Prices ‘Open’ Reveals Valuable Information

How Prices ‘Open’ Reveals Valuable Information

After the above wordy dissertation, the meat of this subject is being aware of how to get into trades properly. What is the message of a “buy” signal? As expressed in the Profitable Candlestick Trading book, a signal is the cumulative knowledge of all investors participating in that stock that day. If this is the only statement that you remember about Candlestick analysis, you will easily com­prehend the ramifications behind the signals. A “buy” signal forms by the re­versal of investor psychology in downward trend. That formation becomes visually evident to the Candlestick investor.

Simply stated, the signal is showing the evidence of buyers coming into a stock, reversing the previous downtrend. The Candlestick trader can identify those signals, 12 major signals and approximately 50 secondary signals and continuation patterns. As discussed earlier, the signals each provide a positive percentage of profitable trades. Upon recognizing a candlestick reversal signal, the best test to determine when to establish your position is based upon one simple question. “On the open of the next day, are the buyers still showing their presence?” This may appear to be elementary, but that is the basis for getting into the position in the first place. The Candlestick signal represents a change of direction. The magnitude of buyers present is an important factor on how strong the reversal will perform.

Fig. 9-1, the Pinnacle Entertainment chart opens near the previous close. This clearly indicates that the buyers have not backed away. Witnessing the price advance at the ‘open’ reveals that buyers are stepping in without hesitation. Buy immediately. You have all the parameters evaluated. The probabilities are in your favor. There should be no reason not to get into the position.

Note in Fig. 9-2 Province Healthcare Co. that the buyers were still present. The open, by remaining in the area of where the buyers closed the price the night before, indicates that there was not a change of heart during the evening. “In the area” can mean a slightly lower opening price. Consider the action of the price the previous day. It had a big up day. As the end of the trading day is getting near, the shorts may have realized that buying was the overriding influ­ence. The shorts may have covered, pushing the price up further on the close. Profit taking or sellers still wanting to get out of the stock could lower the price on the open. The next morning, prices opening slightly lower and immediately moving higher indicate that the buyers have not disappeared. As soon as the first few minutes of trading transpire after the open, an investor should be able to ascertain how the stock and markets arc performing.

If the market in general is not falling out of bed and the stock price does not appear to want to move lower, it is time to start establishing the position. A prudent method would be to buy half the position at the slightly lower level and put a buy stop at the previous days close for the other half. The rationale being that if the price conies up through yesterday’s price, the buyers are still present.

The most promising form of evidence, indicating the price is getting strong buyers’ attention, is the gap up. Note in Figure 9-3, Meritagc Corp,, a gap up formed. As defined by the gap, the strength of the buyers is very strong. A gap- up, at the bottom of a downtrend, and after a candlestick reversal signal, is one of the best signs of buying strength. One should be committing funds immediately.

The gap up at a beginning of a trend bodes very well for an extended rally. Whether the indexes are opening up weak or strong, a gap up in a stock de­serves immediate attention. The buying coming into this stock is not concerned about the status of the markets. Try to get into tire stock as fast as possible. The advantage of being able to view the bid and ask prior to the open is that it prepares an investor for an entry strategy. Seeing a stock price biding up before the open and knowing what a gap up indicates after a Candlestick signal allows for placing a market order on the open.

Use that buying force to your advantage. Get in early as possible. Again, the probabilities are in your favor and this time the gap is adding to the force of the move.

Sometimes you are going to see a gap up; you get in and then watch the price head back the other way. Don’t worry. The buy signal was the reason to buy. The buyers were still around if prices gap up. If profit taking occurs after that, no big deal, the buyers are still around. Wait for a day or two and the signal should confirm itself.

A substantial gap up may require watching to see if there is any immediate profit taking. This might be better accumulated by buying one-half the position on the open, the second half after observing the price move. In some substan­tial gaps up, the opening price might be the high for that day, creating a black candle. The fact that it had many buyers on the open, followed by some immediate profit taking, still reveals that there was a strong change in sentiment.

“I hear and I forget. I see and I remember. I do and I understand.”

Note in Fig. 9-4, the Meridian Gold Inc. chart, how the large bullish engulfing pattern clearly illustrated that the bulls had stepped in. This shows a great buying influence. The next day gaps up. This could be the beginning of a very strong rally. This has all the makings of a strong run up. There would be no reason not to get into the position. However, once the position is filled, the profit taking sets in. Is this time to worry? Remember what the bullish engulf­ing pattern told you. The buyers were coming into this stock with great force for some reason. It would seem very unusual that the next day they would all of a sudden disappear.

It is not unusual to see some profit taking after a 10% to 15% run up in two days. The underlying factor remains that the buyers have come into this posi­tion with vigor. Sit comfortably for a day or two to see what happens after the profit taking disappears. In this case, the strong ‘buy5 signal was the prelude to more buying.

The appearance of a gap tip is a clear indication that the “buy” signal is having the follow through that is required to sustain a strong rally.

Fig. 9-5, The Exploration Co. has every sign of strong buying. A Bullish Engulfing pattern is the first signal. The gap up and the strong buying after­wards is more evidence. There would be no reason for not getting into the position on the next show of strength.

Once you have gotten into the position, the price rolls back. Profit taking, or the market in general starts getting weak. Your peace of mind is still in the strong buy signals. As in this illustration, it took a few days for the trend to start back up. During those few days, note that the sellers could not knock the prices down.

It may have tested some nerves, but after 3 or 4 days, the bulls starting gaining confidence that the sellers did not have enough strength to push the price back down. This leads to the continuation of the upward trend. It took a few extra days but that is reality. Some positions look great when you get in but will be a laggard for a few days. Nevertheless, if the message of the signals is correct, the trend will be continuing. Sometimes that will take patience but the probabili­ties will be in your favor.