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Enhancing The Power Of Candle Charts
by Steve Nison, CMT
President of Candlecharts.com
The Best of the East and West
We know that candle charts shine at providing early reversal signals. Another major advantage of candle charts is that because they use the same data as bar charts (i.e. the open, high, low and close) they can easily be combined with classic western charting techniques. I will be discussing this aspect at my West Palm Beach (Jan. 14) and Ft. Lauderdale (Jan. 15) sessions. But let's look at a recent example of this with lows in the NASDAQ made late September.
On Sept. 21 the NASDAQ formed a low at 1387. The next day the market gapped higher, forming an island bottom (in Western parlance an island bottom occurs when the market gaps down, and then the gaps higher the next day). This is usually a bullish reversal signal. Of extra significance was that this island bottom also confirmed the major support at the major low formed on October 8, 1998 at 1357 (which was also an island bottom!).
While the September 21 island bottom was a positive, most experienced traders want to see a retest of new lows (or near those lows). This serves to expand on a base for a potentially more powerful rally. With this in mind, we would want to see a retest anywhere near the 1387 level. And, on September 27 we got this retest with a bullish candlestick line called a "hammer." A hammer is a candle line with a very long lower shadow, and a small real body (black or white) at the top end of the session's range. The hammer shows that the market was rejecting lower price levels. With a hammer the Japanese say that the market is "hammering out a base." And so it was.
As the Japanese proverb says, "Like both wheels of a cart." And so it is with candles and classic Western charting tools. With the hammer (a candlestick line) confirming the lows near major support (from October 1998) and the island bottom (Western technical signals) the September NASDAQ low was a classic example of the forging of the power of combining Eastern and Western techniques.
(EDITOR'S NOTE: Steve Nison was the first teacher to introduce Japanese Candle Charting to the Western world. His website is the most comprehensive on the web on this subject. Click here to visit: www.CandleCharts.com.)
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