Your SlideShare is downloading. ×
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Volume1of3-YourComprehensiveGuidetoFinancialChartsandTechnicalAnalysis _VanLuong.BlogSpot.Com

1,539

Published on

Published in: Business, Economy & Finance
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
1,539
On Slideshare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
172
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Vietnam’s One-stop Financial PortalYour Comprehensive Guideto Financial Charts andTechnical Analysis ofthe Stock Markets Volume 1/3
  • 2. About Stox.vnStox.vn is a trademark of StoxPlus, a financial media company providing a complete suite of financialinformation solutions and educational services to Private Investors and Financial Companies inVietnam and internationally. Our vision is to become the Best Stock Market Research and FinancialInformation Portal in Vietnam.Our senior management team has over 35 years of extensive and diverse experience in Investmentand Technology, Banking, Corporate Finance, in the United Kingdom, Switzerland, Australia andIndochina.About this GuideTechnical analysis is the study of investor behaviour and its effect on the subsequent price actionof financial instruments. The main data that we need to perform our studies are the price histories ofthe instruments, together with time and volume information. These enable you to determine trend,market sentiment and various buy and sell signals in order make some extremely profitable investingdecisions.We are very pleased to present “Your Comprehensive Guide to Financial Charts and Technicalanalysis of the Stock markets”. This Guide can be obtained from www.stox.vn and partly available inVietnamese .We believe that this will be a helpful guidebook for investors in Vietnam. For furtherinformation about our services, please visit our website at www.stox.vn.© 2008 Stox.vn: Vietnam’s One-stop Financial PortalVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 3
  • 3. Table of Contents:Part Contents Page1 Overview - Articles that help you understand what Technical Analysis is and is 5 not, what Fundamental Analysis is, why someone should analyze securities at all, and more.2 Chart Analysis - Articles describing the various kinds of financial chart 31 analysis including trendline analysis, support and resistance, chart pattern analysis and Japanese candlestick charting.3 Technical Indicators and Overlays - In-depth descriptions of all the technical 171 indicators, market indicators and chart overlays.4 Market Analysis - Articles on various schools of market analysis including 333 Dow Theory and Elliott Wave Theory5 Trading Strategies - Articles about how to use technical analysis to make 353 better trading decisions.6 Recommended Sites - Links to other helpful financial web sites. 385Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 4
  • 4. Part 1- OverviewVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 5
  • 5. OverviewWhat is Technical Analysis?Technical Analysis is the forecasting of future financial price movements based on an examinationof past price movements. Like weather forecasting, technical analysis does not result in absolutepredictions about the future. Instead, technical analysis can help investors anticipate what is"likely" to happen to prices over time. Technical analysis uses a wide variety of charts that showprice over time.More Articles for New Chartists:• Why Analyze Securities? - This article examines the three types of market analysts, what they believe about financial markets and why. It will help you understand the big picture when it comes to deciding the "best" way to invest.• Technical Analysis - This article explains what Technical Analysis is, how it works, and the general steps one should take when using technical charts and indicators to analyze stocks. It concludes with a look at the strengths and weaknesses of using charts to make investment decisions.• Fundamental Analysis - This article describes Fundamental Analysis and explains the general steps that a fundamental analyst takes when evaluating a stock. It also looks at the strengths and weaknesses of fundamental analysis.• Random Walk Theory - Describes the Random Walk Theory of financial markets which is at odds with both Technical Analysis and Fundamental Analysis.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 6
  • 6. Why Analyze Securities?Security Analysis - Does it Matter?Wall Street has scores of analysts, strategists and portfolio managers hired to do one thing: beatthe market. Analysts are hired to find undervalued stocks. Strategists are hired to predict thedirection of the market and various sectors. Portfolio managers are hired to put it all together andoutperform their benchmark, usually measured as the S&P 500. Granted, there are many studiesand disputes raging on the performance of equity mutual funds, but it is safe to assume that about75% of equity mutual funds underperform the S&P 500. With these kinds of stats, individualinvestors would surely be better off simply investing in an index fund rather than attempting to beatthe market wouldnt they?The added value of analysis is in the eye of the beholder. A fundamental analyst believes thatanalyzing strategy, management, product, financial statistics and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market. They are alsolikely to believe that there is little or no value in analyzing past prices and that technical analystswould be better off stargazing. (Humph!) The technical analyst believes that the chart, volume,momentum and an array of mathematical indicators hold the keys to superior performance.Technicians are just as likely to believe that fundamental data is hogwash pure and simple. Andthen there are the Random Walkers who believe that any attempt to try and outwit the market isfutile.So whom do we believe? Is fundamental analysis worth the time and effort? Are technicians abunch of quacks? Or is it all a lesson in random futility? Lets start to clarify things by looking at theefficient market hypothesis and see where the fundamentalists, technicians and random walkersstand on the question of market efficiency. After we have explored this area, we will then take acloser look at the random walk theory, fundamental analysis and technical analysis.Are Markets Efficient?The question concerning the value of analysis begins with the debate on market efficiency. Justwhat is represented by the current price of a security? Is a securitys current price an accuratereflection of its fair value? Or, do anomalies exist that allow traders and investors the opportunity tobeat the market by finding undervalued or overvalued securities?Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 7
  • 7. Aswath Damara, of the Stern Business School at New York University, defines an efficient marketas one in which the market price is an unbiased estimate of the true value of the investment. Fairenough, but it is not quite that simple. In an efficient market, the current price of a security fullyreflects all available information and is the fair value. "All" because the price is the sum value of allviews (bullish, bearish or otherwise) held by market participants. It is the fair value because themarket agreed on a price to buy and sell the security. As new information becomes available, themarket assimilates the information by adjusting the securitys price up (buying) and down (selling).In an efficient market, deviations above and below fair value are possible, but these deviations areconsidered to be random. Over the long run, the price should accurately reflect fair value.The hypothesis further asserts that if markets are efficient, then it should be virtually impossible tooutperform the market on a sustained basis. Even though deviations will occur and there will beperiods when securities are overvalued or undervalued, these anomalies will disappear as quicklyas they appeared, thus making it almost impossible to profit from them.From experience, most of us would agree that the market is not perfectly efficient. Anomalies doexist and there are investors and traders that outperform the market. Therefore, there are varyingdegrees of market efficiency, which have been broken down into three levels. These three levelsalso happen to correspond to the beliefs of the fundamentalists, technicians and random walkers.Strong-form: TechniciansThe strong-form of market efficiency theorizes that the current price reflects all informationavailable. It does not matter if this information is available to the public or privy to topmanagement; if it exists at all, it is reflected in the current price. Because all possible information isalready reflected in the price, investors and traders will not be able to find or exploit inefficienciesbased on fundamental information. Generally, pure technical analysts believe that the markets arestrong-form efficient and all information is reflected in the price.Semi-Strong Form: Random WalkersThe semi-strong form of market efficiency theorizes that the current price reflects all readilyavailable information. This information will likely include annual reports, SEC filings, earningsreports, announcements and other relevant information that can be readily gathered. However,there is other information not readily available to the public that is not fully reflected in the price.This could be information held by insiders, competitors, contractors, suppliers or regulators, amongothers. Anomalies exist when information is withheld from the public and the only way to profit isby using information not yet known to the public. This is sometimes called insider trading. Oncethis information becomes public knowledge, prices adjust instantaneously, so it is virtuallyimpossible to profit from such news. The Random Walk theory is an example of the semi-strongform of market efficiency.Weak-form: FundamentalistsThe weak-form of market efficiency theorizes that the current price does not reflect fair value andis only a reflection of past prices. Furthermore, the future price cannot be determined using past orcurrent prices (sorry technical analysts). Fundamental analysts are champions of weak-formmarket efficiency and believe that the true value of a security can be ascertained through financialmodels using information readily available. The current price will not always reflect fair value, andthese models will help identify anomalies.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 8
  • 8. Which Form Exists in the Market Today?Many in academia, including Gordon Gemmill of the University of Warwick and Aswath Damara ofNYU, believe that security prices are semi-strong efficient. Recall that semi-strong efficient impliesthat all public knowledge is reflected in the price and it is virtually impossible to exploit deviationsfrom the true value based on public information. Only new information will affect the price. Judgingfrom the reaction of many stocks to news events, there seems to be evidence to support this case.The flow of information has become faster with the Internet, and surprises are factored in instantly.Few will argue that a surprise, both positive and negative, can violently move the price of asecurity. A few examples include:• After Prue-announcing that earnings would come in below expectations on 6-Jan-00, Lucent fell from 59 to 43 in one day.• After positive comments from an influential analyst on 23-Feb-00, Time Warner shot up 49 to 59 in 2 days.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 9
  • 9. • After reporting earnings that were below expectations on 15-Feb, Ascribe and Fitch fell from 24 to 15.Even though these are but a few examples, it is obvious that new information can move the priceof a security in non-random ways.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 10
  • 10. What is Technical Analysis?Technical Analysis is the forecasting of future financial price movements based on an examinationof past price movements. Like weather forecasting, technical analysis does not result in absolutepredictions about the future. Instead, technical analysis can help investors anticipate what is"likely" to happen to prices over time. Technical analysis uses a wide variety of charts that showprice over time.Technical Analysis - This article explains what Technical Analysis is, how it works, and the generalsteps one should take when using technical charts and indicators to analyze stocks. It concludeswith a look at the strengths and weaknesses of using charts to make investment decisions.What is Technical Analysis?Technical Analysis is the forecasting of future financial price movements based on an examinationof past price movements. Like weather forecasting, technical analysis does not result in absolutepredictions about the future. Instead, technical analysis can help investors anticipate what is"likely" to happen to prices over time. Technical analysis uses a wide variety of charts that showprice over time.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 11
  • 11. Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrumentwhere the price is influenced by the forces of supply and demand. Price refers to any combinationof the open, high, low, or close for a given security over a specific time frame. The time frame canbe based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily,weekly or monthly price data and last a few hours or many years. In addition, some technicalanalysts include volume or open interest figures with their study of price action.The Basis of Technical AnalysisAt the turn of the century, the Dow Theory laid the foundations for what was later to becomemodern technical analysis. Dow Theory was not presented as one complete amalgamation, butrather pieced together from the writings of Charles Dow over several years. Of the many theoremsput forth by Dow, three stand out:• Price Discounts Everything• Price Movements Are Not Totally Random• What Is More Important than WhyPrice Discounts EverythingThis theorem is similar to the strong and semi-strong forms of market efficiency. Technicalanalysts believe that the current price fully reflects all information. Because all information isalready reflected in the price, it represents the fair value, and should form the basis for analysis.After all, the market price reflects the sum knowledge of all participants, including traders,investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technicalanalysts, fundamental analysts and many others. It would be folly to disagree with the price set bysuch an impressive array of people with impeccable credentials. Technical analysis utilizes theinformation captured by the price to interpret what the market is saying with the purpose of forminga view on the future.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 12
  • 12. Prices Movements are not Totally RandomMost technicians agree that prices trend. However, most technicians also acknowledge that thereare periods when prices do not trend. If prices were always random, it would be extremely difficultto make money using technical analysis. In his book, Schwager on Futures: Technical Analysis,Jack Schwager states:"One way of viewing it is that markets may witness extended periods of random fluctuation,interspersed with shorter periods of nonrandom behavior. The goal of the chartist is to identifythose periods (i.e. major trends)."A technician believes that it is possible to identify a trend, invest or trade based on the trend andmake money as the trend unfolds. Because technical analysis can be applied to many differenttime frames, it is possible to spot both short-term and long-term trends. The IBM chart illustratesSchwagers view on the nature of the trend. The broad trend is up, but it is also interspersed withtrading ranges. In between the trading ranges are smaller uptrends within the larger uptrend. Theuptrend is renewed when the stock breaks above the trading range. A downtrend begins when thestock breaks below the low of the previous trading range."What" is More Important than "Why"In his book, The Psychology of Technical Analysis, Tony Plummer paraphrases Oscar Wilde bystating, "A technical analyst knows the price of everything, but the value of nothing". Technicians,as technical analysts are called, are only concerned with two things:1. What is the current price?2. What is the history of the price movement?The price is the end result of the battle between the forces of supply and demand for thecompanys stock. The objective of analysis is to forecast the direction of the future price. Byfocusing on price and only price, technical analysis represents a direct approach. Fundamentalistsare concerned with why the price is what it is. For technicians, the why portion of the equation istoo broad and many times the fundamental reasons given are highly suspect. Technicians believeit is best to concentrate on what and never mind why. Why did the price go up? It is simple, morebuyers (demand) than sellers (supply). After all, the value of any asset is only what someone iswilling to pay for it. Who needs to know why?Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 13
  • 13. General Steps to Technical EvaluationMany technicians employ a top-down approach that begins with broad-based macro analysis. Thelarger parts are then broken down to base the final step on a more focused/micro perspective.Such an analysis might involve three steps:• Broad market analysis through the major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite.• Sector analysis to identify the strongest and weakest groups within the broader market.• Individual stock analysis to identify the strongest and weakest stocks within select groups.The beauty of technical analysis lies in its versatility. Because the principles of technical analysisare universally applicable, each of the analysis steps above can be performed using the sametheoretical background. You dont need an economics degree to analyze a market index chart.You dont need to be a CPA to analyze a stock chart. Charts are charts. It does not matter if thetime frame is 2 days or 2 years. It does not matter if it is a stock, market index or commodity. Thetechnical principles of support, resistance, trend, trading range and other aspects can be applied toany chart. While this may sound easy, technical analysis is by no means easy. Success requiresserious study, dedication and an open mind.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 14
  • 14. Chart AnalysisTechnical analysis can be as complex or as simple as you want it. The example below representsa simplified version. Since we are interested in buying stocks, the focus will be on spotting bullishsituations.Overall Trend: The first step is to identify the overall trend. This can be accomplished with trendlines, moving averages or peak/trough analysis. As long as the price remains above its uptrendline, selected moving averages or previous lows, the trend will be considered bullish.Support: Areas of congestion or previous lows below the current price mark support levels. Abreak below support would be considered bearish.Resistance: Areas of congestion and previous highs above the current price mark the resistancelevels. A break above resistance would be considered bullish.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 15
  • 15. Momentum: Momentum is usually measured with an oscillator such as MACD. If MACD is aboveits 9-day EMA (exponential moving average) or positive, then momentum will be considered bullish,or at least improving.Buying/Selling Pressure: For stocks and indices with volume figures available, an indicator thatuses volume is used to measure buying or selling pressure. When Chaikin Money Flow is abovezero, buying pressure is dominant. Selling pressure is dominant when it is below zero.Relative Strength: The price relative is a line formed by dividing the security by a benchmark. Forstocks it is usually the price of the stock divided by the S&P 500. The plot of this line over a periodof time will tell us if the stock is outperforming (rising) or under performing (falling) the major index.The final step is to synthesize the above analysis to ascertain the following:• Strength of the current trend.• Maturity or stage of current trend.• Reward to risk ratio of a new position.• Potential entry levels for new long position.Top-Down Technical AnalysisFor each segment (market, sector and stock), an investor would analyze long-term and short-termcharts to find those that meet specific criteria. Analysis will first consider the market in general,perhaps the S&P 500. If the broader market were considered to be in bullish mode, analysis wouldproceed to a selection of sector charts. Those sectors that show the most promise would besingled out for individual stock analysis. Once the sector list is narrowed to 3-4 industry groups,individual stock selection can begin. With a selection of 10-20 stock charts from each industry, aselection of 3-4 of the most promising stocks in each group can be made. How many stocks orindustry groups make the final cut will depend on the strictness of the criteria set forth. Under thisscenario, we would be left with 9-12 stocks from which to choose. These stocks could even bebroken down further to find the 3-4 of the strongest of the strong.Strengths of Technical AnalysisFocus on PriceIf the objective is to predict the future price, then it makes sense to focus on price movements.Price movements usually precede fundamental developments. By focusing on price action,technicians are automatically focusing on the future. The market is thought of as a leadingindicator and generally leads the economy by 6 to 9 months. To keep pace with the market, itmakes sense to look directly at the price movements. More often than not, change is a subtlebeast. Even though the market is prone to sudden knee-jerk reactions, hints usually developbefore significant moves. A technician will refer to periods of accumulation as evidence of animpending advance and periods of distribution as evidence of an impending decline.Supply, Demand, and Price ActionMany technicians use the open, high, low and close when analyzing the price action of a security.There is information to be gleaned from each bit of information. Separately, these will not be ableto tell much. However, taken together, the open, high, low and close reflect forces of supply anddemand.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 16
  • 16. The annotated example above shows a stock that opened with a gap up. Before the open, thenumber of buy orders exceeded the number of sell orders and the price was raised to attract moresellers. Demand was brisk from the start. The intraday high reflects the strength of demand(buyers). The intraday low reflects the availability of supply (sellers). The close represents the finalprice agreed upon by the buyers and the sellers. In this case, the close is well below the high andmuch closer to the low. This tells us that even though demand (buyers) was strong during the day,supply (sellers) ultimately prevailed and forced the price back down. Even after this sellingpressure, the close remained above the open. By looking at price action over an extended periodof time, we can see the battle between supply and demand unfold. In its most basic form, higherprices reflect increased demand and lower prices reflect increased supply.Support/ResistanceSimple chart analysis can help identify support and resistance levels. These are usually marked byperiods of congestion (trading range) where the prices move within a confined range for anextended period, telling us that the forces of supply and demand are deadlocked. When pricesmove out of the trading range, it signals that either supply or demand has started to get the upperhand. If prices move above the upper band of the trading range, then demand is winning. If pricesmove below the lower band, then supply is winning.Pictorial Price HistoryEven if you are a tried and true fundamental analyst, a price chart can offer plenty of valuableinformation. The price chart is an easy to read historical account of a securitys price movementover a period of time. Charts are much easier to read than a table of numbers. On most stockcharts, volume bars are displayed at the bottom. With this historical picture, it is easy to identify thefollowing:• Reactions prior to and after important events.• Past and present volatility.• Historical volume or trading levels.• Relative strength of a stock versus the overall market.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 17
