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| Harami Candle |
HARAMI:
THIS CANDLE CAN HELP NURTURE YOUR PROFITS
Major reversal candlesticks include: doji, hammer, hangman, bearish and
bullish engulfing, piercing, dark cloud cover and star.
When you see any of these on a daily chart following an up or downtrend
of more than six days, you should immediately ask yourself if the Minor
trend is about to reverse direction. Because of their importance, all
swing traders should be able to readily identify these candles. Day
traders should also learn how to spot them in intraday charts, such as
the 5-minute or 60-minute, as these candles often have great
significance in those time frames as well.
In addition to the major reversal candles, there are several other
candles all swing traders should be able to identify and integrate into
their decision-making. In this week's "Inside The Black Box"
installment we will explore harami, the "pregnant" candle. The
ability to recognize this "intermediate strength" trend change
signal will help you nurture your profits.
The harami candle can occur both after an uptrend or downtrend. To keep
this discussion clear, however, for the sake of today's example I will
assume a stock is in an uptrend. Immediately preceding the harami
candle, there should be a large, real body clear candle. When this
candle occurs, the bulls appear to be fully in the driver's seat.
The next day, however, a small real body candle appears within
the larger real body. This is the harami candle. In my experience, the
signal is more powerful if the second day's candle is near the middle of
the trading range of the first. When the two candles are grouped
together, you can imagine that the first candle is like a mother and the
second candle the child that emerges from its belly. That is where the
name harami, or pregnant, comes from. Here is an example of a harami
candle:
Experts tend to disagree about whether
the harami day needs to be of the opposite color from the large, clear
candle day. Clearly, the reversal signal is more potent if it is the
opposite color, as this color change shows that the advance has stalled.
The bears are now on strong ground and are engaged in a struggle for
power with the bulls. The upper and lower shadows can be of any size,
and theoretically could even go above the real body of the clear candle
day. In practice, however, the harami day's shadows are often small and
are typically contained well within the real body of the previous day's
candle.
Always look carefully at the next day's candle -- the one that follows
the harami candle. Sometimes harami merely signifies that the stock is
entering a period of consolidation (meaning that the shares will trade
sideways). If, however, the stock you're examining plummets the day
after the harami candle takes place, then there is an increased
likelihood that the shares have put in a Minor top.
In the historical chart of Activision (ATVI) below I have circled a good
example of the harami candle. On the day before the harami appeared, a
long white candle capped a rally that took the stock from below $13 to
north of $16 in just 15 trading days. (It's important to note that at
fifteen trading days, the Minor uptrend was very mature and was ripe for
reversal.) On the day of the long white candle, the stock penetrated the
upper Bollinger band, showing ATVI was overbought. Volume, however, was
much weaker than at the first high, which also took place at $16 several
days before.
This bearish divergence can also be seen
in the CCI indicator, which made a significantly lower peak than it had
on the first high. The harami candle brought ATVI back within the
Bollinger band. At this point, holders of this stock should have been
alert that the trend was potentially changing. Defensive action should
have been taken to protect profits. The next day, the stock attempted a
probe north of $16, but left a large upper shadow and closed sharply
down. In fact, it closed even lower than the day of the large white
candle, more than reversing that day's entire gain. An MACD sell signal
followed, and that signal remains in force. The shares are still well
below the level of the harami day (and even the day after it).
While the harami candle is considered
less potent than many of the key reversal candles I mentioned above, it
nevertheless has substantial predictive power. If it occurs in a stock
in which you have a position, then you should be alert to a change in
trend from up to sideways, or even up to down. (If the stock is in a
downtrend, then the harami candle can also warn of an impending period
of sideways trading, or perhaps even an uptrend.) So, the next time you
observe the harami candle, I'd urge you to take heed, as it can provide
you with a valuable tool to help you protect your profits.
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