A marubozu is either a large bullish candle or a large bearish candle that is at least 2 times the average candle bar. The pattern tells us of extreme bullishness or bearishness in a stock but it does not tell us a reversal or continuation of a move by itself.
In order to know the value of the bullish or bearish marubozu as a continuation or reversal signal, a trader needs to look at:
The picture above shows how a bullish and bearish marubozu looks like. The candle will either be a very large green bar or a very large red bar. The pattern must be at least 2 times the average candle in the recent history of the stock chart. Sometimes the candle can be 3-5 times the average size.
What this large candles tell us is the extreme bullishness and bearishness that is in the stock. It is up to the trader to correctly interpret whether the large candle will act as a continuation signal or reversal signal.
A strict interpretation of a marubozu candle is there is a large body with no wicks at the top or bottom. But in reality, you will seldom see this kind of candle with no wicks at all. So, a trader needs to use his or her judgment. When I see a large bullish candle with a little wick sticking out, I will still call it a bullish marubozu candle.
The marubozu candle pattern acts a powerful continuation signal when it is formed during or just slightly after a breakout or breakdown in the stock. A breakout or breakdown requires extra strength because the stock has been trading relatively sideways for a period of time. So, to see a large bullish or bearish marubozu gives us confidence behind the breakout or breakdown. We want to see power in the breakout or breakdown and not just some slow moving up or down.
In the chart above, we can see that O which is a REIT was in a downtrend. The stock was trading sideways in October and then in late October the stock broke down from the consolidation. The presence of a large red bearish marubozu on the day of the breakdown gave us confidence that the breakdown is a genuine one with the power of sellers behind it. The bearish marubozu acted as a continuation candle pattern because of where it was at the time it formed.
The chart above shows AGN which began a new uptrend in January. The stock went above its 20 MA and 50 MA and had a bullish 20 MA cross 50 MA. This usually signals a new uptrend. However, AGN did not immediately rise higher but it drifted sideways moving lower little by little.
Then a bullish marubozu appeared. Some traders see this as a bullish engulfing pattern. Whatever you called it, the large green candle engulfed many smaller candles. This large bullish candle told us that something is about to happen. The next day, the stock trade above the highs of the marubozu and this confirmed the bullish signal that the candle gave.
The bullish marubozu acted as a continuation pattern for this stock. The candle help ignite a bullish move and the stock had a nice bullish run in the next 2 weeks.
The marubozu can also act as a reversal signal. This usually happens when the pattern is formed at price support or resistance or some major subjective support and resistance like the 50 MA.
In the chart of DCP above, towards the mid of January the stock had a slight correction to the downside. The stock touched its 50 MA and it was also at price support. A huge bullish marubozu formed and engulfed the previous bar. Many traders will also realize that this is also a bullish engulfing pattern. The presence of the marubozu at support areas ended the correction.
Did you know that a trading signal that is ignored can be a very powerful hint that the stock will go the other direction? For example a breakout that failed can often end up making the stock crash and go the other way.
In the chart above, OCLR had a bullish marubozu which gave hope to many people that the stock may go higher. For the next few days, the stock went nowhere. Although it tried to go higher on the 5th day, the stock just couldn't break higher. The signal that was ignored turned into a powerful hint to traders that this stock just isn't going to go higher anymore.
The next day, a bearish marubozu appeared and sent the stock crashing down for a few days. How ironic it must be for traders who were expecting a big move to the upside.
Let me show you another example of a marubozu that was ignored. Can you see in the chart above a large bearish marubozu? There was a lot of selling, I guess a panic selling for the stock on that day. With such a bearish large candle forming, one would have thought that the stock is going to move lower.
However, instead of moving lower, the stock formed another large green candle that pierced more than half into the bearish marubozu. Someone was buying this stock. The bearish marubozu that was ignored now acted as a signal that the stock will move higher. And higher it moved indeed.
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