After the Dow Industrials’ thousand-point decline over the last nine trading days, the markets are seriously oversold, and we are expecting a bounce. If a bounce happens, we might see a meaningful rise. Apart from a wet finger in the air or reading tea leaves, what clues are available to us that give any credence at all to the prospect of an advance in prices now? Without knowing the future, we do know from history and experience that certain Japanese Candlestick patterns in prices have often, but not always, accurately foretold the next major direction of prices. As with every Indicator, they don’t always work; but more often than not, a particularly strong Candlestick pattern or group of patterns which appear at the same time across several Indexes will eventually prove their mettle.

Certain Candlestick patterns formed yesterday, January 9, 2008, which leads us to believe that there is a good chance of rising prices over the next week or so.

For example, in the Value Line Composite Sector Index, the price bar on the Daily chart yesterday formed a classic Candlestick “Hammer” pattern. The “Hammer” forms only at the end of a significant decline in price trend, and is characterized by a price bar which shows a relatively close relationship between the opening price and the closing price, a closing price near the top price of the day, and a long “shadow,” or tail, below. This is an indication of strong rejection of attempts to drive prices lower, and a return of market command toward the bulls. The net result is a return of mass psychology toward an optimistic outlook; and, as with any Indicator, it is subject to later confirmation. Here is the Hammer in yesterday’s Daily chart of the Value Line Composite (outlined in Chart 1 below):

Chart 1 ($VLE Daily)

An identical Hammer pattern was likewise formed in yesterday’s Daily chart of the Value Line Geometric Index (outlined in Chart 2 below):

Chart 2 ($XVG Daily)

A similar Hammer pattern also formed in the Daily chart of the Dow Jones Transport Index (outlined in Chart 3 below):

Chart 3 ($DJTA Daily)

The “High-Wave Spinning Top” is another Candlestick pattern which always catches our attention, whether it occurs at the top of a trend or at the bottom. In this case, one of them formed yesterday in the Weekly chart of the S&P 500 Index, at the end of a long downtrend. The High-Wave Spinning Top reveals indecision in the market and is a warning of a possible change of trend. We will know today whether prices move higher; and if they do, that would constitute a confirmation of the pattern. The High-Wave Spinning Top is aptly named: it looks like one! Here it is, from yesterday (outlined in Chart 4 below):

Chart 4 ($SPX Weekly)

The S&P 500 also displayed for us yesterday a bullish pattern called a “Piercing” pattern. It’s easy to see that, in fact, prices yesterday “pierced” the prices of the day before, and closed more than half way into the bar of the previous day. If this pattern is confirmed later by a higher closing price, its bullish implications will have been confirmed. Here is the S&P 500’s Piercing pattern in the S&P 500 yesterday (outlined in Chart 5 below):

Chart 5 ($SPX Daily)

The NASDAQ 100 Index also displayed a Piercing pattern yesterday, on its Daily chart. Note that prices closed more than half way into the black portion of the bar of the previous day (outlined in Chart 6 below):

Chart 6 ($NDX Daily)

And to cap the performance, the NASDAQ 100 Index also favored us yesterday with a Hammer of its own, on its Weekly chart (outlined in Chart 7 below):

Chart 7 ($NDX Weekly)

Considering all of these Candlestick clues together, having marshaled the evidence we think that the odds are in favor of the proposition that prices in these Indexes will rise over the next several days. We could be fooled; we have certainly been fooled before. Nevertheless, understanding these clues is light-years ahead of a wet finger in the air. And, if prices do decline below yesterday’s lows, batten down the hatches!

William G. Kurtz Jr. January 10, 2008 www.candlewave.com info@candlewave.com