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| The
Marubozu Candle |
THE "FULL" MARUBOZU: A
CANDLE WITHOUT SHADOWS
Throughout our recent series on candlesticks and
candlestick patterns, I have argued that swing traders should be able to
recognize key candlesticks by name. If you can spot approximately 20 key
candlesticks on the daily chart, then you should be able to identify
high-probability situations where the chance of a Minor trend reversal
is high. (For the average stock, Minor trends typically last between six
and fifteen days.)
All of the candles we have discussed so far should put
the swing trader on the alert that a change in trend may be occurring. A
subsequent technical signal, such as a crossover in MACD, a stochastics
sell signal or a trendline break, would then be reason to initiate a
short or long trade.
The candle I want to discuss this week is called
"Marubozu." In Japanese, the term means
"close-cropped." Other common terms for the marubozu include
"shaven head" or "shaven bottom." Typically, the
marubozu is a long candle that implies the day's trading range has been
large.
A marubozu candle lacks either an upper or
lower shadow. On rare occasions it can lack both an upper or lower
shadow. I am going to create a new term and call a long candle without
either an upper or lower shadow a "full" marubozu. Although
not generally recognized as a major reversal candle, I believe it
should in fact be added to this category.
If you spend a lot of time at the trading screen, then
you probably realize that a full marubozu is a very unlikely occurrence.
Even after a strong gap, most stocks experience a minor reversal, which
leaves a small shadow. In addition, if a stock has moved sharply higher
during the day, daytraders often seek to nail down profits toward the
end of the session. This creates a small upper shadow. Conversely, if a
stock has sharply declined, then short sellers will generally cover
before the close of trading. Because of this, stocks rarely close on
their absolute low. In these cases there will be a small lower shadow.
When a "full marubozu" occurs, it is very
well worth noting. If it is a white candle, then it signals extreme
conviction among buyers. Conversely, if it is a dark candle, then it
indicates sellers were eager to flee. As always, you should pay careful
attention to the next day's trading to see if there is follow through.
If the stock you're analyzing is at the end of a very mature Minor
uptrend, then you are likely spotting a reversal. Below you will find an
illustration of a bullish full marubozu candle:
For a real-life example of this important
candlestick, let's turn our attention to the chart of Frequency
Electronics (FEI) below. This particular chart is interesting because of
the large number of days the stock trades without leaving an upper or
lower shadow. In other words, it frequently creates either a shaven top
or shaven bottom. (Perhaps the reason for this pattern is due to thin
volume on the stock, which trades fewer than 25,000 shares per day.
However, maybe there is some other explanation.) In the last 22 trading
days since late December, I count five days in which either an upper or
lower shadow is absent. Furthermore, on several of these days, the upper
and lower shadows are very small. It appears once FEI establishes its
trend for the day, the stock is likely to keep going in that direction.
As you can see in the chart, a full marubozu candle
took place on January 16th. (I've circled this candle above.) It marked
the peak of a Minor uptrend that lasted, as I analyze it, six days. The
marubozu candle also occurred at important round-number resistance just
under $15. It marked the third day that FEI could not overcome that
important resistance level. Its occurrence marked what has so far
been the absolute peak in FEI's share price.
On the day of the full marubozu, MACD gave a sell
signal and RSI continued below 70, warning of a change in trend. So far,
while drifting lower, FEI has found some support about $1.50 below its
peak. That support, however, may be about to break. The stock is now up
against its rising 30-day moving average. A break of that moving average
and $13.45 support would complete an Intermediate-term top and should
send the stock quickly toward a test of $12.
The "full marubozu" is not generally
considered a major reversal candlestick. In my opinion, however, it
should be added to this category. Although it is infrequent, this
candlestick tends to be very significant when it occurs. If you observe
it in a stock you own -- beware. If you don't, then this candle can cast
a shadow over your profits.
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