After days of consistent selling, there is panic on the street as the last holders of the stock finally give up in desperation. This desperation can be brought about by a bad earnings report or some other fundamental news. The stock gaps down on the day following the news because of the huge sell orders. However, smart money knows that this is the final panic selling in progress, which usually leads to all sellers getting wiped out. If all sellers are wiped out, where is the stock going to go from here? Up of course! The smart money realizes that the ‘seemingly’ bad news which caused the stock to gap down as been already reflected in the stock price. This buying leads to a tall bullish candle which brings the stock price back in its previous trading range. Usually the stock price will begin appreciating from that point on.

Similarly, in a up-trending stock or a flat stock, the Belt-Hold signal signifies that most of the people who wanted to get out of the stock, maybe for profit preservation, have done so. With lack of sellers and new buying coming in, the stock usually will start a strong uptrend.

From the candlestick trader’s perspective, the fundamental news or lack of news that causes the gap-down is irrelevant. What needs to be analyzed is this candle formation following the news. The candle will provide all the information you need to make your decision.

The following chart shows a Belt-Hold signal in AAPL. Notice the strong rally following the signal. The analysis is visually very simple. Most of the sellers are washed out as demand steadily absorbs supply throughout the day. As shorts notice the bullish candle forming, they start covering their positions and thus add fuel to the fire.