Black Candle Meaning

LimitedEdition

Hi all,

I often see black candles at the top of ranges, double tops and so on. Can these black candles be a sign of institutional selling? If so, what would be a good way to analyse a black candle to make a good assumption tuts were selling at this level?

Thanks!

markd

It's likely a sign of professional selling, at least, and maybe institutional selling as well.

The black candle forms when price opens higher but then closes below the open. The higher open after a leg up is usually non-professional buying worried about missing their last chance on a good thing. The close below the open is professional selling distributing their shares on the high demand.

It's often seen on the first or second up leg after climax selling - in other words, in Wyckoff's terms, during the accumulation phase of stocks that have sold far enough below value in the eyes of the accumulators. The purpose is to discourage a following before the accumulators have acquired a stake sufficiently large to manage the price on the way up. (They need cash to stop declines with their buying, and stock to cap up legs with shorting, to prevent over-enthusiasm that would flame out before they could distribute their entire position.) The problem with followers, from the accumulators point of view, is that they might sell before the stock reaches the accumulators target price range, and if they have enough stock to sell, might swamp the accumulators' ability to stop a down leg, causing them to lose control of the price.

It could also result from a positive news story anticipated by short horizon pros, who see it as an opportunity to distribute at good prices some shares they acquired at lower prices.

LimitedEdition

Thanks for the reply. Very useful.

so if you were to take a look at URI on the daily, would that have been institutional selling with the recent black candle followed by subsequent decline? Would I need further clarification such as rsi divergence?

markd

Probably not a very good example (11/27) because of the very low volume near the holiday. Also, the stock has just broken out on strong volume (11/1,11/4), which suggests the accumulation phase is over. Not much volume in the selling either, so it's not probably not professionals dumping stock because the longer term trend is over.

Following the analysis above on URI, the climactic downside volume was in October 2018 (although it kept going lower on lighter volume). The accumulation up legs were Jan-Feb, Apr, Jun, with a shakeout down leg (breaks support but recovers) ending in August. More accumulation in Sep (six straight days of gains off lows while the MAs are declining - often a tip-off of professional interest - the public buys more on rising MAs).

The rally cap days are Feb 25, May 1 (not black candles because also a down close, but same thing going on), July 1, Sep 13 and 20. On the early bars, (Feb, May) the volume is not impressive, which is unusual. More usual is at least above average volume (sma(21, volume)) and/or higher volume than the previous day like Jul 1, Sep 13.

I don't use RSI (not a knock on RSI - just you can't get everything on a chart), so I don't know if that would help.

LimitedEdition

Excellent commentary, thank you markd.

If I could pick your brains a little more. Just breaking down some analysis based on what I learnt from you. Let me know how I get on!

I am looking at FNV on the daily. Almost 1 million shares traded yesterday and it's create a 52 week high. Closed Red and a black candle.

It has bounced off previous resistance Sept 4.

RSI shows me a slight divergence.

Acc/DistBuy Pressure is at 80%. MACD is abouve zero line but not crossed over as yet.

So, right now then this is a wait and see moment. Not enough detail in the charts to tell me to go short here.

Finally, the gap up was on high volume, coming about from a period of accumulation the 8 days prior, along with support on the 20 EMA.

Suggests the move isn't over as yet.

But did institutions come into play yesterday?

markd

You haven't said what your time frame is for going short - a down leg in an up trend, or a longer term trend reversal. But in either case, the long term trend in FNV is still up, so the odds favor doubtful situations resolving to the upside. If you look at all the stocks in the industry ($DJUSPM - load the stocks into a list, run a scan to rank by market cap and view it in candleglance - maybe a custom candleglance with just one or two indicators), many are in up trends making annual highs or consolidating after making new annual highs (daily price channel = 251). Only a few small ones are in actual down trends.

In FNV, there is a fair amount of selling going on due to price re-approaching the Sep high. However, there wasn't much volume off the top in Sep - high volume off the top is the usual sign of distribution - instead the down leg ended on high (local climax) volume. But high volume bars since then haven't produced new low prices, showing there is still a lot of support.

If you want to short something, better to look for a stock that has broken an important support level, say a monthly low, on strong volume, then rallied back to that support level on relatively week volume and failed to get above it, or stay above it. And, ideally, you want its peers (same or similar industry) to look weak also. Some stocks do behave independently, but the odds favor you more if you have a general industry positive or negative working for you.

A note on the black candles - they are more likely to be significant if they have a long body vs a doji style minimal body. Wicks and tails show relatively balanced buying and selling, whereas a long body shows conviction. Volume also lends more weight, and makes up at least some for bad form (small body instead of a large one) when it occurs as an up leg seems to be maturing. For instance, after an up leg has gone on for a while, if high volume can not make a new high close, and hold up enough to make a body about half the range in size, then continued higher prices are more doubtful. If you are long you should probably at least lighten up. But shorting is probably pre-mature.

One more thought. If you want to short the down legs in an up trend, it might be better to use an intraday time frame to plan your trades - maybe hourly or half hourly.