So here’s the million dollar question "how do you know a stock is about to reverse direction?” The answer is one candlestick pattern!
In this post I’m going to show you how one single candlestick can predict the very top or bottom of a swing, very often times exactly to the day.
everyone gets to buy at the bottom and sell at the top once in their life…”
Other than that once in a life time experience, buying at the very bottom and selling at the top is not something you should count on.
However using candlestick reversals you can often get in or out the very next day, and let’s face it, that’s almost as good as getting in at the extreme top or bottom.
When we look at candlestick pattern names you will discover that many (most) have a somewhat unconventional name, something you would never have come up with. These names are actually very picturesque and they are intended to describe the sentiment that the candlestick (or pattern) is reflecting.
Remember, candlesticks tell us a story. The story of what’s happening between the bulls and the bears on any given trading day.
Spinning top candles are a broad classification of candlesticks that fit the following criteria:
What’s the story around spinning tops?
The name spinning top comes from the idea of balance.
Like the child’s spinning top toy, the candlestick shows there is a balance of buyers and sellers. It’s a “spinning top” (can’t you see it?)
A spinning top toy must spin in balance. Once it gets out of balance it falls over.
In a similar fashion, when the buyers and sellers are somewhat agreed on price, the price action slows and we have a “balance” in the market.
What’s so special about balance?
Balance in the marketplace reflects the idea that a stock is at a turning point and the old guard is preparing to shift.
Very often, a spinning top marks the high day of an upswing, or the low day of a bear swing.
In particular a spinning top (black or white) at resistance is a bearish signal and a spinning top (black or white) at support is a bullish signal. Pull up a stock you like to trade, and take a look. The vast majority of swing points include one or more spinning tops. It’s almost uncanny when you start to notice it.
Here’s the bottom line: Spinning tops very often mark the very first day of a swing reversal. So when you see a spinning top, you should take note, because this may be the very day of the turn.
Spinning tops (in any form) are great candles to recognize because they are very often the first candle in a swing reversal. The sooner you can recognize that swing the sooner you can either enter a new position, or get out of an existing position.
So it’s safe to say spinning tops may be the most valuable candle to recognize!
But if you recall, we said Spinning Tops are a broad classification of candles.
There are actually some very specific types of spinning tops that are even more telling and we are going to discuss those here.
The shooting star candlestick is a specific type of spinning top.
It’s named a “shooting star” because it looks like a star falling from the sky (use your imagination) and that’s what the trade is about to do, fall.
There are two criteria that really make this candlestick particularly bearish:
If you recall, long upper shadows are a strong bearish signal in and of themselves because they reflect buying pressure that could not sustain through the day, instead the bears pushed the buyers back down.
Even if this candle has a white candle body, it is a very bearish signal because of the long upper shadow.
The hammer candlestick is basically the inverse version of a shooting star. But instead of occurring at resistance, it will occur at support.
It’s named a “hammer” because it looks like a hammer, and it is said that “the stock is hammering out support”.
There are two criteria that really make this candlestick particularly bullish:
Just like long upper shadows are a strong bearish signal, long lower shadows are a strong bullish signal. They reflect selling pressure that could not sustain through the day and instead the bulls pushed the sellers back.
Even if this candle has a black candle body, it is a very bullish signal because of the long lower shadow.
How should you react if you see one?
On it’s own merit, a shooting star or hammer (or any other candle) is not a strong enough signal to actually reverse your position (say flip from bullish to bearish). However it is strong enough to adjust your stops and/or get out of the previous trade to protect your capital!
Very often, Shooting stars and hammers are the actual high or low point of the swing. If you look at enough charts, very very often you will see these candles marking the actual day of the swing.
Now that’s some powerful insight!
The Shooting Star and Hammer are the most powerful spinning top candlesticks. They show the balance of power is shifting and the long upper shadow (shooting star) and lower shadow (hammer) also put the weight of the momentum on the side of the opposite direction.
But these candles are not the only specific classification of spinning tops. There are 3 more to talk about.
The hangman candle is a very popular formation, probably because of the name. It looks like a hanging man (with no arms or legs… a bit morbid).
As the name suggests, it indicates this “trade is hung”. It is in fact considered a bearish reversal signal, because of the spinning top.
The interesting thing about this pattern is that it actually is a fairly poor predictor of market conditions. I have found it to sometimes lead to a swing reversal, but just as frequently the swing does not reverse.
The spinning top part of this candlestick makes it a reversal signal. The fact that it must occur at a resistance, and it has a spinning top, would certainly lead one to believe it is bearish.
But the long lower shadow on this candle is actually a bullish signal. It shows the bears could not hang on and the bulls are continuing to push forward.
These mixed signals explain why the hangman, despite it’s name, is actually not a death wish for an upswing.
In practice, what I have found is the hangman often leads to maybe a sideways move, or it may be the first in a cluster of candles that ultimately lead to a reversal. I might tighten a stop a bit after a hangman, but I rarely freak out when I see one. They just aren’t that strong.
The bullish version of the hangman is what we call an inverted hammer. It’s essentially an upside down hammer at support.
Similar to the hangman, the inverted hammer is a candlestick that sends mixed signals. The spinning top portion, occurring at support, is a bullish signal. But the long upper shadow is actually a bearish signal.
Like the hangman, the inverted hammer is considered a bullish reversal signal but in practice it is not a very reliable reversal signal. Like it’s counterpart, this candle is best seen as part of a cluster which may ultimately lead to a reversal, but on it’s own is not that strong of a signal.
The final spinning top variation to discuss is what we call a High Wave Candle.
This candlestick is kind of a mix of everything. It’s a spinning top, but it has both long upper and lower shadows, and it shows downright confusion.
The high wave candle indicates confusion in the market place. If the spinning top indicates balance and indecision of the bulls and bears, the high wave indicates an all out battle that no one seems to have won.
Realize for a high wave candle to be created, something like the following must occur:
The candle opens the day, and in order to create the long lower shadow, at some point the candle must have looked extremely bearish. But at another point in the day, the candle has evolved and now the bulls are in control. At that moment the day is looking extremely bullish. Then by the end of the day everything returns to balance and it would appear no one has really won!
While technically someone (bulls or bears) won this battle based on the candlestick color, the reality is we have a shifting of the guard that is occurring.
If this battle takes place at a resistance level, very often the follow through will be in favor of the bears.
If this battle takes place at a support level, very often the follow through is in favor of the bulls.
By now you should have a pretty decent understanding of the spinning top candle and it’s power to predict a shift in momentum. If you take the time to study enough charts you will certainly see how this one candle (and it’s specific varieties) is probably at the center of more swing reversals than any other candle signal.
It is definitely worth your time to learn how to identify these candles and to recognize them in the context of your trades.
As always, remember the location means the most. This candlestick in the middle of a move may mean nothing, but at a resistance or support may very well represent the very day a reversal is about to happen.