ChartWatchers

COMBINING FUNDAMENTALS AND TECHNICALS TO PRODUCE SUPERIOR RESULTS

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First, let me say that it was AWESOME meeting so many of you at Chartcon 2012 in Seattle last week.  It was also great to finally meet several of the co-authors of ChartWatchers.  I've been to a LOT of trading conferences and this one surpassed all of the others on so many levels.  If you weren't able to make it, please mark your calendar for August 2013 in the event that Chip decides to host the ChartCon 2013.  ChartCon 2012 was truly outstanding.

My background is in public accounting and while my first choice is always to believe the technicals, it's difficult to stray from solid fundamentals.  Accordingly, each quarter I search through hundreds of earnings reports and charts to find that rare combination of "out of the park" earnings results and just the right amount of uncontrollable buying interest.  Generally speaking, here's my formula:

Beat on revenues, beat on EPS, raise guidance and print a marubozu candle (or at least a very strong candle) on MASSIVE volume.

Ok, so you might be asking what is a "marubozu" candle?  A bullish marubozu candle shows buying interest the entire trading day.  There are either no tails (shadows) or very small tails on the candle.  It opens with a gap up and the buying interest never slows, trending higher all session long and finishing at or very near its high of the day.  Normally, gaps get filled.  As everyone jumps on board at the opening bell, market makers provide liquidity and complete the other side of the trade.  This explains why so many gaps fill.  Market makers generally make their money one way or the other.  But a marubozu candle in essence paints a picture of unrelenting demand - even after a HUGE gap up.  Even the market makers can't slow demand.

In the last two quarters, I've been able to find a couple stocks where demand swamps supply and I'll highlight them both below:

First, check out Multimedia Games (MGAM):

MGAM 8.18.12

Next, take a look at Mellanox Technologies (MLNX):

MLNX 8.18.12

There are differences in how the two traded shortly after their blowout earnings reports, but ultimately both stocks soared much, much higher.  Identifying these stocks when "game-changing" candles print can make a big difference in your trading success.

Unfortunately, marubozu candles are not particularly common.  But I do still look for gaps to the upside after solid earnings where momentum continues on the long side after the gap higher.  I have one such stock that appears poised to me to move much higher over the next quarter.  For more details, CLICK HERE.

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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