Prices in the S&P 500 and in other major Indexes rose quickly on the day after the government announced that it would take over Freddie Mac and Fannie Mae. Both agencies had been abused for years by top management which, it is now alleged, manipulated the numbers so as to falsely report earnings, as a result of which their own compensation was enhanced. It had been assumed, sub rosa, for a long time that both institutions were functionally insolvent.
The advance in prices was particularly dramatic, and some investors took it to mean that good times were here again and that the various crises in the financial industry were on the way to solution. However, those who were knowledgeable in Japanese Candlestick technical analysis had a different outlook. Prices had risen to a common retracement level in an underlying bear market; and the next day's price action would tell the story.
As it turned out, that story was quickly on full display, in the form of a classic Candlestick "Belt Hold" pattern, which almost totally repeated the rise, but in the other direction. It was as if the market had seized the price action of the day before and had thrown it out of the ring.
History and experience tell us that the Belt Hold pattern is a successful predictor often enough that we are wise to plan ahead, on the probability that it will be accurate this time, too. We know that no pattern or indicator is perfect; nor is the skill of the interpreter perfect. However, stock market investing is a process of assessing probabilities, and acting upon those which appear to have the best chances of success.
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