Harami Candle and Trend Reversal

TREND-FOLLOWING can be an exciting task for the beginning stock trader. And when you add watching the Japanese candlesticks on a daily basis for our favorite stock Ayala Corporation, you are in for a great game.

Marginal Stock Trader wants to share with you what he learned about a reversal candlestick called harami, the "pregnant" candle. When we see this on a daily chart following an up or downtrend of more than six days, we are advised to immediately ask ourselves if the Minor trend is about to reverse direction.

The harami candle can occur both after an uptrend or downtrend.

Let us use the trading days beginning June 2, 2009 when our Ayala Corporation stock established a downtrend. In this case on June 9, the day immediately preceding the green harami candle, there is a large, real body red candle. The bears appear to be fully in the driver's seat.


The next day on June 10, however, a small real body green candle appeared within the larger real body. This is the harami candle. It was said that the reversal signal is more potent if it is the opposite color -- like the one we have on June 10 -- as this color change shows that the decline has stalled. The bulls are now on strong ground and are engaged in a struggle for power with the bears.

We are told also by those familiar with candlestick charting to always look carefully at the next day's candle, the one that follows the harami candle. This refers to the one on June 11, last trading day of Week 24.

The experts cautioned that sometimes harami merely signifies that the stock is entering a period of consolidation (meaning that the shares will trade sideways). If, however, our Ayala Corporation stock advanced the day after the harami candle takes place, then there is an increased likelihood that the shares have put in a Minor bottom.

Indeed, this is what happened on Thursday: the stock advanced. The 297.50 pesos open equals the low and the 307.50 pesos close equals the high. Listening to those skilled in this field, then we should be alert to a change in trend.

Outlook for Week 25
Here is Marginal Stock Trader's beginner's forecast for trading period June 15 to June 19, 2009. Since the Ayala Corporation stock we are following is currently in a short-term downtrend, then today's advance following the harami candle of the previous day warns of an impending period of sideways trading, or perhaps reverting back to its Major trend: an uptrend.


Data Source
Philippine Stock Exchange through online broker BPI Trade

Suggested Reading

Harami: This Candle Can Help Nutrure Your Profits
Stop-Loss: How To Use It In Trading

Learning About Candlestick Charts

CANDLESTICK CHARTING has its own unique language and terms like Marubozu, Spinning Tops, Doji, Harami Position, Hammer, Hanging Man, Shooting Star and a more. Understanding their meaning, including a feel of the emotions involved, may give us a better insight about some ways we can be play the stock trading game.

Marginal Stock Trader became aware of candlestick charts only for a couple of weeks. Thus, his familiarity with it maybe described as superficial at best. Nevertheless, let us see how a novice can use this technical analysis tool for his day-to-day stock trading operations.

For Week 24 covering the trading period June 8 to June 12, our general outlook is to take a long position in Ayala Corporation. Please read our previous post Japanese Candlesticks for Stock Trading for more details.

June 8, 2009
Ayala Corporation open equals the high of 305 pesos and the close equals the low of 300 pesos. This indicates that sellers controlled the price action from the first trade to the last trade.

The stock traded at 305 pesos for over an hour until 10:10 a.m. The next 15 minutes of trading was at 302.50 pesos. And from 10:25 a.m. onwards, the price stayed at 300 pesos.

Trading range was narrow at 5 pesos and is equal to 2 fluctuations. Main number of trades was placed at 89. It looks like both sides - buyers and sellers - are positioning themselves for the next move. That includes Marginal Stock Trader who bought 10 shares at 312.50 pesos last week.

Learning by experience
Admittedly, Marginal Stock Trader is just very new to this candlestick chart. Nevertheless, we would like to write about how we are applying this tool in our online stock trading so we could learn some hard lessons by experience.

Trading range
By our own reckoning, we consider the trading range to be somewhere between 300 pesos (support) to 315 pesos (resistance). A break above 315 pesos is a victory for the bulls (demand) and a break below 300 pesos is a victory for the bears (supply).

Price fluctuation
In terms of price fluctuation, we would consider 5 pesos to be narrow, 10 pesos is somewhat wide, 15 pesos is wide, and 20 pesos to be very wide.

Outlook for June 9, 2009
Based on experience of recent weeks, we would say the trading range is good for 6 to 8 trading days, then price breaks out above the trading trading range. This break is usually indicated by a gap up, or sometimes by a wide price fluctuation. The trendine is consistently upwards for the past weeks. But we also know that today's close, as well as last week's closing prices, is already approaching the 52-week high for Ayala Corporation. In addition, the stock is approaching the current resistance level, hence an alert to look for signs of increased selling pressure and potential reversal.

Our data source is the Philippine Stock Exchange through our online broker: BPI Trade.