Best Candlestick Pattern - J-Hook Pattern

J-Hook Pattern

A J-hook pattern (J-hook) is a variation of a wave 1 — 2 — 3 patterns. It be­comes an easy pattern to identify with the use of candlestick signals. The prob­lem most investors have is understanding when to sell after a price has made a strong move. The J-hook pattern demonstrates some easily identifiable attributes. First, it starts with a strong uptrend that usually produces “stronger than nor­mal” returns in a very short period of time. This strong up move is significant enough to create the normal wave pattern. A reversal caused by profit taking, followed by a declining trajectory of the pullback, then the continuation of the uptrend. The J-hook pattern is the description of the pullback that starts to round out at a bottom and starts moving back up, thus forming a ‘hook.’

This pattern provides the candlestick investor with some very simple prof­itable applications. Tire first uptrend will usually show clear candlestick ‘sell’ signals when it comes to an end. The top may be formed with the stochastics in the overbought, or very close to the overbought area. Because of the strong initial uptrend, the first evidence of ‘sell’ signals should be acknowledged. Even if it is suspected that the uptrend could be forming a J-hook pattern, why risk remaining in the trade? When a sell signal becomes evident take your profits.

What criteria makes a candlestick investor suspect a J-hook pattern will form? The analysis of the market trends in general should provide that infor­mation. For example, if a stock price had a strong run up while the market indexes had a steady uptrend, and the market indexes do not appear to be ready for a significant pullback, then a strong stock move could warrant some profit taking before the next move up. The benefit of being able to identify candlestick signals is being prepared for some candlestick ‘buy’ signals after a few days of pullback. These signals would also alter the trajectory of the stochastics that will be pulling back.

Witnessing Doji, Hammers, Inverted Hammers or Bullish Harami after a few days of a pullback becomes an alert that the selling is starting to wane. If the stochastics are flattening out during that same timeframe, then a set-up for a J-hook pattern is taking place. Taking profits when the first sell signals occur in the initial uptrend eliminates the downside risk. Those candlesticks ‘sell’ sig­nals indicate that it is time to get out of the trade. Even though the strength of the initial move would warrant suspecting a J-hook pattern to form, there is no guarantee that the pullback could not retrace 20%, 40%, 60%, or even greater of the initial move up.

This creates a trading strategy that allows an investor to utilize the com­mon sense built into the candlestick signals. When it is time to get out, get out! If after four days, small candlestick buy signals start forming, there is nothing wrong with buying back into the position. The second entry of this trade now has some targets that can be clearly defined. The first target should be the test of the recent high. Although it may not be a huge percentage return moving to that level, at least the probabilities indicate that it should be profitable.

The benefit of candlestick signals once again can be applied if and when that recent high is tested. Witnessing another sell signal, as the price approaches the recent high trading level, would be a clear indication that the recent high was going to act as resistance. This would induce taking quick profits and getting back out of the trade. On the other hand, if strong signals are seen as the recent high is breached, that would be a clear indication the high was not going to act as a resistance level. A new leg of the trend may be in progress.

Note the J-hook pattern in Fig. 6-1, the Loews Corporation chart. Once the trend started up, the pattern formed when the price pulled back for a few days.

However, the stochastics never reached the oversold area and they came down only part way before hooking back up. The signals indicated buying before it pulled back too much, showing the buyers were going to test the high of the previous week. The gap above the recent high indicated that the buyers were very anxious to see prices go to much higher prices. Recognizing this pattern and the elements that form it allows an investor to move decisively at the right points of a trend. Being prepared for the pattern and knowing what signals to look for, creates opportunities to participate in a profitable trend while greatly reducing risk.

Where will the pullback move to? Sometimes that is obvious, sometimes it is not. Yet there are indicators that can at least provide a target for a J-hook pullback.

In the example of the Diamond Offshore Drilling Inc. chart, Fig. 6-2, the 50-day moving average becomes the obvious support level. Although the stochastics have not moved back down to the oversold condition, it becomes apparent with the Bullish Engulfing pattern, followed a few days later by a Doji and a gap-up day, the potential of a J-hook pattern is starting.

