PART 2 THE RULE OF MULTIPLE TECHNIC

PART 2 THE RULE OF MULTIPLE TECHNICAL TECHNIQUES
Candlestick methods, by themselves, are a valuable trading tool.But candlestick techniques become even more powerfully significant if they confirm a Western technical signal. This is the focus of Part 2. For example, if a bullish belt-hold line intersects at a long-term support line, there are two reasons for a bullish outlook. The candlestick indicator confirmed a Western technical indicator or, depending on how you view it, the other way around.
This method of looking for confirmation from different technical indicators is called the "Rule of Multiple Techniques" by Arthur Sklarew in his book Techniques of a Professional Chart Analyst.' This principle states that the more technical indicators that assemble at the same price area, the greater the chance of an accurate forecast.
Part 2 of this book will be based on this "Rule of Multiple Techniques." The remainder of this section's introduction will examine the importance of this idea using two examples of traditional Western technical analysis techniques. Chapter 10 shows how a cluster of candle- stick indicators provides a clear sign of an important turning point. Chapters 11 to 17 marry candlesticks to some common Western technical tools. These include trendlines, moving averages, oscillators, and so forth. In each of these chapters, I have detailed how to use candlesticks to supplement traditional Western technical techniques. For novices to technical analysis, or for those who need to refresh their memory on the basics, the introductions to Chapters 11 to 17 offer a broad, and admittedly cursory, explanation of the Western technique reviewed in that chapter. There are many fine books that provide much more detail on these Western techniques.
After these introductions, we'll explore specific examples of how to use the Western technical tool in combination with candlesticks. Since my experience is in the futures markets, the Western techniques with which I join candlesticks are based on futures technical analysis. I will not examine equity technical tools such as advanceldecline lines, the ARMSITRIN index, specialist short sales, and so on. Nonetheless, the concept of using candlesticks as a complimentary tool should be applicable, no matter your technical specialty. Western techniques, when joined with candlesticks, can be a powerfully efficient combination.





EXAMPLES OF THE RULE OF MULTIPLE TECHNICAL TECHNIQUES
This section shows, by example, how a confluence of technical indicators can help predict where important support or resistance may occur. The following examples use Western techniques. The rest of Part 2 addresses candlesticks.
In late October 1989, gold broke above a two-year downtrend resistance line when it closed above $380. This, in combination with the excellent base built in 1989 at $357, was a sign that higher prices were to follow. After gold's breakout in late 1989, Financial News Networkinterviewed me about my technical outlook for gold. I said that we should see a rally, but that this rally should stop at $425 up to $433. In early 1990, gold peaked at $425 before the bear market resumed.
How did I pick this $425 to $433 zone as my target for resistance when gold was trading at that time near $380? By using the rule of multiple technical techniques. There were four separate technical indicators hinting at major resistance at the $425 to $433 region. Refer to Exhibit 11.1 as I discuss these four indicators (for this example we will not use candlestick patterns):
1. A 50% retracement of the 1987 high (Area A) at $502 and the 1989 lows (1 and 2) at $357 was $430.
2. The lows, marked 1 and 2 in 1989, were a double bottom. Based on this double bottom, I derived a measured target of $425. (A double bottom measured move is derived by taking the height of the move between the two lows and adding this distance to the intervening high).
3. The late 1988 high was $433.
4. My colleague, John Gambino, who follows Elliott Wave Theory, said gold was in an Elliott fourth wave count. Based on this, rallies in gold should not pierce the prior first wave's low in early 1988 at $425.
These separate technical techniques all pointed to major resistance near the same price area-$425 to $433. By failing to move above the $425 to $433 resistance zone in gold, the bulls could not prove their mettle (pun intended). It was not long before the major downtrend resumed in earnest.
What would have happened if gold went above the upper end of my resistance zone of $433? Then I would have had to change my longer-term bearish prognosis about the market. This is why the technicals can be so valuable. There is always a price where I will say my market view is wrong. In this case, if gold closed above $433 I would have changed by long-term bearish bias.
The market communicates to us by way of its price activity. If this activity tells me I am mistaken in my opinion, I adjust to the market. I am not egocentric enough to believe that the market will adjust to me. That is because the market is never wrong.
In early May, after sugar collapsed (see Exhibit II.2), I thought that sugar could have a temporary bounce from $.I4 (that was the bottom a year-long bull channel on a weekly chart as well as the lows in late February/early March). Yet, unless sugar pushed above the $.I515 to $.I520 zone I believed sugar should be viewed as in an intermediateterm bear market. The rally high on May 14 was $.1505.
Where did I get this $.I515 to $.I520 zone as resistance? From identifying four technical indicators that implied strong resistance in that band. Specifically:
1. This was a multi-tested old support level from early March through April. I believed that once this strong support broke, it should become equally strong resistance.
2. The 65-day moving average (which I find useful for many markets) intersected near the $.I515 level. (See Chapter 13 for more detail on using moving averages with candlesticks.).
3. Looking at the highs from area A in January and the gap at area B in March, we can see the psychological importance of the $.I5 level.
4. A Fibonacci 32% retracement of the move from the $.I627 peak (marked H) to the $.I444 low (marked L) is $.1514. A 32% retracement is where first resistance is sometimes seen after a selloff.



