Option Investor
Trader's Corner

The Buck Stops Here

Printer friendly version

Previous articles in the candlestick charting series discussed the basics of this charting method and introduced some of the many reversal signals. For those who want to review those previous articles, they can be found in the Traders Corner articles in the Saturday June 11, 18, and 25, and July 2 editions of the weekend OptionInvestor newsletters.

Reversal signals gain more significance when produced at support or resistance. As with any type of charting system, previous swing highs and lows might again serve as resistance, but candlestick charts offer unique insights into likely support or resistance. Note: Charts were chosen to show characteristics of candlestick support and resistance, and do not reflect current prices.

Annotated Weekly Chart of GE:

In addition, the construction of candlesticks, with their two-dimensional real bodies, allows for a deeper examination of where real support or resistance might lie.

Annotated Daily Chart of the OEX:

The OEX was to go on testing that 100-sma from below for another couple of weeks before closing above it Friday. The importance of that 100-sma does not appear quite so readily on a regular bar chart, pointing to another benefit of candlestick charting methods.

Annotated Daily Chart of the OEX:

Specific candlesticks sometimes signal where support or resistance may lie. Among those candlesticks are the doji and the longer-than-normal white or red candle.

Annotated Five-Minute Chart of A:

Doji at the bottom of a swing low also signal potential S/R.

In addition, some candlestick chartists search for longer-than-normal white or red candlesticks, knowing that support or resistance is often found at the midpoint of such candles.

Annotated 60-Minute Chart of CME:

Similarly, harami can serve as support or resistance.

Annotated Daily Chart of LSI:

Engulfing patterns can later serve as support or resistance, similar to the way that harami might provide that support or resistance. In addition, gaps, or windows in candlestick nomenclature, might be watched for support or resistance.

AAnnotated Daily Chart of RLX:

Friday, the RLX finally broke out of that diamond to the upside to move up to a retest of the diamond's high, but the formation of the diamond around the gap or window's S/R zone corroborated its importance. That gap or window's resistance had already been proven in February and March when the RLX rose to test the window. Nison, termed by some the "father of candlestick charting" and credited by others with introducing this Japanese candlestick to western chartists, suggests that a window's importance should not be ignored..

As with other articles detailing the basics of candlestick charting, one article cannot do justice to the many nuances of candlestick support and resistance. Instead, this article introduces some ideas to consider when looking for support or resistance. For more ideas and an in-depth discussion, see Steve Nison's JAPANESE CANDLESTICK CHARTING TECHNIQUES, Greg Morris' CANDLESTICK CHARTING EXPLAINED or other books on candlestick charting.

Trader's Corner Archives