If you have never looked at a book or website about candlestick charts and the patterns from the charting style, I highly recommend it. Not only are the patterns worthy of your attention, but some of the names of the patterns are humorous as well.
I prefer using candlestick charts simply because I find them easier to read than other charting styles. I don’t necessarily look for all of the candlestick patterns, but there are a few that when I see them, they get my attention. Two of those patterns are “shooting star” and “gravestone doji.”
In Wednesday’s trading, United Parcel Service (NYSE: UPS) had one of these two patterns, and which one depends upon your interpretation of candlestick charts. Some chartists believe that for it to be a doji the open and closing prices have to be exactly the same, while others think the open and closing prices just have to be close. That differentiation is why the pattern formed on UPS’s chart yesterday could be considered a shooting star or a gravestone doji. Either way, they are both considered bearish signals for the stock.
If you look at what happened yesterday, UPS opened at $103.05 and then rallied up to $104.06, but it couldn’t sustain the momentum and it closed at $102.94. Sure, the stock ended up with a small gain on the day, but the fact that the stock couldn’t hold the intraday high – and that it formed this pattern at a previous resistance level – is a bad sign for the stock.
In addition to the bearish pattern formed, we see that the slow stochastic readings made a bearish crossover Wednesday and the 10-day RSI is in overbought territory for only the second time in the last six months.
You can also see that the stock has support down around the $94.20 level, where two different pullbacks have been stopped in recent months. UPS reported earnings on July 28 and the results were better than what analysts expected – thus the gap higher that day.
The sentiment toward UPS is one of indifference. The short interest ratio is at 3.80, which signals neither extreme optimism nor extreme pessimism. The analyst ratings show 11 “buy” ratings and 17 “hold” ratings. There aren’t any “sell” ratings on the stock. Once again, this is a reading of indifference toward the stock.
With the bearish pattern, the stochastic crossover and the lack of support for the stock, I look for UPS to drop again in the coming weeks, and I can see it moving back down to challenge the support in the $94.20 range. If you are a short-term trader, you can take advantage of such a move by shorting the stock or by buying put options on the stock. Either way, it should make for a quick but profitable trade.
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