CHAPTER 10 A CONFLUENCE OF CANDLESTICKS

This chapter explores how a cluster of candlestick patterns or lines that coincide at the same price area can make that level an important market juncture. Exhibit 10.1 shows a confluence of candlestick-indicators that foretold a price setback and then another set of candlesticks that called the end of a selloff. In early June, a bearish hanging-man line is immediately followed by another negative technical signal a doji. Prices then fell until a series of candlestick indicators signaled an important bottom. First, is the hammer. The next day is a bullish engulfing line. A few days later a minor selloff confirmed the solidity of support as the lows of the hammer day were maintained. This second test of the low created a tweezers bottom.
The September hammer in Exhibit 10.2 presaged a rally. In late November, the bonds built three candlestick top reversal indicators that put an end to this rally. They were:
a hanging man;
a doji;
and a shooting star which was the coup de'grace.
Exhibit 10.3 illustrates how an individual candlestick line can give multiple signals. In early April, a long white real body is followed by a small real body with a long upper shadow. The shape of this line is thatof a bearish shooting star. This line's small real body (being within the previous day's real body) makes it a harami. Finally, the top of the upper shadow (that is, the high of the day) on the shooting star day was also a failure at the February 1600 highs.
Exhibit 10.4 shows that within a period of a few weeks, this market formed a tweezers bottom, a bullish engulfing pattern, and a hammer. Exhibit 10.5 shows that from mid to late July, a series of bearish candlestick indications occurred including a doji star followed by three hanging-man lines (as shown by 1, 2 and 3). In between hanging-man 1 and 2, a shooting star formed.
Exhibit 10.6 is a bearish candlestick signal within a bearish candlestick signal. The peak of the rally in December was touched by a hanging-man session. This hanging-man session was also the star portion of an evening star formation. Exhibit 10.7 shows that May 9 through 11 delivered a series of top reversal candlestick signals at the $1.12 area. The tall white candlestick on May 9 was followed by a small real body candlestick. This second candlestick was a hanging man. It also, when joined to the prior candlestick, completed a harami pattern. On May 11, another assault at the $1.12 highs occurred. This assault failed via a shooting star line. These three sessions had nearly the same highs. This constructed a short-term top. Thus, within three sessions there were four bearish indications:
a hanging man;
a harami;
a shooting star; and
tweezers top.
The market backed off from these highs. The $1.12 price became significant resistance as evidenced by the bulls' failure to punch above it during mid-June's rally. This $1.12 level was important for another reason. Once broken on the upside on June 28, it converted to pivotal sup- port. Observe the doji star that arose after the June 28 long white candlestick. We know a doji after a long white candlestick is a top reversal. This means the prior uptrend should end. For two days after the doji, the market showed it was running out of breath since there were two black candlesticks locked in a lateral band. The market had run out of steam-or so it had appeared. Remember the May 9 through 11 resis- tance area? The lows of the two black candlestick sessions of July 2 and 3 held that old resistance as support. The bears had tried to break the market but they could not.