Using Bullish Candlestick Patterns To Buy Stocks
Candlestick charts are a type of financial chart for tracking the movement of securities. They have their origins in the centuries-old Japanese rice trade and have made their way into modern day price charting. Some investors find them more visually appealing than the standard bar charts and the price actions easier to interpret.
Candlesticks are so named because the rectangular shape and lines on either end resemble a candle with wicks. Each candlestick usually represents one day’s worth of price data about a stock. Over time, the candlesticks group into recognizable patterns that investors can use to make buying and selling decisions.
Key Takeaways Candlestick charts are useful for technical day traders to identify patterns and make trading decisions.
Bullish candlesticks indicate entry points for long trades, and can help predict when a downtrend is about to turn around to the upside.
Here, we go over several examples of bullish candlestick patterns to look out for.
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How to Read a Single Candlestick
Each candlestick represents one day’s worth of price data about a stock through four pieces of information: the opening price, the closing price, the high price, and the low price. The color of the central rectangle (called the real body) tells investors whether the opening price or the closing price was higher. A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure. The lines at both ends of a candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow shows the stock’s highest price for the day, and the lower shadow shows the lowest price for the day.
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Bullish Candlestick Patterns
Over time, groups of daily candlesticks fall into recognizable patterns with descriptive names like three white soldiers, dark cloud cover, hammer, morning star, and abandoned baby, to name just a few. Patterns form over a period of one to four weeks and are a source of valuable insight into a stock’s future price action. Before we delve into individual bullish candlestick patterns, note the following two principles:
Bullish reversal patterns should form within a downtrend. Otherwise, it’s not a bullish pattern, but a continuation pattern. Most bullish reversal patterns require bullish confirmation. In other words, they must be followed by an upside price move which can come as a long hollow candlestick or a gap up and be accompanied by high trading volume. This confirmation should be observed within three days of the pattern.
The bullish reversal patterns can further be confirmed through other means of traditional technical analysis—like trend lines, momentum, oscillators, or volume indicators—to reaffirm buying pressure. There are a great many candlestick patterns that indicate an opportunity to buy. We will focus on five bullish candlestick patterns that give the strongest reversal signal.
- The Hammer or the Inverted Hammer
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The Hammer is a bullish reversal pattern, which signals that a stock is nearing bottom in a downtrend. The body of the candle is short with a longer lower shadow which is a sign of sellers driving prices lower during the trading session, only to be followed by strong buying pressure to end the session on a higher close. Before we jump in on the bullish reversal action, however, we must confirm the upward trend by watching it closely for the next few days. The reversal must also be validated through the rise in the trading volume.
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The Inverted Hammer also forms in a downtrend and represents a likely trend reversal or support. It’s identical to the Hammer except for the longer upper shadow, which indicates buying pressure after the opening price, followed by considerable selling pressure, which however wasn’t enough to bring the price down below its opening value. Again, bullish confirmation is required, and it can come in the form of a long hollow candlestick or a gap up, accompanied by a heavy trading volume.
- The Bullish Engulfing
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The Bullish Engulfing pattern is a two-candle reversal pattern. The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows. The Bullish Engulfing pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle. On the second day of the pattern, price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers. It is advisable to enter a long position when the price moves higher than the high of the second engulfing candle—in other words when the downtrend reversal is confirmed.
- The Piercing Line
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Similar to the engulfing pattern, the Piercing Line is a two-candle bullish reversal pattern, also occurring in downtrends. The first long black candle is followed by a white candle that opens lower than the previous close. Soon thereafter, the buying pressure pushes the price up halfway or more (preferably two-thirds of the way) into the real body of the black candle.
- The Morning Star
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As the name indicates, the Morning Star is a sign of hope and a new beginning in a gloomy downtrend. The pattern consists of three candles: one short-bodied candle (called a doji or a spinning top) between a preceding long black candle and a succeeding long white one. The color of the real body of the short candle can be either white or black, and there is no overlap between its body and that of the black candle before. It shows that the selling pressure that was there the day before is now subsiding. The third white candle overlaps with the body of the black candle and shows a renewed buyer pressure and a start of a bullish reversal, especially if confirmed by the higher volume.
- The Three White Soldiers
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This pattern is usually observed after a period of downtrend or in price consolidation. It consists of three long white candles that close progressively higher on each subsequent trading day. Each candle opens higher than the previous open and closes near the high of the day, showing a steady advance of buying pressure. Investors should exercise caution when white candles appear to be too long as that may attract short sellers and push the price of the stock further down.
Putting it All Together
The chart below for Enbridge, Inc. (ENB) shows three of the bullish reversal patterns discussed above: the Inverted Hammer, the Piercing Line, and the Hammer.
The chart for Pacific DataVision, Inc. (PDVW) shows the Three White Soldiers pattern. Note how the reversal in downtrend is confirmed by the sharp increase in the trading volume.