Some patterns become very easy to recognize and things do not have to be made complicated. “Buy” signals, occurring at a major technical support level, even though the stochastics are only part way down toward the oversold area, should be recognized for their potential. Buying in the $35 area should be done with the anticipation that the price could reasonably test the recent high at the $38 area. Once again, the benefit of candlestick signals is being able to deter­mine whether the $38 level will become a resistance level or not. The Doji could have been the resistance signal had the prices opened lower the following day.

Seeing prices move higher the following day would have been an indication that there was no selling at the recent high level. More upside from that point now became a good probability

As a side-note, the uptrend, at $40 a share, indicated the potential pull­back, but notice how the recent resistance level, the $38 area now becomes the support level. The Spinning Top, the Doji, and then the Bullish Engulfing signal provided the visual information that the $38 area was now acting as support.

Fig.6-3, The Valero Energy Corp. Inc. chart is an illustration of a potential J- hook pattern move. As the candlestick buy signals appear, the Hammer, followed a few days by later the Piercing signal, and the stochastics start curling up, the recent high becomes the first potential target.

In this case, the candlestick sell signals make it apparent that the $44 area is not going to be broken. The Spinning Tops, Hanging Man, and Dark Cloud signals, as stochastics are starting back down, revealed that the buyers have run out of strength. The evidence of buying strength would have been revealed with more white candle bodies. The presence of the black candle signals becomes our mes­sage that the buying strength is waning at the $44 area.

Fig. 6-4, The Excel Maritime Carrier chart provides an opportunity to take advantage of a J-hook pattern. Whether an investor was involved in the initial move or not, the fact that a potential J-hook pattern could be forming can produce calculated profits in the next move. Buying into this stock at about the $12.50 area still has a viable probability that the $15 area will be tested once again.

A $2.00 to $2.50 move is still worth the attempt. If prices gap back up to the $15 area and candlesticks sell signals started appearing, then it would be a logical deduction that this move was not heading to new highs. However, a $2.00 move on a $12.50 price is still a reasonable percentage return. But, as illustrated in the EXM chart, the resistance level at the $15 area was breached with a large bullish candle. This should reveal immediately that new high levels were going to be attempted. This makes participating in a J-hook pattern very rewarding. Some­what rewarding, even if it fails at the recent highs, with additional explosive return potential if the recent high is breached.

Does the J-hook pattern always allow an investor to sell at one level and buy back in lower? Not always! However, keep in mind that the point of invest­ing is to maintain the practice of maximizing your profits for your account, not necessarily maximizing profits for each individual trade.

As illustrated in Fig.6-5, the Audible Inc. chart, the high-probability trade was taking profits on the confirmed selling after the Bearish Engulfing signal. Buying back, upon the formation of the J-hook pattern being established, may have been done at a higher price. Candlestick analysis does not attempt to buy at the absolute lowest point and sell at the absolute highest point. Candlestick analysis illustrates when it is time to buy and when it is time to sell. That definitely eliminates the possibility, most of the time, of buying in at the abso­lute bottom. The ‘buy’ signals indicate a high-probability ‘time to buy5 in a trend. The time to sell does not come at the absolute top. The time to sell comes in the top “range”.

Understanding the mechartics of a J-hook pattern allows an investor to take profits after the initial move. This has the investor out of a trend that “potentially” could pull back too much lower levels. When the signals indicate the pullback is over, establishing a new position has the investor in a trend that should be moving in the anticipated direction. Not participating in all of a move that a trend offers reduces investor risk dramatically. Selling at one level, when the candlestick signals indicate that is time to sell and buying back when the signals/pattern tells the investor it is time to buy, even if at a higher price, is the cost of insuring that your investment funds are always participating in high probability trades.

Why own stock if the signals show a high-probability that it could be head­ing back down? Sell it! If a J-hook pattern forms, buy it back.

The benefit of the candlestick signals is that they reveal when a pullback is not occurring with great enthusiasm. When an uptrend moved with inordinate force, a pullback with greater magnitude can be expected. Viewing small candle­stick “buy” signals, a few days after a pullback has occurred, at least provides the inkling that the pullback may just be profit taking. As the downward trajec­tory of the pullback starts flattening out, watch for more buy signals. When the trend starts moving up, a new position can be established.

