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| The
Stalled Pattern |
THE STALLED
PATTERN WARNS IT'S TIME TO TAKE PROFITS
In one of our recent educational lessons we explored the
pattern known as "three white soldiers" -- one of the most
bullish candlestick patterns. The three white soldiers pattern occurs
after a downtrend or period of consolidation. It then shows up when the
stock posts three long white candles in a row and closes near its high
on all three days.
Typically, the upper shadows on the three soldiers are small. This
signifies that there is little profit taking and the longs are in
complete control of the market. Traders are anxious to buy. On the third
day, even after a sharp advance, there is not much motivation to book
profits, so the upper shadow on this day's candle is small. The three
white soldiers pattern tells the swing trader that higher prices should
be seen down the road. A pullback or period of consolidation after these
soldiers show up often provides traders with an attractive entry point.
The theme of the stalled pattern might be "what a difference a day
makes." In this particular candlestick pattern, days one and two
are identical to the first two days of the three white soldiers pattern.
However, on day three we see a major change. A small white real body
forms -- often one with an upper shadow that suggests a shooting star.
This candle warns that the longs have lost full control of the
situation. True, they still manage to move the stock higher. However,
the advance has stalled (hence the name of this pattern). Below you will
find an example of the stalled pattern:
The stalled pattern is not normally
considered a reversal pattern. Instead, it indicates a time of
uncertainty. The stock is "making up its mind" what it wants
to do next. Another name for the stalled pattern is "the
deliberation pattern." This name emphasizes that the stock will not
necessarily reverse; rather it will consolidate. Appropriate trading
tactics therefore are to take profits in the position, but not to go
short (although a very short-term swing trader may be able to make a
small percentage profit if he or she can time the trade very precisely).
A very interesting recent example of the stalled pattern occurred in
shares of Andrew Corporation (ANDW), a maker of wireless infrastructure
equipment. On Wednesday, January 7th, Andrew benefited from an upgrade
by a Morgan Stanley analyst. The stock gapped sharply higher at the
opening bell, but then gave up most of its ground during the day.
On Thursday, January 8th, however, the company itself announced that
both sales and earnings would be well above analysts' consensus
expectations. That lit a fire under the stock. It gapped sharply higher
and this time managed to close near its highs for the day. With this
candle the stock completed a multi-month consolidation pattern between
approximately $10 and $14. According to the measuring principle, ANDW
then had a minimum target of approximately $18 a share. The large white
candle of January 8th represented the first day of the stalled
pattern.
On January 9th, the second day of the pattern, the stock continued its
upward climb, probing just north of the $18 target. At that point, the
candle pattern looked entirely like the first two days of three white
soldiers. However, on the third day (Monday, January 12th) a small,
star-like candle appeared. This created the stalled pattern and was a
clear signal to take trading profits. A swing trader who recognized the
stalled pattern would have sold just below $18 the next morning.
However, from a candlestick point of view, a short position was not
warranted.
Western technical analysis provides an
interesting confirmation of Japanese candlestick theory. Over the last
several days, Andrew has formed a flag formation (a small pennant is in
the process of forming). This interpretation is supported by volume,
which has been drying up and returning to normal levels. A flag
formation is indeed one where a stock deliberates before making its next
move. Although flags often resolve to the upside, they can take several
weeks so do so.
If after some deliberation Andrew does
move higher, then a swing trader could initiate a new long position in
the stock when it breaks the Minor downtrend line of the pennant. If
additional safety was sought, then a trader could instead buy the stock
on the breakout above its previous high at $18.40.
The difference between three white soldiers and the stalled pattern is
subtle. But whereas the soldiers project higher prices are ahead, the
stalled pattern leaves more of a question mark. Being able to recognize
the fine difference between the two candles is critical, as the
appropriate swing trading response depends entirely on which pattern is
present.
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