A J Hook pattern is a variation of a wave 1 -- 2 -- 3 pattern. It becomes an easy pattern to identify with the use of Candlestick signals. The problem most investors have is understanding when to sell after a price has made a strong move. The J Hook pattern demonstrates some easily identifiable attributes. First, it starts with a strong uptrend that usually produces “stronger than normal” returns in a very short period of time. This strong up-move is significant enough to create the normal wave pattern. A reversal is caused by profit-taking, followed by a declining trajectory of the pullback, then the continuation of the uptrend. The J Hook pattern is the description of the pullback that starts to round out at a bottom and starts moving back up, thus forming a ‘hook.'
This pattern provides the Candlestick investor with some very simple profitable applications. The first uptrend will usually show clear Candlestick ‘sell' signals when it comes to an end. The top may be formed with the stochastics in the overbought area or very close to the overbought area. Because of the strong initial uptrend, the first evidence of ‘sell' signals should be acknowledged. Even if it is suspected that the uptrend could be forming a J Hook pattern, why risk remaining in the trade? When a sell signal becomes evident, take your profits.
What criteria makes a Candlestick investor suspect a J Hook pattern will form? The analysis of the market trends in general should provide that information. For example, if a stock price had a strong run-up while the market indexes had a steady uptrend, and the market indexes do not appear to be ready for a significant pullback, then a strong stock move could warrant some profit taking before the next move up. The benefit of being able to identify Candlestick signals is being prepared for some Candlestick ‘buy' signals after a few days of pullback. These signals would also alter the trajectory of the stochastics that will be pulling back.
Witnessing Doji's, Hammers, Inverted Hammers, or Bullish Harami's after a few days of a pullback movement becomes an alert that the selling is starting to wane. If the stochastics are flattening out during that same timeframe, then a set-up for a J Hook pattern is taking place. Taking profits when the first sell signals occur in the initial uptrend eliminates the downside risk. Those Candlestick ‘sell' signals indicate that it is time to get out of the trade. Even though the strength of the initial move would warrant suspecting a J Hook pattern to form, there is no guarantee that the pullback could not retrace 20%, 40%, 60% or even greater of the initial move up.
This creates a trading strategy that allows an investor to utilize the common sense built into the Candlestick signals. When it is time to get out, get out! If, after four days, small Candlestick buy signals start forming, there is nothing wrong with buying back into the position. The second entry of this trade now has some targets that can be clearly defined. The first target should be a test of the recent high. Although it may not be a huge percentage return moving to that level, at least the probabilities indicate that it should be profitable.
The benefit of Candlestick signals, once again, can be applied if and when that recent high is tested. Witnessing another sell signal, as the price approaches the recent high trading level, would be a clear indication that the recent high was going to act as resistance. This would induce taking quick profits and getting back out of the trade. On the other hand, if strong signals are seen as the recent high is breached, that would be a clear indication the high was not going to act as a resistance level. A new leg of the trend may be in progress.
Note the J Hook pattern in Fig. 1, the Loews Corporation chart. Once the trend started up, the pattern formed when the price pulled back for a few days. However, the stochastics never reached the oversold area and they came down only part way before hooking back up. The signals indicated buying before it pulled back too much, showing the buyers were going to test the high of the previous week. The gap above the recent high indicated that the buyers were very anxious to see prices go to much higher prices. Recognizing this pattern and the elements that form it allows an investor to move decisively at the right points of a trend. Being prepared for the pattern and knowing what signals to look for creates opportunities to participate in a profitable trend while greatly reducing risk.
j-There is one Positive J-hook pattern and one Failed J-hook pattern. Both setups look pretty much the same. I guess you can get in after a pullback and ride the wave up. BUT be careful you may get stuck in a trade while you wait for the pattern to mature, like in setup #2. What I am saying is watch the daily candles and other indicators for your sell point because the pattern you are looking for may not happen.
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