Candlestick charts help in lighting the way

TECHNICAL analysis is all about giving yourself an edge by using charting tools to determine what other investors are doing and feeling, which can arm you to make a profit through timely action.

By InvestSMART · 7 Aug 2012

By InvestSMART ·
7 Aug 2012

Comments

TECHNICAL analysis is all about giving yourself an edge by using charting tools to determine what other investors are doing and feeling, which can arm you to make a profit through timely action.

This week Robert Brain, a director of the Australian Technical Analysts Association, gives us some insight into breakouts the moment when sentiment changes and stocks move quickly. For this exercise we are using a weekly candlestick chart of Breville Group, a well-known developer and distributor of consumer electrical goods.

Candlestick charts are used because they paint a detailed picture of market movements. The broad "candle bodies" in this chart represent the weekly opening and closing prices of the stock. Where the candle is white the stock rose that week while a black candle indicates a price fall.

The "wicks", or thin lines, show how much the stock overshot or undershot the opening and closing prices during intra-week trading. The chart tells us that from April to July Breville traded within a range indicated by the green lines on the chart, with that range tightening towards the end as the lower line rose towards the upper-range line.

Market action slowed in June, with the blue vertical volume lines indicating less Breville stock was traded than in May. But then in late July sentiment changed, volumes rose dramatically and Breville experienced a breakout.

Viewing daily candlestick charts would give investors even quicker early warnings that sentiment has changed but we could not provide that detail here due to space constraints. However, Brain says the price moved dramatically on July 30, with volume jumping the next day as the market caught up.

The question investors will be asking is, can the breakout hold? This is impossible to say, of course, but Brain reminds us that breakouts have often led to rises of up to 300 per cent in following months.

Similar breakouts have been experienced lately by Challenger Infrastructure, Consolidated Media, Kibaran Resources and Sun Resources. Positions taken in stocks like these can be protected by putting in place stop losses, sell orders triggered if the stock moves dramatically the other way.

Breville outsources its manufacturing and takes an active role in developing new products. The formula has worked well, with the stock returning 69.8 per cent to investors in the past year, 62.9 per cent in three years and 22.7 per cent over five years. It's now trading on a price-earnings ratio of 15.14 times, well above the general market's 12.55 per cent.

This column is not financial advice. The writer has Consolidated Media shares.

rodmyr@gmail.com

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What are candlestick charts and how do they help everyday investors with technical analysis?

Candlestick charts are a technical analysis tool that paint a detailed picture of market movements. Each broad “candle body” shows the weekly opening and closing prices (white if the stock rose that week, black if it fell), while the thin lines or “wicks” show how far price overshot or undershot those levels during intra-week trading. They help investors see sentiment shifts and timing for potential action.

What is a breakout in stock trading and how does it signal changing market sentiment?

A breakout is the moment when sentiment changes and a stock moves quickly out of a trading range. The article uses Breville as an example: after trading in a tightening range from April to July, Breville’s price moved dramatically in late July and volumes rose, signalling a clear sentiment change — that’s a breakout.

How can trading volume confirm a breakout when using candlestick charts?

Volume helps confirm a breakout because rising volume shows wider market participation. In the Breville example, June showed lower volume, but in late July volumes rose dramatically and jumped the day after the big price move, indicating the market was catching up and confirming the breakout.

Why might investors look at daily candlestick charts instead of weekly charts for early warnings?

Daily candlestick charts give quicker, more granular early warnings of changing sentiment because they show intraday and day-to-day price action. The article notes weekly charts are useful for the bigger picture, but daily charts would provide even earlier signals of a shift.

How can investors protect positions after a breakout using stop losses?

Positions taken after a breakout can be protected with stop losses — sell orders automatically triggered if the stock moves sharply the other way. The article suggests stop losses as a risk-management tool to guard profits or limit losses when volatility increases.

Which other Australian stocks recently experienced similar breakouts mentioned in the article?

The article cites similar recent breakouts in Challenger Infrastructure, Consolidated Media, Kibaran Resources and Sun Resources. It also discloses the writer owns Consolidated Media shares.

What does the article say about Breville Group’s business model and recent stock performance?

Breville outsources its manufacturing and takes an active role in developing new products. The article reports the stock returned 69.8% over the past year, 62.9% over three years and 22.7% over five years, and was trading on a price-earnings ratio of 15.14 times — above the general market’s 12.55.

Can investors be sure a breakout will keep going, and how big can breakouts be?

No — it’s impossible to say for certain whether a breakout will hold. The article quotes Robert Brain reminding readers that breakouts have sometimes led to rises of up to 300% in the following months, but there’s no guarantee, so caution and risk management are important.