THE "FULL" MARUBOZU: A CANDLE WITHOUT SHADOWS

Throughout our recent series on candlesticks and candlestick patterns, I have argued that swing traders should be able to recognize key candlesticks by name. If you can spot approximately 20 key candlesticks on the daily chart, then you should be able to identify high-probability situations where the chance of a Minor trend reversal is high. (For the average stock, Minor trends typically last between six and fifteen days.)

All of the candles we have discussed so far should put the swing trader on the alert that a change in trend may be occurring. A subsequent technical signal, such as a crossover in MACD, a stochastics sell signal or a trendline break, would then be reason to initiate a short or long trade.

The candle I want to discuss this week is called "Marubozu." In Japanese, the term means "close-cropped." Other common terms for the marubozu include "shaven head" or "shaven bottom." Typically, the marubozu is a long candle that implies the day's trading range has been large.

A marubozu candle lacks either an upper or lower shadow. On rare occasions it can lack both an upper or lower shadow. I am going to create a new term and call a long candle without either an upper or lower shadow a "full" marubozu. Although not generally recognized as a major reversal candle, I believe it should in fact be added to this category.

If you spend a lot of time at the trading screen, then you probably realize that a full marubozu is a very unlikely occurrence. Even after a strong gap, most stocks experience a minor reversal, which leaves a small shadow. In addition, if a stock has moved sharply higher during the day, daytraders often seek to nail down profits toward the end of the session. This creates a small upper shadow. Conversely, if a stock has sharply declined, then short sellers will generally cover before the close of trading. Because of this, stocks rarely close on their absolute low. In these cases there will be a small lower shadow.

When a "full marubozu" occurs, it is very well worth noting. If it is a white candle, then it signals extreme conviction among buyers. Conversely, if it is a dark candle, then it indicates sellers were eager to flee. As always, you should pay careful attention to the next day's trading to see if there is follow through. If the stock you're analyzing is at the end of a very mature Minor uptrend, then you are likely spotting a reversal. Below you will find an illustration of a bullish full marubozu candle:

For a real-life example of this important candlestick, let's turn our attention to the chart of Frequency Electronics (FEI) below. This particular chart is interesting because of the large number of days the stock trades without leaving an upper or lower shadow. In other words, it frequently creates either a shaven top or shaven bottom. (Perhaps the reason for this pattern is due to thin volume on the stock, which trades fewer than 25,000 shares per day. However, maybe there is some other explanation.) In the last 22 trading days since late December, I count five days in which either an upper or lower shadow is absent. Furthermore, on several of these days, the upper and lower shadows are very small. It appears once FEI establishes its trend for the day, the stock is likely to keep going in that direction.

As you can see in the chart, a full marubozu candle took place on January 16th. (I've circled this candle above.) It marked the peak of a Minor uptrend that lasted, as I analyze it, six days. The marubozu candle also occurred at important round-number resistance just under $15. It marked the third day that FEI could not overcome that important resistance level. Its occurrence marked what has so far been the absolute peak in FEI's share price.

On the day of the full marubozu, MACD gave a sell signal and RSI continued below 70, warning of a change in trend. So far, while drifting lower, FEI has found some support about $1.50 below its peak. That support, however, may be about to break. The stock is now up against its rising 30-day moving average. A break of that moving average and $13.45 support would complete an Intermediate-term top and should send the stock quickly toward a test of $12.

The "full marubozu" is not generally considered a major reversal candlestick. In my opinion, however, it should be added to this category. Although it is infrequent, this candlestick tends to be very significant when it occurs. If you observe it in a stock you own -- beware. If you don't, then this candle can cast a shadow over your profits.

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