Power & Finesse of Candlestick Charting (Part 2)
The Three Mountains consist of two groups, each with three individual shapes of market topping and bottoming formations (see figure 2). These two groups directly correlate to the three level fluctuations theory we have already discussed. The Three Mountains pattern is very similar to the Western Head and Shoulders Top. They both consist of the very same price movement characteristics. The Japanese also consider the Double Top and Rounded Top as variations to the Three Mountains group.
The reverse of the three individual market top formations detailed above create the second group of patterns that complete the Three Mountains. This group identifies a market bottom. They are the Head and Shoulders Bottom, the Double Bottom and the Rounded Bottom.
The Japanese view these patterns from a broader perspective. These patterns are attuned to identifying major reversals of trend over a longer time frame. Often times, we see these patterns as smaller pieces to amuch larger puzzle. When we begin to piece together the puzzle, we can only then begin to predict its outcome.
Sansen (Three Rivers)
The Three Rivers patterns reflect a complete reversal of price direction. They form in either Morning or Evening positions with many variations. The Three River Morning Star pattern reflects a bullish reversal of trend or a possible market bottom. Whereas the Three River Evening Star pattern reflects a bearish reversal of trend or a possible market top.
The common formations, as shown in figure 3, often consist of very strong single candle types (such as Dojis, Bozu or Marubozu lines). These individual candle types represent some of the strongest single candle types to identify price direction or lack of it. For example, the Doji Line, that separates the other two candles within this pattern identifies that the market is unable to continue its current trend. The third candle that completes this pattern confirms the fact that the market trend has reversed.
The variations of the Three Rivers include the Upside Gap's Two Crows, the Evening Southern Cross, the Two Crows and the Unique Three River Bottom. Although these variations may appear visually completely different, they reflect the same intention of the market - to reverse.
Sanku(Three Gaps)
The Three Gaps pattern consists of three individual gaps in price that occur during a defined trend. The gaps do not need to be consecutive, they may form throughout many days of trading. This pattern signifies that the market has continued in its defined trend and current trend may soon end. The Three Gaps pattern can form during either a bullish or bearish trend to identify specific trend reversals. Remember that this pattern has a specific correlation to the Three Level Fluctuation theory. The gaps may form during the three individual price advances or declines that support the Three Level Fluctuation theory.When a Bullish Three Gaps is formed, the Japanese call this Sanku Fumiage. It represents a price ceiling and one should start selling.
When a Bearish Three Gaps is formed, the Japanese call this the Sanku Nage Owari or the Sanku Tatakikomi and one should start ordering long positions. In either condition, once the market price begins to reverse and the third gap is filled, one should increase one's current long or short positions.
Sanpei(Three Parallel Lines)
The classic formation of the Three Parallel Lines occurs when three of the same color candles appear withno price gaps between them. If they are all bullish candles (white), they create the Three White Soldiers pattern. If they are all bearish candles (black), they create the Three Crows pattern. These common types of Parallel Lines are viewed as a continuation of the current market trend.
The variations of the bullish (white) Three Parallel Lines are different in shape and meaning from the classic formations. The White Three Line Advance Block (Sakizumari) differs slightly from the Three White Soldiers, yet it represents the possible end a current bullish price move. It depicts a continuing bullish price move that is diminishing in strength and likely to reverse. Another variation is the bullish (white) Three Line Star in Deliberation (Akasansen Shianboshi). It represents that the current price move is indecisive and is likely to reverse. Often, this pattern may form into an Engulfing Bearish or a Three River Evening Star indicating strong selling in the market now.
The bearish variations of the Three Parallel Lines are a little more complicated. The first is the Bozu Three Wings. It varies from the Three Crows because of a gap between the first and second candles and the requirement that all three candles be of the Bozu or Marubozu type. This pattern represents strong bearish price action. The second variation occurs when the second candles opening price is equal to the first candles closing price and the third candles opening price is equal to the second candles closing price. So to say, each new candle opens on the previous candles close. This is called the Simultaneous Three Wings, and is an indication of continued bearish price action.
Sanpo (Three Methods)
The Three Methods patterns are related to one's position in the market (buy, sell, or wait). So to say, one shouldnt buy and sell all year, it is often wise to wait and not enter any position in the market. These pattern groups indicate a congestion period within the market and one should wait for confirmation of new trend.
These two patterns are the Rising Three Methods and the Falling Three Methods. If the Rising Three Methods appears in a rising market, one should expect a short rest before a further climb in price. The opposite is true for the Falling Three Methods. If it appears is a declining market, one should expect a short break before a further fall.
Facts about Japanese Candlesticks
Candlesticks are a true leading indicator. They regularly identify potential market pricemoves before they begin to happen.
Candlesticks are attuned to the short term trend (3 to 15 trading sessions) when charted on a Daily basis. To apply candlestick to longer term trending markets, one must use a Weekly or Monthly chart.
Candlesticks can be applied to any other Western technical oscillators to produce asynergistic trading approach.
Candlesticks are the only technical analysis tool that generates intuitive text massages(results) about the inner psychology of any market.
Candlesticks have been relatively unknown, except in Japan, for the last three centuries.
Candlesticks use the same price data as bar charts, yet the candlestick technique better promotes the ability to recognize complex patterns and to identify what these patterns mean.The Japanese candlestick technique consists of hundreds of different patterns that accurately identify specific market traits or tendencies.
[to be continued next week ..]
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