  • 17. Assist with Entry PointTechnical analysis can help with timing a proper entry point. Some analysts use fundamentalanalysis to decide what to buy and technical analysis to decide when to buy. It is no secret thattiming can play an important role in performance. Technical analysis can help spot demand(support) and supply (resistance) levels as well as breakouts. Simply waiting for a breakout aboveresistance or buying near support levels can improve returns.It is also important to know a stocks price history. If a stock you thought was great for the last 2years has traded flat for those two years, it would appear that Wall Street has a different opinion. Ifa stock has already advanced significantly, it may be prudent to wait for a pullback. Or, if the stockis trending lower, it might pay to wait for buying interest and a trend reversal.Weaknesses of Technical AnalysisAnalyst BiasJust as with fundamental analysis, technical analysis is subjective and our personal biases can bereflected in the analysis. It is important to be aware of these biases when analyzing a chart. If theanalyst is a perpetual bull, then a bullish bias will overshadow the analysis. On the other hand, ifthe analyst is a disgruntled eternal bear, then the analysis will probably have a bearish tilt.Open to InterpretationFurthering the bias argument is the fact that technical analysis is open to interpretation. Eventhough there are standards, many times two technicians will look at the same chart and paint twodifferent scenarios or see different patterns. Both will be able to come up with logical support andresistance levels as well as key breaks to justify their position. While this can be frustrating, itshould be pointed out that technical analysis is more like an art than a science, somewhat likeeconomics. Is the cup half-empty or half-full? It is in the eye of the beholder.Too LateTechnical analysis has been criticized for being too late. By the time the trend is identified, asubstantial portion of the move has already taken place. After such a large move, the reward torisk ratio is not great. Lateness is a particular criticism of Dow theory.Always Another LevelEven after a new trend has been identified, there is always another "important" level close at hand.Technicians have been accused of sitting on the fence and never taking an unqualified stance.Even if they are bullish, there is always some indicator or some level that will qualify their opinion.Traders RemorseNot all technical signals and patterns work. When you begin to study technical analysis, you willcome across an array of patterns and indicators with rules to match. For instance: A sell signal isgiven when the neckline of a head and shoulders pattern is broken. Even though this is a rule, it isnot steadfast and can be subject to other factors such as volume and momentum. In that samevein, what works for one particular stock may not work for another. A 50-day moving average maywork great to identify support and resistance for IBM, but a 70-day moving average may workbetter for Yahoo. Even though many principles of technical analysis are universal, each securitywill have its own idiosyncrasies.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 18
  • 18. ConclusionsTechnical analysts consider the market to be 80% psychological and 20% logical. Fundamentalanalysts consider the market to be 20% psychological and 80% logical. Psychological or logicalmay be open for debate, but there is no questioning the current price of a security. After all, it isavailable for all to see and nobody doubts its legitimacy. The price set by the market reflects thesum knowledge of all participants, and we are not dealing with lightweights here. Theseparticipants have considered (discounted) everything under the sun and settled on a price to buyor sell. These are the forces of supply and demand at work. By examining price action todetermine which force is prevailing, technical analysis focuses directly on the bottom line: What isthe price? Where has it been? Where is it going?Even though there are some universal principles and rules that can be applied, it must beremembered that technical analysis is more an art form than a science. As an art form, it is subjectto interpretation. However, it is also flexible in its approach and each investor should use only thatwhich suits his or her style. Developing a style takes time, effort and dedication, but the rewardscan be significant.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 19
  • 19. What is Fundamental Analysis?Fundamental analysis is the examination of the underlying forces that affect the well being of theeconomy, industry groups, and companies. As with most analysis, the goal is to derive a forecastand profit from future price movements. At the company level, fundamental analysis may involveexamination of financial data, management, business concept and competition. At the industrylevel, there might be an examination of supply and demand forces for the products offered. For thenational economy, fundamental analysis might focus on economic data to assess the present andfuture growth of the economy. To forecast future stock prices, fundamental analysis combineseconomic, industry, and company analysis to derive a stocks current fair value and forecast futurevalue. If fair value is not equal to the current stock price, fundamental analysts believe that thestock is either over or under valued and the market price will ultimately gravitate towards fair value.Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information,fundamental analysts look to capitalize on perceived price discrepancies.General Steps to Fundamental EvaluationEven though there is no one clear-cut method, a breakdown is presented below in the order aninvestor might proceed. This method employs a top-down approach that starts with the overalleconomy and then works down from industry groups to specific companies. As part of the analysisprocess, it is important to remember that all information is relative. Industry groups are comparedagainst other industry groups and companies against other companies. Usually, companies arecompared with others in the same group. For example, a telecom operator (Verizon) would becompared to another telecom operator (SBC Corp), not to an oil company (ChevronTexaco).Economic ForecastFirst and foremost in a top-down approach would be an overall evaluation of the general economy.The economy is like the tide and the various industry groups and individual companies are likeboats. When the economy expands, most industry groups and companies benefit and grow. Whenthe economy declines, most sectors and companies usually suffer. Many economists linkeconomic expansion and contraction to the level of interest rates. Interest rates are seen as aleading indicator for the stock market as well. Below is a chart of the S&P 500 and the yield on the10-year note over the last 30 years. Although not exact, a correlation between stock prices andinterest rates can be seen. Once a scenario for the overall economy has been developed, aninvestor can break down the economy into its various industry groups.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 20
  • 20. Group SelectionIf the prognosis is for an expanding economy, then certain groups are likely to benefit more thanothers. An investor can narrow the field to those groups that are best suited to benefit from thecurrent or future economic environment. If most companies are expected to benefit from anexpansion, then risk in equities would be relatively low and an aggressive growth-oriented strategymight be advisable. A growth strategy might involve the purchase of technology, biotech,semiconductor and cyclical stocks. If the economy is forecast to contract, an investor may opt for amore conservative strategy and seek out stable income-oriented companies. A defensive strategymight involve the purchase of consumer staples, utilities and energy-related stocks.To assess a industry groups potential, an investor would want to consider the overall growth rate,market size, and importance to the economy. While the individual company is still important, itsindustry group is likely to exert just as much, or more, influence on the stock price. When stocksmove, they usually move as groups; there are very few lone guns out there. Many times it is moreimportant to be in the right industry than in the right stock! The chart below shows that relativeperformance of 5 sectors over a 7-month time frame. As the chart illustrates, being in the rightsector can make all the difference.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 21
  • 21. Narrow Within the GroupOnce the industry group is chosen, an investor would need to narrow the list of companies beforeproceeding to a more detailed analysis. Investors are usually interested in finding the leaders andthe innovators within a group. The first task is to identify the current business and competitiveenvironment within a group as well as the future trends. How do the companies rank according tomarket share, product position and competitive advantage? Who is the current leader and how willchanges within the sector affect the current balance of power? What are the barriers to entry?Success depends on an edge, be it marketing, technology, market share or innovation. Acomparative analysis of the competition within a sector will help identify those companies with anedge, and those most likely to keep it.Company AnalysisWith a shortlist of companies, an investor might analyze the resources and capabilities within eachcompany to identify those companies that are capable of creating and maintaining a competitiveadvantage. The analysis could focus on selecting companies with a sensible business plan, solidmanagement and sound financials.Business PlanThe business plan, model or concept forms the bedrock upon which all else is built. If the plan,model or concepts stink, there is little hope for the business. For a new business, the questionsmay be these: Does its business make sense? Is it feasible? Is there a market? Can a profit bemade? For an established business, the questions may be: Is the companys direction clearlydefined? Is the company a leader in the market? Can the company maintain leadership?ManagementIn order to execute a business plan, a company requires top-quality management. Investors mightlook at management to assess their capabilities, strengths and weaknesses. Even the best-laidplans in the most dynamic industries can go to waste with bad management (AMD insemiconductors). Alternatively, even strong management can make for extraordinary success in amature industry (Alcoa in aluminum). Some of the questions to ask might include: How talented isthe management team? Do they have a track record? How long have they worked together? Canmanagement deliver on its promises? If management is a problem, it is sometimes best to moveon.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 22
  • 22. Financial AnalysisThe final step to this analysis process would be to take apart the financial statements and come upwith a means of valuation. Below is a list of potential inputs into a financial analysis.Accounts Payable Good WillAccounts Receivable Gross Profit MarginAcid Ratio GrowthAmortization IndustryAssets - Current Interest CoverAssets - Fixed InternationalBook Value InvestmentBrand Liabilities - CurrentBusiness Cycle Liabilities - Long-termBusiness Idea ManagementBusiness Model Market GrowthBusiness Plan Market ShareCapital Expenses Net Profit MarginCash Flow Pageview GrowthCash on hand PageviewsCurrent Ratio PatentsCustomer Relationships Price/Book ValueDays Payable Price/EarningsDays Receivable PEGDebt Price/SalesDebt Structure ProductDebt:Equity Ratio Product PlacementDepreciation RegulationsDerivatives-Hedging R&DDiscounted Cash Flow RevenuesDividend SectorDividend Cover Stock OptionsEarnings StrategyEBITDA Subscriber GrowthEconomic Growth SubscribersEquity Supplier RelationshipsEquity Risk Premium TaxesExpenses Trademarks Weighted Average Cost of CapitalThe list can seem quite long and intimidating. However, after a while, an investor will learn whatworks best and develop a set of preferred analysis techniques. There are many different valuationmetrics and much depends on the industry and stage of the economic cycle. A complete financialmodel can be built to forecast future revenues, expenses and profits or an investor can rely on theforecast of other analysts and apply various multiples to arrive at a valuation. Some of the morepopular ratios are found by dividing the stock price by a key value driver.Ratio Company TypePrice/Book Value OilPrice/Earnings RetailPrice/Earnings/Growth NetworkingPrice/Sales B2BPrice/Subscribers ISP or cable companyPrice/Lines TelecomPrice/Page views Web site BiotechPrice/PromisesVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 23
  • 23. This methodology assumes that a company will sell at a specific multiple of its earnings, revenuesor growth. An investor may rank companies based on these valuation ratios. Those at the high endmay be considered overvalued, while those at the low end may constitute relatively good value.Putting it All TogetherAfter all is said and done, an investor will be left with a handful of companies that stand out fromthe pack. Over the course of the analysis process, an understanding will develop of whichcompanies stand out as potential leaders and innovators. In addition, other companies would beconsidered laggards and unpredictable. The final step of the fundamental analysis process is tosynthesize all data, analysis and understanding into actual picks.Strengths of Fundamental AnalysisLong-term TrendsFundamental analysis is good for long-term investments based on long-term trends, very long-term.The ability to identify and predict long-term economic, demographic, technological or consumertrends can benefit patient investors who pick the right industry groups or companies.Value SpottingSound fundamental analysis will help identify companies that represent a good value. Some of themost legendary investors think long-term and value. Graham and Dodd, Warren Buffett and JohnNeff are seen as the champions of value investing. Fundamental analysis can help uncovercompanies with valuable assets, a strong balance sheet, stable earnings, and staying power.Business AcumenOne of the most obvious, but less tangible, rewards of fundamental analysis is the development ofa thorough understanding of the business. After such painstaking research and analysis, aninvestor will be familiar with the key revenue and profit drivers behind a company. Earnings andearnings expectations can be potent drivers of equity prices. Even some technicians will agree tothat. A good understanding can help investors avoid companies that are prone to shortfalls andidentify those that continue to deliver. In addition to understanding the business, fundamentalanalysis allows investors to develop an understanding of the key value drivers and companieswithin an industry. A stocks price is heavily influenced by its industry group. By studying thesegroups, investors can better position themselves to identify opportunities that are high-risk (tech),low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples),cyclical (transportation) or income-oriented (high yield).Knowing Whos WhoStocks move as a group. By understanding a companys business, investors can better positionthemselves to categorize stocks within their relevant industry group. Business can change rapidlyand with it the revenue mix of a company. This happened to many of the pure Internet retailers,which were not really Internet companies, but plain retailers. Knowing a companys business andbeing able to place it in a group can make a huge difference in relative valuations.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 24
  • 24. Weaknesses of Fundamental AnalysisTime ConstraintsFundamental analysis may offer excellent insights, but it can be extraordinarily time-consuming.Time-consuming models often produce valuations that are contradictory to the current priceprevailing on Wall Street. When this happens, the analyst basically claims that the whole streethas got it wrong. This is not to say that there are not misunderstood companies out there, but it isquite brash to imply that the market price, and hence Wall Street, is wrong.Industry/Company SpecificValuation techniques vary depending on the industry group and specifics of each company. Forthis reason, a different technique and model is required for different industries and differentcompanies. This can get quite time-consuming, which can limit the amount of research that can beperformed. A subscription-based model may work great for an Internet Service Provider (ISP), butis not likely to be the best model to value an oil company.SubjectivityFair value is based on assumptions. Any changes to growth or multiplier assumptions can greatlyalter the ultimate valuation. Fundamental analysts are generally aware of this and use sensitivityanalysis to present a base-case valuation, a best-case valuation and a worst-case valuation.However, even on a worst-case valuation, most models are almost always bullish, the onlyquestion is how much so. The chart below shows how stubbornly bullish many fundamentalanalysts can be.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 25
  • 25. Analyst BiasThe majority of the information that goes into the analysis comes from the company itself.Companies employ investor relations managers specifically to handle the analyst community andrelease information. As Mark Twain said, "there are lies, damn lies, and statistics." When it comesto massaging the data or spinning the announcement, CFOs and investor relations managers areprofessionals. Only buy-side analysts tend to venture past the company statistics. Buy-sideanalysts work for mutual funds and money managers. They read the reports written by the sell-side analysts who work for the big brokers (CIBC, Merrill Lynch, Robertson Stephens, CS FirstBoston, Paine Weber, DLJ to name a few). These brokers are also involved in underwriting andinvestment banking for the companies. Even though there are restrictions in place to prevent aconflict of interest, brokers have an ongoing relationship with the company under analysis. Whenreading these reports, it is important to take into consideration any biases a sell-side analyst mayhave. The buy-side analyst, on the other hand, is analyzing the company purely from aninvestment standpoint for a portfolio manager. If there is a relationship with the company, it isusually on different terms. In some cases this may be as a large shareholder.Definition of Fair ValueWhen market valuations extend beyond historical norms, there is pressure to adjust growth andmultiplier assumptions to compensate. If Wall Street values a stock at 50 times earnings and thecurrent assumption is 30 times, the analyst would be pressured to revise this assumption higher.There is an old Wall Street adage: the value of any asset (stock) is only what someone is willing topay for it (current price). Just as stock prices fluctuate, so too do growth and multiplierassumptions. Are we to believe Wall Street and the stock price or the analyst and marketassumptions?It used to be that free cash flow or earnings were used with a multiplier to arrive at a fair value. In1999, the S&P 500 typically sold for 28 times free cash flow. However, because so manycompanies were and are losing money, it has become popular to value a business as a multiple ofits revenues. This would seem to be OK, except that the multiple was higher than the PE of manystocks! Some companies were considered bargains at 30 times revenues.ConclusionsFundamental analysis can be valuable, but it should be approached with caution. If you arereading research written by a sell-side analyst, it is important to be familiar with the analyst behindthe report. We all have personal biases, and every analyst has some sort of bias. There is nothingwrong with this, and the research can still be of great value. Learn what the ratings mean and thetrack record of an analyst before jumping off the deep end. Corporate statements and pressreleases offer good information, but they should be read with a healthy degree of skepticism toseparate the facts from the spin. Press releases dont happen by accident; they are an importantPR tool for companies. Investors should become skilled readers to weed out the importantinformation and ignore the hype.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 26
  • 26. Random Walk TheoryRandom Walk Theory - Describes the Random Walk Theory of financial markets which is at oddswith both Technical Analysis and Fundamental Analysis.A Random Walk Down Wall Street, written by Burton Malkiel in 1973, has become a classic ininvestment literature. Random walk theory jibes with the semi-strong efficient hypothesis in itsassertion that it is impossible to outperform the market on a consistent basis. Malkiel puts bothtechnical analysis and fundamental analysis to the test and reasons that both are largely a wasteof time. In fact, he goes to great lengths to show that there is no proof to suggest that either canconsistently outperform the market. Any success outperforming the market with technical analysisor fundamental analysis can be attributed to lady luck. If enough people try, some are bound tooutperform the market, but most are still likely to underperform.The basic random walk premise is that price movements are totally random. Judging from thechart, the price movements of Newmont Mining (NEM) over this 5-month period would appear tobe quite random. Prices have no memory, therefore past and present prices cannot be used topredict future prices (as implied in technical analysis). Prices move at random and adjust to newinformation as it comes available. The adjustment to this new information is so fast that it isimpossible to profit from it. Furthermore, news and events are also random and trying to predictthese (fundamental analysis) is also a lesson in futility.Malkiel maintains that a buy and hold strategy is best and individuals should not attempt to time (orbeat) the market. Attempts based on technical, fundamental or any other analysis are futile.Admittedly, he does have a point. Statistics have shown that the majority of equity mutual funds failto outperform the market, as measured by the S&P 500. Investors can easily buy index-basedsecurities with very low transactions costs.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 27
