You wake up, check your phone, brush your teeth, have a bath, have some breakfast and then leave for your office. You catch your regular 8 AM train, reach your office, punch in your card, greet your peers and go to your desk to start working. Take a scheduled lunch break at 1 p.m. and a chai break at 4 p.m. Finish your daily tasks in the evening, again take the regular 6 p.m. train back home.
You see, we perform some activities daily which now have become our lifestyle. These are nothing but patterns that are repetitive in nature. Be it our activities or our emotional response to situations all are following some patterns, some of which were passed down to us and some we picked up while growing up. These patterns are reflected while we are trading or investing in the stock market. You might have heard these lines, “Market sentiment is bullish/bearish”. But how do we recognize this sentiment? Through this blog, we shall understand one of the ways of understanding the sentiment which is observing candlestick patterns. So, let’s dive in and understand 3 candlestick patterns that show a bullish sentiment. If you don’t know what is a candlestick, you can check out this blog on Basics of technical analysis or my video on Youtube.
How to analyze Candlestick patterns?
To put it very simply, a daily chart candlestick will give you an idea about that day’s price range and movement. When we put one or more candlesticks together, we get some significant candlestick patterns. Each candlestick’s shape/size may indicate something, so based on the price movement, it can be either bullish or bearish. Candlestick patterns help us identify trend reversals in a financial instrument like stocks, indices, currencies, commodities, etc. Hence, they are categorized into bullish reversal patterns and bearish reversal patterns. Bullish reversal patterns indicate a change in direction of a financial instrument from a downtrend to an uptrend. Bearish reversal patterns indicate a change in direction of a financial instrument from an uptrend to a downtrend. Today, let’s focus on understanding some of the major bullish patterns, we will learn about bearish patterns in the next blog.
Bullish Reversal Patterns
1. Bullish Marubozu:
Marubozu is a single candlestick pattern. This pattern does not have an upper and lower shadow or has very small shadows. For a candlestick to qualify as a Marubozu, only the body of the candle must exist and it needs to have a significant length. This means that open = low and close = high of that day. Marubozu means bald in Japanese. As this candle has small or no shadows it appears to be bald and hence the name - Marubozu.
What does it tell you?
A bullish Marubozu indicates that buyers were ready to buy an instrument at every possible price between the days’ range i.e., between high and low. This suggests that the buyers were more powerful during the day which in turn drove the price up, due to high demand. A bullish Marubozu appearing at the end of a downtrend signals a possible bullish reversal in the next few trading sessions. If it appears in an uptrend, it indicates that the uptrend will continue.
Example:
Below is the daily chart of Alembic Pharma. On 11th June 2018, we can see a bullish Marubozu appearing at the end of a downtrend with strong volumes. The stock opened at 423.3 which is the same as its low. It made a high of 503.9 and closed at 501.35. Post that we can see that the stock moved in an uptrend for the next few trading sessions.
2. Bullish Engulfing:
Bullish engulfing is a 2 candlesticks pattern. The first candle must be bearish (red) and the second candle must be bullish (green). The second candle must be bigger and engulf or cover the first candle completely. The bigger the second candle, the higher will be the bullishness. It is important to note that the second candles’ body should engulf the previous candles’ body. If the previous candle is engulfed along with its shadows, it shows more strength in bullishness. This pattern should appear at the end of a downtrend.
What does it tell you?
The second candles open lower than the close of the first candle in expectation of more bearishness. However, a rise in buying interest among investors pushes the price to close above the opening price of the previous candle. This way the second candle ends up engulfing the previous candle. Hence, a bullish engulfing pattern is formed indicating that the buyers have taken the charge and signals a bullish trend in the next few trading sessions. Example:
Below is the daily chart of BSE Ltd. On 6th March 2017, the bullish engulfing pattern was formed. The first red candle opened at around 787.6 and closed at 766.7. The next day's opening was at 766.1 (below the previous day's close of 766.7) and went up to close at 815.35. Post that we can see that the stock moved in an uptrend for the next few trading sessions.
3. Morning Star:
The morning star is a 3 candlesticks pattern. The first candle should be bearish (red). The second candle would be a Doji/spinning top and will open and close below the previous candle. The third candle will open above the second candles’ close and because of huge buying interest, it will close above the first candles’ open/high covering it completely. This pattern should appear at the end of a downtrend. Confused right? Don’t worry, read on, it is very simple.
The morning star is a 3 candlesticks pattern. The first candle should be bearish (red). The second candle would be a Doji/spinning top and will open and close below the previous candle. The third candle will open above the second candles’ close and because of huge buying interest, it will close above the first candles’ open/high covering it completely. This pattern should appear at the end of a downtrend. Confused right? Don’t worry, read on, it is very simple.
What does it tell you?The first and second candles follow the previously existing downtrend. The second candle has a gap-down opening indicating bearishness. However, this candle forms a Doji/ spinning top pattern which indicates indecision in the market. It means there was a tough fight but neither buyers nor sellers could win on this day to establish a trend. Then comes the third candle showing bullishness and manages to close above the first candles’ open/high. This gives a strong signal to the market that the buyers are taking over and it will continue for the next few trading sessions.
Example: Below is the daily chart of Varun Beverages. On 26th March 2018, it completed a morning start pattern. The first candle opened at 408.3 and closed at 402.5 following the bearish trend. On 23rd March, a Doji is formed with almost a gap down open and close around 397. On the third day i.e. 26th March, the stock opened at 395.8 but rallied to close at 414.8 which is higher than the first candle opening price. Post that we can see that the stock moved in an uptrend for the next few trading sessions.
Bottom line:
You might not find the exact patterns as we discussed today. A minor difference in the pattern is okay (like in our last example of VBL where the third candle opened below the previous candles’ close). It is important to note that one should not use candlestick patterns solely to make a trade decision. It should be combined with volume, support/resistance levels, or Fibonacci levels, and indicators like MACD, RSI, etc. to get multiple confirmations. If technical analysis intrigues you, make sure you click on the link to check out my course where I have explained more such patterns, indicators, and strategies in the most simplified way. Until next time!
