Long White at a Low Price Level

A single candle by itself is rarely sufficient reason to forecast an immediate
reversal. It could, however, be one clue that the prior trend may
be changing. For instance, as shown in Exhibit 2.5, a long white real
body at a low price range may be the first sign of a market bottom. A
long white candle shows that the ability to rise is virtually unimpeded
by the bears. The closer the close is to the high of the session, and the
longer the white real body, the more important the candle line.

Exhibit 2.6 shows that in late \991., this stock was stabilizing near $5.
The first sign that the bulls were attempting to take control was the
unusually long white real body at 1. Note how this real body was extended
compared to the prior real bodies. However, an almost equally
long, but black real body (for information on black real bodies, see page
29), on the week after candle L showed that the bears still had enough
force to offset the bulls' advance. In early \992, another unusually long
white candle, shown at2, appeared. This white candle opened on its low
(since it does not have a lower shadow) and closed on its high (since it
does not have an upper shadow). Such a candle is exceptionally strong,
notably when it is so elongated as in candle 2. Candle 3 was another
strong white candle that propelled prices to new multi-month highs. With
the tall white candles L and 2 both appearing near $5, we can see the
significanceo f that $5 support area. Consequently,w hen prices corrected
back to this level in fuly and August 1992, it is not surprising that the
selloff stopped near $5.

CONSTRUCTION OF THE CANDLE LINE

The first step in using the power of candles is learning how to construct
the basic candle line. Exhibits 2.3. and 2.4 show that the candle line
consists of a rectangular section and two thin lines above or below this
section. We see why these are named candlestick charts; the individual
lines often look like candles with their wicks. The rectangular part of the
candlestick line is called the real body. lt represents the range between
the session's open and close. When the real body is black (e.g., filled in),
it shows that the close of the session was lower than the open. If the real
body is white (that is, empty), it means the close was higher than the
oPen.

The thin lines above and below the real body are the shadowsT. he
shadows represent the session's price eXtremes. The shadow above the
real body is referred to as the upper shadow and the shadow under the
real body is the lower shadow. Accordingly, the peak of the upper shadow
is the high of the session and the bottom of the lower shadow is the low
of the session.

Candle charts can be used throughout the trading spectrum, from
daily, to weekly, and intra-day charting. For a daily chart, one would use
the open, high, low, and close of the session. For a weekly chart, the
candle would be composed of Monday's open, then the high and low of
the week, and Friday's close. On an intra-day basis, it would be the open,
high, low, and close for the chosen time period (i.e., hourly).

Exhibit 2.3 shows a strong session in which the market opened near
the low and closed near its high. We know that the close is higher than
the open because of the white real body. Exhibit 2.4 illustrates a long
black candlestick. This is a bearish session in which the market opened
near its high and closed near its low.

The |apanese focus on the relationship between the open and close.
This makes sense; probably the two most important prices of the day are
the open and close. It is therefore surprising that American newspapers
have openings for futures prices, but not for stocks. A member of the
Nippon Technical Analysts Association told me that he found it unusual
that U.S. newspapers do not have opening stock prices; the Japanese
have the openings in their papers. He said that he did not know why
the Americans disregard the openings.

I would expect that just as almost all technical software vendors now
carry candle charts, so it may be that as candles become more popular
in the equity market, newspapers may, by popular request, carry stock
openings. Until then, in order to obtain the data needed to draw the
candles (the open, high, low, and close) you need to use a data vendor
service. These services furnish prices on disks or through modems. The
data supplied from a data vendor are then transferred into a technical
analysis software package that will draw the candles based on these
data.

A note of caution: Some data vendors who do not have the actual
opening price of a stock default to the prior session's close as today's
open. This, in my opinion, is not valid. You must have the true open to
draw an accurate candle line. Although an open on a stock will usually
not be much different from the prior close, there are some candle patterns
in which a higher or lower opening (compared to the prior close) gives
valuable information. A data vendor that includes actual opens on stocks
is Dial Data (Brooklyn, NY).