The Art of the Candlestick Chart - The Intrepid Investor Series (Part 2)

7/29/2019 The Art of the Candlestick Chart - The Intrepid Investor Series (Part 2)

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The Art of the Candlestick Chart The Intrepid Investor Series (Part 2)

Matt Brennan

Whether used to set a romantic mood at dinner, an enchanted mood during a psychic reading, or a

hurry up Synergy and get the power back on mood after yet another black out, the role of candles isfirmly entrenched in Perth society. Most fireman however would regard this candle-mania as being

to the detrimental of the city, as data from the Department of Fire and Emergency services

estimates the number of candle related house fires has almost doubled since 2006. It was the

Japanese who set the business world alight, dating back to the 1800s with their innovation of the

candlestick chart. This unscented variety of non-flammable candle still produced plenty of heat, as

rice merchants noted with surprising accuracy how they were regularly able to predict when the

next trend was developing and behave accordingly. Candlestick charts are such an important

investment that to this day the Japanese craft is still being continually refined and explored.

Source: ASX

Above is a singular candlestick with the wax of the candle being shaded in white as this represents a

day when the close was higher than the open, as the price of the security increased during the days

trading. The white for gain/black for loss colour combination is unimportant, as long as the colour

schematics are consistent then more in-depth analysis can follow. The value of the change is

represented by the length of the candle from top to bottom. Candlesticks are even adaptable for

when there is no trading (flat line), but in the above example, the wick extends below and above the

candle and this suggests uncertainty and volatility in trading on this day. This burning the candle at

both ends makes it difficult for investors to pick a market direction, which is why candlesticks are

analysed as a collective to determine if the performance is a trend or an anomaly.

There are more types of candlestick patterns then there are get rich quick books, but the bullish

harami often provides a distinct turning point when good stocks desist their funk and begin to

rebound. Firstly, for a trend to exist there must be three distinct data points so using two

candlesticks is insufficient information to attempt to base a decision on. A bullish harami results

after two consecutive days of price drops followed by a slight but modest rise the following day.

Some factors which strengthen this trend include the size of the black candle wax compared to the

white candle wax, the price at which the trend is occurring being near the bottom of the companys

long term price cycle and a day-by-day decline in trading volumes.


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Bullish Harami Bearish Harmai

Notice how the white candle wax in the bullish harami fits snuggly inside the black candle? This was

what lead to the pattern being named harami, as harami is Japanese for pregnant. The word harami

has an alternate meaning in Farsi, a dialect language of Afghanistan, which makes sense give that the

offspring of these two candles is of a different shade. Harami is Farsi for bastard.

Being nimble and being quick with decision making will enable an investor to jump on a candlestick

trend, spotting the roots of the growth or decay and then behaving accordingly, which is what

candlestick charting was all about even in small Japanese villages in the 19th Century.

Bullish harami. Source: E*Trade

Westpac (WBC) provides a recent example of a bullish harami. From the chart above, the bullish

harami occurs between the 13/06/2012 15/06/2012. What strengthened this trend is the doji star

which is shown on the 18th

of June and this has the same effect as the star of Bethlehem, guiding

wise investors to the birthplace of new life and growth of the Westpac stock. This was evidently the

case as Westpac bank is now trading at $30.33 (when this article was written).


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Bearish harami. Source: E*Trade

The knowledge of bearish haramis can be just as useful. Gunns timber (GNS) between 07/04/2011

11/04/2011 (the 9th and 10th of April were non trading days) exhibited the clear pattern of a bearish

harami, with two consecutive price rises followed by a modest price drop with the wax of the candle

on the 11thof April fitting snuggly inside the previous trading day. If a trader hadnt decided to get

out already, the presence of the three black crows (the formation occurring between the 11th 13th

April, keeping in mind a decrease in price is traditionally a black candle) within a bull market (the AllOrds was hovering around 5000pts at this point), is a strong indication of a downturn. This turned

out to be the case as less than a year later Gunns have been suspended from official quotation,

never reaching a higher price since, ending their listed days at a mere 16c.

Candlestick charts vary in reliability in the same manner as market research surveys. Low volume

trading days (in some cases no trades) made by a small group of individuals does not properly

represent market sentiment, making predictions unsubstantiated. Candlestick charts are

strengthened by waiting for overlapping trends to occur as shown above, but in doing so the exit or

entry price is no longer as attractive as what was previously on offer. Fundamental analysis would

mean some companies would be simply ignored; however candlestick charting is unbiased and onlyresponds to a trend. Gunns for instance, had a brief resurgence in October 2011 leaping more than

244% (from 13.5c to 33c) which raised eyebrows from the ASX and the investment community alike,

who had already disowned Gunns purely on the basis of very poor fundamentals (in particular

serious debt concerns). Facebook, which is affectionately known as Faceplant because of its instant

demise since its IPO, has landed itself in the investments to ignore pile along with channel Ten until

the poor fundamentals are corrected, but both still have spurts of growth which would have been

detected by candlestick charting. Whilst experimenting with candlestick charts does shed light on

new opportunities, it is still playing fire and investors should consider their own risk appetite and

wider market conditions before they get burnt.

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The Art of the Candlestick Chart - The Intrepid Investor Series (Part 2)