  • 27. Should Random Walkers Take a Hike?While there are some good points to be gleaned from the random walk theory, it appears to be abit dated and does not accurately reflect the current investment climate.Random walk theory was introduced over 25 years ago when institutions dominated the market.These institutions had superior access to resources and the individual was at the mercy of thelarge brokerage houses for quality research. With the advent of online trading, power and influenceare shifting from institutions to the individual. Resources are now widely available to all at minimalcost, if not free. Not only can individuals access information, but the Internet ensures that everyonewill receive it almost instantaneously. They also have access to real time data and can trade likethe pros. With the availability of real time data and almost instant executions, individuals can acton information like never before.As little as 5 years ago, transactions costs were high and figured into any investment or tradingstrategy. Again, with the advent of online trading, transactions costs have become minimal. Thishas increased the amount of trading volume and probably volatility. Higher volatility increases thepossibility that anomalies will develop. With better trading resources and low commissions, moretraders and investors than ever are able to capitalize on potential anomalies.For obvious reasons, the Wall Street establishment is not thrilled about random walk theory. Afterall, Wall Street is in the business of analysis, strategy and money management. However, it is afact that about 75% of equity mutual funds underperform the S&P 500 year after year. Some of thisunderperformance can be blamed on transaction costs and management fees. However, with theadvent of index-linked securities, the onus will be on the money managers to figure out a way tooutperform the market, or lose business.In truth, 75% of equity mutual funds underperforming is not as bad as it sounds. When theRandom Walk theory was introduced in 1973, or even 15 years ago, around 90% of equity mutualfunds underperformed the market. Since this number seems to have risen, it would appear thateither stock picking is getting better or fees are getting smaller, or both. 15 years ago, the stockmarket and mutual funds were much more homogeneous. Even though there were tech stocks,they did not exert nearly as much influence. With the explosion of the NASDAQ, tech stocks play amuch larger role in todays market. Internet stocks, which have also come to the forefront, did noteven exist 15 years ago. With an increase in specialty mutual funds catering to tech and Internet,the total number of mutual funds has proliferated over the last few years. With the increase inmutual funds has also come and increase in the diversity of such funds. There are funds for almostevery sector, industry or index imaginable and investors have a wide array of choices. The morehomogeneous mutual funds there are, the less chance there is to outperform. However, thisspecialization has created a hierarchy among mutual funds and helped to increase the percentagefunds that outperform the S&P 500 from 10% to 25%.History has proved that a buy and hold strategy outperforms most attempts to time the market inabsolute returns. In risk-adjusted returns, the argument loses some of its credibility. Buy and holdmay take the guesswork out of beating the market, but it does little to compensate for the riskassociated with a continuous investment in the market. There is a direct correlation with risk andreturn: the higher the expected return, the higher the associated risk. A portfolio with a timingstrategy that seeks to move into risk-free treasuries when a bear market is signaled (Dow Theoryfor example), significantly reduces the amount of risk associated with that portfolio.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 28
  • 28. The New York Times on 6-Sept-98, notes a study that was published in the Journal of Finance byStephen Brown of New York University, William Goetzmann of Yale, and Alok Kumar of theUniversity of Notre Dame. The Dow theory system was tested against buy-and-hold for the periodfrom 1929 to Sept-98. Over the 70-year period, the Dow theory system outperformed a buy-and-hold strategy by about 2% per year. In addition, the portfolio carried significantly less risk. Ifcompared as risk-adjusted returns, the margin of outperformance would even be greater. Over thepast 18 years, the Dow theory system has underperformed the market by about 2.6% per year.However, when adjusted for risk, the Dow theory system outperformed buy-and-hold over the past18 years. Keep in mind that 18 years is not a long time in the history of the market.A Non-Random Walk Down Wall StreetThere is another school of thought that considers the markets efficient yet predictable. One of theleading proponents is Andrew Lo. Lo earned his Ph.D in economics at the University of Chicagoand is currently a Professor of Finance at the Sloan School of Management at MIT. Lo is a bit ofan odd ball among academics because of his beliefs regarding the efficient market hypothesis andhis attraction to technical analysis. Lo and Mackinlays book A Non-Random Walk Down WallStreet debunks many of the theories put forth in the 1973 classic with a similar name. (Rememberthat most academics subscribe to the random walk theory.) Los research concluded the following:Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 29
  • 29. Financial markets are predictable to some degree, but far from being a symptom of inefficiency orirrationality, predictability is the oil that lubricates the gears of capitalism.It is not only plausible that markets are efficient, but participants can also profit from efficientmarkets. However, Lo asserts that even though it is possible to outperform the markets, it requiresongoing research, continuous improvement and constant innovation. Beating the market does notcome easy, nor is it something that is easy to maintain. Lo likens the pursuit of above-averagereturns to that of a company trying to maintain its competitive advantage. After introducing a hotnew product, a company cannot just sit back and wait for the money to roll in. In order to remainabove the competition, management must be flexible and look for ways to continuously improveand innovate. Otherwise the competition will overtake them. Money managers, traders andinvestors who find ways to outperform the market must also remain flexible and innovative. Justbecause a method works today, does not mean it will work tomorrow. In an interview withTechnical Analysis of Stocks and Commodities, Lo sums it up by stating:"The more creativity you bring to the investment process, the more rewarding it will be. The onlyway to maintain ongoing success, however, is to constantly innovate. Thats much the same in allendeavors. The only way to continue making money, to continue growing and keeping your profitmargins healthy, is to constantly come up with new ideas."ConclusionsThese rebuttals to random walk theory are not meant to suggest that the vast majority ofindividuals are going to suddenly start outperforming the market. Even though this may be trueover the past 3 years, history suggests that it is not likely to be the case 10 years from now. Inother words, history suggests that this is an anomaly and there will be a reversion to the mean.Nonetheless, the investment and trading landscape has changed drastically over the last 20 years,even over the last 5 years. Individuals have access to more information and tools, transactionscosts are negligible, trades are executed almost instantaneously, equity mutual funds haveimproved their performance and the buy-and-hold strategy does not appear to be a profitmaximizing strategy. It should come as no surprise that analysis can make a difference. The onlyquestion is which type: fundamental analysis, technical analysis or both?Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 30
  • 30. Part 2- Chart AnalysisVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 31
  • 31. Chart AnalysisThis section describes the various kinds of financial charts. There are articles that describe howthe charts are constructed and how they can be used to make better investing decisions.Table of Contents Page1 What are Charts? - What charts are, how to pick timeframes, how charts are 33 formed, and price scaling.2 Support and Resistance - What support and resistance are, where they are 42 established, and methods used.3 Trend Lines - What trend lines are, scale settings, validation, angles, and more. 494 Introduction to Chart Patterns - A brief review of what chart patterns are, and 57 how to recognize them.5 Chart Patterns - A collection of articles describing common chart patterns. 616 Introduction to Candlesticks - An overview of candlesticks, including history, 121 formation, and key patterns.7 Candlesticks and Support - How candlestick chart patterns can mark support 137 levels.8 Candlesticks and Resistance - How candlestick chart patterns can mark 140 resistance levels.9 Candlestick Bullish Reversal Patterns - Detailed descriptions of bullish reversal 142 candlestick patterns10 Candlestick Bearish Reversal Patterns - Detailed descriptions of common 152 bearish reversal candlestick patterns.11 Candlestick Pattern Dictionary - A comprehensive list of common candlestick 162 patterns.12 Gaps and Gap Analysis - A gap is an area on a price chart in which there were 166 no trades. Gaps show that something important has important has happened to the fundamentals of or the mass psychology surrounding a stock.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 32
  • 32. What Are Charts?A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, chartsare referred to as time series plots.On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis)represents the time scale. Prices are plotted from left to right across the x-axis with the mostrecent plot being the furthest right. The price plot for IBM extends from January 1, 1999 to March13, 2000.Technicians, technical analysts and chartists use charts to analyze a wide array of securities andforecast future price movements. The word "securities" refers to any tradable financial instrumentor quantifiable index such as stocks, bonds, commodities, futures or market indices. Any securitywith price data over a period of time can be used to form a chart for analysis.While technical analysts use charts almost exclusively, the use of charts is not limited to justtechnical analysis. Because charts provide an easy-to-read graphical representation of a securitysprice movement over a specific period of time, they can also be of great benefit to fundamentalanalysts. A graphical historical record makes it easy to spot the effect of key events on a securitysprice, its performance over a period of time and whether its trading near its highs, near its lows, orin between.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 33
  • 33. How to Pick a Time FrameThe time frame used for forming a chart depends on the compression of the data: intraday, daily,weekly, monthly, quarterly or annual data. The less compressed the data is, the more detail isdisplayed.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 34
  • 34. Daily data is made up of intraday data that has been compressed to show each day as a singledata point, or period. Weekly data is made up of daily data that has been compressed to showeach week as a single data point. The difference in detail can be seen with the daily and weeklychart comparison above. 100 data points (or periods) on the daily chart is equal to the last 5months of the weekly chart, which is shown by the data marked in the rectangle. The more thedata is compressed, the longer the time frame possible for displaying the data. If the chart candisplay 100 data points, a weekly chart will hold 100 weeks (almost 2 years). A daily chart thatdisplays 100 days would represent about 5 months. There are about 20 trading days in a monthand about 252 trading days in a year. The choice of data compression and time frame depends onthe data available and your trading or investing style.• Traders usually concentrate on charts made up of daily and intraday data to forecast short- term price movements. The shorter the time frame and the less compressed the data is, the more detail that is available. While long on detail, short-term charts can be volatile and contain a lot of noise. Large sudden price movements, wide high-low ranges and price gaps can affect volatility, which can distort the overall picture.• Investors usually focus on weekly and monthly charts to spot long-term trends and forecast long-term price movements. Because long-term charts (typically 1-4 years) cover a longer time frame with compressed data, price movements do not appear as extreme and there is often less noise.• Others might use a combination of long-term and short-term charts. Long-term charts are good for analyzing the large picture to get a broad perspective of the historical price action. Once the general picture is analyzed, a daily chart can be used to zoom in on the last few months.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 35
  • 35. How Are Charts Formed?We will be explaining the construction of line, bar, candlestick and point & figure charts. Althoughthere are other methods available, these are 4 of the most popular methods for displaying pricedata.Line ChartSome investors and traders consider the closing level to be more important than the open, high orlow. By paying attention to only the close, intraday swings can be ignored. Line charts are alsoused when open, high and low data points are not available. Sometimes only closing data areavailable for certain indices, thinly traded stocks and intraday prices.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 36
  • 36. Bar ChartPerhaps the most popular charting method is the bar chart. The high, low and close are required toform the price plot for each period of a bar chart. The high and low are represented by the top andbottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. On adaily chart, each bar represents the high, low and close for a particular day. Weekly charts wouldhave a bar for each week based on Fridays close and the high and low for that week.Bar charts can also be displayed using the open, high, low and close. The only difference is theaddition of the open price, which is displayed as a short horizontal line extending to the left of thebar. Whether or not a bar chart includes the open depends on the data available.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 37
  • 37. Bar charts can be effective for displaying a large amount of data. Using candlesticks, 200 datapoints can take up a lot of room and look cluttered. Line charts show less clutter, but do not offeras much detail (no high-low range). The individual bars that make up the bar chart are relativelyskinny, which allows users the ability to fit more bars before the chart gets cluttered. If you are notinterested in the opening price, bar charts are an ideal method for analyzing the close relative tothe high and low. In addition, bar charts that include the open will tend to get cluttered quicker. Ifyou are interested in the opening price, candlestick charts probably offer a better alternative.Candlestick ChartOriginating in Japan over 300 years ago, candlestick charts have become quite popular in recentyears. For a candlestick chart, the open, high, low and close are all required. A daily candlestick isbased on the open price, the intraday high and low, and the close. A weekly candlestick is basedon Mondays open, the weekly high-low range and Fridays close.Many traders and investors believe that candlestick charts are easy to read, especially therelationship between the open and the close. White (clear) candlesticks form when the close ishigher than the open and black (solid) candlesticks form when the close is lower than the open.The white and black portion formed from the open and close is called the body (white body orblack body). The lines above and below are called shadows and represent the high and low.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 38
  • 38. Point & Figure ChartThe charting methods shown above, all, plot one data point for each period of time. No matter howmuch price movement, each day or week represented is one point, bar, or candlestick along thetime scale. Even if the price is unchanged from day to day or week to week, a dot, bar, orcandlestick is plotted to mark the price action. Contrary to this methodology, point & figure Chartsare based solely on price movement, and do not take time into consideration. There is an x-axisbut it does not extend evenly across the chart.The beauty of point & figure charts is their simplicity. Little or no price movement is deemedirrelevant and therefore not duplicated on the chart. Only price movements that exceed specifiedlevels are recorded. This focus on price movement makes it easier to identify support andresistance levels, bullish breakouts and bearish breakdowns. This P&F article has a more detailedexplanation of point & figure charts.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 39
  • 39. Price ScalingThere are two methods for displaying the price scale along the y-axis: arithmetic and logarithmic.An arithmetic scale displays 10 points (or dollars) as the same vertical distance no matter what theprice level. Each unit of measure is the same throughout the entire scale. If a stock advances from10 to 80 over a 6-month period, the move from 10 to 20 will appear to be the same distance as themove from 70 to 80. Even though this move is the same in absolute terms, it is not the same inpercentage terms.A logarithmic scale measures price movements in percentage terms. An advance from 10 to 20would represent an increase of 100%. An advance from 20 to 40 would also be 100%, as would anadvance from 40 to 80. All three of these advances would appear as the same vertical distance ona logarithmic scale. Most charting programs refer to the logarithmic scale as a semi-log scale,because the time axis is still displayed arithmetically.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 40
  • 40. The chart above uses the 4th-Quarter performance of VeriSign to illustrate the difference in scaling.On the semi-log scale, the distance between 50 and 100 is the same as the distance between 100and 200. However, on the arithmetic scale, the distance between 100 and 200 is significantlygreater than the distance between 50 and 100.Key points on the benefits of arithmetic and semi-log scales:• Arithmetic scales are useful when the price range is confined within a relatively tight range.• Arithmetic scales are useful for short-term charts and trading. Price movements (particularly for stocks) are shown in absolute dollar terms and reflect movements dollar for dollar.• Semi-log scales are useful when the price has moved significantly, be it over a short or extended time frame• Trend lines tend to match lows better on semi-log scales.• Semi-log scales are useful for long-term charts to gauge the percentage movements over a long period of time. Large movements are put into perspective.• Stocks and many other securities are judged in relative terms through the use of ratios such as PE, Price/Revenues and Price/Book. With this in mind, it also makes sense to analyze price movements in percentage terms.ConclusionsEven though many different charting techniques are available, one method is not necessarilybetter than the other. The data may be the same, but each method will provide its own uniqueinterpretation, with its own benefits and drawbacks. A breakout on the point & figure chart may notoccur in unison with a breakout in a candlestick chart. Signals that are available on candlestickcharts may not appear on bar charts. How the securitys price is displayed, be it a bar chart orcandlestick chart, with an arithmetic scale or semi-log scale, is not the most important aspect. Afterall, the data is the same and price action is price action. When all is said and done, it is theanalysis of the price action that separates successful technicians from not-so-successfultechnicians. The choice of which charting method to use will depend on personal preferences andtrading or investing styles. Once you have chosen a particular charting methodology, it is probablybest to stick with it and learn how best to read the signals. Switching back and forth may causeconfusion and undermine the focus of your analysis. Faulty analysis is rarely caused by the chart.Before blaming your charting method for missing a signal, first look at your analysis.The keys to successful chart analysis are dedication, focus, and consistency:• Dedication: Learn the basics of chart analysis, apply your knowledge on a regular basis, and continue your development.• Focus: Limit the number of charts, indicators and methods you use. Learn how to use them, and learn how to use them well.• Consistency: Maintain your charts on a regular basis and study them often (daily if possible).Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 41
  • 41. Support and ResistanceSupport and resistance represent key junctures where the forces of supply and demand meet. Inthe financial markets, prices are driven by excessive supply (down) and demand (up). Supply issynonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying.These terms are used interchangeably throughout this and other articles. As demand increases,prices advance and as supply increases, prices decline. When supply and demand are equal,prices move sideways as bulls and bears slug it out for control.What Is Support?Support is the price level at which demand is thought to be strong enough to prevent the price fromdeclining further. The logic dictates that as the price declines towards support and gets cheaper,buyers become more inclined to buy and sellers become less inclined to sell. By the time the pricereaches the support level, it is believed that demand will overcome supply and prevent the pricefrom falling below support.Support does not always hold and a break below support signals that the bears have won out overthe bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive tobuy. Support breaks and new lows signal that sellers have reduced their expectations and arewilling sell at even lower prices. In addition, buyers could not be coerced into buying until pricesdeclined below support or below the previous low. Once support is broken, another support levelwill have to be established at a lower level.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 42
  • 42. Where Is Support Established?Support levels are usually below the current price, but it is not uncommon for a security to trade ator near support. Technical analysis is not an exact science and it is sometimes difficult to set exactsupport levels. In addition, price movements can be volatile and dip below support briefly.Sometimes it does not seem logical to consider a support level broken if the price closes 1/8 belowthe established support level. For this reason, some traders and investors establish support zones.What Is Resistance?Resistance is the price level at which selling is thought to be strong enough to prevent the pricefrom rising further. The logic dictates that as the price advances towards resistance, sellersbecome more inclined to sell and buyers become less inclined to buy. By the time the pricereaches the resistance level, it is believed that supply will overcome demand and prevent the pricefrom rising above resistance.Resistance does not always hold and a break above resistance signals that the bulls have won outover the bears. A break above resistance shows a new willingness to buy and/or a lack ofincentive to sell. Resistance breaks and new highs indicate buyers have increased theirexpectations and are willing to buy at even higher prices. In addition, sellers could not be coercedinto selling until prices rose above resistance or above the previous high. Once resistance isbroken, another resistance level will have to be established at a higher level.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 43
