Now turn the tables over. The same enthusiasm demonstrated by a gap to the upside is
just as pertinent for sellers on the downside. A gap down illustrates the desire for
investors to get out of a stock very quickly. Identifying clear Candlestick “sell” signals
prepares the investor for potential reversals. The Doji at the top, Dark Clouds, Bearish
Engulfing patterns are obvious signals to be prepared for further downmoves. The Doji is
the best signal to witness a trend reversal.
The Doji should stand out at the top of a trend just like a blinking billboard. Note the Doji
at the top of the ISSI, Integrated Silicon Solution chart, Figure 13. The Candlestick
investor would have already been prepared upon seeing that a Doji was forming that day
as the close was getting near. At worst, the position should have been liquidated when the
pre-market indications showed a weak open.
Figure 13 – Integrated Silicon Solutions
The existence of the gap down demonstrates an urgency to get out of this position. Being
prepared for this event prevented giving back a major portion of profits.
Illustrated in the ASTSF chart, Ase Test Limited Ord Shr, Figure 14, the gap down
confirms the downtrend a day later after the appearance of the Doji. A clear Evening Star
signal requires the black candle after the Doji to close more than half-way down the
previous large white candle. In this case, it closed right at the midpoint, still leaving some
doubt as to whether the uptrend is truly over. The gap down the following day confirms
that the sellers are now in control.
Knowing the simple description of the signals gives the candlestick investor that extra
head start in preparing to take profits or go short. Utilizing the statistical probabilities of
what the signals convey allows the mental, as well as the actual preparedness. The ease of
identifying a gap, and knowing what messages a gap conveys, instigates the investor to
change the position status immediately.
Figure 14 – Ace Test Limited Ord. Shrs.
These are examples that demonstrate the obvious benefits of what the windows /gaps
portray. However, there are many more situations where they provide important
investment decision-making aspects.
For example, review the Toll Brothers chart, Figure 15, April of 1999. Notice how the
initial gap acted as a support level. In the weeks after the gap up the price would come
back to the top of the gap but would not close lower. As long as the gap was not filled,
the uptrend stayed intact. This is a good rule of thumb. If a gap cannot be filled, the
predominant trend will continue. The Japanese term for filling a gap is anaume.
Knowing that a gap will act as a support or resistance level gives the Candlestick investor
time to prepare when one of these levels is approached. The condition of the Stochastics
and the potential set up of another reversal signal informs the investor as to whether that
gap is going to act as a support or if the gap will be filled. This may be occurring at a
time when no other technical indicators are present in that price area. Note how the gap
acts as a support level in the Toll Brothers chart. Each time price dipped to this level, the
buyers stepped in and would not let the price fill the gap. This should obviously become a
support consideration.
