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

Marubozu Candlesticks Green and Red

SELLERS CONTROLLED THE PRICE ACTION from the first trade to the last trade on June 9, the second day of Week 24. The Ayala Corporation stock's 300 pesos open equals the high and the 292.50 pesos close equals the low.

Here is an example of a Marubozu. This candlestick do not have upper or lower shadows and the high and low are represented by the open or close.

Support level breach
Strong selling pressure is now clearly noticeable and is demonstrated by the break out below our 300 pesos support level. In addition, prices declined moderately from the open and sellers were more aggressive this time. Although we are waiting for a gap down for confirmation, we still think this day may foreshadow a turning point or mark a future resistance level.



Outlook for June 10, 2009
Selling pressure overwhelmed buying pressure for five days now within our trading range. But it remains unclear whether or not sustained selling or lack of buyers will continue to push prices lower. A gap down, long red candlestick or high volume decline means bearish confirmation.

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.

Japanese Candlesticks for Stock Trading

JAPANESE CANDLESTICKS or candlestick charting is a tool for technical analysis that can provide us some useful insights into market moves suitable for purposes of our online stock trading.

Marginal Stock Trader decided to play around with candlestick charting for his online stock trading activities starting May 18, 2009.

WEEK 21

May 18, 2009

• closing price equals the low of 255 pesos
  
• close is lower than its opening price of 260 pesos
  
• little price movement and may represent consolidation
• most of the trading action was confined near the open and close
• sellers controlled the price action from the first trade, dominated during the session and drove prices lower though buyers later resurfaced to bid prices as high as 262.50 pesos
  
• high - low range is 7.50 pesos
  

May 19, 2009

• opening price equals the low of 260 pesos and the close equals the high of 267.50 pesos
  
• close is higher than close of previous day
  
• buyers controlled the price action from the first trade to the last trade
• prices advanced from open to close showing strong buying pressure indicating buyers were aggressive
• high - low range is 7.50 pesos, same as first trading day of Monday

May 20, 2009

• open equals the low of 270 pesos
• close of 277.50 pesos is higher than its opening price and the close of previous day
• buyers controlled the price action from the first trade and bid prices higher though sellers later forced prices down from the high of 285 pesos
  
• high - low range is 15 pesos
  

May 21, 2009

• close equals the low of 275 pesos
• close is lower than its opening price of 277.50 and the close of previous day
  
• little price movement and may represent consolidation
• most of the trading action was confined near the open and close
• sellers controlled the price action from the first trade, dominated during the session and drove prices lower though buyers later resurfaced to bid prices as high as 282.50 pesos
  
• pattern is similar to May 18 but with higher prices for open, high, low and close, as well as a narrower open - close range of 2.50 pesos
  

May 22, 2009

• conveys a sense of indecision or tug-of-war between buyers and sellers
• closed lower than Wednesday and Thursday but higher than Monday and Tuesday
  
• prices move above and below the opening level during the session, but closed at the same opening level of 270 pesos
  
• neither bulls nor bears were able to gain control and a turning point could be developing
• high - low range is 7.50 pesos
  

Outlook for Week 22

• sellers were unable to overcome the higher bid prices of buyers resulting to higher closing prices of Tuesday and Wednesday
• sellers took Monday and Thursday but then Thursday prices were higher for open, high, low and close compared to their Monday trading
  
• Friday trading is a standoff and conveyed a sense of indecision or tug-of-war between buyers and sellers
• the trend is upward, buyers were aggressive during the week and overall controlled the prices for the week, but then sellers were always waiting for their turn
• BUY WITH CAUTION, look out for possible consolidation and turning point
  

WEEK 22

May 25, 2009

• close equals the low of 270 pesos and the close of last trading day May 22
  
• close is lower than its opening price of 272.50 pesos
  
• little price movement and represent possible consolidation
• most of the trading action was confined near the open and close
• sellers controlled the price action from the first trade, dominated during the session and drove prices lower though buyers later resurfaced to bid prices as high as 275 pesos
  
• pattern is similar to May 21 but with lower prices for open, low and close
• narrow high - low range of 5 pesos
• BUY TOMORROW if prices hit below 270 pesos
  

May 26, 2009

• open equals the high of 275 pesos
• close of 265 pesos is lower than its opening price of 275 pesos
  
• sellers controlled the price action from the first trade and drove prices to a low of 260 pesos
  
