Having discovered that the Candlestick patterns of stock prices in early October 1987 accurately predicted the catastrophic decline which developed during a two-week period which culminated in “Black Monday,” a larger question remained: Did the Candlesticks also predict the decline from the year 2000 peak in the Stock Market, as well as the spectacular rise which arose out of the 2002 lows
which followed the peak?

The short answer is Yes, on both counts. I’ve found that the “canaries in the coal mine” in year 2000 were falling over; while in 2002 and 2003 the air was increasingly filled with the song of “robins” announcing the return of Spring.

The Candlestick patterns in the stock price charts tell the story. (Unless indicated otherwise, reference to prices means Daily Opening and Closing prices, not Daily Highs or Lows).

A. The “Canaries”
The Dow Jones Transportation Average Index was the first canary to fall from its perch, having peaked on May 12, 1999 as a “Hanging Man” bearish-warning bar which was confirmed by a lower close on May 13 and additionally by an 87 point drop on the day after that.

The Dow Jones Industrial Average Index did not confirm that lower close of the “Transports” on May 13. Instead, the “Industrials” rose to a new high close on that day. Astute observers could have noticed this disparity and could have considered it to be an “early warning.” One day later, on May 14, the Industrials did post a decline together with the Transports, while displaying a nearly-perfect confirmatory “Bearish Engulfing” pattern in a drop of about 189 points between open and close. Chart 2:

However, unlike the Transports, which continued lower, the Industrials were not yet ready to quit. They then traded generally sideways, then down, then higher, finally peaking eight months later,
on Friday, January 14, 2000, followed on the next trading day by a nearly-perfect Bearish Engulfing pattern which was then followed by four days of declines, for a total five-day drop of about 711 points.

At this time in January 2000, then, two canaries had fallen (i.e., the Transports and the Industrials). The S&P 500 and 100, the Russell 2000, and the NASDAQ Composite and NASDAQ 100 canaries were still alive.

But not for long. On March 10, 2000, the Russell 2000 and the NASDAQ Combined Composite Indexes peaked and left behind threebar bearish Evening Star patterns, the middle bar of each being a bearish Shooting Star. Charts 4 and 5:

There were now two more canaries dead at the bottom of the cage, for a total of four.

The S&P 500 and S&P 100 were next to peak, doing so in unison on March 24, 2000. I interpret their respective patterns as four-bar variations of bearish Evening Stars, the second bar of each group
being a High-Wave Doji variation of a Shooting Star. The S&P 500 and the S&P 100 continued lower, thereby confirming the efficacy of the topping pattern, and then traded erratically until attempting a
new high Closing peak late in August. The attempt failed (barely). Thereafter, their Daily Closing prices of March were never again challenged into the next major low. Two more canaries were now
down, for a total of six. Charts 6 and 7:

About March 27, 2000, the NASDAQ 100 (the last canary) finally capitulated, leaving behind a bearish Evening Star 3-bar bearish pattern with a Shooting Star as the middle bar. Chart 8:

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From their respective peak-high closings to their respective low closings of October 2002, the Dow Industrials fell 37%; the Russell 2000, 46%; the S&P 500, 49%; the S&P 100, 53%; the NASDAQ Composite 78%, and the NASDAQ 100, 83% (all rounded).

The Indexes had been replete with Candlestick warning signals at their key top reversal points. The Transports had given warning on May 13, 1999. Investors who saw and understood the signals, and
took action, were not only spared a disaster but stood to gain by committing funds to the downside.

At the Indexes’ respective bottoms, the Candles again radiated telltale signals, this time leading to a spectacular advance:

B. The “Robins”
The birds first began to sing during the week of October 11, 2002 when the Russell 2000 formed a beautiful (bullish) Hammer and Morning Star on the Weekly chart. Chart 9:

Also during the week of October 11, the NASDAQ Composite and the NASDAQ 100 displayed Bullish Engulfing patterns on their respective Weekly charts, Charts 10 and 11:

During the same time period, the NASDAQ Composite and NASDAQ 100 also displayed bottoming patterns ending with a bullish candle, a gap up, and additional bullish candles, as shown on their respective Daily charts, Charts 12 and 13:

And finally, five months later, on March 12, 2003, the Dow Transports, the Dow Industrials, the S&P 500, and the S&P 100 all formed bullish Hammer bars, surrounded by well-formed Morning Star patterns. Charts 14, 15, 16, and 17:

The Russell 2000 capped its performance of the previous October with another Hammer and Morning Star as shown on the Weekly chart for the week of March 14, Chart 18:

….plus (on the Daily chart) yet another Hammer on March 12, surrounded by yet another Morning Star.

March 12, 2003 was an ignitive day in the markets. The last of the Robins had returned, and Spring was here.

From those leadoff points, the Dow Industrials, the S&P 500, and the Russell 2000 have proceeded to new all-time nominal highs; the S&P 100, notably, has not, the significance of which (if any) is yet to be
determined. The NASDAQ Composite has recovered to a price level which is above the .382 retracement of the major decline from its year 2000 peak. The NASDAQ 100 has not attained that retracement
level, which may have significance in future days.

The point of the story is this: the Candle patterns ARE the story. Candlestick charting patterns do mark points of trend reversal at highs and at lows. The Candles shine in pinpointing reversals.
Investors who learn the basic skills of Candlestick pattern interpretation can fruitfully apply the information which is provided by Candlestick patterns, not only to safeguard the integrity of their
invested capital but also to realize substantial rewards in the markets.
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William G. Kurtz Jr. December 10, 2007
www.candlewave.com info@candlewave.com