Daily Candlesticks Are a Useful Tool for Identifying Responsive Activity
To recognize change in trend we must understand “responsive activity.”
As a market moves lower, we need to identify when buyers respond to the cheap prices. Conversely, as prices move higher, we have to note when sellers consider prices too rich.
Daily candlesticks are a useful tool to determine when momentum has faded and the trend is likely to change or enter a consolidation phase. Consolidation phases are ideal for option traders who prefer to sell volatility(NYSEARCA:VXX) and collect premium through time to decay.
Responsive activity occurs when a market opens lower and immediately trades higher or when a market opens higher and immediately trades lower.
So how do we recognize such activity?
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Assume a market opens lower and the daily candle has a long positive body or a long wick with a green (positive) candle. This is an indication that buyers have responded. Thus, higher prices are likely during the next day or longer. On the other hand, if a market opens sharply higher and then trades immediately down, it leaves a long-bodied red (negative) candle or a long wick. This is a hint that sellers consider the market rich. Thus, lower levels are probable for the near-term.
Traders can use these subtle clues to take profits or to countertrade trends.