• buyers later resurfaced to bid prices higher by the end of the session but still ended with a close of 265 pesos
• BOUGHT 10 shares of Ayala Corporation early at 265 pesos per share for a total cost of 2,675.26 pesos
  
• high - low range is 15 pesos
  

May 27, 2009

• open equals the low of 270 pesos
• close of 275 pesos is higher than its opening price and the close of previous day
• buyers controlled the price action from the first trade and bid prices higher though sellers later forced prices down from the high of 282.50 pesos
  
• potential bearish reversal
• sudden and sustained increase in selling pressure was indicated
• high - low range is12.50 pesos

May 28, 2009

• open equals the high of 275 pesos and the close of previous day
  
• close of 272.50 is lower than opening price
  
• little price movement and represented consolidation
• most of the trading action was confined near the open and close
• sellers controlled the price action from the first trade, dominated during the session and drove prices to a low of 270 pesos
  
• buyers later resurfaced to bid prices higher but still ended with a close of 272.50 pesos
• narrow high - low range of 5 pesos
• SOLD 10 shares of Ayala Corporation at the high of 275 pesos with net proceeds of 2,713.22 pesos, yielding a net profit of 38 pesos and exceeding our profit target of 30 pesos for each board lot of 10 shares

May 29, 2009

• results of this trading day is almost totally unexpected save for reinforcing the validity of our upward trendline for the stock
  
• open equals the low of 272.50 pesos
• close of 287.50 pesos is higher than its opening price and the highest for the past 10 trading days
  
• buyers controlled the price action from the first trade and bid prices higher but sellers later forced prices down from the high of 297.50 pesos
  
• wide high - low range of 25 pesos
  

Outlook for Week 23

• prices continue trending upwards
• buyers remain in control of the overall direction though not as aggressive
  
• high - low ranges varies from a narrow of 5 pesos to a wide 25 pesos
• further consolidation and reversals may still be possible
• BUY at the first opportunity and prepare to have a long position in Ayala Corporation
  

June 1, 2009

• results of this trading day confirmed the validity of our upward trendline for the stock
  
• open equals the low of 290 pesos
• close of 305 pesos is higher than its opening price and the highest for the past 2 weeks
• buyers controlled the price action from the first trade and bid prices higher but sellers later forced prices down from the high of 312.50 pesos
• wide high - low range of 22.50 pesos

June 2, 2009

• little price movement since most of the trading action was confined near the open of 315 pesos and close of 312.50
  
• buying pressure may be diminishing and the uptrend could be nearing an end
• selling pressure is starting to increase
• a change in trend may be near
• high - low range is 7.50 pesos
• BOUGHT 10 shares of Ayala Corporation at the high of 312.50 pesos per share for a total cost of 3,150.37 pesos since uptrend remains intact and the intention is to have a long position
  

June 3, 2009

• confirmed the downtrend indicated the day before coming from increased selling pressure
• little price movement since most of the trading action was confined near the open of 310 pesos and close of 305 pesos
• sellers were still unable to drive the prices under the Monday low of 290 pesos
• high - low range is 10 pesos
• hence, no decision to sell the shares
  

June 4, 2009

• for the third day in a row, sellers prevailed over the buyers
• little price movement was maintained since most of the trading action was confined near the open of 302.50 pesos and close of 300 pesos
• sellers were still unable to drive the prices under the Monday low of 290 pesos
• high - low range is 7.50 pesos
  
• hence, no decision to sell the shares
  

June 5, 2009

• open equals the low of 302.50 pesos and the close equals the high of 305 pesos
• buyers controlled the price action from the first trade to the last trade
• buyers overcame prior selling pressure but remained unclear whether new buyers will bid prices higher
• downtrend of the past three days was broken
• existing uptrend in place for three weeks remained valid
• hence, no decision to sell shares
  

Outlook for Week 24

• existing uptrend will remain intact
• selling pressure will be diminishing with buyers getting more aggressive
• sellers will still make attempts to force prices down from their highs
• wider range of 5 to 20 pesos for high - low prices may occur
• closing prices may approach our support level or the primary trendline of our trend channel organised some weeks ago
• TAKE A LONG POSITION in Ayala Corporation
  

Suggested Reading
Introduction to Candlesticks. (2009) In Stockcharts.com

Retrieved June 5, 2009, from
http://stockcharts.com/

Candlestick Bullish Reversal Patterns. (2009) In Stockcharts.com

Retrieved June 5, 2009, from
http://stockcharts.com/