  • 43. Where Is Resistance Established?Resistance levels are usually above the current price, but it is not uncommon for a security to tradeat or near resistance. In addition, price movements can be volatile and rise above resistancebriefly. Sometimes it does not seem logical to consider a resistance level broken if the price closes1/8 above the established resistance level. For this reason, some traders and investors establishresistance zones.Methods to Establish Support and Resistance?Support and resistance are like mirror images and have many common characteristics.Highs and LowsSupport can be established with the previous reaction lows. Resistance can be established byusing the previous reaction highs.The above chart for Halliburton (HAL) shows a large trading range between Dec-99 and Mar-00.Support was established with the October low around 33. In December, the stock returned tosupport in the mid-thirties and formed a low around 34. Finally, in February the stock againreturned to the support scene and formed a low around 33 1/2.After each bounce off support, the stock traded all the way up to resistance. Resistance was firstestablished by the September support break at 42.5. After a support level is broken, it can turn intoa resistance level. From the October lows, the stock advanced to the new support-turned-resistance level around 42.5. When the stock failed to advance past 42.5, the resistance level wasconfirmed. The stock subsequently traded up to 42.5 two more times after that and failed tosurpass resistance both times.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 44
  • 44. Support Equals ResistanceAnother principle of technical analysis stipulates that support can turn into resistance and visaversa. Once the price breaks below a support level, the broken support level can turn intoresistance. The break of support signals that the forces of supply have overcome the forces ofdemand. Therefore, if the price returns to this level, there is likely to be an increase in supply, andhence resistance.The other turn of the coin is resistance turning into support. As the price advances aboveresistance, it signals changes in supply and demand. The breakout above resistance proves thatthe forces of demand have overwhelmed the forces of supply. If the price returns to this level,there is likely to be an increase in demand and support will be found.In this example of the NASDAQ 100 Index ($NDX) , the stock broke resistance at 935 in May-97and traded just above this resistance level for over a month. The ability to remain above resistanceestablished 935 as a new support level. The stock subsequently rose to 1150, but then fell back totest support at 935. After the second test of support at 935, this level is well established.From the PeopleSoft (PSFT) example, we can see that support can turn into resistance and thenback into support. PeopleSoft found support at 18 from Oct-98 to Jan-99 (green oval), but brokebelow support in Mar-99 as the bears overpowered the bulls. When the stock rebounded (red oval),there was still overhead supply at 18 and resistance was met from Jun-99 to Oct-99.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 45
  • 45. Where does this overhead supply come from? Demand was obviously increasing around 18 fromOct-98 to Mar-99 (green oval). Therefore, there were a lot of buyers in the stock around 18. Whenthe price declined past 18 and to around 14, many of these buyers were probably still holding thestock. This left a supply overhang (commonly known as resistance) around 18. When the stockrebounded to 18, many of the green-oval-buyers (who bought around 18) probably took theopportunity to sell. When this supply was exhausted, the demand was able to overpower supplyand advance above resistance at 18.Trading RangeTrading ranges can play an important role in determining support and resistance as turning pointsor as continuation patterns. A trading range is a period of time when prices move within a relativelytight range. This signals that the forces of supply and demand are evenly balanced. When theprice breaks out of the trading range, above or below, it signals that a winner has emerged. Abreak above is a victory for the bulls (demand) and a break below is a victory for the bears (supply).After an extended advance from 27 to 64, WorldCom (WCOM) entered into a trading rangebetween 55 and 63 for about 5 months. There was a false breakout in mid-June when the stockbriefly poked its head above 62 (red oval). This did not last long and a gap down a few days laternullified the breakout (black arrow). The stock then proceeded to break support at 55 in Aug-99and trade as low as 50. Here is another example of support turned resistance as the stockbounced off 55 two more times before heading lower. While this does not always happen, a returnto the new resistance level offers a second chance for longs to get out and shorts to enter the fray.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 46
  • 46. In Nov/Dec-99, Lucent Technologies (LU) formed a trading range that resembled a head andshoulders pattern (red oval). When the stock broke support at 60, there was little or no time to exit.Even though the there is a long black candlestick indicating an open at 59, the stock fell so fastthat it was impossible to exit above 44. In hindsight, the support line could have been drawn as anupward sloping neckline (blue line), and the support break would have come at 61. This is only 1point higher and a trader would have had to take action immediately to avoid a sharp fall. However,the lows match up rather nicely on the neckline, and it is something to consider when drawingsupport lines.After Lucent declined, a trading range was established between 40.5 and 47.5 for almost twomonths (green oval). The resistance level of the trading range was well marked by three reactionpeaks at 47.5. The support level was not as clearly marked, but appeared to be between 40 and41. Some buying interest began to become evident around 44 in mid- to late-February. Notice thearray of candlesticks with long lower shadows, or hammers, as they are known. The stock thenproceeded to form two up gaps on 24-Feb and 25-Feb, and finally closed above resistance at 48.This was a clear indication of demand winning out over supply. There were still two moreopportunities (days) to get in on the action. On the third day after the breakout, the stock gappedup and moved above 56.Support and Resistance ZonesBecause technical analysis is not an exact science, it is useful to create support and resistancezones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it issometimes the case. Each security has its own characteristics, and analysis should reflect theintricacies of the security. Sometimes, exact support and resistance levels are best, and,sometimes, zones work better. Generally, the tighter the range, the more exact the level. If thetrading range spans less than 2 months and the price range is relatively tight, then more exactsupport and resistance levels are best suited. If a trading range spans many months and the pricerange is relatively large, then it is best to use support and resistance zones. These are only meantas general guidelines, and each trading range should be judged on its own merits.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 47
  • 47. Returning to the analysis of Halliburton (HAL) , we can see that the November high of the tradingrange (33 to 44) extended more than 20% past the low, making the range quite large relative to theprice. Because the September support break forms our first resistance level, we are ready to setup a resistance zone after the November high is formed, probably around early December. At thispoint though, we are still unsure if a large trading range will develop. The subsequent low inDecember, which was just higher than the October low, offers evidence that a trading range isforming, and we are ready to set the support zone. As long as the stock trades within theboundaries set by the support and resistance zone, we will consider the trading range to be valid.Support may be looked upon as an opportunity to buy, and resistance as an opportunity to sell.ConclusionIdentification of key support and resistance levels is an essential ingredient to successful technicalanalysis. Even though it is sometimes difficult to establish exact support and resistance levels,being aware of their existence and location can greatly enhance analysis and forecasting abilities.If a security is approaching an important support level, it can serve as an alert to be extra vigilantin looking for signs of increased buying pressure and a potential reversal. If a security isapproaching a resistance level, it can act as an alert to look for signs of increased selling pressureand potential reversal. If a support or resistance level is broken, it signals that the relationshipbetween supply and demand has changed. A resistance breakout signals that demand (bulls) hasgained the upper hand and a support break signals that supply (bears) has won the battle.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 48
  • 48. Trend LinesTechnical analysis is built on the assumption that prices trend. Trend Lines are an important tool intechnical analysis for both trend identification and confirmation. A trend line is a straight line thatconnects two or more price points and then extends into the future to act as a line of support orresistance. Many of the principles applicable to support and resistance levels can be applied totrend lines as well. It is important that you understand all of the concepts presented in our Supportand Resistance article before you continue.DefinitionUptrend LineAn uptrend line has a positive slope and is formed by connecting two or more low points. Thesecond low must be higher than the first for the line to have a positive slope. Uptrend lines act assupport and indicate that net-demand (demand less supply) is increasing even as the price rises. Arising price combined with increasing demand is very bullish, and shows a strong determination onthe part of the buyers. As long as prices remain above the trend line, the uptrend is consideredsolid and intact. A break below the uptrend line indicates that net-demand has weakened and achange in trend could be imminent.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 49
  • 49. Downtrend LineA downtrend line has a negative slope and is formed by connecting two or more high points. Thesecond high must be lower than the first for the line to have a negative slope. Downtrend lines actas resistance, and indicate that net-supply (supply less demand) is increasing even as the pricedeclines. A declining price combined with increasing supply is very bearish, and shows the strongresolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solidand intact. A break above the downtrend line indicates that net-supply is decreasing and that achange of trend could be imminent.For a detailed explanation of trend changes, which are different than just trend line breaks, pleasesee our article on the Dow Theory.Scale SettingsHigh points and low points appear to line up better for trend lines when prices are displayed usinga semi-log scale. This is especially true when long-term trend lines are being drawn or when thereis a large change in price. Most charting programs allow users to set the scale as arithmetic orsemi-log. An arithmetic scale displays incremental values (5,10,15,20,25,30) evenly as they moveup the y-axis. A $10 movement in price will look the same from $10 to $20 or from $100 to $110. Asemi-log scale displays incremental values in percentage terms as they move up the y-axis. Amove from $10 to $20 is a 100% gain, and would appear to be a much larger than a move from$100 to $110, which is only a 10% gain.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 50
  • 50. In the case of EMC , there was a large price change over a long period of time. While there werenot any false breaks below the uptrend line on the arithmetic scale, the rate of ascent appearssmoother on the semi-log scale. EMC doubled three times in less than two years. On the semi-logscale, the trend line fits all the way up. On the arithmetic scale, three different trend lines wererequired to keep pace with the advance.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 51
  • 51. In the case of Amazon.com (AMZN) , there were two false breaks above the downtrend line asthe stock declined during 2000 and 2001. These false break outs could have led to prematurebuying as the stock continued to decline after each one. The stock lost 60% of its value three timesover a two year period. The semi-log scale reflects the percentage loss evenly, and the downtrendline was never broken.ValidationIt takes two or more points to draw a trend line The more points used to draw the trend line, themore validity attached to the support or resistance level represented by the trend line. It cansometimes be difficult to find more than 2 points from which to construct a trend line Even thoughtrend lines are an important aspect of technical analysis, it is not always possible to draw trendlines on every price chart. Sometimes the lows or highs just dont match up, and it is best not toforce the issue. The general rule in technical analysis is that it takes two points to draw a trend lineand the third point confirms the validity.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 52
  • 52. The chart of Microsoft (MSFT) shows an uptrend line that has been touched 4 times. After thethird touch in Nov-99, the trend line was considered a valid line of support. Now that the stock hasbounced off of this level a fourth time, the soundness of the support level is enhanced even more.As long as the stock remains above the trend line (support), the trend will remain in control of thebulls. A break below would signal that net-supply was increasing and that a change in trend couldbe imminent.Spacing of PointsThe lows used to form an uptrend line and the highs used to form a downtrend line should not betoo far apart, or too close together. The most suitable distance apart will depend on the time frame,the degree of price movement, and personal preferences. If the lows (highs) are too close together,the validity of the reaction low (high) may be in question. If the lows are too far apart, therelationship between the two points could be suspect. An ideal trend line is made up of relativelyevenly spaced lows (or highs). The trend line in the above MSFT example represents well-spacedlow points.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 53
  • 53. On the Wal-Mart (WMT) example, the second high point appears to be too close to the first highpoint for a valid trend line; however, it would be feasible to draw a trend line beginning at point 2and extending down to the February reaction high.AnglesAs the steepness of a trend line increases, the validity of the support or resistance level decreases.A steep trend line results from a sharp advance (or decline) over a brief period of time. The angleof a trend line created from such sharp moves is unlikely to offer a meaningful support orresistance level. Even if the trend line is formed with three seemingly valid points, attempting toplay a trend line break or to use the support and resistance level established it will often provedifficult.The trend line for Yahoo! (YHOO) was touched four times over a 5-month period. The spacingbetween the points appears OK, but the steepness of the trend line is unsustainable, and the priceis more likely than not to drop below the trend line. However, trying to time this drop or make aplay after the trend line is broken is a difficult task. The amount of data displayed and the size ofthe chart can also affect the angle of a trend line. Short and wide charts are less likely to havesteep trend lines than long and narrow charts. Keep that in mind when assessing the validity andsustainability of a trend line.Internal Trend LinesSometimes there appears to be the possibility for drawing a trend line, but the exact points do notmatch up cleanly. The highs or lows might be out of whack, the angle might be too steep or thepoints might be too close together. If one or two points could be ignored, then a fitted trend linecould be formed. With the volatility present in the market, prices can over-react, and producespikes that distort the highs and lows. One method for dealing with over-reactions is to drawinternal trend lines. Even though an internal trend line ignores price spikes, the ignoring should bewithin reason.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 54
  • 54. The long-term trend line for the S&P 500 ($SPX) extends up from the end of 1994, and passesthrough low points in Jul-96, Sept-98 and Oct-98. These lows were formed with selling climaxes,and represented extreme price movements that protrude beneath the trend line. By drawing thetrend line through the lows, the line appears to be at a reasonable angle, and the other lows matchup extremely well.Sometimes, there is a price cluster with a high or low spike sticking out. A price cluster is an areawhere prices are grouped within a tight range over a period of time. The price cluster can be usedto draw the trend line, and the spike can be ignored. The Coca Cola (KO) chart shows aninternal trend line that is formed by ignoring price spikes and using the price clusters, instead. InOctober and November 1998, Coke formed a peak, with the November peak just higher than theOctober peak (1). If the November peak had been used to draw a trend line, then the slope wouldhave been more negative, and there would have appeared to be a breakout in Dec-98 (gray line).However, this would have only been a two-point trend line, because the May-June highs are tooclose together (black arrows). Once the Dec-99 peak formed (green arrow), it would have beenpossible to draw an internal trend line based on the price clusters around the Oct/Nov-98 and theDec-99 peaks (blue line). This trend line is based on three solid touches, and it accuratelyforecasts resistance in Jan-00 (blue arrow).Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 55
  • 55. ConclusionTrend lines can offer great insight, but if used improperly, they can also produce false signals.Other items - such as horizontal support and resistance levels or peak-and-trough analysis -should be employed to validate trend line breaks. While trend lines have become a very popularaspect of technical analysis, they are merely one tool for establishing, analyzing, and confirming atrend. Trend lines should not be the final arbiter, but should serve merely as a warning that achange in trend may be imminent. By using trend line breaks for warnings, investors and traderscan pay closer attention to other confirming signals for a potential change in trend.The uptrend line for VeriSign (VRSN) was touched 4 times, and seemed to be a valid supportlevel. Even though the trend line was broken in Jan-00, the previous reaction low held, and did notconfirm the trend line break. In addition, the stock recorded a new higher high prior to the trend linebreak.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 56
  • 56. Introduction to Chart PatternsThere are hundreds of thousands of market participants buying and selling securities for a widevariety of reasons: hope of gain, fear of loss, tax consequences, short-covering, hedging, stop-losstriggers, price target triggers, fundamental analysis, technical analysis, broker recommendationsand a few dozen more. Trying to figure out why participants are buying and selling can be adaunting process. Chart Patterns put all buying and selling into perspective by consolidating theforces of supply and demand into a concise picture. As a complete pictorial record of all trading,chart patterns provide a framework to analyze the battle raging between bulls and bears. Moreimportantly, chart patterns and technical analysis can help determine who is winning the battle,allowing traders and investors to position themselves accordingly.In many waves, Chart patterns are simply more complex versions of trend lines. It is important thatyou read and understand our articles on Support and Resistance as well as Trend Lines beforeyou continue.Chart pattern analysis can be used to make short-term or long-term forecasts. The data can beintraday, daily, weekly or monthly and the patterns can be as short as one day or as long as manyyears. Gaps and outside reversals may form in one trading session, while broadening tops anddormant bottoms may require many months to form.Amazon (AMZN)Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 57
  • 57. CIENA (CIEN)An Oldie but GoodieMuch of our understanding of chart patterns can be attributed to the work of Richard Schabacker.His 1932 classic, Technical Analysis and Stock Market Profits, laid the foundations for modernpattern analysis. In Technical Analysis of Stock Trends (1948), Edwards and Magee creditSchabacker for most of the concepts put forth in the first part of their book. We would also like toacknowledge Messrs. Schabacker, Edwards and Magee, and John Murphy as the driving forcesbehind these articles and our understanding of chart patterns.Pattern analysis may seem straightforward, but it is by no means an easy task. Schabacker states:The science of chart reading, however, is not as easy as the mere memorizing of certain patternsand pictures and recalling what they generally forecast. Any general stock chart is a combinationof countless different patterns and its accurate analysis depends upon constant study, longexperience and knowledge of all the fine points, both technical and fundamental, and, above all,the ability to weigh opposing indications against each other, to appraise the entire picture in thelight of its most minute and composite details as well as in the recognition of any certain andmemorized formula.Even though Schabacker refers to "the science of chart reading", technical analysis can at timesbe less science and more art. In addition, pattern recognition can be open to interpretation, whichcan be subject to personal biases. To defend against biases and confirm pattern interpretations,other aspects of technical analysis should be employed to verify or refute the conclusions drawn.While many patterns may seem similar in nature, no two patterns are exactly alike. Falsebreakouts, bogus reads and exceptions to the rule are all part of the ongoing education.Careful and constant study are required for successful chart analysis. On the AMZN chart above,the stock broke resistance from a head and shoulders reversal. While the trend is now bearish,analysis must continue to confirm the bearish trend.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 58
  • 58. Novellus (NVLS)Some analysts might have labeled the NVLS chart as a head and shoulders patterns with necklinesupport around 17.50. Whether or not this is robust remains open to debate. Even though thestock broke neckline support at 17.50, it repeatedly moved back above its support break. Thisrefusal might have been taken as a sign of strength and justify a reassessment of the pattern.Two Dominant GroupsTwo basic tenets of technical analysis are that prices trend and that history repeats itself. Anuptrend indicates that the forces of demand (bulls) are in control and a downtrend that the forcesof supply (bears) are in control. However, prices do not trend forever and as the balance of powershifts, a chart pattern begins to emerge. Certain patterns, such as a parallel channel, denote astrong trend. However, the vast majority of chart patterns fall into two main groups: reversal andcontinuation. Reversal patterns indicate a change of trend and can be broken down into top andbottom formations. Continuation patterns indicate a pause in trend and indicate that the previousdirection will resume after a period of time.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 59
