Candlesticks and Support
Introduction
Single candlesticks and candlestick patterns can confirm or mark support levels. Such a support level could be formed after an extended decline or confirm a previous support level. In a trading range, candlesticks can help choose entry points for buying near support and selling near resistance. The list below contains some, but not all, of the candlesticks and candlestick patterns that can be used together with support levels. The bullish reversal patterns are marked with an (R).
Bullish Harami (R)
Doji (Normal, Long Legged, Dragonfly)
Hammer (R)
Inverted Hammer (R)
Long White candlestick or White Marubozu
Piercing Pattern (R)
Bullish reversal candlesticks and patterns indicate that buying pressure overcame early selling pressure for a strong finish. This bullish price action suggests enough strong demand for support to be established.
The inverted hammer, long white candlestick, and Marubozu show increased buying pressure rather than an actual price reversal. With its long upper shadow, an inverted hammer signifies intra-session buying interest that faded by the finish. Even though the security finished well below its high, the ability of buyers to push prices higher during the session is bullish. The long white candlestick and white Marubozu signify sustained buying pressure in which prices advanced sharply from open to close. Signs of increased buying pressure bode well for support.
The doji and spinning top denote indecision and are generally considered neutral. These non-reversal patterns indicate a decrease in selling pressure but not necessarily a revival of buying pressure. After a decline, the appearance of a doji or spinning top denotes a sudden letup in selling pressure. A stand-off has developed between buyers and sellers, and a support level may form.
In the chart below, Electronic Data Systems (EDS) traded within a range between $58 and $75 for about four months at the beginning of 2000.
Support at $58 was established in early January, followed by resistance at $75 in late January. The stock declined to its previous support level in early March, forming a long-legged doji and later a spinning top (red circle). Notice that the doji formed immediately after a Marubozu (long black candlestick without upper or lower shadows). This doji marked a sudden decrease in relative selling pressure and support held. Support was tested again in April, and this test was marked by a long-legged doji (blue arrow).
Broadcom (BRCM) formed a bullish engulfing pattern to mark a new support level below $210 (green oval) in late July 2000. A few days later, a long white candlestick formed and engulfed the previous four candlesticks.
The combination of the bullish engulfing and long white candlestick reinforced the validity of support around $208. The stock has since tested support around $208 once in early September and twice in October. A piercing pattern (red arrow) formed in early October, and a large hammer in late October.
Medtronic (MDT) established support around $46 in late February with a spinning top (red arrow) and early March with a harami.
The stock declined sharply in April, and a hammer was formed to confirm support at $46 (first green arrow). After a reaction rally to resistance around $57, the stock declined sharply and again found support around $46 (blue arrow).
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