At askslim.com, cycle analysis is our go-to method of technical analysis. This article will refer to various concepts and terms pertaining to cycle analysis, so some background knowledge will prove useful. If you’d like to learn more about Cycle Analysis or just review what you already know, be sure to check out our series on Cycle Analysis Basics.
This article is Part 2 of How We Identify Cycle Highs and Lows Using Candlesticks. If you have not read Part 1, we suggest that you start there and then come back to this article.
Looking for Follow Through
In Part 1, we explained how important it is not to examine candlestick patterns in isolation. This is particularly important in the practice of cycle analysis, as a bullish or bearish candlestick pattern can have varying implications depending on the cycle phase in which it takes place.
The next step in the process is what we refer to as “looking for follow through”, which involves analyzing additional technical factors to increase our confidence in our projections. Essentially, if we believe a cycle high or low has been marked, it takes more than a candlestick pattern for us to be certain.
In the following examples, we will demonstrate how we use candlestick patterns to identify cycle highs and lows and then look for follow through to verify.
Identifying Cycle Highs in Amazon
In this daily chart of Amazon (AMZN), there are two key candlestick patterns, highlighted by red ovals, that we’ll examine further.
The first, shown on the left side of the chart, is a gap reverse pattern that occurs right around the midpoint of that cycle. Since the cycle midpoint often marks the cycle peak, this event gives us the first indication that the cycle high has been marked. To the right of the highlighted candlestick, you will see a horizontal red line which shows the Minor 78.6% Fibonacci Extension level. When looking for follow through, we would watch to see if this level was broken within the timeframe of that particular cycle. If it was, we would start to wonder if the candlestick within the gap reverse pattern truly marked the cycle high.
The second pattern, shown on the right side of the chart, is an evening star, which also occurs around the midpoint of its cycle. An evening star is a bearish indicator, so its occurrence around the midpoint of that cycle leads us to project that the cycle high had been marked. As price continues downward following this pattern, we also see the Slim Ribbon Momentum Indicator, shown by the color of the candlesticks, neutralize (grey candlesticks) and then turn negative (red candlesticks). This provides us with strong confidence that the evening star pattern marked the cycle high.
Analyzing Patterns in Google
In this daily chart of Google (GOOGL), there are two highlighted candlestick patterns we will analyze further.
The first, a piercing line pattern highlighted in green, occurs right around where we expect a cycle bottom. In looking for follow through, we watch to see if the low marked by the piercing line is not broken. We also look to see if any upcoming dips are bought up. As the next couple of candlesticks following the piercing line show upward movement, we also see the Slim Ribbon change from neutral to positive, increasing our confidence that the piercing line marked the cycle bottom.
The second pattern we want to point out, highlighted in red in the center or the chart, is a gap reverse pattern. An important detail to note here is that this pattern occurs early in the cycle. Though it is not uncommon for a cycle peak to occur earlier than the true midpoint, we need to watch for follow through. Only six candlesticks to the right, the high of the gap reverse is broken, and a new cycle high is printed. These events demonstrate the importance of considering candlestick patterns within the greater context of cycle analysis, so as not to get caught on the wrong side of momentum.
Bonus Google Patterns
Here again we see the daily chart for Google. There are three highlighted candlestick patterns you can see, though we will only be analyzing the first two.
On the left side of the chart, we see a bear kicker pattern, highlighted in red occurring around the midpoint of its cycle. By now, you hopefully have an idea of what our thought process is here. In looking for follow through on this event, we watch to be suer that the high marked by the pattern is not broken. When price continues downward in the following days, and we see the Slim Ribbon turn from neutral to negative, we gain a strong confidence that the cycle high was marked by the bear kicker pattern.
On the right side of the chart, highlighted in green, we see a bull kicker pattern occurring where we projected a cycle bottom. To be sure that this pattern is demonstrating a cycle bottom, we verify that the new low is not broken in the following days. As you can see, price took a shard turn upward in the following days, so we could be very confident that the bull kicker marked the cycle bottom.
As you’ve seen, analyzing candlestick patterns in conjunction with cycle analysis can be a very reliable and useful method. As a final reminder, please do remember to always consider a candlestick pattern within the larger context, and always watch for follow through!
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