Bullish Harami

HARAMI

BULLISH HARAMI

Description

The Japanese definition for Harami is “pregnant woman” or “body within”. Western terminology would call the Harami an inside trading day. It is com­prised of two candles. The first candle is black, a continuation of the existing trend. The second candle, the little belly sticking out, is usually white, but that is not always the case (See Homing Pigeon, Profitable Candlestick Trading, p. 96). The location and size of the second candle will influence the magnitude of the reversal.

The Harami signal conveys some important information. It says that the previous trend is over. The appearance of a Harami signal will convey the same information after an extended downtrend or one or two days of a pullback.

After a strong down trend has been in effect and after a ‘long candle’ selling day, the bulls open the price higher than the previous close. The short’s become concerned and start covering. The price finishes higher for the day.

This is enough support to have the short sellers take notice that the trend has been violated. A bullish day alter that would convince everybody that the trend was reversing. Usually, the volume is above the recent norm due to the unwind­ing of short positions. One of the visual benefits provided by the Harami signal is the indication of how strong the potential of the new trend will be. It acts as a barometer. The signal works most effectively after an extended downtrend concluded with the large black candle at the bottom of the trend or a gap down black candle. The appearance of a Harami signal the following day reveals that the selling has stopped. The size of the Harami or where it is formed in the previous days black candle is significant.

Criteria

1.    The body of tine first candle is black; the body of the second candle is white.

2.   The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.

3.   The second day opens higher than the dose of the previous day and closes lower than the open of the prior day.

4.   Unlike the Western “Inside Day”, just the body needs to remain in the previous day's body, where as the “Inside Day” requires both the body and the shadows to remain inside the previous day’s body.

5.   For a reversal signal, further confirmation is required to indicate that the trend is now moving up.

Signal Enhancements

1.    The longer the black candle and the white candle, the more forceful the reversal.

2.   The higher the white candle closes up on the black candle, the more con­vincing that a reversal has occurred despite the size of the white candle.

A Harami forming at the very lower end of the last bearish candle of a downtrend provides some insights. Although it illustrates that the selling has stopped, it also illustrates that there is not much buying impetus. The potential uptrend may not be immediate or very strong.

As seen in Fig. 2-51. the EchoStar Communication Corp. chart, the Bullish Harami was very small and stayed near the bottom of the previous black candle’s trading range. The subsequent buying took a while to get started, not showing any great immediate strength.

The higher the close of Harami into the previous days black candle, the stronger the trajectory of the new uptrend. The Harami requires bullish confir­mation the following day. The Harami signal itself indicates the downtrend has stopped. Continued buying the next day reveals the uptrend is now in progress.

As viewed in Fig.2-51A, the Television Azteca chart, the Harami closing just above the bottom third of the previous black candle, followed by a bullish open the following day, started a decent up trend. The stochastics are an additional confirming parameter.

The Harami works very well for indicating whether important support levels are going to hold. As seen in Fig. 2-52 (following page), the Standard Pacific Corp. chart, a bullish Harami revealed that the uptrend was going to continue after the pullback. A pullback moving very near to the 50-day moving average. Although the stochastics were not in the oversold condition, it could be deduced that the pullback was over, the price stayed above the moving average, in the process of continuing the uptrend. Remembering that the Harami indicates selling has stopped, it becomes an effective visual indicator when trying to analyze existing mends.