  • 59. Microsoft (MSFT)Just because a pattern forms after a significant advance or decline does not mean it is a reversalpattern. Many patterns, such as a rectangle, can be classified as either reversal or continuation.Much depends on the previous price action, volume and other indicators as the pattern evolves.This is where the science of technical analysis becomes the art of technical analysis.For detailed explanations of specific chart patterns, see the Chart Analysis page in the ChartSchool.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 60
  • 60. Chart PatternsBelow is a list of common chart patterns that can be useful in Technical Analysis. Please see theIntroduction to Chart Patterns article for more details on how to use chart patterns when analysinga chart. Double Top (Reversal) Double Bottom (Reversal) Head and Shoulders Top (Reversal) Head and Shoulders Bottom (Reversal) Falling Wedge (Reversal) Rising Wedge (Reversal) Rounding Bottom (Reversal) Triple Top (Reversal) Triple Bottom (Reversal) Bump and Run Reversal (Reversal) Flag, Pennant (Continuation) Symmetrical Triangle (Continuation) Ascending Triangle (Continuation) Descending Triangle (Continuation) Rectangle (Continuation) Price Channel (Continuation) Measured Move - Bullish (Continuation) Measured Move - Bearish (Continuation) Cup with Handle (Continuation)Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 61
  • 61. Double Top (Reversal)The double top is a major reversal pattern that forms after an extended uptrend. As its nameimplies, the pattern is made up of two consecutive peaks that are roughly equal, with a moderatetrough in-between.Although there can be variations, the classic double top marks at least an intermediate change, ifnot long-term change, in trend from bullish to bearish. Many potential double tops can form alongthe way up, but until key support is broken, a reversal cannot be confirmed. To help clarify, we willlook at the key points in the formation and then walk through an example.1. Prior Trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the double top, a significant uptrend of several months should be in place.2. First Peak: The first peak should mark the highest point of the current trend. As such, the first peak is fairly normal and the uptrend is not in jeopardy (or in question) at this time.3. Trough: After the first peak, a decline takes place that typically ranges from 10 to 20%. Volume on the decline from the first peak is usually inconsequential. The lows are sometimes rounded or drawn out a bit, which can be a sign of tepid demand.4. Second Peak: The advance off the lows usually occurs with low volume and meets resistance from the previous high. Resistance from the previous high should be expected. Even after meeting resistance, only the possibility of a double top exists. The pattern still needs to be confirmed. The time period between peaks can vary from a few weeks to many months, with the norm being 1-3 months. While exact peaks are preferable, there is some leeway. Usually a peak within 3% of the previous high is adequate.5. Decline from Peak: The subsequent decline from the second peak should witness an expansion in volume and/or an accelerated descent, perhaps marked with a gap or two. Such a decline shows that the forces of demand are weaker than supply and a support test is imminent.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 62
  • 62. 6. Support Break: Even after trading down to support, the double top and trend reversal are still not complete. Breaking support from the lowest point between the peaks completes the double top. This too should occur with an increase in volume and/or an accelerated descent.7. Support Turned Resistance: Broken support becomes potential resistance and there is sometimes a test of this newfound resistance level with a reaction rally. Such a test can offer a second chance to exit a position or initiate a short.8. Price Target: The distance from support break to peak can be subtracted from the support break for a price target. This would infer that the bigger the formation is, the larger the potential decline.While the double top formation may seem straightforward, technicians should take proper steps toavoid deceptive double tops. The peaks should be separated by about a month. If the peaks aretoo close, they could just represent normal resistance rather than a lasting change in thesupply/demand picture. Ensure that the low between the peaks declines at least 10%. Declinesless than 10% may not be indicative of a significant increase in selling pressure. After the decline,analyze the trough for clues on the strength of demand. If the trough drags on a bit and has troublemoving back up, demand could be drying up. When the security does advance, look for acontraction in volume as a further indication of weakening demand.Perhaps the most important aspect of a double top is to avoid jumping the gun. Wait for support tobe broken in a convincing manner, and usually with an expansion of volume. A price or time filtercan be applied to differentiate between valid and false support breaks. A price filter might require a3% support break before validation. A time filter might require the support break to hold for 3 daysbefore considering it valid. The trend is in force until proven otherwise. This applies to the doubletop as well. Until support is broken in a convincing manner, the trend remains up.The double top in Ford took about 5 months to form. Even after the support break, there wasanother test of newfound resistance almost 4 months later.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 63
  • 63. 1. From a low near 10 in Mar-97, Ford advanced to 36 by Dec-98. The trend line extending up from Mar-97 is an internal trend line and Ford held above it until the break in May-99.2. From the first peak, the stock declined around 15% to form the trough.3. After reaching a low near 30 1/2 in early February, the trough formed over the next 2 months, and there wasnt a rally until early April. This long-drawn-out low suggested tepid demand.4. The decline from 36.80 occurred with two gaps down and increased volume. Furthermore, Chaikin Money Flow promptly moved below -10%. The speed with which money flows deteriorated indicated a serious increase in selling pressure.5. In late May and early June, the stock traded for about 3 weeks at support from the previous low. During this time, money flows declined below -20%. Even though the situation looked ominous, the double formation would not be complete until support was broken.6. Support was broken in early June when the stock fell below 28 1/2, which was more than 3% below support at 30 1/2. After this sharp drop, there was an equally sharp advance back above the newfound resistance level. While a test of broken support can be expected, it is usually not quite this early. The advance to 32 in late June may have triggered some unpleasant short covering for those who jumped in on the first support break. The stock fell to 25, and then began the retracement advance that would ultimately test support.On the second chart, 30 3/4 marked the support turned resistance level, and 31 marked a 50%retracement of the decline from 36.80 to 25. Combined with the price action in early June and earlyJuly, a resistance zone could probably be established between 31 and 32. The stock subsequentlyformed a lower high at 30 in Jan-00, and declined to around 22 by mid-March.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 64
  • 64. Double Bottom (Reversal)The double bottom is a major reversal pattern that forms after an extended downtrend. As its nameimplies, the pattern is made up of two consecutive troughs that are roughly equal, with a moderatepeak in-between.Although there can be variations, the classic double bottom usually marks an intermediate or long-term change in trend. Many potential double bottoms can form along the way down, but until keyresistance is broken, a reversal cannot be confirmed. To help clarify, we will look at the key pointsin the formation and then walk through an example.1. Prior Trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the double bottom, a significant downtrend of several months should be in place.2. First Trough: The first trough should mark the lowest point of the current trend. As such, the first trough is fairly normal in appearance and the downtrend remains firmly in place.3. Peak: After the first trough, an advance takes place that typically ranges from 10 to 20%. Volume on the advance from the first trough is usually inconsequential, but an increase could signal early accumulation. The high of the peak is sometimes rounded or drawn out a bit from the hesitation to go back down. This hesitation indicates that demand is increasing, but still not strong enough for a breakout.4. Second Trough: The decline off the reaction high usually occurs with low volume and meets support from the previous low. Support from the previous low should be expected. Even after establishing support, only the possibility of a double bottom exists, it still needs to be confirmed. The time period between troughs can vary from a few weeks to many months, withVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 65
  • 65. the norm being 1-3 months. While exact troughs are preferable, there is some room to maneuver and usually a trough within 3% of the previous is considered valid.5. Advance from Trough: Volume is more important for the double bottom than the double top. There should clear evidence that volume and buying pressure are accelerating during the advance off of the second trough. An accelerated ascent, perhaps marked with a gap or two, also indicates a potential change in sentiment.6. Resistance Break: Even after trading up to resistance, the double top and trend reversal are still not complete. Breaking resistance from the highest point between the troughs completes the double bottom. This too should occur with an increase in volume and/or an accelerated ascent.7. Resistance Turned Support: Broken resistance becomes potential support and there is sometimes a test of this newfound support level with the first correction. Such a test can offer a second chance to close a short position or initiate a long.8. Price Target: The distance from the resistance breakout to trough lows can be added on top of the resistance break to estimate a target. This would imply that the bigger the formation is, the larger the potential advance.It is important to remember that the double bottom is an intermediate to long-term reversal patternthat will not form in a few days. Even though formation in a few weeks is possible, it is preferableto have at least 4 weeks between lows. Bottoms usually take longer than tops to form and patiencecan often be a virtue. Give the pattern time to develop and look for the proper clues. The advanceoff of the first trough should be 10-20%. The second trough should form a low within 3% of theprevious low and volume on the ensuing advance should increase. Volume indicators such asChaikin Money Flow, OBV and Accumulation/Distribution can be used to look for signs of buyingpressure. Just as with the double top, it is paramount to wait for the resistance breakout. Theformation is not complete until the previous reaction high is taken out.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 66
  • 66. After trending lower for almost a year, PFE formed a double bottom and broke resistance with anexpansion in volume.1. From a high near 50 in April-99, PFE declined to 30 in November-99, which was a new 52- week low.2. The stock advanced over 20% off of its low and formed a reaction high around 37 1/2. Volume expanded and the 13-Jan advance (green arrow) occurred on the highest volume since 5-Nov.3. After a short pullback, there was another attempt to break above resistance, but this failed. Even so, volume on advancing days was generally higher than on declining days. The ability of the stock to remain in the mid-thirties for an extended period of time indicated some strengthening in demand.4. The decline from 37 1/2 back to 30 was sharp, but downside volume did not expand materially. There were two days when volume on a decline exceeded the 60-day SMA and Chaikin Money Flow dipped near -10% twice. However, money flows indicated accumulation throughout the decline by remaining mostly above zero with periodic movements above +10%.5. The second trough formed with a low exactly equal to the previous low (30) and a little over 2 months separated the lows.6. The advance off of the second low witnessed an accelerated move with an expansion of volume. After the second low at 30, 5 of the next 6 advancing days saw volume well above the 60-day SMA. Chaikin Money Flow, which never really weakened, moved above +20% within 6 days of the low.7. Resistance at 37 1/2 was broken with a gap up on the open and another volume expansion. After running from 30 to 40 in a few weeks, the stock pulled back to the resistance break at 37 1/2, which now turned into support. There was a brief chance to get in on the pullback and the stock quickly advanced past 45.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 67
  • 67. Head and Shoulders Top (Reversal)A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trendreversal. The pattern contains three successive peaks with the middle peak (head) being thehighest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows ofeach peak can be connected to form support, or a neckline.As its name implies, the Head and Shoulders reversal pattern is made up of a left shoulder, a head,a right shoulder, and a neckline. Other parts playing a role in the pattern are volume, the breakout,price target and support turned resistance. We will look at each part individually, and then put themtogether with some examples.1. Prior Trend: It is important to establish the existence of a prior uptrend for this to be a reversal pattern. Without a prior uptrend to reverse, there cannot be a Head and Shoulders reversal pattern (or any reversal pattern for that matter).2. Left Shoulder: While in an uptrend, the left shoulder forms a peak that marks the high point of the current trend. After making this peak, a decline ensues to complete the formation of the shoulder (1). The low of the decline usually remains above the trend line, keeping the uptrend intact.3. Head: From the low of the left shoulder, an advance begins that exceeds the previous high and marks the top of the head. After peaking, the low of the subsequent decline marks the second point of the neckline (2). The low of the decline usually breaks the uptrend line, putting the uptrend in jeopardy.4. Right Shoulder: The advance from the low of the head forms the right shoulder. This peak is lower than the head (a lower high) and usually in line with the high of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack. The decline from the peak of the right shoulder should break the neckline.5. Neckline: The neckline forms by connecting low points 1 and 2. Low point 1 marks the end of the left shoulder and the beginning of the head. Low point 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two low points, the neckline can slope up, slope down or be horizontal. The slope of the neckline will affect the patterns degree of bearishness: a downward slope is more bearish than an upward slope. Sometimes more than one low point can be used to form the neckline.6. Volume: As the Head and Shoulders pattern unfolds, volume plays an important role in confirmation. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing volume levels. Ideally, but not always, volume during the advance of the left shoulder should be higher than during the advance of the head. This decrease in volume andVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 68
  • 68. the new high of the head, together, serve as a warning sign. The next warning sign comes when volume increases on the decline from the peak of the head. Final confirmation comes when volume further increases during the decline of the right shoulder.7. Neckline Break: The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken. Ideally, this should also occur in a convincing manner, with an expansion in volume.8. Support Turned Resistance: Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not always, the price will return to the support break, and offer a second chance to sell.9. Price Target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered as well. These factors might include previous support levels, Fibonacci retracements, or long-term moving averages.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 69
  • 69. Archer Daniels Midland Company (ADM) formed a Head and Shoulders reversal with a slightlyupward sloping neckline. Key points include:1. The low at 17 1/2 marked the end of the left shoulder and the beginning of the head (1).2. During the advance to 20 1/2, volume was still high, but not as high as during the left shoulder advance. However, during the next advance to 20, volume tapered off significantly.3. Volume continued to decline until the breaking of the neckline. (Note red line on volume bars.)4. The decline from 20 1/2 to 17 1/2 formed the second low point (2).5. During the decline of the right shoulder and neckline break, volume expanded (red oval), and Chaikin Money Flow turned negative.6. After the initial decline, there was a return to the neckline break (black arrow). Even during this decline, Chaikin Money Flow remained negative. The subsequent decline took the stock below 11.7. The measurement from neckline to the top of the head was 3. With the neckline break at 17 1/2, this would imply a move to around 14 1/2. The July 98 low was 13 1/2. After a decline from 20 1/2, at least, a short reaction rally could have been expected.The head and shoulders pattern is one of the most common reversal formations. It is important toremember that it occurs after an uptrend and usually marks a major trend reversal when complete.While it is preferable that the left and right shoulders be symmetrical, it is not an absoluterequirement. They can be different widths as well as different heights. Identification of necklinesupport and volume confirmation on the break can be the most critical factors. The support breakindicates a new willingness to sell at lower prices. Lower prices combined with an increase involume indicate an increase in supply. The combination can be lethal, and sometimes, there is nosecond chance return to the support break. Measuring the expected length of the decline after thebreakout can be helpful, but dont count on it for your ultimate target. As the pattern unfolds overtime, other aspects of the technical picture are likely to take precedence.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 70
  • 70. Head and Shoulders Bottom (Reversal)The Head and Shoulders bottom is referred to sometimes as an Inverse Head and Shoulders. Thepattern shares many common characteristics with its comparable partner, but relies more heavilyon volume patterns for confirmation.As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and itscompletion marks a change in trend. The pattern contains three successive troughs with themiddle trough (head) being the deepest and the two outside troughs (shoulders) being shallower.Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle ofthe pattern can be connected to form resistance, or a neckline.The price action forming both Head and Shoulders Top and Head and Shoulders Bottom patternsremains roughly the same, but reversed. The role of volume marks the biggest difference betweenthe two. Generally speaking, volume plays a larger role in bottom formations than top formations.While an increase in volume on the neckline breakout for a Head and Shoulders Top is welcomed,it is absolutely required for a bottom. We will look at each part of the pattern individually, keepingvolume in mind, and then put the parts together with some examples.1. Prior Trend: It is important to establish the existence of a prior downtrend for this to be a reversal pattern. Without a prior downtrend to reverse, there cannot be a Head and Shoulders Bottom formation.2. Left Shoulder: While in a downtrend, the left shoulder forms a trough that marks a new reaction low in the current trend. After forming this trough, an advance ensues to complete the formation of the left shoulder (1). The high of the decline usually remains below any longer trend line, thus keeping the downtrend intact.3. Head: From the high of the left shoulder, a decline begins that exceeds the previous low and forms the low point of the head. After making a bottom, the high of the subsequent advance forms the second point of the neckline (2). The high of the advance sometimes breaks a downtrend line, which calls into question the robustness of the downtrend.4. Right Shoulder: The decline from the high of the head (neckline) begins to form the right shoulder. This low is always higher than the head, and it is usually in line with the low of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack, and the right shoulder will be higher, lower, wider, or narrower. When the advance from the low of the right shoulder breaks the neckline, the Head and Shoulders Bottom reversal is complete.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 71
  • 71. 5. Neckline: The neckline forms by connecting reaction highs 1 and 2. Reaction High 1 marks the end of the left shoulder and the beginning of the head. Reaction High 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two reaction highs, the neckline can slope up, slope down, or be horizontal. The slope of the neckline will affect the patterns degree of bullishness: an upward slope is more bullish than downward slope.6. Volume: While volume plays an important role in the Head and Shoulders Top, it plays a crucial role in the Head and Shoulders Bottom. Without the proper expansion of volume, the validity of any breakout becomes suspect. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing the absolute levels associated with each peak and trough. • Volume levels during the first half of the pattern are less important than in the second half. Volume on the decline of the left shoulder is usually pretty heavy and selling pressure quite intense. The intensity of selling can even continue during the decline that forms the low of the head. After this low, subsequent volume patterns should be watched carefully to look for expansion during the advances. • The advance from the low of the head should show an increase in volume and/or better indicator readings, e.g., CMF > 0 or rise in OBV. After the reaction high forms the second neckline point, the right shoulders decline should be accompanied with light volume. It is normal to experience profit-taking after an advance. Volume analysis helps distinguish between normal profit-taking and heavy selling pressure. With light volume on the pullback, indicators like CMF and OBV should remain strong. The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout.7. Neckline Break: The Head and Shoulders Bottom pattern is not complete, and the downtrend is not reversed until neckline resistance is broken. For a Head and Shoulders Botom, this must occur in a convincing manner, with an expansion of volume.8. Resistance Turned Support: Once resistance is broken, it is common for this same resistance level to turn into support. Often, the price will return to the resistance break, and offer a second chance to buy.9. Price Target: After breaking neckline resistance, the projected advance is found by measuring the distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered, as well. These factors might include previous resistance levels, Fibonacci retracements or long-term moving averages.Alaska Air Group, Inc. (ALK) formed a head and shoulders bottom with a downward slopingneckline.Key points include:Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 72
