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Stocks & Commodities V. 11:4 (169-173): Candlesticks And Intraday Market Analysis by Gary S. Wagner and Bradley L.

Matheny

Candlesticks And Intraday Market Analysis


by Gary S. Wagner and Bradley L. Matheny

Can the much-ballyhooed candlestick method be helpful in intraday trading? To find out, Gary Wagner
and Brad Matheny went through one day's trading via candlesticks for one contract and came up with
some intriguing results.

raders who understand the candlestick technique are now placing greater emphasis on these patterns

when making trading decisions. Many of these traders have discovered the useful factor present in
candlesticks not generally found in other oscillators or indicators: candlesticks actually depict the
ongoing relationship between the bulls and bears. Candlesticks show the opening price and the closing
price in relation to the opening (see sidebar, "The candlestick method") and the high and low for the time
period compared to the open and close. The result is a portrait of the struggle for domination and the
eventual victor, the bulls or the bears. Thus, each candlestick pattern can indicate any notable trait or
tendency for any market explored using candles. In addition, candlestick analysis can be applied over any
period, whether weekly or daily or even intraday.

Candlesticks show the opening and closing prices in relation to


the opening and the high and low for the period compared with
the open and close. Each candlestick pattern can indicate any
notable tendency for any market explored using candles.
INTRADAY TRADING
When trading any market on an intraday candlestick basis, the investor would be prudent to select a
number of varying time segments because of the different speeds by which results can become known.
For example, a five-minute Standard & Poor's candlestick chart would predict and confirm a reversal
before a 20-minute S&P candlestick chart would. As a result, selecting the most accurate (and timely)

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Stocks & Commodities V. 11:4 (169-173): Candlesticks And Intraday Market Analysis by Gary S. Wagner and Bradley L. Matheny

time/price ratio can be difficult. It would be best to select many different time/price ratios for your charts
and then isolate which would work best for your needs.
Here, we will focus on 22-minute intraday bars and look at one day's trading using candlesticks. The
examples presented are taken from the March 1993 contract of the Standard & Poor's 500 on December
28, 1992. The time stamp on each chart is Pacific Standard Time (P ST) (except Figure 1, which is in
Central Standard).
We used computer-aided analysis to isolate and reveal the patterns. Figure 1 is an overall view of the
trading activity on December 28, 1992. The three highlighted patterns were the most significant we found
that day. Figure 2 reveals the first pattern found an engulfing bearish pattern which issued a sell
signal at 7:52 a.m. PST. A white hangman pattern became engulfed by a large black candle. This
formation was followed by a black candle (closing bozu) at 8:14 PST, which made anew low. This candle
confirmed the engulfing pattern found previously (Figure 3). As seen in Figure 4, the next candle to form
was also black with a new low, typical of a bearish continuation pattern. A pattern called three crows,
which indicates three consecutive declining candlesticks, also signaled the continuation of this trend.
THRUSTING PATTERN
Another large black candle formed at 8:58 a.m. PST, with increased range and a new low for the day. This
created a five-candle pattern based on the original engulfing pattern (Figure 5). At this point, the S&P
500 contract had lost more than 140 points since the engulfing pattern was formed.
The next candle, Figure 6, created a pattern known as a thrusting pattern. This pattern is a bearish
continuation pattern if found within a downtrend, as in this instance. However, no new low was made, so
the engulfing bearish continuation patterns found previously were no longer present. This gave us our
first indication that the market could begin to bottom out. All we had to do was wait for a bullish signal.
Two small doji formed, followed by a large black candle commonly called a bearish belt-hold line, which
opens on the high of the session and continues lower through the session, making a new low. But it was
not until the next candle (Figure 7) that we had any indication using candlesticks that the market was
about to bottom. At 10:26 a.m., about two hours after entering a short position, a bullish harami pattern
which is the reverse of the engulfing pattern and is comparable to the traditional technical indicator
inside day was created. Mean while, western technical indicators also pointed to an oversold market.
At 11:17 a.m., a white (belt-hold) candle signaled an end to the selling and the beginning of a bullish
reversal . The candles following a reversal pattern are used for confirmation and are of critical
importance in determining the strength of that pattern. A white belt-hold candle is a very bullish candle
when used as a confirmation for a bullish reversal pattern. In this case, it issued a buy signal (Figure 8)
because it confirmed the bullish harami pattern. During that period, the stochastic oscillator %K line
crossed above the %D line, confirming the bullish harami pattern. Figure 9 shows a continuation pattern,
which is created during the very next candle because the newest white candle makes both a higher high
and a higher low. Figure 10 is also a continuation of the bullish harami pattern. In this example, an
inverted hammer closed higher with a higher low. Continuation patterns found after confirmations are
often a conservative trader's best trade and are perfect for trailing stop price levels and to evaluate your
position in the market.
A doji and a long white line continued to push the market higher. Doji candles often predict market tops

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Stocks & Commodities V. 11:4 (169-173): Candlesticks And Intraday Market Analysis by Gary S. Wagner and Bradley L. Matheny

FIGURE 1: S&P 500 MARCH 1993. The intraday candlestick bars are 22 minutes per bar. There are
three patterns analyzed for forecasting.

