Why You Wait for Confirmation: Spanish Case Study

• Posted by Greg Harmon
• on February 5th, 2013

The Spanish market ($IBEX, $EWP) had a hard week last week. After making a new higher high on Monday it sold off the rest of the week, ending with a Spinning Top Doji (blue circle). Either a Spinning Top or a Doji or the combination are often quoted as reversal candles. This is because after a large move in one direction, in this case lower, the price action continued lower and then rebounded, to an equilibrium of buyers and sellers. That thinking is only partly correct. In fact these candles can be reversals, but they can also be continuation candles. A better interpretation is that

the balance between buyers and sellers signals indecision about the next direction and that confirmation is needed to determine continuation or reversal. Clearly in this case it was just a pause before continuing lower with a strong Marubozu candle. That is a candle that shows meaning. Starting at the high of the day and finishing at the low, there is no mistaking who was in charge in the Spanish market Monday.

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