  • 72. 1. The stock began a downtrend in early July, and declined from 60 to 26.2. The low of the left shoulder formed with a large spike in volume on a sharp down day (red arrows).3. The reaction rally at around 42 1/2 formed the first point of the neckline (1). Volume on the advance was respectable with many gray bars exceeding the 60-day SMA. (Note: gray bars denote advancing days, black bars declining days and the thin red horizontal is the 60-day SMA).4. The decline from 42 1/2 to 26 (head) was quite dramatic, but volume did not get out of hand. Chaikin Money Flow was mostly positive when the lows around 26 were forming.5. The advance off of the low saw a large expansion of volume (green oval) and gap up. The strength behind the move indicated that a significant low formed.6. After the reaction high around 39, the second point of the neckline could be drawn (2).7. The decline from 39 to 33 occurred on light volume until the final two days, when volume reached its highest point in a month. Even though there are two long black (down) volume bars, these are surrounded by above-average gray (up) volume bars. Also notice how trend line resistance near 35 became support around 33 on the price chart.8. The advance off of the low of the right shoulder occurred with above average volume. Chaikin Money Flow was at its highest levels, and surpassed +20% shortly after neckline resistance was broken.9. After breaking neckline resistance, the stock returned to this newfound support with a successful test around 35 (green arrow).AT&T (T) formed a head and shoulders bottom with a flat neckline. The shoulders are a bit shallow,but the neckline and head are well pronounced. Key points include:Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 73
  • 73. 1. The stock established a 6-month downtrend with the trend line extending down from Mar-98.2. After a head fake above the trend line in late June, the stock fell from 66 to 50 with a sharp increase in volume to form the left shoulder.3. The rally to 61 met resistance from the trend line, and the reaction high became the first point of the neckline.4. The decline from 61 to 48 finished with a piercing pattern to form the low of the head. Even though volume was heavy when the long black candlestick formed, the subsequent reversal occurred on even higher volume. This reversal was followed with a number of strong advances and up gaps. Also notice that Chaikin Money Flow was above +10% when the low of the head formed.5. The advance from the low of the head broke above the trend line, extending down from Mar- 98, and met resistance around 61. This reaction high formed the second point of the neckline.6. The right shoulder was quite short and shallow. The low was recorded at 57 and Chaikin Money Flow remained above +10% the whole time. Support was found from the trend line that offered resistance a few weeks earlier.7. The stock advanced sharply off of lows that formed the right shoulder, and volume increased three straight days (blue arrow). This is a bit early, but volume remained just above average for the neckline breakout a few days later. Also Chaikin Money Flow remained above +10% the whole time.8. After the break of neckline resistance, the stock tested this newfound support twice while consolidating recent gains. The power arrived a few weeks later with a strong move off support and a huge increase in volume. The stock subsequently advanced from the low sixties to the low eighties.Head and Shoulder Bottoms are one of the most common and reliable reversal formations. It isimportant to remember that they occur after a downtrend and usually mark a major trend reversalVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 74
  • 74. when complete. While it is preferable that the left and right shoulders be symmetrical, it is not anabsolute requirement. Shoulders can be different widths as well as different heights. Keep in mindthat technical analysis is more an art than a science. If you are looking for the perfect pattern, itmay be a long time coming.Analysis of the Head and Shoulders Bottom should focus on correct identification of necklineresistance and volume patterns. These are two of the most important aspects to a successful read,and by extension a successful trade. The neckline resistance breakout combined with an increasein volume indicates an increase in demand at higher prices. Buyers are exerting greater force, andthe price is being affected.As seen from the examples, traders do not always have to chase a stock after the necklinebreakout. Often, but certainly not always, the price will return to this new support level and offer asecond chance to buy. Measuring the expected length of the advance after the breakout can behelpful, but dont count on it for your ultimate target. As the pattern unfolds over time, otheraspects of the technical picture are likely to take precedent. Technical analysis is dynamic, andyour analysis should incorporate aspects of the long-, medium- and short-term picture.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 75
  • 75. Falling Wedge (Reversal)The falling wedge is a bullish pattern that begins wide at the top and contracts as prices movelower. This price action forms a cone that slopes down as the reaction highs and reaction lowsconverge. In contrast to symmetrical triangles, which have no definitive slope and no bias, fallingwedges definitely slope down and have a bullish bias. However, this bullish bias cannot berealized until a resistance breakout.The falling wedge can also fit into the continuation category. As a continuation pattern, the fallingwedge will still slope down, but the slope will be against the prevailing uptrend. As a reversalpattern, the falling wedge slopes down and with the prevailing trend. Regardless of the type(reversal or continuation), falling wedges are regarded as bullish patterns.1. Prior Trend: To qualify as a reversal pattern, there must be a prior trend to reverse. Ideally, the falling wedge will form after an extended downtrend and mark the final low. The pattern usually forms over a 3-6 month period and the preceding downtrend should be at least 3 months old.2. Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line, ideally three. Each reaction high should be lower than the previous highs.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 76
  • 76. 3. Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be lower than the previous lows.4. Contraction: The upper resistance line and lower support line converge to form a cone as the pattern matures. The reaction lows still penetrate the previous lows, but this penetration becomes shallower. Shallower lows indicate a decrease in selling pressure and create a lower support line with less negative slope than the upper resistance line.5. Resistance Break: Bullish confirmation of the pattern does not come until the resistance line is broken in convincing fashion. It is sometimes prudent to wait for a break above the previous reaction high for further confirmation. Once resistance is broken, there can sometimes be a correction to test the newfound support level.6. Volume: While volume is not particularly important on rising wedges, it is an essential ingredient to confirm a falling wedge breakout. Without an expansion of volume, the breakout will lack conviction and be vulnerable to failure.As with rising wedges, the falling wedge can be one of the most difficult chart patterns toaccurately recognize and trade. When lower highs and lower lows form, as in a falling wedge, asecurity remains in a downtrend. The falling wedge is designed to spot a decrease in downsidemomentum and alert technicians to a potential trend reversal. Even though selling pressure maybe diminishing, demand does not win out until resistance is broken. As with most patterns, it isimportant to wait for a breakout and combine other aspects of technical analysis to confirm signals.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 77
  • 77. FCX provides a textbook example of a falling wedge at the end of a long downtrend.1. Prior Trend: The downtrend for FCX began in the third quarter of 1997. There was a brief advance in Mar-98, but the downtrend resumed and the stock was trading at new lows by Feb-99.2. Upper Resistance Line: The upper resistance line formed with four successively lower peaks.3. Lower Support Line: The lower support line formed with four successive lower lows.4. Contraction: The upper resistance line and lower support line converged as the pattern matured. Even though each low is lower than the previous low, these lows are only slightly lower. The shallowness of the new lows indicates that demand is stepping almost immediately after a new low is recorded. The supply overhang remains, but slope of the upper resistance line is more negative than the lower support line.5. Resistance Break: In contrast to the three previous lows, the late February low was flat and consolidated just above 9 for a few weeks. The subsequent breakout in March occurred with a series of strong advances. In addition, there was a positive divergence in the PPO.6. Volume: After the large volume decline on 24-Feb (red arrow), upside volume began to increase. Above-average volume continued on advancing days and when the stock broke trend line resistance. Money flows confirmed the strength by surpassing their Nov-98 high and moving to their highest level since Apr-98.7. After the trend line breakout, there was a brief pullback to support from the trend line extension. The stock consolidated for a few weeks and then advanced further on increased volume again.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 78
  • 78. Rising Wedge (Reversal)The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices movehigher and the trading range narrows. In contrast to symmetrical triangles, which have no definitiveslope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.Even though this article will focus on the rising wedge as a reversal pattern, the pattern can also fitinto the continuation category. As a continuation pattern, the rising wedge will still slope up, but theslope will be against the prevailing downtrend. As a reversal pattern, the rising wedge will slope upand with the prevailing trend. Regardless of the type (reversal or continuation), rising wedges arebearish.1. Prior Trend: In order to qualify as a reversal pattern, there must be a prior trend to reverse. The rising wedge usually forms over a 3-6 month period and can mark an intermediate or long-term trend reversal. Sometimes the current trend is totally contained within the rising wedge; other times the pattern will form after an extended advance.2. Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line, ideally three. Each reaction high should be higher than the previous high.3. Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be higher than the previous low.4. Contraction: The upper resistance line and lower support line converge as the pattern matures. The advances from the reaction lows (lower support line) become shorter and shorter, which makes the rallies unconvincing. This creates an upper resistance line that fails to keep pace with the slope of the lower support line and indicates a supply overhang as prices increase.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 79
  • 79. 5. Support Break: Bearish confirmation of the pattern does not come until the support line is broken in a convincing fashion. It is sometimes prudent to wait for a break of the previous reaction low. Once support is broken, there can sometimes be a reaction rally to test the newfound resistance level.6. Volume: Ideally, volume will decline as prices rise and the wedge evolves. An expansion of volume on the support line break can taken as bearish confirmation.The rising wedge can be one of the most difficult chart patterns to accurately recognize and trade.While it is a consolidation formation, the loss of upside momentum on each successive high givesthe pattern its bearish bias. However, the series of higher highs and higher lows keeps the trendinherently bullish. The final break of support indicates that the forces of supply have finally won outand lower prices are likely. There are no measuring techniques to estimate the decline – otheraspects of technical analysis should be employed to forecast price targets.ANN provides a good example of the rising wedge as a reversal pattern that forms in the face ofweakening momentum and money flow.• Prior Trend: From a low around 10 in Oct-98, ANN surpassed 23 in less than 7 months. The final leg up was a sharp advance from below 15 in Feb. to 23.5 in mid-April.• Upper Resistance Line: The upper resistance line formed with three successively higher peaks.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 80
  • 80. • Lower Support Line: The lower support line formed with three successive higher lows.• Contraction: The upper resistance line and lower support line converged as the pattern matured. A visual assessment confirms that the slope of the lower support line is steeper than that of the upper resistance line. Less slope in the upper resistance line indicates that momentum is waning as the stock makes new highs.• Support Break: The stock hugged the support line for over a week before finally breaking with a sharp decline. The previous reaction low was broken a few days later with long black candlestick (red arrow).• Volume: Chaikin Money Flow turned negative in late April and was well below -10% when the support line was broken. There was an expansion of volume when the previous reaction low was broken.• Support from the April reaction low around 20 turned into resistance and the stock tested this level in early July before declining further.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 81
  • 81. Rounding Bottom (Reversal)The rounding bottom is a long-term reversal pattern that is best suited for weekly charts. It is alsoreferred to as a saucer bottom, and represents a long consolidation period that turns from abearish bias to a bullish bias.1. Prior Trend: In order to be a reversal pattern, there must be a prior trend to reverse. Ideally, the low of a rounding bottom will mark a new low or reaction low. In practice, there are occasions when the low is recorded many months earlier and the security trades flat before forming the pattern. When the rounding bottom does finally form, its low may not be the lowest low of the last few months.2. Decline: The first portion of the rounding bottom is the decline that leads to the low of the pattern. This decline can take on different forms: some are quite jagged with a number of reaction highs and lows, while others trade lower in a more linear fashion.3. Low: The low of the rounding bottom can resemble a "V bottom, but should not be too sharp and should take a few weeks to form. Because prices are in a long-term decline, the possibility of a selling climax exists that could create a lower spike.4. Advance: The advance off of the lows forms the right half of the pattern and should take about the same amount of time as the prior decline. If the advance is too sharp, then the validity of a rounding bottom may be in question.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 82
  • 82. 5. Breakout: Bullish confirmation comes when the pattern breaks above the reaction high that marked the beginning of the decline at the start of the pattern. As with most resistance breakouts, this level can become support. However, rounding bottoms represent long-term reversal and this new support level may not be that significant.6. Volume: In an ideal pattern, volume levels will track the shape of the rounding bottom: high at the beginning of the decline, low at the end of the decline and rising during the advance. Volume levels are not too important on the decline, but there should be an increase in volume on the advance and preferably on the breakout.A rounding bottom could be thought of as a head and shoulders bottom without readily identifiableshoulders. The head represents the low and is fairly central to the pattern. The volume patternsare similar and confirmation comes with a resistance breakout. While symmetry is preferable onthe rounding bottom, the left and right side do not have to be equal in time or slope. The importantthing is to capture the essence of the pattern.AMGN provides an example of a rounding bottom that formed after a long consolidation period.Throughout 1996, the stock traded in a tight range bound by 16.63 and 12.83. The trading rangecontinued the first half of 1997 and the stock broke support by falling to a low of 12 in August.• Prior Trend: With the break of support at 12.83, it appeared that a downtrend had begun. Even though the decline was not that sharp, the new reaction low represented a 52-week low. AMGN was clearly not in an uptrend.• Decline: The stock declined from 17 to a low of 11.22 and a pair of hammers formed in Oct-98 to mark the end of the decline (red arrow).Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 83
  • 83. • Low: Prior to the hammers, the stock traded around 12 for the previous 6 weeks. When the gap up with high volume followed the hammers, it appeared that a low had been formed. After a short rally, there was another test of the low and a higher low formed at 11.66.• Advance: From the second low at 11.66, the advance began in earnest and volume started to increase. In March, there was a large advance with the highest volume in 4 months (green arrow).• May-97 resistance at 17 represented the confirmation line for the pattern. The stock broke resistance in Jul-98 with a further expansion of volume. This breakout was also confirmed with a new high in OBV.• After breaking resistance, there was a test of support and the stock actually fell back below 17. The stock had advanced from 11.66 to 19.84 in 6 months and some sort of pullback could have been expected.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 84
  • 84. Triple Top (Reversal)The triple top is a reversal pattern made up of three equal highs followed by a break below support.In contrast to the triple bottom, triple tops usually form over a shorter time frame and typicallyrange from 3 to 6 months. Generally speaking, bottoms take longer to form than tops. We will firstexamine the individual parts of the pattern and then look at an example.1. Prior Trend: With any reversal pattern, there should be an existing trend to reverse. In the case of the triple top, an uptrend or long trading range should be in place. Sometimes there will be a definitive uptrend to reverse. Other times the uptrend will fade and become many months of sideways trading.2. Three Highs: All three highs should be reasonable equal, well spaced and mark significant turning points. The highs do not have to be exactly equal, but should be reasonably equivalent to each other.3. Volume: As the triple top develops, overall volume levels usually decline. Volume sometimes increases near the highs. After the third high, an expansion of volume on the subsequent decline and at the support break greatly reinforces the soundness of the pattern.4. Support Break: As with many other reversal patterns, the triple top is not complete until a support break. The lowest point of the formation, which would be the lowest of the intermittent lows, marks this key support level.5. Support Turns Resistance: Broken support becomes potential resistance, and there is sometimes a test of this newfound resistance level with a subsequent reaction rally.6. Price Target: The distance from the support break to highs can be measured and subtracted from the support break for a price target. The longer the pattern develops, the more significant is the ultimate break. Triple tops that are 6 or more months old represent major tops and a price target is less likely to be effective.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 85
  • 85. Throughout the development of the triple top, it can start to resemble a number of patterns. Beforethe third high forms, the pattern may look like a double top. Three equal highs can also be found inan ascending triangle or rectangle. Of these patterns mentioned, only the ascending triangle hasbullish overtones; the others are neutral until a break occurs. In this same vein, the triple topshould also be treated as a neutral pattern until a breakout occurs. The inability to break aboveresistance is bearish, but the bears have not won the battle until support is broken. Volume on thelast decline off resistance can sometimes yield a clue. If there is a sharp increase in volume andmomentum, then the chances of a support break increase.When looking for patterns, it is important to keep in mind that technical analysis is more art andless science. Pattern interpretations should be fairly specific, but not overly exacting as to obstructthe spirit of the pattern. A pattern may not fit the description to the letter, but that should not detractfrom its robustness. For example: it can be difficult to find a triple top with three highs that areexactly equal. However, if the highs are within reasonable proximity and other aspects of thetechnical analysis picture jibe, it would embody the spirit of a triple top. The spirit is three attemptsat resistance, followed by a breakdown below support, with volume confirmation. ROK illustratesan example of a triple top that does not fit exactly, but captures the spirit of the pattern.• The stock was in an uptrend and remained above the trend line extending up from Oct-98 until the break in late August 1999.• Over a period of about 4 months, the stock bounced off resistance around 23. The first attempt happened in May, the second in July and the third in August.• The decline from the third high broke trend line support and the stock continued to fall past support from the previous lows. Triple top support should be drawn from the lowest low of the pattern, which would be the May low around 19.80.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 86
  • 86. • Volume expanded after the stock broke trend line support. The stock paused for a few days when support at 19.80 was reached, but volume accelerated when this support level was broken in late September (gray dotted vertical line). In addition, the Chaikin Money Flow turned negative and broke below -10%.• After the support break, there was a test of the newfound resistance a few weeks later. Money flows continued to indicate selling pressure and volume expanded when the stock began to fall again.• The projected decline was 3.2 points, from 19.80 down to 16.60, and the stock reached this target soon after the resistance test.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 87
