Bullish and Bearish Counterattack Line Trading Strategy

COUNTERATTACK LINES

Counterattack lines are formed when opposite colored candles have the same close. The best way to describe this pattern is by discussing the illustrations in Exhibits 4.45 and 4.46.

Exhibit 4.45 Bullish Counterattack Line

Exhibit 4.45 is an example of a bullish counterattack line. This pattern occurs during a decline. The first candle of this pattern is usually a long black candle. The next session opens sharply lower. At this point, the bears are feeling confident. The bulls then stage their counterattack as they push prices back up to unchanged from the prior close. The prior downtrend has then been bridled.

The bullish counterattack is comparable to the bullish piercing line. If you remember, the piercing line has the same two- candle configuration as that shown for the bullish counterattack pattern. The main difference is that the bullish counterattack line does not move into the prior session's white real body. It just gets back to the prior session's close. The piercing pattern's second line pushes well into the black real body.

Consequently, the piercing pattern is a more significant bottom reversal than is this bullish counterattack line. Nonetheless, as shown in some examples below, the bullish counterattack line should be respected, since it proves that there is a change in the flow of direction of the market.

Exhibit 4.46 Bearish Counterattack Line

Exhibit 4.46 illustrates the bearish counterattack line. The first candle, a long white one, keeps the bullish momentum going. The next session's opening gaps higher. The longs are happy— then the bears come out fighting and pull prices to the prior day's close. The bulls' tide of optimism on the second day's opening probably turned to apprehension by the close.

As the bullish counterattack line is related to the piercing line, so the bearish counterattack line is related to the dark- cloud cover. The bearish counterattack, like the dark-cloud cover, should ideally open above the prior day's high. Unlike the dark-cloud cover, though, the close does not go into the prior day's white candle. Thus, the dark-cloud cover sends a stronger top reversal signal than does the bearish counterattack line.

An important consideration of counterattack lines is if that second session should open robustly higher (in the case of the bearish counterattack) or sharply lower (for the bullish counterattack). The idea is that on the opening of the second day of this pattern, the market has moved strongly in the direction of the original trend. Then, surprise! By the close, it moves back to unchanged from the prior session. In doing so, it changes the market's texture in one day.

In Exhibit 4.47 on March 10, the stock surged one dollar higher on the opening than the prior day's close. By session's end the whole bullish hue of the stock had changed since the bears dragged down prices to the prior close of March 7. This bearish counterattack line of March 10 was the first of three black candles that completed the three black crows.

As mentioned in the section of three black crows, because we need to wait for three black candles for the completion of that signal, much of the move may be lost by the time the third candle of the three black crows unfolds. In this case, however, with the first black candle's counterattack line, we would have received an early turning signal in one session that was further confirmed with the three black crows.

Exhibit 4.47. Bank One-Daily (Bearish Counterattack Lines)

Exhibit 4.48 illustrates a bearish counterattack line emerging October 15. We can see that the counterattack did not close exactly at the prior white candle's close but marginally below the prior close. With the counterattack lines, as is true with most candlestick signals, there is room for flexibility in the definition of the pattern. For example, on December 6 there was a bullish counterattack line. On that session, the stock gapped sharply lower on the opening and, by session's end, closed almost, but not exactly, at the prior day's close. I would still view this as a bullish counterattack pattern, although the stock did not close exactly the same as the prior close, but certainly was close enough. The main criterion in this bullish counterattack was the impressive rebound on the white candle from its weak opening.

In Exhibit 4.49 a bearish counterattack pattern helped confirm July's significant resistance near $138-$139. Again, the two closes were not exactly equal, but close enough to validate this pattern. This chart highlights how easy it is to use candles to get extra confirmation of resistance. While this $138-$139 resistance

Exhibit 4.48. Gillette-Daily (Bearish and Bullish Counterattack Lines)

Exhibit 4.48. IBM-Daily (Bearish Counterattack Lines)

would be available on a bar chart, there is no such thing as a "counterattack" concept with bar charts. Thus, by substituting candle charts for bar charts, a trader gets all the bar chart signals (such as resistance areas) with the bonus of the unique candle indicators.

A bullish counterattack line is shown in Exhibit 4.50 at the January 12 lows. This helped confirm a support area in place since mid December between $25.50 and $27.

This chart also highlights what I call a "cluster of candles." By this I mean a convergence, or grouping, of candle signals that reinforce a specific resistance or support area. With this in mind, let's look at how a cluster of candle signals, denoted by 1-4, reinforced resistance.

·       A shooting star. The next day completed a bearish engulfing pattern.

·       The black real body that intruded well into the prior white real body formed a dark-cloud cover.

·       Another dark-cloud cover.

·       A bearish engulfing pattern.

Exhibit 4.50. Applied Material-Daily (Bullish Counterattack Lines)

After the clues at 1-4 above, would one think there is resistance between $38 and $39.50? As my 11-year-old son would say, "Duh." This technique of a cluster of candles underscores the importance of having a group of signals, whether candles signals or Western signals, converging at one area to increase the importance of that specific area.