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Bulkowski's 7 Tips to Determine Market Direction

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As of 02/19/2019
  Industrials: 25,891 +8.07 +0.0%
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Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

This article discusses seven tips to help you determine the direction of the stock market.


Yahoo!finance home page

Before the market opens, how can you tell the direction it is going to take? Here are some tips.

Market Direction Tip #1. What Are the Futures Doing?

Go to yahoo!finance and look at the home page. I show a portion of it, but this is an old screen capture. They have reworked their site. This is a screen shot. If you visit the site after the open, the futures numbers may not be there.

Circled in red are the Dow futures. If the values shown on the website are negative, then expect a lower open. Positive values usually mean a higher open. The larger the values, the larger the move. I consider a large move as plus or minus 20.

The futures indicator is like all other indicators: It is not perfect, but I have found it to be reliable. After the first 5 or 10 minutes, then anything can happen, but the indicator usually gets the opening direction right and it suggests the strength behind the move.


Market Direction Tip #2. Look at the Prior Candle.

Black marubozu candlesticks

Before the market opens, look at the prior price trend and the last candlestick. If you see a black marubozu or a closing black marubozu candlestick, then expect price to open lower.

Why? Because price in the marubozu candlestick is already tumbling at a good clip (price is at the bottom of the candlestick after having opened near the top of the tall candle line), so downward momentum will tend to push price lower, at least for a while.

The black candle should be a tall one (taller than most over the prior month) and appear in a downtrend with the best price trend being a straight-line run where price near the bottom of one candle becomes the top of the next (or they gap lower).

If price is moving sideways near the closing bell, then the next day's direction is uncertain using this method.

The same can be said for bullish moves. The bottom half of the picture shows two white candles, a white marubozu and a closing white marubozu. Both show price opening near the low and closing at the high price for the day.

Look at the intraday price chart of your favorite market index. If price is trending higher in a straight-line run up to the close, then there is a tendency for price to continue that momentum run at the open the next day. In other words, a trend in motion tends to remain in motion.

If price started an uphill run earlier in the day and moved sideways during the last hour, then the direction the next day is less certain. Price could continue the run in a measured move up type push or the congestion region could be a sign of a reversal. Read the other tips in this article to help determine the ultimate direction the next day.


Spikes or tails chart pattern

Market Direction Tip #3. Long Shadows

Candles with long shadows sometimes predict a change in direction. The non-candle version of these patterns are called spikes or tails. They appear after a move up, a single line peak that sees price standing alone or after price trends downward and bottoms in a valley with price poking out the bottom.

The chart on the right shows an upward and downward price spike (sometimes called a tail).

Downward spikes are more reliable turning signals that upward ones. That may be due, in part, to the upward bias present in the markets over the decades.

Candlesticks with long lower shadows

The candle equivalent of a spike or tail would be a shooting star, hammer, or Takuri line. All of these candlesticks appear after a price trend and take the form of one of the candlesticks pictured on the left. The candles have small bodies of any color, accompanied by unusually long shadows.

The candles highlight the battle between the bulls and the bears.

Let's take a shooting star, as an example. After trending higher in days leading to the shooting star, price continues the trend in a long move up, but then the bears counterattack. The selling pressure forces price lower and it closes the session leaving a small black or white body on the charts, but a long upper shadow. It suggests the bears are firmly in control

Depending on how price trended during the session may determine how price reacts the next day. If price was trending lower, it could continue lower in the opening minutes of the next trading session. If price was moving horizontally, then the breakout from the congestion region will determine the new direction.

For any of these candlesticks, I direct you to my book, Encyclopedia of Candlestick ChartsEncyclopedia of Candlestick Charts book. (pictured on the right). It discusses the candle patterns in detail and provides performance statistics and trading guidance.



Market Direction Tip #4. Tall Candles Retrace

If the candle is a tall one, then expect a partial retrace of the candle. For example, imagine that price is moving up at a good clip. When a tall candle appears, the next candle will sometimes see price drift back down, showing overlap between the two candles. The uptrend may resume, but for day traders, a tall candle may be an opportunity to take profits. You can always buy back in at a lower price if you think the uptrend remains intact.

Think of this movement as a Fibonacci retracement as it applies to the prior candle. Expect price to overlap between 38% and 62% of the prior candle height. Several of the intra day setups make use of this retrace behavior, so be sure to read those articles.



Market Direction Tip #5. Reversal Time

Once the session begins, keep an eye on the clock. Why? Because price often reverses 15 to 20 minutes into a trading session.

If you are looking to buy (long) when price has been moving up since the opening and it is 15 minutes into the session, then that is almost suicide. Wait for price to reverse and go short. Same with a strong downtrend at the open. Expect a reversal 15 to 20 minutes into the session and then buy long.


Market Direction Tip #6. Opens Higher, Closes Higher

Years ago I noticed that when price was higher an hour into the session, it often signaled a higher close. In other words, price would extend their move during the last hour.

I haven't checked whether or not this is still true and to what extent, but maybe it still applies and you can find it useful. Clearly the major indexes have started to make major reversal moves during the last hour. That was the game plan back in 2008, but this year (2009), that behavior seems to have diminished.

Market Direction Tip #7. Underlying Support and Overhead Resistance

Check the intra day chart and look for nearby support or resistance. If you find some, then the market could turn when it reaches those locations. Remember that support or resistance setup by prior peaks or valleys, round numbers (10, 20, 30 and so on), horizontal price movement, and similar patterns are not discreet prices but tall areas. Price may hit a support area and dive well into it before turning.

Also remember that price could push through the support or resistance zone without pausing or if it does pause, it could still burn its way through.

Of these 7 tips, I like the futures one the best (Tip #1). It is easy to use because you just pull up yahoo!finance and check the numbers just before the market opens.

-- Thomas Bulkowski


See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Patent: a method of publicizing inventions so others can copy them.