Candlesticks have become a popular analysis tool for spotting early signs of change, and here, technician Tom Aspray highlights one of its most revealing patterns, which could help pinpoint optimal entry and exit points.

In the last trading lesson, I discussed the low close doji formation (LCD) that was created by trader John Person, which is in his book Candlestick and Pivot Point Trading Triggers.

Of course, John also taught me about his high close doji (HCD) trigger, which I have found equally as valuable as the LCD, particularly when it is confirmed by the volume analysis. Since I was first exposed to this technique, there have been numerous times when I looked at a market that had dropped sharply or risen strongly only to realize that a LCD or HCD had been triggered at the turning point.

In this article, I will look at the HCD trigger in-depth and show how the use of multiple time frame OBV analysis can confirm the price action.

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Just as the case with most technical methods, the signals from the monthly data are often the most powerful. They can often help one catch moves that last many months or even a year. This first chart of Bank of America (BAC) has two excellent examples of LCDs, as well as a HCD that formed in early 2012.

In April of 2010 BAC made a high of $19.86, a low of $17.41, and closed at $17.43. The following month (point 1) BAC closed at $15.41 which triggered a LCD. Over the next six months, BAC declined and eventually reached a low of $10.91. This was a drop of 29.2% from the May close.

BAC closed higher in December 2010 but the next month formed another doji, point 2. The pattern of the OBV was much different, as this doji was at the 2010 high, the OBV had also made a new high, so there were no negative divergences. Two months after the LCD was confirmed, the OBV dropped below its WMA.

As the doji was forming in January 2011, the OBV was just rallying back to its declining WMA (point 3), which is typically a very negative formation. The close in March 2011 was at $13.33, which was below the January low of $13.40. This therefore confirmed a LCD.

BAC closed December 2011 at $5.41, which was a drop of over 59% from the March close. That month BAC formed a doji with a monthly high of $5.95. In January 2012 BAC closed at $7.13, which triggered a high close doji or HCD. The risk was to under the December low of $4.92.

The monthly OBV formed a slight positive divergence at the lows and by the end of February 2012 had clearly moved above its downtrend, line a, and its WMA (see circle). At this point, the stop could have been moved to under the January low of $5.62.

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Let’s look at this same time period for BAC on a weekly basis. The chart shows that in the final week of 2011 BAC formed a doji (line 1). Over the prior six weeks, the OBV had been forming higher lows (line b) while prices had formed lower lows (line a). The OBV moved above its WMA a week before the doji was formed (point 3).

The doji high was $5.58, and the next week (point 2), BAC had a close of $6.18 and therefore triggered a weekly HCD. The stop would have been under the doji low of $5.27, making the risk much more favorable on the weekly HCD signal than it was on the monthly.

NEXT PAGE: Examples of HCD

Tickers Mentioned: Tickers: XLE, BAC, FAZ, GOOG, HD