tion of the candle whether the price rose or fell during the period the candle rep-resents. For example, if the real body is white or hollow, the bottom of the real body represents the opening price and the top represents the close. For shad-ed or blue real bodies, the top of the real body represents the open and the bottom signifies the close.

Now, lets focus on some of the bet-ter-known and more easily identifiable patterns that might help you improve your trading decisions. Well use the current New York Mercantile Exchange crude oil futures contract as our sample security. Begin by typing CL1 GPC to access the Candle Chart function. You can also create custom candle charts with the Graph Work-sheet (G) function. Press twice to ask questions about creating techni-cal analysis charts with G.

The first pattern we ll look at is known as Doji. Its made up of one can-dle that doesnt have a real body or thick portion and looks like a cross. Dojis are indicative of a tired or weakening mar-ket and can signal a reversal. If the opening price is equal or very close to the closing price, then the supply/de-mand relationship is equal. When Dojis appear on a candle chart following a period of upward price movements, its a warning that the price is reaching a peak because the selling pressure or supply now equals the buying pressure or demand. Technical analysts gener-ally consider Doji patterns to be more significant when they follow a trend of

Interpret ing Cand lest ick Pat ternsType CL1 GPC to track the price of crude oil futures contracts using candle charts. You can see a so-called Northern Doji, which is a Doji during a rally, on May 10. The graph shows that a sell-off began on the next day.

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upward price movement rather than a downward trend.

There are several types of Doji pat-terns. For example, adjust the date range of the candle chart for the crude oil fu-tures contract to see data from March 1 through Aug. 9. Youll see a so-called Northern Doji, which is a Doji during a rally, on May 10. The closing price for that day was $52.07, and the graph shows that a sell-off began the next day, taking the price down to a close of $46.80 on May 20, eight trading days later.

gpc signaled the rally that followed, which took crude oil to a high of $62.10 on July 7, with whats known as a Bull-ish Engulfing pattern on both May 20 and 23. Bullish Engulfing patterns in-volve two candles. The first candlestick is shaded or blue, and the second is white or open. The body of the second candle completely engulfs the body of the first candle. Technical analysts con-sider the signal more powerful when the first candlestick has a small real body and the second candle has a very long real body, as was the case on May 20 and 23. The pattern shows that the

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buying pressure on May 23 outweighed the selling pressure on May 20, which had also started to lessen the day before as demonstrated by the small body. That indicated a shift in the supply/demand relationship and signaled a potential rally reversal.

The candle chart signaled the more recent sell-off from the July 7 high with a Bearish Engulfing pattern, which is the reverse of a Bullish Engulfing pat-tern. This pattern is also made up of two candles, only in this case the first candle is white or open and the second is shaded or blue, showing that sell-ing pressure is starting to outweigh buying pressure.

The final reversal patterns well look at have different price relationships than en-gulfing patterns, and they also have more distinctive names. Dark Cloud Cover is another dual-candle pattern that signals a reversal after an upward trend in price. This pattern features a first candle that has a long white or open real body. The second candle has a long shaded or blue real body. The second days price opens above the prior sessions high and closes near the days low and below the halfway point of the prior sessions white or open body. This pattern again illustrates sup-ply outweighing demand, which analysts might interpret as a reversal signal indi-cating a downtrend in price. This pattern occurred for crude oil futures on April 25 and April 22.

Next, lets look at a Bullish Reversal pattern called the Piercing Line pat-tern, which is the mirror image of Dark Cloud Cover. A Piercing Line pattern appears after a downward trend and involves a first candle with a long shad-ed or blue real body. The second candle has a long white or open real body. The

second days price opens below the prior sessions low and closes near the high of the day and above the halfway point of the prior sessions shaded or blue real body. The Piercing Line pattern that ap-peared on the candle chart for crude oil futures on May 2 and April 29 hinted that there might be a rally in oil prices over the next few days. The candle chart shows that the oil futures price rose to $52.07 on May 10, when Doji appeared, from $50.92 on May 2.

Those and other candle patterns can be even more useful when paired with technical indicators such as moving av-erage convergence/divergence and rel-ative strength index, which can help you confirm signals from the candle-stick analysis and aid in setting price targets. Type CNDL for the Can-dlestick Patterns function. CNDL dis-plays a candle chart with symbols that indicate where various patterns occur. Type 1 to list the abbrevi-ations, and click on a specific abbrevi-ation for a description of the pattern. Type CNDL 9 6 for illustrations of various candlestick pat-terns. Type TDEF 2 to set up custom colors and other defaults for your candle charts.

GREG BYRNES is an application specialist in the Bloomberg Sales department in New York. gbyrnes@bloomberg.net

Customize You r Cand le Char tsType CNDL 1 2 to set defaults for the dates, moving average periods, candle sizes, pattern symbols and other features.

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