  • 87. Triple Bottom (Reversal)The triple bottom is a reversal pattern made up of three equal lows followed by a breakout aboveresistance. While this pattern can form over just a few months, it is usually a long-term pattern thatcovers many months. Because of its long-term nature, weekly charts can be best suited foranalysis. We will first examine the individual parts of the pattern and then look at an example.1. Prior Trend: With any reversal pattern, there should be an existing trend to reverse. In the case of the triple bottom, a downtrend or long trading range should be in place. Sometimes there will be a definitive downtrend to reverse. Other times the downtrend will fade away after many months of sideways trading.2. Three Lows: All three lows should be reasonable equal, well spaced and mark significant turning points. The lows do not have to be exactly equal, but should be reasonably equivalent.3. Volume: As the triple bottom develops, overall volume levels usually decline. Volume sometimes increases near the lows. After the third low, an expansion of volume on the advance and at the resistance breakout greatly reinforces the soundness of the pattern.4. Resistance Break: As with many other reversal patterns, the triple bottom is not complete until a resistance breakout. The highest point of the formation, which would be the highest of the intermittent highs, marks resistance.5. Resistance Turns Support: Broken resistance becomes potential support, and there is sometimes a test of this newfound support level with the first correction. Because the triple bottom is a long-term pattern, the test of newfound support may occur many months later.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 88
  • 88. 6. Price Target: The distance from the resistance breakout to lows can be measured and added to the resistance break for a price target. The longer the pattern develops, the more significant is the ultimate breakout. Triple bottoms that are 6 or more months in duration represent major bottoms and a price target is less likely to be effective.As the triple bottom develops, it can start to resemble a number of patterns. Before the third lowforms, the pattern may look like a double bottom. Three equal lows can also be found in adescending triangle or rectangle. Of these patterns mentioned, only the descending triangle hasbearish overtones; the others are neutral until a breakout occurs. Similarly, the triple bottom shouldalso be treated as a neutral pattern until a breakout occurs. The ability to hold support is bullish,but demand has not won the battle until resistance is broken. Volume on the last advance cansometimes yield a clue. If there is a sharp increase in volume and momentum, then the chances ofa breakout increase.After a failed double bottom breakout, ANDW formed a large triple bottom. While the new reactionhigh (black arrow) and potential double bottom breakout seemed bullish, the stock subsequentlyfell back to support.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 89
  • 89. • Technically, the downtrend ended when the stock formed a higher low in Mar-99 and surpassed its Jan-99 high by closing above 20 in Jul-99 (black arrow). Even though the downtrend ended, it would have been difficult to label the trend bullish after the third test of support around 11.• Over a 13-month timeframe, three relatively equal lows formed in Oct-98, Mar-99 and Nov-99. When the Jul-00 high surpassed the Jan-99 high, the possibility of a rectangle pattern was ruled out.• Resistance at 22 1/2 was broken in Jan-00. The stock closed above this key level for 5 consecutive weeks to confirm the breakout.• Even though volume expanded near the second and third lows, the 10-day EMA of volume declined between the lows. The advance off the third low saw a dramatic expansion of volume that lasted many weeks. The Accumulation/Distribution Line formed a positive divergence in 1999 and broke to new highs with the stock in Jan-00.• After the resistance break, the stock fell below 22 1/2 twice over the next 2 months. Based on the Feb-00 and Apr-00 lows, a new support level was established at 20 and. Because upside movement was limited after the breakout (a high of 25 1/2), a pullback below 22 1/2 might have been expected. Based on Oct-99 resistance, critical support could have been marked at 18 1/2.• ANDW built a base over a 13-month period. Even though the height of the pattern is relatively impressive, it pales in comparison to the length of the base. The length of this pattern and subsequent breakout suggest a long-term change of sentiment.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 90
  • 90. Bump and Run Reversal (Reversal)As the name implies, the Bump and Run Reversal (BARR) is a reversal pattern that forms afterexcessive speculation drives prices up too far, too fast. Developed by Thomas Bulkowski, thepattern was introduced in the June-97 issue of Technical Analysis of Stocks and Commodities andalso included in his recently published book, the Encyclopedia of Chart Patterns.The pattern was originally named the Bump and Run Formation, or BARF. Bulkowski decided thatWall Street was not ready for such an acronym and changed the name to Bump and Run Reversal.Bulkowski identified three main phases to the pattern: lead-in, bump and run. We will examinethese phases and also look at volume and pattern validation.1. Lead-in Phase: The first part of the pattern is a lead-in phase that can last 1 month or longer and forms the basis from which to draw the trend line. During this phase, prices advance in an orderly manner, and there is no excess speculation. The trend line should be moderately steep. If it is too steep, then the ensuing bump is unlikely to be significant enough. If the trend line is not steep enough, then the subsequent trend line break will occur too late. Bulkowski advises that an angle of 30 to 45 degrees is preferable. The size of the angle will depend on the scaling (semi-log or arithmetic) and the size of the chart. It is probably easier to judge the soundness of the trend line with a visual assessment.2. Bump Phase: The bump forms with a sharp advance, and prices move further away from the lead-in trend line. Ideally, the angle of the trend line from the bumps advance should be about 50% greater than the angle of the trend line extending up from the lead-in phase. Roughly speaking, this would call for an angle between 45 and 60 degrees. If it is not possible to measure the angles, then a visual assessment will suffice.3. Bump Validity: It is important that the bump represent a speculative advance that cannot be sustained for a long time. Bulkowski developed what he calls an "arbitrary" measuring technique to validate the level of speculation in the bump. The distance from the highest high of the bump to the lead-in trend line should be at least twice the distance from the highest high in the lead-in phase to the lead-in trend line. These distances can be measured by drawing a vertical line from the highest highs to the lead-in trend line. An example is provided below.4. Bump Rollover: After speculation dies down, prices begin to peak and a top forms. Sometimes, a small double top or a series of descending peaks forms. Prices begin to decline towards the lead-in trend line, and the right side of the bump forms.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 91
  • 91. 5. Volume: As the stock advances during the lead-in phase, volume is usually average and sometimes low. When the speculative advance begins to form the left side of the bump, volume expands as the advance accelerates.6. Run Phase: The run phase begins when the pattern breaks support from the lead-in trend line. Prices will sometimes hesitate or bounce off the trend line before breaking through. Once the break occurs, the run phase takes over, and the decline continues.7. Support Turns Resistance: After the trend line is broken, there is sometimes a retracement that tests the newfound resistance level. Potential support-turned-resistance levels can also be identified from the reaction lows within the bump.The Bump and Run Reversal pattern can be applied to daily, weekly or monthly charts. As statedabove, the pattern is designed to identify speculative advances that are unsustainable for a longperiod. Because prices rise very fast to form the left side of the bump, the subsequent decline canbe just as ferocious.Level Three Communications (LVLT) formed a Bump and Run Reversal pattern after pricesadvanced in a speculative frenzy at the beginning of 2000. Prices advanced from 72 to 132 in 2months and this advance ultimately proved unsustainable.• The lead-in phase formed over a 3 month period from early Oct-99 to early Jan-00. Volume during this phase was relatively subdued, and actually declined during the November and December advance.• The trend line extending up from the lead-in phase lows formed a 34 degree angle. A visual assessment also reveals that this trend line is neither too steep nor too flat.• The bump phase began in early January when the advance accelerated with a large increase in volume. A conservatively drawn trend line formed a 51 degree angle that was exactly 50% larger than the angle from the lead-in trend line.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 92
  • 92. • The distance from the lead-in phases highest high to the trend line. was 13. The distance from the Bump Phases highest high to the trend line was 38. This is almost three times larger, and validates the speculative excesses in the bump.• After reaching a high around 132, prices declined sharply, and bounced off the lead-in trend line. A lower high formed around 115 (red arrow), and the trend line was soon broken.• The decline continued after the trend line break, and reached 67 before a reaction rally began. The reaction rally advanced to around 95, but fell just short of the horizontal support line before falling back to new lows.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 93
  • 93. Flag, Pennant (Continuation)Flags and Pennants are short-term continuation patterns that mark a small consolidation beforethe previous move resumes. These patterns are usually preceded by a sharp advance or declinewith heavy volume, and mark a mid-point of the move.1. Sharp Move: To be considered a continuation pattern, there should be evidence of a prior trend. Flags and pennants require evidence of a sharp advance or decline on heavy volume. These moves usually occur on heavy volume and can contain gaps. This move usually represents the first leg of a significant advance or decline and the flag/pennant is merely a pause.2. Flagpole: The flagpole is the distance from the first resistance or support break to the high or low of the flag/pennant. The sharp advance (or decline) that forms the flagpole should break a trend line or resistance/support level. A line extending up from this break to the high of the flag/pennant forms the flagpole.3. Flag: A flag is a small rectangle pattern that slopes against the previous trend. If the previous move was up, then the flag would slope down. If the move was down, then the flag would slope up. Because flags are usually too short in duration to actually have reaction highs and lows, the price action just needs to be contained within two parallel trend lines.4. Pennant: A pennant is a small symmetrical triangle that begins wide and converges as the pattern matures (like a cone). The slope is usually neutral. Sometimes there will not be specific reaction highs and lows from which to draw the trend lines and the price action should just be contained within the converging trend lines.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 94
  • 94. 5. Duration: Flags and pennants are short-term patterns that can last from 1 to 12 weeks. There is some debate on the timeframe and some consider 8 weeks to be pushing the limits for a reliable pattern. Ideally, these patterns will form between 1 and 4 weeks. Once a flag becomes more than 12 weeks old, it would be classified as a rectangle. A pennant more than 12 weeks old would turn into a symmetrical triangle. The reliability of patterns that fall between 8 and 12 weeks is debatable.6. Break: For a bullish flag or pennant, a break above resistance signals that the previous advance has resumed. For a bearish flag or pennant, a break below support signals that the previous decline has resumed.7. Volume: Volume should be heavy during the advance or decline that forms the flagpole. Heavy volume provides legitimacy for the sudden and sharp move that creates the flagpole. An expansion of volume on the resistance (support) break lends credence to the validity of the formation and the likelihood of continuation.8. Targets: The length of the flagpole can be applied to the resistance break or support break of the flag/pennant to estimate the advance or decline.Even though flags and pennants are common formations, identification guidelines should not betaken lightly. It is important that flags and pennants are preceded by a sharp advance or decline.Without a sharp move, the reliability of the formation becomes questionable and trading couldcarry added risk. Look for volume confirmation on the initial move, consolidation and resumption toaugment the robustness of pattern identification.HWP provides an example of a flag that forms after a sharp and sudden advance.• Sharp Move: After consolidating for three months, HWP broke above resistance at 28 to begin a sharp advance. The 5-April high and 16-Feb trend line marked resistance and the breakout occurred with a volume expansion. The stock advanced from 28 to 38 in a mere 4 weeks. (Note: It is also possible that a small pennant formed in early May with resistance around 31).Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 95
  • 95. • Flagpole: The distance from the breakout at 28 to the flags high at 38 formed the flagpole.• Flag: Price action was contained within two parallel trend lines that sloped down.• Duration: From a high at 38 to the breakout at 36, the flag formed over a 23-day period.• Breakout: The first break above the flags upper trend line occurred on 21-June without an expansion of volume. However, the stock gapped up a week later and closed strong with above-average volume (red arrows)• Volume: To recap - volume expanded on the sharp advance to form the flagpole, contracted during the flags formation and expanded right after the resistance breakout.• Targets: The length of the flagpole measured 10 points and was applied to the resistance breakout at 36 to project a target of 46.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 96
  • 96. Symmetrical Triangle (Continuation)The symmetrical triangle, which can also be referred to as a coil, usually forms during a trend as acontinuation pattern. The pattern contains at least two lower highs and two higher lows. Whenthese points are connected, the lines converge as they are extended and the symmetrical triangletakes shape. You could also think of it as a contracting wedge, wide at the beginning andnarrowing over time.While there are instances when symmetrical triangles mark important trend reversals, they moreoften mark a continuation of the current trend. Regardless of the nature of the pattern, continuationor reversal, the direction of the next major move can only be determined after a valid breakout. Wewill examine each part of the symmetrical triangle individually, and then provide an example withConseco.1) Trend: In order to qualify as a continuation pattern, an established trend should exist. The trend should be at least a few months old and the symmetrical triangle marks a consolidation period before continuing after the breakout.2) Four (4) Points: At least 2 points are required to form a trend line and 2 trend lines are required to form a symmetrical triangle. Therefore, a minimum of 4 points are required to begin considering a formation as a symmetrical triangle. The second high (2) should be lower than the first (1) and the upper line should slope down. The second low (2) should be higher than the first (1) and the lower line should slope up. Ideally, the pattern will form with 6 points (3 on each side) before a breakout occurs.3) Volume: As the symmetrical triangle extends and the trading range contracts, volume should start to diminish. This refers to the quiet before the storm, or the tightening consolidation before the breakout.4) Duration: The symmetrical triangle can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a pennant. Typically, the time duration is about 3 months.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 97
  • 97. 5) Breakout Time Frame: The ideal breakout point occurs 1/2 to 3/4 of the way through the patterns development or time-span. The time-span of the pattern can be measured from the apex (convergence of upper and lower lines) back to the beginning of the lower trend line (base). A break before the 1/2 way point might be premature and a break too close to the apex may be insignificant. After all, as the apex approaches, a breakout must occur sometime.6) Breakout Direction: The future direction of the breakout can only be determined after the break has occurred. Sound obvious enough, but attempting to guess the direction of the breakout can be dangerous. Even though a continuation pattern is supposed to breakout in the direction of the long-term trend, this is not always the case.7) Breakout Confirmation: For a break to be considered valid, it should be on a closing basis. Some traders apply a price (3% break) or time (sustained for 3 days) filter to confirm validity. The breakout should occur with an expansion in volume, especially on upside breakouts.8) Return to Apex: After the breakout (up or down), the apex can turn into future support or resistance. The price sometimes returns to the apex or a support/resistance level around the breakout before resuming in the direction of the breakout.9) Price Target: There are two methods to estimate the extent of the move after the breakout. First, the widest distance of the symmetrical triangle can be measured and applied to the breakout point. Second, a trend line can be drawn parallel to the patterns trend line that slopes (up or down) in the direction of the break. The extension of this line will mark a potential breakout target.Edwards and Magee suggest that roughly 75% of symmetrical triangles are continuation patternsand the rest mark reversals. The reversal patterns can be especially difficult to analyze and oftenhave false breakouts. Even so, we should not anticipate the direction of the breakout, but ratherwait for it to happen. Further analysis should be applied to the breakout by looking for gaps,accelerated price movements, and volume for confirmation. Confirmation is especially importantfor upside breakouts.Prices sometimes return to the breakout point of apex on a reaction move before resuming in thedirection of the breakout. This return can offer a second chance to participate with a better rewardto risk ratio. Potential reward price targets found by measurement and parallel trend line extensionare only meant to act as rough guidelines. Technical analysis is dynamic and ongoing assessmentis required. In the first example above, SUNW may have fulfilled its target (42) in a few months, butthe stock gave no sign of slowing down and advanced above 100 in the following months.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 98
  • 98. Conseco (CNCEQ) formed a rather large symmetrical triangle over a 5-month period beforebreaking out on the downside.• The stock declined from 50 in Mar-98 to 22 in Oct-98 before beginning to firm and consolidate. The low at 22 probably was an over-reaction, but the long-term trend was down and established for almost a year.• After the first 4 points formed, the lines of the symmetrical triangle were draw. The stock traded within the boundaries for another 2 months to form the last 2 points.• After the gap up from point 3 to point 4, volume slowed over the next few months. There was some increase in volume in late June, but the 60-day SMA remained in a downtrend as the pattern took shape.• The red square marks the ideal breakout time-span from 50% to 75% of the pattern. The breakout occurred a little over 2 weeks later, but proved valid nonetheless. While it is preferable to have an ideal pattern develop, it is also quite rare.• After points 5 and 6 formed, the price action moved to the lower boundary of the pattern. Even at this point, the direction of the breakout was still a guess and its was prudent to wait. The break occurred with an increase in volume and accelerated price decline. Chaikin Money Flow declined past -30% and volume exceeded the 60-day SMA for an extended period.• After the decline from 29 1/2 to 25 1/2, the stock rebounded, but failed to reach potential resistance from the apex. The weakness of the reaction rally foreshadowed the sharpness of the decline that followed.• The widest point on the pattern extended 10 1/2 points. With a break of support at 29 1/2, the measured decline was estimated to around 19. By drawing a trend line parallel to the upper boundary of the pattern, the extension estimates a decline to around 20.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 99
  • 99. Ascending Triangle (Continuation)The ascending triangle is a bullish formation that usually forms during an uptrend as a continuationpattern. There are instances when ascending triangles form as reversal patterns at the end of adowntrend, but they are typically continuation patterns. Regardless of where they form, ascendingtriangles are bullish patterns that indicate accumulation.Because of its shape, the pattern can also be referred to as a right-angle triangle. Two or moreequal highs form a horizontal line at the top. Two or more rising troughs form an ascending trendline that converges on the horizontal line as it rises. If both lines were extended right, theascending trend line could act as the hypotenuse of a right triangle. If a perpendicular line weredrawn extending down from the left end of the horizontal line, a right triangle would form. Letsexamine each individual part of the pattern and then look at an example.1. Trend: In order to qualify as a continuation pattern, an established trend should exist. However, because the ascending triangle is a bullish pattern, the length and duration of the current trend is not as important as the robustness of the formation, which is paramount.2. Top Horizontal Line: At least 2 <gl reaction high>reaction highs<gl> are required to form the top horizontal line. The highs do not have to be exact, but they should be within reasonable proximity of each other. There should be some distance between the highs, and a reaction low between them.3. Lower Ascending Trend Line: At least two reaction lows are required to form the lower ascending trend line. These reaction lows should be successively higher, and there should be some distance between the lows. If a more recent reaction low is equal to or less than the previous reaction low, then the ascending triangle is not valid.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 100
  • 100. 4. Duration: The length of the pattern can range from a few weeks to many months with the average pattern lasting from 1-3 months.5. Volume: As the pattern develops, volume usually contracts. When the upside breakout occurs, there should be an expansion of volume to confirm the breakout. While volume confirmation is preferred, it is not always necessary.6. Return to Breakout: A basic tenet of technical analysis is that resistance turns into support and vice versa. When the horizontal resistance line of the ascending triangle is broken, it turns into support. Sometimes there will be a return to this support level before the move begins in earnest.7. Target: Once the breakout has occurred, the price projection is found by measuring the widest distance of the pattern and applying it to the resistance breakout.In contrast to the symmetrical triangle, an ascending triangle has a definitive bullish bias before theactual breakout. If you will recall, the symmetrical triangle is a neutral formation that relies on theimpending breakout to dictate the direction of the next move. On the ascending triangle, thehorizontal line represents overhead supply that prevents the security from moving past a certainlevel. It is as if a large sell order has been placed at this level and it is taking a number of weeks ormonths to execute, thus preventing the price from rising further. Even though the price cannot risepast this level, the reaction lows continue to rise. It is these higher lows that indicate increasedbuying pressure and give the ascending triangle its bullish bias.Primus Telecom (PRTL) formed an ascending triangle over a 6-month period before breakingresistance with an expansion of volume.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 101
