Candlestick Power Patterns: Making Investment Patterns More Predictable

The Jay-Hook Pattern

Candlestick signals provide an immense advantage to investors when pin pointing the best trades in the market. The implied logic built-in to the signals creates a platform that always places the probabilities in the candlestick investor’s favor.  The signals work extremely well on their own.  However, applying candlestick signals to easy-to-recognize trading patterns creates a platform for taking advantage of high profit moves.

Japanese rice traders became legendarily wealthy by using the signals. It allowed them to take advantage of ‘most’ investor’s basic human emotions when money was put on the line.  Fear and greed becomes the predominant factors in most investment decisions. That is why large volume days are seen at the reversal points, the ‘panicked’ sell out at the bottom, the ‘exuberant’ buy at the top. The question should always arise, “ Who is buying the panic selling and who is selling when the world looks great?” Being aware that the candlestick signals exploit those emotions, an investor can quickly  take advantage of the “herd’s”  known weaknesses. Having this asset as part of the investment arsenal, you can eliminate that weakness in your own investment decisions and profit from  that knowledge.  Capturing  human emotions in a graphic depiction makes for a consistent method  to extract profits from the market. This knowledge is easily learned when viewing the candlestick charts.

One of the most powerful patterns that can be utilized is the Jay-hook pattern.  A Jay-hook pattern (J-hook) is a variation of a wave 1 -- 2 -- 3 price move.  It becomes an easy pattern to identify with the use of candlestick signals.  A problem most investors have is understanding when to ‘sell’ after a price has made a strong move.  The J-hook pattern demonstrates some easily identifiable attributes.  First, it starts with a strong uptrend that you have usually produces “stronger than normal” returns in a very short period of time.  This strong up move is significant enough to create the normal wave pattern, a reversal caused by profit taking, followed by a declining trajectory of the pullback, then the continuation of the uptrend.  The J-hook pattern is the description of the pullback involving a  rounding  out of the bottom of the pullback, then starting a move back up thus forming a ‘hook.’

This pattern provides the candlestick investor with some very simple profitable applications.  Specific  criteria makes a candlestick investor expect  a J-hook pattern will form?  The analysis of the market trends in general will provide that information.  For example, if a stock price  had a strong run up while the market indexes  had a steady uptrend, and the market indexes do not appear to be ready for a significant pullback, then a strong stock move will warrant some profit taking before the next move up.  The benefit of being able to identify candlestick signals is being prepared for  some candlestick ‘buy’ signals after a few days of pullback.  These signals would also alter the trajectory of the stochastics that will be pulling back.

Witnessing Doji, Hammers, Inverted Hammers or Bullish Harami after a few days of a pullback becomes an alert that the selling is starting to wane.  If the stochastics are flattening out during that same timeframe, then a set-up for a J-hook pattern is taking place.  Taking profits when the first sell signals occur in the initial uptrend eliminates the downside risk.  Those candlestick ‘sell’ signals indicate that it is time to get out of the trade.  Even though the strength of the initial move would warrant suspecting a J-hook pattern to form, there is no guarantee that the pullback could not retrace 20%, 40%, 60% or even greater of the initial move up.

Note the J-hook pattern in Fig. 1, the Loews Corporation chart. Once the trend started up, the pattern formed when the price pulled back for a few days. However, the stochastics never reached the oversold area and they came down

Wave 3 will be relatively the same as Wave 1.

The benefit of the candlestick signals is that they reveal when a pullback is not occurring with great enthusiasm. When an uptrend moved with inordinate force, a pullback with some magnitude can be expected. Viewing small candlestick “buy” signals, a few days after a pullback has occurred, at least provides the inkling that the pullback may just be profit taking. As the downward trajectory of the pullback starts flattening out, watch for more buy signals.  When the trend starts moving up, a new position can be established.

The J-hook has distinct characteristics. It allows the candlestick investor to establish positions with a high degree of profitable expected results. All boats will rise in a rising tide. Most stocks will move up in a market uptrend. Understanding what to look for in specific patterns such as the J hook pattern allows for profits that will well exceed the normal price moves. The combination of identifying candlestick signals, in conjunction with candlestick price patterns, provides a trading platform with high probability entry, stop loss, and profit-taking points.

Stephen W. Bigalow is author of  “Profitable Candlestick Investing, Pinpointing Market Turns to Maximize Profits” and “High Profit Candlestick Patterns.” And “Candlestick Profits – Eliminating Emotions” He is the principal of the www.candlestickforum.com, the leading website on the Internet for providing information and educational material about Japanese Candlestick investing.  Over 20 years of extensive study and utilization of candlestick analysis has produced an array of easy-to-learn educational material about Candlesticks. As one of the leading Candlestick experts in the nation, Mr. Bigalow, through his consulting with major trading firms, and managing a candlestick hedge fund, has developed  multiple successful trading programs for the day-trader to the long-term hold investor.