The Bottom Line
Investors should use candlestick charts like any other technical analysis tool (i.e., to study the psychology of market participants in the context of stock trading). They provide an extra layer of analysis on top of the fundamental analysis that forms the basis for trading decisions.
We looked at five of the more popular candlestick chart patterns that signal buying opportunities. They can help identify a change in trader sentiment where buyer pressure overcomes seller pressure. Such a downtrend reversal can be accompanied by a potential for long gains. That said, the patterns themselves do not guarantee that the trend will reverse. Investors should always confirm reversal by the subsequent price action before initiating a trade.
Stock markets turn volatile after starting week on a positive note
HINDUSTAN UNILEVER
Overall, the stock has performed well with a gain of 5 percent during the week. On the daily chart, the stock has formed a long bullish candle with a higher volume, which indicates Accenture buying in the counter. Moreover, the price has sustained above the Upper Bollinger Band formation and 50-DMA, which suggest bullish strength for the near term. In addition, a momentum indicator RSI and MACD witnessed a positive crossover, which pointed out an upward move in the stock.
TATA CONSUMER
On a weekly basis, the stock has gained more than 3 percent to close at 737.90 levels. Overall, the stock has given a Rising Channel breakout and moved above it, which confirms that the bullish trend may continue for the long term. The stock has been trading above Ichimoku Cloud formation for the last many days, which indicates bullish strengths or the long-term prospect. A momentum indicator RSI & MACD is also supportive of the bullish trend. So we are expecting an upside move in the counter towards the level of 770-800 in the upcoming week.
BRITANNIA
On the daily chart, Britannia has confirmed the Double Bottom pattern breakout and sustained above it, which indicates bullish sentiments in the counter. However, on Friday’S session, the stock has retreated almost half a percent and formed a bearish engulfing candlestick pattern, which suggests some correction in the prices for the near term, and it may retest the neckline of the bottom pattern at 3,555 levels. Although, a momentum indicator RSI & MACD are suggesting positive moves. Hence, we are recommending a buy-on dips strategy in Britannia for the upcoming sessions.
INFOSYS
On a weekly chart, the stock has sustained above the prior resistance of 1477 levels and gained more than 4 percent to close at 1510 levels. The stock has been trading in bullish territory for the last many sessions. The volume is also rising gradually, which suggests buying interest among the trades. On the daily time frame, the stock has settled above Upper Bollinger Band formation with a positive crossover in MACD indicator. Based on the above technical structure, we are expecting bullish strength in the counter for the upcoming session.
ASIAN PAINTS
The stock increased more than 3 during the week and closed at 3,050 levels on the Friday trading session. The stock has been rising continuously for the last couple of weeks, which shows bullish strengths. However, in the recent week, the stock has formed a pattern like an Evening Star candlestick, which could be a reversal sign for the upcoming week. In addition, a momentum indicator RSI (14) is also trading in overbought territory, which shows some buying exhaustion among the trades. For the coming week, the stock may find the resistance around 3130 levels, whereas immediate support comes at 2900 levels.
Indices close at record high amid falling COVID cases; Nifty likely to touch 16,000-levels next week
The bulls were driving the market throughout the week as we were witnessing daily new record highs in the Nifty 50. However, on Friday (June 4) trading session, the benchmark index turned volatile after the Reserve Bank of India (RBI) decided to keep the policy rate unchanged and closed slightly lower at 15,669.25 levels with a loss of 21 points while Bank Nifty settled around 35291.65 levels with almost 1 percent loss in a day. Overall, it was profitable weekly as the Nifty index gained more than 1.3 percent on a weekly basis and also made a new record high at 15,733.60 levels on the last trading session of the week.
On a sectoral front, the weekly gainers were Nifty Metal, Media, PSE, Realty and Commodities while prime losers were Nifty Consumption, FMCG, IT and financials. Technically, the Index has been trading in a Rising Wedge formation and tested the lower bottom of the formation, which suggests an upside movement in the index. Moreover, the index has been trading continuously above the Ichimoku Could formation, which confirms that the bullish trend may continue for the long term. The index has taken the support from 21 Moving Averages and formed a Hammer candlestick formation in the hourly chart which points out strength in the counter. A momentum indicator MACD is also trading with a positive crossover as well as above the zero lines, which suggests a bull-run for upcoming sessions. On a weekly basis, the Nifty may move towards the level of 15900/16000 levels while strong support is intact at 15450 levels.
Top Gainers and Losers for week ended June 4
Adani Port
The stock has taken a support at 750 level which is a 38.2 percent Retracement level of its previous up move which shows a northward movement towards its upside level. On a daily chart, the stock has given a breakout of accumulation phase which indicates a further upside movement in the counter. The stock has been trading with a positive crossover of 21*50 daily Moving Average which can be considered as a Bullish Crossover which shows a Bullish movement in the counter. At the present level, the stock has good support at 780-level, while resistance comes at 850-870 levels.
