Bloomberg Markets

October 2005

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Technical
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Analysis

Candlestick Patterns
Light the Way
Use GPC, CNDL and G to track supply and demand.
By Greg Byrnes
candlestick analysis, a form

of technical analysis of security prices, involves patterns with colorful

names such as Evening Star, Three
Black Crows and Abandoned Baby that
illustrate something quite basic: supply 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 invented 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 portion of the candle whether the price rose
or fell during the period the candle represents. 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 shaded 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 better-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 <Cmdty>
GPC <Go> to access the Candle Chart
function. You can also create custom
candle charts with the Graph Worksheet (G) function. Press <Help> twice
to ask questions about creating technical analysis charts with G.

The first pattern we ll look at is

known as Doji. Its made up of one candle that doesnt have a real body or thick
portion and looks like a cross. Dojis are
indicative of a tired or weakening market and can signal a reversal. If the
opening price is equal or very close to
the closing price, then the supply/demand 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 generally consider Doji patterns to be more
significant when they follow a trend of

168

I nt e r p r e t i n g
Candlest ick Pat terns
Type CL1 <Cmdty> GPC
<Go> 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.

upward price movement rather than a

downward trend.
There are several types of Doji patterns. For example, adjust the date range
of the candle chart for the crude oil futures 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 Bullish Engulfing pattern on both May 20
and 23. Bullish Engulfing patterns involve 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 consider 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 pattern. 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 selling pressure is starting to outweigh
buying pressure.
The final reversal patterns well look at
have different price relationships than engulfing 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 supply outweighing demand, which analysts
might interpret as a reversal signal indicating 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 pattern, 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 shaded or blue real body. The second candle
has a long white or open real body. The

C u s t o m i z e Yo u r
Candle Charts
Type CNDL <Go> 1 <Go>
2 <Go> to set defaults
for the dates, moving
average periods, candle
sizes, pattern symbols
and other features.

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 appeared 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 average convergence/divergence and relative strength index, which can help
you confirm signals from the candlestick analysis and aid in setting price
targets. Type CNDL <Go> for the Candlestick Patterns function. CNDL displays a candle chart with symbols
that indicate where various patterns
occur. Type 1 <Go> to list the abbreviations, and click on a specific abbreviation for a description of the pattern.
Type CNDL <Help> 9 <Go> 6 <Go> for
illustrations of various candlestick patterns. Type TDEF <Go> 2 <Page Fwd>
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