How Bottoming Tails Can Signal A Reversal And Provide A Great Trading Opportunity
Japanese Candlestick analysis have revolutionized the way modern traders trade the market. There are a whole lot of books and courses that are devoted to helping a trader gain a better knowledge about this subject. I find Steve Nison to be among the best out there. Anyway, legend has it that he is the one that popularized the use of Japanese Candlesticks. Today it is used by almost all new students of technical analysis and trading. The reason is because of the visual form that Candlestick analysis can give you. I totally agree with that.
If there is only one candlestick pattern that you need to know, it will be the bottoming tail pattern. No need for me to draw a diagram of what it looks like. Just google it and you will see how it looks like and how it is formed. In this page, I will show you how this pattern can signal a reversal, a bottom and provide you will a great trading opportunity.
Note: For it to be a valid bottoming tail, I think the tail should be at least 2X the length of the body. The longer the tail the more significant the meaning. That's because the longer the tail, the more the stock has dropped and then recover to give a surprise to the bears and all those who are short or bearish.
If there is only one candlestick pattern that you need to know, it will be the bottoming tail pattern. No need for me to draw a diagram of what it looks like. Just google it and you will see how it looks like and how it is formed. In this page, I will show you how this pattern can signal a reversal, a bottom and provide you will a great trading opportunity.
Note: For it to be a valid bottoming tail, I think the tail should be at least 2X the length of the body. The longer the tail the more significant the meaning. That's because the longer the tail, the more the stock has dropped and then recover to give a surprise to the bears and all those who are short or bearish.
Bottoming Tails Can Halt A Drop (Especially if it happens at support areas or major MAs)
The chart above show how a bottoming tail formed in BFR when it reached its 200 MA. THe 200 MA as most of you know is a significant technical point which often acts as an area of support psychologically. When the bottoming tail happened there, BFR reversed direction and went up.
Once again, the presence of a bottoming tail near the 200 MA made Berkshire Hathaway which is Warren Buffett's company stop the drop. It gapped up the next day giving a scare to all bears and from there the stock grinded higher.
This time, a BT formed at support. It did not form at the 200 MA but it formed near another significant moving average which is the 50 day moving average. When the stock opened above the high of the BT, the stock moved higher.
How to trade the BT and make a profit
The way to trade the bottoming tail is pretty simple. Here are some criterias that I recommend:
A successful pattern should give you a profit within a day and you can usually hold it for 3-5 days depending on your chart. If there are lots of voids above and not much resistance overhead, then of course you can hold it longer. If there are quite a lot of resistance overhead, then of course you need to be wise and get out a bit early.
Now lets continue to look at some charts and you try and figure out how to play this pattern.
- There must be a valid bottoming tail (of course)
- The BT must happen near an area of support
- The BT should happen near a major moving average (like 50 MA or 200 MA)
- BT should happen when stochastics is oversold and about to make a buy signal
- BT should happen when the MACD Histogram is forming a valley. (Not necessary but the presence helps)
- Stock should have fallen for at least 3 days (or 3 bars). 5 to 7 bars are ideal.
- Buy the stock or long the stock when the stock trades above the high of the bottoming tail the next day.
- Put a stop slightly below the low of the bottoming tail
- A slight gap up the next day above the highs of the bottoming tail is ideal as it scares the bears even more.
A successful pattern should give you a profit within a day and you can usually hold it for 3-5 days depending on your chart. If there are lots of voids above and not much resistance overhead, then of course you can hold it longer. If there are quite a lot of resistance overhead, then of course you need to be wise and get out a bit early.
Now lets continue to look at some charts and you try and figure out how to play this pattern.
CL formed a BT at support and at the 50 MA. It gave bold traders a trading opportunity.
In the chart above, the BT already caught some bears in surprise. A gap up the next day shock many of them.
Notice how the presence of a BT at the 200 MA ignited the move upwards?
Bottoming Tails also works in other time frames
One thing to note is that Bottoming tails not only work in daily charts. They also work in other timeframes whether bigger time frames or smaller time frames. They work very well in weekly charts. If a bottoming tail forms in the weekly charts, it has a bigger significance which can mean a mutli week rally from the lows. BT also work in 60 min charts, 15 min charts and 5 min charts or whatever time frame. But in my opinion they have more power and purpose in the daily charts and weekly charts since more players are affected by them. And also, more traders will notice them since not all people bother to look at lower time frames.
The above weekly chart of Diversified Industrials shows an analysis I did for my Industry Analysis for July 2016. Don't worry about the other commentaries but notice the Bottoming tail happening at the weekly 200 MA. The presence of the BT ignited a move up which gave us a multi week rally after that.
The chart above shows the weekly chart of Health Care Plans industry. Notice the 2 bottoming tails that ignited a rally. There are also two other bottoming tails that did not work. Why?
That's because patterns do not work all the time. A further analysis of other stuff will perhaps also tell you why the BTs there did not work. But that will be the subject for another discussion.
Let me show you more examples of daily charts.
That's because patterns do not work all the time. A further analysis of other stuff will perhaps also tell you why the BTs there did not work. But that will be the subject for another discussion.
Let me show you more examples of daily charts.
Remember I said BTs also work on lower time frames? Here is an example in the 60 min chart. The BT happened at the 60 min 200 MA and price support. The stock only trade above the highs of the BT after 5 bars. But again it provided a bold trader a trading opportunity. I would not have taken this since I won't have noticed this since I would probably have gone to sleep. 9.30 am in New York is 9.30 pm in Malaysia. So after 1 am I prefer not to look at the market.
The chart above is a 15 min chart of the same stock showing how to enter.
The chart above shows how a BT ended a long downtrend. Another BT appeared before the green BT. But it did not provide an entry point because the stock did not go above the highs of the BT the next day. The successful green bar had a slight gap up the next day which scared more bears.
So there you have it.
The simple to spot, easy to use and wonderful Bottoming Tail Pattern. The next time you scroll through the stocks in your watchlist and spot a Bottoming tail, pay attention to it. Who knows, it may give you a very profitable trade.
So there you have it.
The simple to spot, easy to use and wonderful Bottoming Tail Pattern. The next time you scroll through the stocks in your watchlist and spot a Bottoming tail, pay attention to it. Who knows, it may give you a very profitable trade.
Updates
When I see more examples of how a BT can reverse a drop, I will put them here. So do check out once in a while to see if there are any superb examples.
