October 31, 2008

Reversal Signal – TOL

By Planet Wealth

In the Trading Room we identified a fantastic reversal signal on TOL. We used a very powerful Japanese candle stick pattern as a starting point, then analyzed the stock further to see if there was more to support the trade.

The candle pattern is known as a piercing pattern. This is a bullish signal and is found at the bottom of an existing downtrend and consists of two (2) candles to complete the pattern. The first candle of the pattern is a long red body signifying a strong down day. The second candle is a long green candle signifying a strong up day. What makes it a piercing patter is two (2) things. Firstly, the second days candle must start, or open, below the previous days low, or close.

The second point that makes it piercing is the candle must end, or close, at least 50% of the way up the first day’s body.

Once we identified this as a reversal candle pattern we look at some other supporting evidence to add probability to this trade. As always volume is KEY. And as you can see below there was excellent volume today. The piercing pattern also pierced through a weekly resistance line and was bouncing off a weekly trend line that started back in Dec 07.

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