Heiken-Ashi Chart Indicates Potential Reversal of Current Trend

Although gains for this week in gold pricing were fractional, nonetheless it closed above its open on Monday. This creates a green candlestick on a weekly chart, and now for the fourth consecutive week we have seen gold close with weekly gains. The last time this occurred was in mid-November up until the first week of December. This was followed by a week which closed below its open during the week of December 10th, proceeding the current 4 weeks of consecutive gains.

When we convert our weekly candlestick chart to a Heikin-Ashi chart we can see that the last eight weeks were all green candles which indicate a bullish disposition. The key to this type of chart is twofold.

First by using the midpoint of the prior candle as the open of the current candle you tend to smooth out market noise.

 Secondly this chart allows you to determine the relative strength of a current trend as well as define pivot points or keys reversal as the market transitions.

According to Investopedia the Heikin-Ashi technique (meaning "average bar" in Japanese.) can be used in conjunction with candlestick charts to spot trends and to predict future prices.

Most profits are generated when markets are trending, so predicting trends correctly is necessary. Heikin-Ashi charts can also be used to keep traders in trades while a trend persists but get them out when the trend pauses or reverses.

When looking to analyze a trend utilizing Heiken-Ashi charts there are a few primary rules that can be used to identify and categorize a current trend.

First, Green candles with no lower shadows, or wicks, indicate a strong uptrend. A green candle with no lower wick is simply stating that at no time during the trading did prices move to or below the midpoint of the prior candle.

Second, the larger the body of the candle in relation to the prior candles, the stronger the current trend is. If the candle body is shorter than the previous candles it could be indicating that the trend is losing some momentum or steam.

Third, as body size begins to diminish it will usually occur in conjunction with the reemergence of wicks both above and below the body. Even if the color of the candle remains the same as prior candles it most often is indicating a potential change in trend or pivot point.

Lastly as body size becomes smaller approaching the point in time when color shifts from green to red, or red to green. Diminishing size is a strong indication that the current trend has run its course and the probability of a reversal is increased substantially.

Looking at our daily Heiken-Ashi chart of gold we can see that from December 17^th up until January 7^th we had consistent and consecutive green candles. More so during this period there were a total of 14 trading days resulting in 14 green candles. The 15^th candle was a small red candle which is being followed by the last 3 days of trading in which the body size is small and we see a return of wicks both above and below the real body.

While this could be signaling a simple consolidation or resting point in the market, it is more likely signaling a key reversal is likely to occur and forecasting and upcoming pivot point.

Given that markets move on fundamental events and how that is translated into market sentiment, this type of candle can graphically illustrate that sentiment. It is for that reason I believe that there is a decent probability that we will see the current bullish trend conclude, with gold pricing entering a period of consolidation and a move back to lower pricing.

Wishing you as always, good trading,