3 Candlestick Patterns For Market Reversals


Hey everyone, this is Kirk, here again at
Option Alpha. And I wanted to go over in this video, 3 of the candlestick patterns that
are highly profitable for market turns. So, we’re going to be talking about candlestick
patterns that you can find in the market that will show or give a tell that the market may
be turning very, very soon. And what I like about these 3 patterns in particular is that
they are a bit of a long pattern, meaning it’s not a 2 candlestick pattern, it’s not
even a 1 candlestick pattern, like a hammer or a shooting star. These are 3 together candlesticks
or more that really give a good full understanding of why the market is turning at that particular
time. So, we’re going to go through them right here right now, and then we’ll look at some
visuals on current market charts, so you can see them in action. So, the first one is the Morning Doji Star.
This is obviously a reversal for bullish trends. So, what you actually have on this is you
have a large candle that’s going down, representing selling or acceleration. So really, this is
a 3 step candlestick process. So, the first one again, is hard selling by sellers, people
getting out of the stock. It looks like it’s going to continue falling. The next day is
the Doji which represents indecision. This means that the market opening close is fairly
similar, a lot of volatility to stay. And this is really showing the tug of war that’s
happening in the stocks. So, the first day, we have the market falling hard. The second
day is now a bit of a more indecision day. So, you still don’t know if it’s going to
reverse quite yet on the second day. That moves us to the third day which is the
long white candle which represents buyers taking back complete control of the market.
So, you can see how the market sentiment has turned 100%. The first day was hard selling,
the second day was a little bit of indecision or tug of war, and then the third day, the
buyers take this security back. So, this is a good 3 step candlestick pattern that can
show that the market is moving off of a bottom. Now, the next one that we’re going to look
at is the complete mirror image of the morning Doji Star, and that’s the evening Doji Star.
So again, everything happens in reverse. The first day is long white candle which shows
buyer acceleration. So, buyers are buying the stock up, very healthy, it doesn’t look
like it’s going to stop. The next day, we have a Doji that appears that’s higher than
the close of the long white candle. Again, this shows the indecision in the market. So,
buyers are less willing to buy up with these higher levels which shows that this thing
may be running out of steam, not always, we have to wait for the third candle. But it
does show that the buyers may be losing some steam. And then comes that third day, that long black
candle which means that sellers have taken back control, that the barriers are now back
in control of the security. And again, you can see the 180° turn that we’ve made in
investor sentiment for the stock. We have buyers who are in control, then indecision,
and then we have that long black day which sellers just cram the stock down. Okay, the third one is a really, really important
one. This is a good pattern for reversals. And it’s the Island Reversal. Now, on this
chart, I only show one candlestick on an island by itself. And you can see why it’s called
an island because you have this gap on both sides of the trend, whether it’s in an uptrend
or whether it’s in a downtrend. And that gap creates what’s called an island of candlesticks.
Now usually, you want to have an island be only 3 to 5 candlesticks at most. Once we
get past 5 candlesticks on that island, it starts to really negate those strength and
power of the reversal. But basically, what happens in an Island Reversal,
similar to what happens in those morning and evening stars, is that the market has huge
sentiment. The market actually gaps higher. But once it gaps higher, it stays in that
region and doesn’t go any further. So, it gets really excited and gaps higher and stays
in that region, and then it loses complete faith and gaps lower. And that’s what creates
that island reversal. Same thing on the bottom side. The market will gap lower. It’ll seem
like this thing is just going to keep falling through the floor. And then the market will
stabilize and actually gap again, higher, showing some massive, massive buying pressure
into the security. Okay, so now let’s look at each of these on
a stock chart just to get a look at what they look like on a real-life chart. So, here I
am on my screen once again, and I’ll go over here to my stock chart. This is a really good
one that I found. And actually, through the help of think or swim, you can actually go
up here to patterns and then click “find candle patterns” right here. So, it’s very easy to
find candle patterns with think or swim. And I’ll go over that in another video tutorial. But here, you can see that this is a morning
Doji Star. It’s a very, very clean pattern that we had on PNX back in November of last
year. And again, if I zoom in on this, you can see the indecision and the hard selling
that we have on the first half of this pattern. So again, hard selling. Then we have that
Doji where it shows indecision or the market may be reversing here. But we need the third
day which is right here, this massive buying pressure, this long white candle here. And
again, you can see this is a very good signal because after this day, the stock ran up a
little bit here. So again, very, very good, clean morning Doji Star. Okay, now we’re going to BRKL. And this is
a very good pattern of the evening Doji Star. Again, you can see everything happens in reverse.
We have a long white day, showing that buyers are still major in control here. Then we have
this Doji up here which shows that buyers may be losing some steam, that this rally
which has been lasting since the low or mid 8’s may be running out of steam up here in
the high $10 region. Then we have the next day that has this long red candle which is
showing that sellers are taking back control of this security. Now ideally, we’d like this
red candle here to eat into or sell off just a little bit more, so that it’s almost even
with the midpoint of the long white candle. But it is a very good signal. And again, you
can see that this signal did show some selling pressure over the next two weeks. The last one that we’re going to look at is
actually coach. And this one had a really good island top pattern back in 2007 here.
This is a really good pattern again to look at. Again, like I said, 3 to 5 candlesticks
on this pattern that’s usually ideal for these island tops. But you can see what happened
here with coach is that it ran up very, very strong. It got so excited that it gapped higher
the next day. And so, it created this gap up here on this island top. But then it traded
lower throughout the island top and actually gapped lower on the 25th of September here. So, it created this island of candlesticks
that are all by itself. It’s just out here in the open and nothing really near it. It
didn’t continue on from that trend. And that really creates a very strong reversal. Island
tops are very strong if you can spot them in the middle of a trend here in the trend
reversal. But you can see that after that island top, that coach absolutely just got
hammered, another exhaustion gap here back around 40. So, a very, very powerful signal
that emerged on coach.

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