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Stocks & Commodities V. 11:4 (169-173): Candlesticks And Intraday Market Analysis by Gary S. Wagner and Bradley L. Matheny

and bottoms, although in this case the doji candle preceded the impending bearish harami reversal pattern
two candles later. The final long white line represented an attempt by the bulls to continue this move
upward. A short black line appeared as the next candle, creating a bearish harami pattern (Figure 11).
This bearish harami line formation predicted a potential bearish reversal and reaffirmed a prior resistance
level. The intraday trader should exit the long position at this time. The position trader would tighten the
stop price to a point near the low of the short black line and wait for the next trading day.
This was an ideal example of trading the Standard & Poor's 500 with candlesticks. We often hear from
traders who have not yet grasped the concepts behind candlestick analysis. The integration of
candlesticks into any trader's current trading techniques can be beneficial because candlesticks predict
market moves before most western technical indicators. The techniques and principles detailed here can
be used and applied by any trader to develop a combination of traditional western and Japanese trading
techniques.
Gary S. Wagner, CTA, a registered commodity broker since 1984, and Bradley L. Matheny, a systems
analyst who has been developing custom software applications since 1980, are currently developing
technical market analysis software for International Pacific Trading Co. Together, they co-developed the
Candlestick Forecaster, a candlestick-interpretation program based on artificial intelligence.

REFERENCES
Hartle, Thom [1991]. "Steve Nison on candlestick charting," Technical Analysis of STOCKS &
COMMODITIES, Volume 9: March.
International Pacific Trading Co. 1050 Calle Cordillera, San Clemente, CA 714-498-4009.
Nison, Steve [1991]. Japanese Candlestick Charting Techniques , New York Institute of Finance/Simon
& Schuster.
Shimizu, Seiki [1986]. The Japanese Chart of Charts, available from Probus Publishing.

Figures

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FIGURE 2: ENGULFING BEARISH LINE. The tsutsumi line is created when a white candle is engulfed by a larger black candle.

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FIGURE 3: ENGULFING BEARISH LINE CONFIRMATION. The tsutsumi line is correct. A white candle engulfed by a larger black candle is now
followed by a lower day.

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FIGURE 4, PART A: ENGULFING BEARISH LINE CONTINUATION. Tsutsumi now indicates a very bearish trend. Look for technicals.

FIGURE 4, PART B: THREE CROWS. This pattern is composed of three


black lines, sometimes called three-winged crows.

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FIGURE 5: ENGULFING BEARISH LINE CONTINUATION. Tsutsumi line now indicates a very bearish trend.

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FIGURE 6: THRUSTING PATTERN. This could signal continuation if in a downtrend. Incomplete piercing line; in rising market, bullish.

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FIGURE 7, PART A: BULLISH HARAMI LINES. Indecision in market; possible reversal, wait to verify. Stochastic signal is below 40%.

FIGURE 7, PART B: OVERSOLD POTENTIAL. This has bullish potential. Stochastic indicators: %D = 19;
%K = 17. RSI is 17. Look for %K to cross above %D.

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FIGURE 8, PART A: BULLISH HARAMI LINE CONFIRMATION. The bullish harami lines seem to be correct. Enter the market from the long side. Place
stop below 437.60.

FIGURE 8, PART B: CROSSING BULLISH STOCHASTICS. Bullish potential. %K has crossed over %D. RSI
is 22.

FIGURE 8, PART C: LONG OPENING BOZU WHITE LINE. Also


called a belt-hold line, it is considered bullish.

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FIGURE 9: BULLISH HARAMI LINE CONTINUATION. Harami line now indicates bullish trend. Maintain stop below 437.60.

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FIGURE 10: BULLISH HARAMI LINE CONTINUATION. Harami line now indicates a very bullish trend.

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FIGURE 11, PART 1: BEARISH HARAMI LINES. Possible reversal; wait for confirmation.

FIGURE 11, PART B: WILLIAMS %R IS AT 21. The oscillator has reached an overbought level.

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