The Belthold Signal

WHAT IS THIS INDICATOR?
Long-term investors and daytraders alike can extract such trades using a simple candlestick signal known as the belthold signal. It is easy to recognize and also reveals an easy-to-understand explanation why the reversal will occur. Once an investor grasps the investment psychology behind a belthold signal, profits can be taken out of the markets consistently.

Dissecting the implications of a belthold makes it easier to understand. Once you know why this formation occurs, taking advantage of what the belthold signal reveals becomes profitable. The ramifications of where a belthold signal occurs are an important aspect of candlestick analysis.

Candlestick signals make analyzing market patterns relatively easy. Trading patterns become easily recognized because of investor sentiment. Investor decision-making is flawed with the input of emotion; human emotions are contrary to rational investment decision-making. Being able to analyze what investors normally do provides a huge advantage for the candlestick investor. Essentially, candlestick analysis is capturing and analyzing investor sentiment on a chart.

Candlestick signals work effectively in all time frames, since the sentiment for each time period is clearly defined with candlestick formations. Once you recognize a trading pattern is developing, you can analyze it and time your trades more accurately.

The belthold is a powerful reversal signal and a continuation pattern, and it can be recognized with a simple premise. The opening price gaps open well below the current trading area (Figure 1). Very often the buying will start almost immediately from that level and the price will start moving back up into, or very near, the previous trading area. (The bearish belthold signal has the same indication, except it gaps open at the top and comes back down into the trading range. For the purpose of illustration, all explanations here will be for the bullish belthold signal.)

FIGURE 1: THE BELTHOLD SIGNAL

As a bottom reversal signal, it is highly effective. It is also an informative formation for revealing when profit-taking is over in an uptrend, making it an accurate continuation signal. The Japanese term for "belthold" is yorikiri, a sumo wrestling term meaning "pushing with the body" while maintaining a grip on the opponent's mawashi, or belt.

BELTHOLD SIGNAL ELEMENTS

The gap down below the previous trend reveals panic selling or the sellers wanting to get out of the position as quickly as possible. If buyers step into position, the price goes right back up near the previous trading range.

WHERE IS THE MOST PANIC SELLING?
Most panic selling takes place at the absolute bottom. A strong bullish candle formed after the severe gap down reflects a new investor sentiment. At that point, the selling pressure is over and the last of sellers has finally been eliminated. This usually creates new optimism coming into the price trend.

Understanding the ramifications of a belthold signal allows an investor to analyze other technical factors that may add to the credibility of the reversal signal. As illustrated in the chart of Bottomline Technologies in Figure 2, the belthold signal occurring at the same level as the previous bullish candlestick signal, a bullish harami, has more credibility than an uptrend will.

FIGURE 2: ADDING CREDIBILITY TO THE BELTHOLD. Here you can see the belthold signal occurring at the same level as the previous bullish candlestick signal, a bullish harami, has more credibility than an uptrend.

Figure 3, the chart of First Industrial Realty Trust, demonstrates how a belthold/bullish engulfing signal brings new life to the price trend. Whatever investor sentiment was dominating the price trend over the past few months was completely altered. The gap down in price, followed by immediate and strong buying, changed the perception of the price activity.

FIGURE 3: BRINGING NEW LIFE TO THE PRICE TREND. A gap down in price followed by immediate and strong buying changed the perception of price activity.

FIGURE 4: BELTHOLD PATTERN DURING AN UPTREND. Here the profit-taking was taken out quickly. The bulls stepped in and continued their buying.

When it comes to investing funds, human emotions will always have the same ingredients. The candlestick signals are simply the graphic depiction of investor sentiment. Candlestick signals were not discovered and tested by computer back-testing simulations; they are the result of centuries of analyzing how human emotions affect a price trend. The signals occurring over and over at specific points in a trend reversal provide a statistically proven trading platform. If you understand how they are formed, you will understand what makes prices move.

SUGGESTED READING
Bigalow, Steve [2001]. Profitable Candlestick Investing: Pinpointing Market Turns To Maximize Profits, John Wiley & Sons.
_____ [2005]. High Profit Candlestick Patterns, Profit Publishing.