TWEEZERS CANDLES CAN HELP YOU PULL PROFITS OUT OF THE MARKET

In my experience, "tweezers" candles do not occur all that often in the stock market. However, when they do indeed take place, they are almost always significant.

What are tweezers candles?

Candlestick theory recognizes both a tweezers top and a tweezers bottom. The tweezers formation always involves two candles. At a tweezers top, the high price of two nearby sessions is identical. Meanwhile, at a tweezers bottom the low price of two sessions that come in close succession is the same.

For simplicity, let's talk just about the tweezers bottom. In some instances, the tweezers bottom is formed by two real candlestick bodies that make an identical low. In other instances, the lower shadows of two nearby candles touch the same price level and the stock then bounces higher. Meanwhile, a third possibility is that the lower shadow of one day and the real body of a nearby session hit the same bottom level.

The graphic illustration of the tweezers candles below illustrates one of these three possibilities:

 

Most swing traders are familiar with a double bottom or double top. For this formation to occur, the chart you're looking at should generally show at least fifteen trading days between the two tops or bottoms. The double top or bottom is typically a forecasting formation that applies to Intermediate-term reversals.

In my mind, the tweezers pattern is analogous to a very short-term double top or double bottom. What the tweezers candles say is that prices held twice at the exact same level. At the bottom, sellers were not able to push the stock lower. At the top, the bulls were not able to drive prices higher. Tweezers thus signify very short-term support and resistance levels.

Tweezers sometimes occur on two consecutive trading sessions. In these cases they are relatively easy to spot. However, they can also occur several sessions apart -- say six or eight. (If they are spread further apart than that, then the formation is beginning to approach the double bottom or top described above.) When the tweezers occur consecutively their forecasting value generally increases. Why? Well, in these cases a bullish or bearish move has been absolutely stopped in its tracks and is more likely to reverse.

As with any candles, swing traders should carefully watch the price action that occurs immediately after the tweezers candles. If the tweezers bottom is to be a meaningful reversal, then the low formed by the two candles should hold. If the bottom is penetrated, then prices are likely to descend to at least the next important support level. The opposite is true for a tweezers top.

Looking at our current holdings, we initiated a long position in Ventas (VTR) at $20.05 on Monday, November 24th. Below you will find a chart of VTR with its recent tweezers formation circled.

On Monday, December 15th, the stock gapped higher at the opening after benefiting from the Saddam Hussein rally. The shares then hit a high of $21.25 for the day. However, VTR then sold off sharply along with the rest of the market, hitting a low of $20.51. The following morning, VTR edged slightly lower in the early morning, again testing $20.51. As I watched the intraday trading action, I observed with bated breath. Would support hold? Gradually the bid firmed. A tweezers bottom had formed. Had we not already been in the position, at that point I would have known that a high-probability swing trading opportunity had emerged. Since that time VTR has proceeded to rally back toward its early-week high.

Again, in my experience, tweezers candles occur infrequently. When they do occur, however, they generally give rise to high-probability swing trading opportunities. Recognize this candle formation and you'll have a much easier time extracting money from the market.

Good trading!

Dr. Melvin Pasternak
Editor
The StreetAuthority Swing Trader