What is a Spinning Top Candle?
The spinning top candle looks like this:
How Does a Spinning Top Candle Work?
Spinning top candles portray situations where the market is having difficulty coming to a consensus on a security's value. They are indicative of a market in which uncertainty and indecision prevail. Neither the buyers nor the sellers have a clear sense of which direction the market will head. The forces of supply and demand are equally balanced.
In the spinning top candle, the shadows are relatively small and the candle has a very small range. When combined with low volume, traders may be expressing disinterest in a particular security.
Below you'll find a historical chart of the S&P 500. note that following early March there were three candles that can be interpreted as spinning tops and one candle that was close to a doji. The doji had a small real body and was virtually a high wave. This collection of candles depicts a bull/bear war, with neither side being able to declare a decisive victory. The last candle, however, seems to resolve the indecision of the first several weeks.
Why Does a Spinning Top Candle Matter?
As the old cliche goes -- "when in doubt, stay out." The spinning top candle expresses doubt and confusion on the part of the market. Until the situation becomes clear, traders should emphasize careful stock selection and minimize position size.