So what's the big deal about Japanese candlestick charts? The more I work with them, the more I believe that it embodies The Wisdom Of The East, the Tao of the Market. Let me explain. The closest Western cousin is the Open-Low-High-Close (OLHC) chart, which shows the same data as the candle chart. However, when you look at a candle chart, you get a much clearer picture.

Compare a one month OLHC chart of Microsoft with a candle chart for the same month. The OLHC chart shows the open and close as tick marks, open to the left and close to the right, of the line whose height is the difference between the high and the low. The candle chart, instead, shows the open and close prices as a rectangle, either colored green (or transparent) when the close is higher than the open, or red (or black) when the close is lower than the open. Immediately, you see the volatility of the price action. A small rectangle (or a line if the close = open, a pattern known as a doji) means little or no price change. A deep rectangle means a large move. The price move and direction, the most important information for a trader, jump out at you. Over time, a series of deep, green rectangles shows a clear uptrend, with the reverse for a downtrend. With the OLHC chart, it's difficult to pick these trends up visually.

The eye is drawn to the high vs. low line on an OLHC chart, while on a candle chart the eye is drawn to open vs. close. What's more important? Think of the daily market action as like a sports contest - to mix a sports metaphor, the Chicago Bulls vs. the Chicago Bears. The whistle opens at 9:30 am and closes at 4:00 pm. The price zigs and zags all day. Who won the game? Was it a close match (1-0), or did one side trounce the other (52-0)? Try figuring that out with an OLHC chart. With a candle chart, you know both immediately.

There are many other subtleties with candle chart reading. I hope this gives you glimpse into its power and why all those 18th century Japanese rice traders became so rich.

TRADING ACTIVITY UPDATE FOR DECEMBER 28, 2007

The market was flat today. That's not a good trading environment. In fact, none of my three potential trades - UA, GES, and NTRI - displayed the upward price action required to pull the trigger. I did not adjust any stops on existing trades, which closed roughly flat, like the market. In summary, a day to sit back and smell the flowers.

POSSIBLE TRADES FOR DECEMBER 31, 2007

1) AT&T (T) generated a bullish kicker - a strong bullish signal signaling a trend reversal, usually on a news surprise. In this case, AT&T won a patent infringement suite from Vonage (VG). AT&T closed at 42.44, close to its 52 week high. Sounds like T might be breaking out to the upside. I will buy if T can sustain a price of 42.55 or higher, with a target of selling when the chart tells me that the up move is over.

2) Baldor Electric (BEZ) generated a bullish piercing pattern and has been rising slowly recently from its low below 32. It closed at 34.48 and has been beaten down from recent highs of 38 in early December and 44 in early October. I will buy if BEZ can sustain a price of 34.60 with a target at 38 and, if the chart gods smile, 44.

3) H&R Block (HRB) generated a bullish harami, closing at 18.09, close to its 52 week low. HRB has been beaten down because of its problems with Option One, its subprime mortgage division. Based on the chart, I think HRB can retrace its recent high of 22. I'll buy if HRB has legs to stay at least above 18.20 for the day.