I have one technical question for you if you have the time. On several stocks, the candlesticks on the chart will have a small candlestick with a large extended wick. These are red in color. They are a gap up and then the price recedes. What is up with this candlestick and what does it mean and what action is usually required when this happens, buy, hold or sell? (July 29, 2003)
The candlestick symbol to which you refer may mean a reversal if it is at the top of a run. The gap up, then recession from the high and lower close (long wick), means sellers pushed the stock back down but then buyers rallied it back up to the close and hence the smaller candlestick body and the long wick. This creates something called a doji, and as noted, it can mean a stock is ready to pullback after a run higher. This situation at the top of a rally up can mean the sellers might win out--at least temporarily--for a price drop. The buyers gapped it up, but they lost control and the sellers pushed it back down. The buyers then came back in and drove it up though they did not recover the open price. After a strong move up this shows the sellers starting to flex some muscle as now they are catching up to the buyers.
As to what action should be taken, it is very important to understand that candlesticks are momentum indicators and dojis are the swing candlestick symbol that indicates the momentum may have shifted from the existing trend either higher or lower. It is not an automatic indicator; it is a warning flag telling us to look at the volume and price action and just how far the stock has run. A stock can still move up or down in the current run even if a doji appears. Many times, however, particularly after a steady move, a doji is telling us to get ready for a shift in direction. In a strong trend that usually means a test back to near support or resistance (the former in an uptrend, the latter in a downtrend). In short term plays and option plays this is a very important indication if we our play has run to our target or a support or resistance level.
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