Candlestick charts contain some unusual terminology, but it seems easier to remember the terms because they are so odd. Cora and I both have our favorites. For us, shaven heads and three black crows stand out like sore thumbs (no -'sore thumbs' aren't part of the lingo). We'll use some of the names this week as we begin to understand what they mean in the overall scheme. If you get lost with some of the terminology, just refer to last week's article.

Most technical analysts look for reversals in chart patterns. A reversal may not mean the market will do the opposite of current past behavior. It may mean the market will stop its current behavior and do something else. If a certain equity is heading south, it may stop its downfall, but it could just level out or jerk around for a while before it goes up or down again.

There are some powerful reversal indicators in candlestick charts that are easy to spot. One body we didn't mention last week was the Marubozu. A Marubozu is a long body with no shadow. If you see a line of black Marubozus, you're probably seeing them in a graceful downward dive. If the Marubozus are white, you'll see them bouncing up from the bottom. Black is bearish, white is bullish. Many of the indicators can be either color, but the color is significant. The color tells you whether the bears or bulls have control.

As bodies of candlesticks shorten and shadows get longer, you're probably going to see a reversal. The Marubozus may turn into spinning tops, which means the market is becoming more indecisive on the equity. The body of the spinning top may narrow even more to form a doji. The dojis are a little harder to read, as they don't have the visual body substance to get a good take at a glance. Perhaps this is a good thing?dojis are worth studying for proper analysis.

Dojis are usually formed when the market opens and closes at the same level, but shadows will give an indication of the volume or activity. A doji with no shadow on either end is a 4-price doji, and happens when a stock is thinly traded. When the doji has a long lower shadow, this means the stock went south for the day, but found support before the close. A long upper shadow is the exact reverse - the stock went north and got hammered before market closing. The latter is called a gravestone doji, and it usually spells doom and southward movement for equity the next day.

If you find some candlestick charts, take a look at the long-range version before you get wrapped in the hourly or five-minute intra-day markings. The overall candlestick chart for a three-month period is a good place to start. Find one that contains periods before, during, and after a quarterly earnings report. You'll begin to see the patterns as the equity rises and falls during this volatile timeframe.

Two candlestick patterns are significant to traders. These are engulfings and gaps. Engulfing happens when one body overlaps or engulfs the previous or succeeding body in the chart. This means a wider range of trading is taking place, and it shows control by either bears or bulls, dependent on the color of the body.

Harami is a term for some engulfing positions. Harami in Japanese means "pregnant." We can only imagine this movement is ripe with possibilities, right? This happens when one candlestick completely engulfs the next candlestick, appearing to hold it in its larger body.

Gaps are a little harder to define, as it seems some technical analysts have their own methods of interpreting them. Mainly, gaps happen when a body and/or shadow is placed away from the previous or succeeding candlestick. This can happen at the top or bottom of a trend, and it can indicate loss of control by either bulls or bears. Gaps can also signal exhaustion, which means the security is no longer of any interest to traders or investors.

Candlesticks gapping away from preceding candlesticks are often called stars. The name of a doji that gaps away from the preceding candlestick at the end of an exhaustion gap is called an abandoned baby. Cora feels sad for this little doji.

You can also take two or three candlesticks from the closing and opening of two consecutive days and combine them to create a new formation for more clarity. One of the easiest combos would be to combine three black crows. When you place them next to each other, you end up with one long black candle, maybe a black Morubozu. This candle would indicate, obviously, that the equity is continuing its downward direction. However, it's always best to place the candlesticks in context, as this will give you more meat to support your analysis.

After you play with three-month charts, have fun with intra-day charts. This is where you can go nuts as you watch action in timeframes from an hour to five minutes. You'll find a wider variety of symbolic indicators to interpret while you're not analyzing new hiding places for last week's Halloween candy booty.

As more and more analysts fall in love with candlesticks, we may see a real mix of east and west. The powerful visuals of candlesticks combined with heads and shoulders and double and triple tops and bottoms may be too hard to resist for some traders. As investors, we can just sit back and watch the gyrations.

Next week we'll talk about a different type of candle behavior as we study pre- and post-holiday effects on the market. Yes, Santa, there's strategy involved in traditional observances.

Until Next Week,
Linda Goin