What is the
most important aspect of stealing a base in baseball? Many coaches
agree that a base runner needs to get a good jump. The next obvious question is:
How do you get a good jump? One key answer to this question is that you must
observe the pitcher's feet closely and carefully. The pitcher has three choices
when he is in the set position: pitch, pick or step off. For a
right-handed pitcher, his right foot will move first when he decides to pick or
step off. If his left foot moves before any parts of the body, you can safely
assume that he is throwing to the plate. Once you learn this trick, your base-stealing skill will be drastically improved.



A similar concept applies to successful stock trading. We have to observe stocks
closely and carefully if we want to develop highly effective trading styles.
Needless to say, stocks do not have feet like pitchers, but stocks give us
certain price and chart patterns. Especially if you are students of candlestick
charts, you might already have experienced how a single candlestick can identify an important price-turning point. In this lesson, I would like to
discuss how to pick potential buys and sells from the TradingMarkets.com's Daily
Indicators page by utilizing candlestick charts. (Note: I will be focusing
on engulfing patterns combined with other indicators.)  



Every day after market close, TradingMarkets.com reports more than 30 lists of stocks which may be tradable for the next day. But, before you
get into these lists, I suggest you first check the Market
Timing Indicators. These indicators are designed to provide you with a
picture of the overall market direction. If you see more up arrows than down
arrows, you can simply conclude that it may be wiser to look into buy
opportunities. On the other hand, if you see more down arrows, probably you are
going to face a down market. Let's see actual trade examples for March 28, 2001. 



As of the close of March 27, 2001, Market Timing Indicators gave me two down
arrows and zero up arrows (see below). This suggested the moderate downward
market directional bias for the next trading day, March 28. Therefore, I decided
to focus on selling and moved on to the Downtrending
Indicators. 

There are seven stock lists in the Downtrending
Indicators. They are: Proprietary
Implosion List; Pullbacks
From Lows List; New
60-Day Lows Double Volume List; Implosion
10 Technology List; Weakest
Sectors of the Past 5 Days; Stocks
Crossing Below Their 50-Day EMA on Double Volume; and Mark
Boucher's Bottom RS and EPS New Lows List. After going through each list
quickly, I found truly attractive situations in the Weakest Sectors of the
Past 5 Days. Of course, I spotted a few good setups in other lists, but
those stocks in the Weakest Sectors of the Past 5 Days exhibited
exceptionally powerful downward potential.



The figure below shows, as of the close of March 27, the weakest sector was the
Interactive Internet Index ($IIX.X),
and the second-weakest was The Street.com Internet Sector ($DOT.X).
The third weakest was the Oil Service sector ($OSX.X),
and this sector was the one with plenty of attractive candlestick chart
patterns. $OSX.X has the total of 15
component issues, and all 15 component issues indicated sell signals after
the closing of March 27. 

Let me show you four key examples.

Schlumberger Ltd ( SLB | Quote | Chart | News | PowerRating),
on March 27, failed to break out above its 20-day moving average after pulling
back from the March 22 low. What made this weak closing more bearish was that
the stock formed an engulfing pattern. The real body of the candlestick totally
engulfed the prior day's real body. As you might have guessed already, my plan
would be selling SLB the next day as soon as the price falls below March 27 intraday
low. Luckily, the stock continued its downward move. By the end of March 29, the
stock lost nearly 5 points.

The chart below of Cooper Cameron ( CAM | Quote | Chart | News | PowerRating) shows another excellent example of the engulfing pattern. On March 27, the stock
failed to break above its 20-day moving average and completed an engulfing
pattern. CAM continued its weakness, and the issue closed almost 5 points
lower by the end of the March 29 trading session.

Tidewater Inc ( TDW | Quote | Chart | News | PowerRating)
also formed an engulfing pattern, but its daily chart revealed additional
profitable selling signs. TDW closed just above its 50-day moving average on
March 27, and it signaled a potential breakdown play. But if you look at the
chart closely, you may notice the formation of a head-and-shoulders pattern. Now,
you have three short-selling entry points. 



Those are: 

1. 
   

   Sell as soon as the TDW trades below the low of the engulfing bar.



2. 
   

   Sell when the stock breaks down below the 50-day moving
   average.



3. 
   

   Sell if the issue falls below its neckline.



4. 
   

   As clearly shown on the chart below, TDW satisfied all three conditions above on
   March 28. Needless to say, multiple signals are always better than one -- a lot
   better.
   
   

I want to show you another case of  multiple
entry signals. Chart below is Noble Drilling ( NE | Quote | Chart | News | PowerRating). Like Tidewater Inc, Noble Drilling formed an engulfing pattern just above its
50-day moving average on March 27. Can you also see a formation of a head and
shoulders? Therefore, you can short the stock as soon as it violates the low of
the engulfing bar, its 50-day moving average, and the neckline. As of the end of
March 29, the stock has fulfilled two conditions, except breaking down below the
neckline.

So far, I have discussed only selling or shorting
because the Market Timing Indicators suggested the downward market bias.
Yes, there were some interesting buy setups as of the end of March 27. But as
you know, on March 28, both the Nasdaq and the Dow Jones Index suffered
losses, and many buy setups did not produce desired results. For example, Anchor
Gaming ( SLOT | Quote | Chart | News | PowerRating),
from the Proprietary Momentum List, formed a bullish belt hold and closed
at a new high on March 27. Volume was also heavy. It suggested continuation of
this upward move, but it began to pull back.

Abercrombie
& Fitch ( ANF | Quote | Chart | News | PowerRating),
from the Proprietary Momentum List, also
failed to follow through to the upside. Like Anchor Gaming, ANF formed a
bullish belt hold and closed at a 52-week high on March 27. I thought the stock
would continue to extend its gains, but it started to decline the next trading day.

Always
remember to trade stocks with the same direction as
the market. It will maximize your profit. Also, don't rely on candlestick chart
patterns alone. As I mentioned above, multiple signals are always better than
one. 

Let me conclude
with a quote from Japanese
Candlestick Charting Techniques by Steve Nison: "I do not use bar charts anymore, I only use
candlestick charts. But that does not mean I only use candlestick indicators.
While the candlesticks are a vital medium of market analysis, I use all the
technical tools at my disposal."



Good luck and happy trading.

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