Fig. 6-6 (following page), The Affiliated Managers Group Inc. chart dem­onstrated a good strong move to the upside, followed by a week of trading that lacked decisiveness. The Bullish Engulfing signal, correlating with the stochastics curling back up, would have been a signal that the sellers were getting out of the way. The strength of the candle following the Bullish Engulfing signal would have revealed that the uptrend should now be continuing.

Tine J-hook pattern should be analyzed in conjunction with what the markets are doing in general. The market indexes can be analyzed by themselves. After a strong rally, a profit-taking period is to be expected. Having the benefit of the candlestick signals allows an investor to better decipher whether the rally has ended. A full-scale reversal may have occurred. However, seeing some candle­stick buy signals after a few days of pullback allows the candlestick investor to formulate a strategy. That strategy should involve deciding whether to short heavily in that market or be prepared to re-establish long positions.

Once candlestick buy signals start appearing in a market index chart, giving the indication that a J-hook pattern could appear, prepares the investor mentally to move one way or the other. If short positions were established at the first sell signals in the trend, being prepared for the covering of those positions can be better executed when a J-hook pattern formation is anticipated.

Individual stock positions have the additional benefit of the market trend itself in evaluating the potential J-hook pattern. If during the market uptrend, a stock price has moved up with greater magnitude than the market trend in general, that becomes the first alert. Simply, that stock trend is inordinately strong. A pullback occurring in that stock, when the market trend appears to be continuing, also gives rise to watching for a J-hook pattern to occur.

Fig. 6-7 The Cameco Corp, chart illustrates a J-hook pattern that is con­firmed with a Bullish Engulfing signal. The continued buying, the following day, provides a good indication that they are going to test the recent high.

This may not result in a very large percentage return if the sell signals appeared at the recent high. However, the probabilities could be better justified if the mar­ket trend in general was moving in a slow bullish fashion. It makes entering a trade more appealing when market conditions do not show any severe selling and a strong moving stock is about to break out to new levels on a J-hook pat­tern.

This may seem very elementary, but this allows the candlestick analyst to make some very simple, quick evaluations. The whole point of candlestick in­vesting is exactly that; making high-probability trade evaluations in a very short timeframe, within minutes every afternoon.

J-Hook Summary

The J-hook pattern should be remembered as a high profit trade potential. As discussed during the chart illustrations, a J-hook pattern is going to occur after witnessing a very strong move in price. Whether that price is in the indexes themselves or in individual stocks, a strong move to the upside is usually going to be followed by some profit taking. Being able to analyze whether that pull­back is profit taking or a true reversal is easily analyzed when applying the candlestick signals.

The J-hook pattern is more often going to be found in market conditions where the trend is moving steadily in one direction. The stronger than normal percentage move is the first major criteria for a J-hook pattern to occur. Once a candlestick sell signal appears, after an extended strong move, the candlestick investor wants to watch for candlestick ‘buy’ signals to begin appearing. The signals do not necessarily need to be big, strong signals. Small volatility days of Doji, Hammers, and Inverted Hammers or Bullish Engulfing signals provide the indication that the selling is losing strength. As they occur, the stochastics should start showing a flattening of the downward trajectory.

Upon seeing the downward trajectory in the price flattening out, an inves­tor can now start watching for the next candlestick buy signal that starts mov­ing price in an upward direction. When that occurs, establishing a position is based upon the price testing the recent high, prior to the pullback. At that level, a decision can be made. If candlestick sell signals start appearing near the recent high, it becomes obvious that the recent high is going to act as resis­tance. The trade can be closed out immediately. On the other hand, if the candles indicate buying, going through the recent high, it becomes a clear indication that the recent high will not act as resistance. The move into a higher ground can now be expected. This move will usually produce a move up with the same magnitude as the first move up before the J-hook pullback.

The likeli­hood of a J-hook pattern is a function of the market conditions in general. The longer and more steady an uptrend in the general markets, the more likely J-hook patterns will become present.