Bajaj Finance
On a weekly chart, the stock has formed open Bullish Marabozu candle which is a sign of continuation of bull trend. Furthermore, the stock has touched a life-time high at 6009.95 and closed near to it which points out buyers are quite active. A momentum indicator RSI and MACD both have shown positive crossover on the daily chart which adds more bullishness to the price. Moreover, the stock has been trading above all the moving averages which further add strength in the counter. At present level, the stock has good support at 5,600 levels sustains above the 5,900 level can show new life time high in the counter.
Titan
On a weekly chart, the stock has been trading in rising wedge formation and tested the upper band of Falling Wedge formation crossing above it can show further upside rally. Furthermore, the stock has formed “Open Bullish Marabozu Candlestick” which suggests an upside movement in the counter. Furthermore, price has also moved above upper “Bollinger Band” formation; which suggests bullish rally will continue further for near term. At the present level, the stock has good support at 1,560 levels while resistance comes at 1,720-level, crossing above it can show 1,780 levels.
Tata Motors
On a daily chart, the stock has given a breakout of its “Downward Sloping Trend line” which indicates an upside move in the counter. Furthermore, the stock has formed Open Bullish Marabozu Candle on a daily time frame which suggest strength in the counter. Moreover, the stock is trading above 21 as well as 50-daily Exponential Moving Averages which suggest a positive trend of the stock. Additionally, momentum indicator Stochastic (6) has shown a positive crossover, which indicates strength in the counter. At the present level, the stock has good support at 306 levels while resistance comes at 350 level crossing above it can show 370-390 levels.
ONGC
On the daily chart, the stock has been rising continuously from last couple of days. The stock has given breakout of cup and handle pattern which suggests further upside movement in the counter. Technically, the stock has been trading in Rising Wedge formation with the support of 21-days Moving Averages. Moreover, the stock has formed Bullish Marubozu Candlestick pattern on a weekly time frame, which suggests bullish strength in the counter. In additions, spurt in volume was also observed on Friday (June 4) trading session, which confirms the buying interest among the trades. An indicator MACD and Stochastic is also a sign of bullish trend for the near term. At present, the stock may find the resistance at 135 levels while support comes at 110 levels.
Top five losers
Mahindra and Mahindra
After a negative opening, the stock has traded into narrow range for the week and managed to close above 800 levels. On the daily chart, the stock has good support at 790 levels with Middle Bollinger Band and 50-Days Moving Average, which suggest reversal in the counter. Moreover, the stock has been hovering above the slopping trendline and multiple support zones. So, based on the above technical aspect, we are recommending buy on dip strategy in the counter. At present, the stock has good support at 790-levels while resistance comes at 840-level crossing above it can show 870-880 levels.
ITC
During the week, the ITC has crossed the prior resistance of 217 but failed to sustain above it and settled around 209.55 levels on Friday trading session. On the daily chart, the stock has slipped below 100-Days Moving Averages and Middle band of Bollinger formation, which indicates bearish move in the counter. A momentum indicator RSI and Stochastic also showed some weakness, which confirms the bearish trend for the upcoming sessions. On the downside, the stock may test the support at 203 while on the upside it may find the resistance at 217 levels.
Infosys
During the week, there were no significant changes in the Infosys script as it was trading in narrow range. On a weekly chart, the stock has been trading in Higher Highs and Higher Lows formation with average volume activity, which suggest upside move for the near term. Moreover, on the daily chart, the price has been hovering above Ichimoku Cloud formation, which confirms bullish presence for the long term. However, an oscillator Stochastic is showing negative crossover. At present, the stock has good support at 1320-levels while immediate resistance comes around 1420-level crossing above it can show 1450-1480 levels.
IndusInd Bank
Despite the positive movement in Nifty 50, a few private banking stocks underperformed. Indusind bank was one of them. On a weekly chart, the stock traded into the range of 965 to 1040 throughout the week. Moreover, the stock has been trading above 50-weeks Moving Averages and also forming Cup and Handle pattern, which is a bullish continuation pattern and indicates a buying strength. A good volume has also been observed in the earlier weeks, which suggests buying interest among the trades. An oscillator Stochastic suggests bullish crossover. Hence, we are expecting upside move in Indusind Bank for the upcoming week. On the higher side, it may test the resistance at 1,120-levels while on the down side, support is placed at 885 levels.
Tech Mahindra
The stock has traded into the range of 990-1,030 over the week. On the Friday (June 5) trading session, we saw positive momentum in the stock with half percent gains to close at 1,020 levels. On a weekly chart, the stock has formed Bullish Pennant pattern, which indicates a bullish move in the counter. Volume activities are raising gradually, which point to bullish movement. An oscillator stochastic witnessed positive crossover, which adds bullish strength for the near term. A breakout above 1,045 levels will drive the stock towards 1,090/1,140 levels. However, on the downside, there is a support at around 935 levels.
(The writer is Executive Director, Choice Broking)