- Large outsized candles either up or down become reference candles for future bars to compare against.
- Tiny candles called dojis, where the market opens and closes at almost the same level, with very little range between the high and the low, show indecision. Is it a sleepy market or indecisive? Dojis are usually found near reversals, but occasionally the market will power on in the same direction.
- Extremely low or high volume suggests something is changing. When the price has been moving in one of three directions — up, down, or sideways — a change in the candles/volume usually shows up to mark a change in trend.
Volume and price bar extremes
Visually keep track of the following points, which can clue you in on how to respond to weird price action:- Inside days and outside days
- Highest- and lowest-volume days
- Largest and smallest candles, including wicks
- Largest and smallest candle bodies
The large price candle on May 17 with big volume was the first such shock in months. Paying attention to where those high-volume bars occur is very valuable (the volume bars are below the price chart). High-volume days that occur with an outside day are especially worth noting. While they may not mean anything, they usually mean something. The odds are that something is changing. Outside days are an important signal — as the market moves forward after one of those days, compare the market behavior after with the market behavior before the high-volume day. Does it resume its previous trend?
Compare where high-volume days are. Are the high-volume candles starting to change the character of the market? Are more than just the occasional candle getting really long? On the right-hand side of the image below, there are eight filled sizable candles over a few weeks. On the left side, there are two, maybe three, in three months.
Chart courtesy of StockCharts.comCounting the days.
Volume can help signal reversals. If the price starts to fall meaningfully on higher volume for multiple days in a row, this is usually a bigger clue of a trend change. Stay alert on a high-volume day, but don’t overreact and get out of a good stock too soon. If the high-volume day is making you concerned, research further using other tools in your chart toolkit for time periods shorter than a week to see whether there are other buy or sell signals.
Outside reversal dates on weekly charts
An outside day is when the price bar extends above and below the previous day. An outside week is when the same thing happens on a weekly chart where the price made a higher high and a lower low.While one outside week may come and go, when multiple weeks start to cluster, the market is struggling to make higher highs. Weekly outside reversals are important clues. In the image below, the June 9 (2017) candle happened on a Friday, creating an outside week. After pushing to a new high in the morning of June 9, it closed the day and the week lower. The price action from that one candle marked the highs for the next month, and the market moved lower. It becomes a reference candle to keep referring back to.
Chart courtesy of StockCharts.comWeekly information.
Weekly charts summarize the market quite cleanly. The uptrend continues with almost every week providing a higher high. The arrows point to outside weeks. Almost every one of them is a bearish candle. The last week of March 2017 is a bullish outside candle. These clusters of outside weeks are significant in marking congestion zones that the market has to work through. Staying in tune with outside weeks can be a simple way to monitor the progress of the market.
Generally, a normal week is a week with higher highs and higher lows. Three conditions suggest watching the market a little more closely:
- A lower low
- A close near the lows of the week after pushing to a higher high
- Outside weeks