In stock analysis, Japanese candlesticks are one of the most popular ways to display price information which includes the open, close, range and direction of trade for trading instruments such as equities and currencies. It was known to be developed by Homma Munehisa, a successful Japanese rice trader in the 18^th century.  The Japanese Candlestick makes price charts visually easy to read and understand, making it a favourite amongst traders, chartists and technical analysts.

A Japanese Candlestick resembles an upright rolling pin as it is composed of a body and two wicks (or shadows) on each side of the body.

The body represents the opening and closing price for the period. If the instrument closed higher than it opened, the candlestick should often be a white, blue or green colour to highlight an upward movement over the specified period. If the instrument closed lower than it opened, it should represent a black or red coloured body.

The wicks above and below the body (if it exists) represent the price range the instrument has traded over the specified period.  The longer the wicks, the larger the range the price of the instrument has traded.

How are they used?

Candlesticks can formulate different price patterns which can be used to help predict the trend of a security, and this is an important concept in stock analysis. There exist specific names that are attached to different types of candlesticks that display different lengths of body and wicks. Generally, they can be used as a timing tool to get into or get out of a trade.

A bullish signal is usually given if the lower wick is much longer than the upper wick, known as a ‘long lower shadow’ while a bearish signal is usually given if the upper wick is much longer than the lower wick, known as the ‘ long upper shadow’.

Additionally, if a bull run would follow a ‘long lower shadow’, it would be reflected by higher highs and higher lows as well as candlesticks with white bodies without wicks which are called ‘white marubozus’. Conversely in a bearish market, a downtrend would be represented by lower highs and lower lows with perhaps black bodies without wicks known as ‘black marubozus’ occurring after a ‘long upper shadow’.

So, when conducting stock analysis using charts, remember that Japanese candlesticks provide more information about price patterns than a normal line chart.

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One common way to classify stocks is to make an assessment as to whether they are “cyclical” or “defensive”.

These two terms represent, as you can probably guess, two types of industry or stock that are at stark odds with the other.

Let’s take a deeper look at what these terms mean, and how they interplay with the stock market.

The terms cyclical and defensive are used to show how closely correlated a company’s share price, or a sector’s performance, is to fluctuations in the economy.

Cyclical stocks are those whose fortunes are tied to the strength of the economy. They perform well when the economy is strong, and will decline when the economy is performing badly.

In other words, cyclical stocks perform according to the big picture, where as defensive stocks generally perform solely on their own merits.

In general, defensive stocks tend to offer more steady products and services. Business doesn’t necessarily boom when the economy is strong, but also doesn’t suffer too badly when the economy is struggling.

Defensive stocks are non-cyclical because they experience solid profits regardless of the motions of the broader economy.

Defensive stocks, as we noted above, are not considered to be tied to the market. However, their fortunes are still party tied to how the broader economy is going.

Defensive stocks are seen as safer, and should perform better in a bear market. Even if they don’t manage to go up during a bear market, they shouldn’t fall by as much as cyclical stocks in bad times.

Because defensive stocks and cyclical stocks are polar opposites, when cyclical stocks are doing poorly, defensive stocks tend to do well.

An example of defensive stocks to choose in a bear market would include those that are in the healthcare industry, namely CSL Limited which is a biopharmaceutical company.

Additionally, other sectors that are generally considered most defensive in a bear market are officially known as the consumer staples and the utilities.

Generally, some experts believe defensive sectors include industries such as drugs, healthcare, information technology and food on a wider spectrum.

Defensive stocks are defensive in nature because the demand for them tends to be strong no matter how the general economy is performing. This is because defensive stocks produce items considered necessities, and product demand should continue regardless of the big picture.

For instance, people will always need electricity in their homes, so utilities companies tend to perform steadily over time; it’s not like you will buy twice as much electricity when times are good!

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