  • 101. • From a low of 8.88 in April, the stock established an uptrend by forming a higher low at 8.94 and advancing to a new reaction high early June. (The beginning of the trend is not included on this chart.) After recording its highest price in 10 months, the stock met resistance at 24.• In June, the stock hit resistance at 23 a number of times and then again at 24 in July. The stock bounced off 24 at least three times in 5 months to form the horizontal resistance line. It was as if portions of a large block were being sold each time the stock neared 24.• The reaction lows were progressively higher, and formed an ascending trend line. The first low in May, 1999, occurred with a large spike down to 12.25, but the trend line was drawn to connect the prices grouped around 14. The ascending trend line could have been drawn to start at 12.25 and this version is shown with the gray trend line. The important thing is that there are at least two distinct reaction lows that are consecutively higher.• The duration of the pattern is around 6 months, which may seem a bit long. However, all the key ingredients for a robust pattern were in place.• Volume declined from late June until early October. There was a huge expansion when the stock fell from 23.44 (point 6) to 19.38 on two heavy trading days in October. However, this was only for two days and the stock found support around 20 to form a higher low. In keeping with the ideal pattern, the next expansion of volume occurred in early November when the stock broke resistance at 24. The stock traded at above average volume 7 of the 10 days surrounding the breakout, and all 7 were up days. Chaikin Money Flow dragged a bit from the two heavy down days, but recovered to +20% five days after the breakout.• The stock advanced to 30.75 before pulling back to around 26. Support was found above the original resistance breakout, and this indicated underlying strength in the stock.• The initial advance was projected to be 10 (24 -14 = 10) points from the breakout at 24, making a target of 34. This target was reached within 2 months, but the stock didnt slow down until reaching 50 in March (not shown). Targets are only meant to be used as guidelines, and other aspects of technical analysis should also be employed for deciding when to sell.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 102
  • 102. Descending Triangle (Continuation)The descending triangle is a bearish formation that usually forms during a downtrend as acontinuation pattern. There are instances when descending triangles form as reversal patterns atthe end of an uptrend, but they are typically continuation patterns. Regardless of where they form,descending triangles are bearish patterns that indicate distribution.Because of its shape, the pattern can also be referred to as a right-angle triangle. Two or morecomparable lows form a horizontal line at the bottom. Two or more declining peaks form adescending trend line above that converges with the horizontal line as it descends. If both lineswere extended right, the descending trend line could act as the hypotenuse of a right triangle. If aperpendicular line were drawn extending up from the left end of the horizontal line, a right trianglewould form. Lets examine each individual part of the pattern and then look at an example.1. Trend: In order to qualify as a continuation pattern, an established trend should exist. However, because the descending triangle is definitely a bearish pattern, the length and duration of the current trend is not as important. The robustness of the formation is paramount.2. Lower Horizontal Line: At least 2 reaction lows are required to form the lower horizontal line. The lows do not have to be exact, but should be within reasonable proximity of each other. There should be some distance separating the lows and a reaction high between them.3. Upper Descending Trend Line: At least two reaction highs are required to form the upper descending trend line. These reaction highs should be successively lower and there should be some distance between the highs. If a more recent reaction high is equal to or greater than the previous reaction high, then the descending triangle is not valid.4. Duration: The length of the pattern can range from a few weeks to many months, with the average pattern lasting from 1-3 months.5. Volume: As the pattern develops, volume usually contracts. When the downside break occurs, there would ideally be an expansion of volume for confirmation. While volume confirmation is preferred, it is not always necessary.6. Return to Breakout: A basic tenet of technical analysis is that broken support turns into resistance and visa versa. When the horizontal support line of the descending triangle is broken, it turns into resistance. Sometimes there will be a return to this newfound resistance level before the down move begins in earnest.7. Target: Once the breakout has occurred, the price projection is found by measuring the widest distance of the pattern and subtracting it from the resistance breakout.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 103
  • 103. In contrast to the symmetrical triangle, a descending triangle has a definite bearish bias before theactual break. The symmetrical triangle is a neutral formation that relies on the impending breakoutto dictate the direction of the next move. For the descending triangle, the horizontal line representsdemand that prevents the security from declining past a certain level. It is as if a large buy orderhas been placed at this level and it is taking a number of weeks or months to execute, thuspreventing the price from declining further. Even though the price does not decline past this level,the reaction highs continue to decline. It is these lower highs that indicate increased sellingpressure and give the descending triangle its bearish bias.After recording a lower high just below 60 in Dec-99, Nucor formed a descending triangle earlyin 2000. In late April, the stock broke support with a gap down, sharp break and increase in volumeto complete the formation.• The stock declined from above 60 to the low 40s before finding some support and mounting a reaction rally. The rally stalled just below 50 and a series of lower reaction highs began to form. The long-term trend was down and the resulting pattern was classified as continuation.• Support at 45 was first established with a bounce in February. After that, the stock touched this level two more times before breaking down. After the second touch in March (about a month later), the lower support line was drawn.• After each bounce off support, a lower high formed. The reaction highs at points 2,4 and 6 formed the descending trend line to mark the potential descending triangle pattern. I say potential because the pattern is not complete until support is broken.• The duration of the pattern was a little less than 3 months.• The last touch of support at 45 occurred in late April. The stock spiked down through support, but managed to close above this key level. The final break occurred a few days later with a gap down, a considerable black candlestick and an expansion in volume. The way support isVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 104
  • 104. broken can offer insight into the general weakness of a security. This was not a slight break, but a rather convincing break. Volume jumped to the highest level in many months and money flows broke below -10%.• After falling from 45 to 41, the stock mounted a feeble reaction rally that only lasted three days and produced two candlesticks with long upper shadows. Sometimes there is a test of the newfound resistance level, and sometimes there isnt. A weak test of support can indicate acute selling pressure.• The initial decline was projected to be 9 points (54 -45 = 9). If this is subtracted from the support break at 45, the downside projection is to around 36. Even though the stock exceeded this target in late June, recent strength has brought it back near 36. Targets are only meant to be used as guidelines and other aspects of technical analysis should also be employed for deciding when to cover a short or buy.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 105
  • 105. Rectangle (Continuation)A Rectangle is a continuation pattern that forms as a trading range during a pause in the trend.The pattern is easily identifiable by two comparable highs and two comparable lows. The highsand lows can be connected to form two parallel lines that make up the top and bottom of arectangle. Rectangles are sometimes referred to as trading ranges, consolidation zones orcongestion areas.There are many similarities between the rectangle and the symmetrical triangle. While both areusually continuation patterns, they can also mark trend significant tops and bottoms. As with thesymmetrical triangle, the rectangle pattern is not complete until a breakout has occurred.Sometimes clues can be found, but the direction of the breakout is usually not determinablebeforehand. We will examine each part of the rectangle and then provide an example with MU.1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation.2. Four (4) Points: At least two equivalent reaction highs are required to form the upper resistance line and two equivalent reaction lows to form the lower support line. They do not have to be exactly equal, but should be within a reasonable proximity. Although not a prerequisite, it is preferable that the highs and lows alternate.3. Volume: As opposed to the symmetrical triangle, rectangles do not exhibit standard volume patterns. Sometimes volume will decline as the pattern develops. Other times volume will gyrate as the prices bounce between support and resistance. Rarely will volume increase as the pattern matures. If volume declines, it is best to look for an expansion on the breakout for confirmation. If volume gyrates, it is best to assess which movements (advances to resistanceVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 106
  • 106. or declines to support) are receiving the most volume. This type of volume assessment could offer an indication on the direction of the future breakout.4. Duration: Rectangles can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a flag, also a continuation pattern. Ideally, rectangles will develop over a 3-month period. Generally, the longer the pattern, the more significant the breakout. A 3-month pattern might be expected to fulfill its breakout projection. However, a 6- month pattern might be expected to exceed its breakout target.5. Breakout Direction: The direction of the next significant move can only be determined after the breakout has occurred. As with the symmetrical triangle, rectangles are neutral patterns that are dependent on the direction of the future breakout. Volume patterns can sometimes offer clues, but there is no confirmation until an actual break above resistance or break below support.6. Breakout Confirmation: For a breakout to be considered valid, it should be on a closing basis. Some traders apply a filter to price (3%), time (3 days) or volume (expansion) for confirmation.7. Return to Breakout: A basic tenet of technical analysis is that broken support turns into potential resistance and visa versa. After a break above resistance (below support), there is sometimes a return to test this newfound support level (resistance level). (For more detail, see this article on support and resistance.) A return to or near the original breakout level can offer a second chance to participate.8. Target: The estimated move is found by measuring the height of the rectangle and applying it to the breakout.Rectangles represent a trading range that pits the bulls against the bears. As the price nearssupport, buyers step in and push the price higher. As the price nears resistance, bears take overand force the price lower. Nimble traders sometimes play these bounces by buying near supportand selling near resistance. One group (bulls or bears) will exhaust itself and a winner will emergewhen there is a breakout. Again, it is important to remember that rectangles have a neutral bias.Even though clues can sometimes be gleaned from volume patterns, the actual price actiondepicts a market in conflict. Only until the price breaks above resistance or below support will it beclear which group has won the battle.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 107
  • 107. In the summer of 1999, Micron Electronics (MU) advanced from the high teens to the low forties.After meeting resistance around 42, the stock settled in a trading range between 40 and 30 to forma rectangle.• The prior intermediate trend was established as bullish by the advance from the high teens to the low forties. However, it was unclear at the time if this trading range would be a reversal or a continuation pattern. The horizontal resistance line at 40 can be extended back to the Feb- 99 high and marked a serious resistance level.• The red resistance line at 40 was formed with three reaction highs. The first reaction high may be a bit suspect, but the second two are robust. The parallel support line at 30 was touched three times and established a solid support level. After the high at point 5 was reached, the rectangle was valid.• As the pattern developed, volume fluctuated and there was no clear indication (bullish or bearish break) until mid-February. The first bullish clue came when the stock declined from 38 to 31 and Chaikin Money Flow failed to move below -10%. Money flows held steady throughout the decline and turned positive as soon as the stock turned back up. By the time the stock reached 39 3/4 (surpassing its previous reaction high in the process), CMF was at +20%. Also notice the strength behind the advance after a higher low.• The duration of the pattern was 5 months. Due to long-term overhead resistance at 40, the pattern needed more time to consolidate before a breakout. The longer consolidation made for bigger expectations after the breakout.• The breakout occurred with a large expansion in volume and a huge moved above resistance.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 108
  • 108. • After the breakout, there was a slight pullback to around 46, but the volume behind the advance indicated a huge breakout. Stocks do not always return to the point of breakout. In the example above, LMT makes a classic return to the breakout. The set up and strength behind the breakout should be assessed to determine the possibility of a second chance opportunity.• The target advance of this breakout was 10 points, which was the width of the pattern. However, judging from the duration and strength of the breakout, expansion of volume and new all-time highs, it was apparent that this was no ordinary breakout. Therefore an ordinary target was useless! After an initial advance as high as 55 13/16, the stock pulled back to 46 and then moved above 70. Another trading range subsequently developed with resistance in the low 70s and support in the upper 40s.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 109
  • 109. Price Channel (Continuation)A price channel is a continuation pattern that slopes up or down and is bound by an upper andlower trend line. The upper trend line marks resistance and the lower trend line marks support.Price channels with negative slopes (down) are considered bearish and those with positive slopes(up) bullish. For explanatory purposes, a "bullish price channel" will refer to a channel with positiveslope and a "bearish price channel" to a channel with negative slope.1. Main Trend Line: It takes at least two points to draw the main trend line. This line sets the tone for the trend and the slope. For a bullish price channel, the main trend line extends up and at least two reaction lows are required to draw it. For a bearish price channel, the main trend line extends down and at least two reaction highs are required to draw it.2. Channel Line: The line drawn parallel to the main trend line is called the channel line. Ideally, the channel line will be based off of two reaction highs or lows. However, after the main trend line has been established, some analysts draw the parallel channel line using only one reaction high or low. The channel line marks support in a bearish price channel and resistance in a bullish price channel.3. Bullish Price Channel: As long as prices advance and trade within the channel, the trend is considered bullish. The first warning of a trend change occurs when prices fall short of channel line resistance. A subsequent break below main trend line support would provide further indication of a trend change. A break above channel line resistance would be bullish and indicate an acceleration of the advance.4. Bearish Price Channel: As long as prices decline and trade within the channel, the trend is considered bearish. The first warning of a trend change occurs when prices fail to reach channel line support. A subsequent break above main trend line resistance would provide further indication of a trend change. A break below channel line support would be bearish and indicate an acceleration of the decline.5. Scaling: Even though it is a matter of personal preference, trend lines seem to match reaction highs and lows best when semi-log scales are used. Semi-log scales reflect price movements in percentage terms. A move from 50 to 100 will appear the same distance as a move from 100 to 200.In a bullish price channel, some traders look to buy when prices reach main trend line support.Conversely, some traders look to sell (or short) when prices reach main trend line resistance in aVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 110
  • 110. bearish price channel. As with most price patterns, other aspects of technical analysis should beused to confirm signals.Because technical analysis is just as much art as it is science, there is room for flexibility. Eventhough exact trend line touches are ideal, it is up to each individual to judge the relevance andplacement of both the main trend line and the channel line. By that same token, a channel line thatis exactly parallel to the main trend line is ideal.CSCO provides an example of an 11-month bullish price channel that developed in 1999.• Main Trend Line: The January, February and March reaction lows formed the beginning of the main trend line. Subsequent lows in April, May and August confirmed the main trend line.• Channel Line: Once the main trend line was in place, the channel line beginning from the January high was drawn. A visual assessment reveals that these trend lines look parallel. More precise analysts may want to test the slope of each line, but a visual inspection is usually enough to ensure the "essence" of the pattern.• Bullish Price Channel: Subsequent touches along the main trend line offered good buying opportunities in mid April, late May and mid August.• The stock did not reach channel line resistance until July (red arrow) and this marked a significant reaction high.• The September high (blue arrow) fell short of channel line resistance, but only by a small margin that was probably insignificant.• The break above channel line resistance in Dec-99 marked an acceleration of the advance. Some analysts might consider the stock overextended after this move, but the advance was powerful and the trend never turned bearish. Price channels will not last forever, but the underlying trend remains in place until proved otherwise.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 111
  • 111. Measured Move - Bullish (Continuation)The Measured Move is a three-part formation that begins as a reversal pattern and resumes as acontinuation pattern. The Bullish Measured Move consists of a reversal advance,correction/consolidation and continuation advance. Because the Bullish Measured Move cannot beproperly identified until after the correction/consolidation period, it is categorized as a continuationpattern. The pattern is usually long-term and forms over several months.1. Prior Trend: For the first advance to qualify as a reversal, there must be evidence of a prior downtrend to reverse. Because the Bullish Measured Move can occur as part of a larger advance, the length and severity of the prior decline may vary from a few weeks to many months.2. Reversal Advance: The first advance usually begins near the established lows of the previous decline and extends for a few weeks or many months. Sometimes a reversal pattern can mark the initial trend change. Other times the new uptrend is established by new reaction highs or a break above resistance. Ideally, the advance is fairly orderly and lengthy with a series of rising peaks and troughs that may form a price channel. Less erratic advances are satisfactory, but run the risk of forming a different pattern.3. Consolidation/Correction: After an extended advance, some sort of consolidation or correction can be expected. As a consolidation, there could be a continuation pattern such as a rectangle or ascending triangle. As a correction, there could be 33% to 67% retracement of the previous advance and the possible patterns include a large downward-sloping flag or falling wedge. Generally speaking, the bigger the advance, the bigger the correction. A 100% advance may see a 62% correction and a 50% advance may see only a 33% correction.4. Continuation Advance - Length: The distance from the low to the high of the first advance can be applied to the low of the consolidation/retracement to estimate a projected advance. Some technicians like to measure by points, others in percentage terms. If the first advance was from 30 to 50 (20 points) and the consolidation/correction was to 40, then 60 would be the target of the second advance (50 - 30 = 20 : 40 + 20 = 60). For those who prefer percentages: if the first advance was from 30 to 50 (66%) and the consolidation/correction was to 40, then 66.40 would be the target of the second advance (40 X 66% = 26.40 : 40 + 26.40 = 66.40).Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 112
  • 112. The decision of which method to use will depend on the individual security and your analysis style.5. Continuation Advance - Entry: If the consolidation/correction is made up of a continuation pattern, then second leg entry points can be identified using the normal breakout rules. However, if there is no readily identifiable pattern, then some other continuation breakout signal must be sought. In this case, much will depend on your trading style, objectives, risk tolerance and time horizon. One method might be to measure potential retracements (33%, 50%, or 62%) and look for short-term reversal patterns for good reward-to-risk entry points. Another method might be to wait for a break above the reaction high set by the first advance as confirmation of continuation. This method would make for a late entry, but the pattern would be confirmed.6. Volume: Volume should increase at the beginning of the reversal advance, decrease at the end of the consolidation/correction and increase again at the beginning of the continuation advance.The Bullish Measured Move can be made up of a number of patterns. There could be a doublebottom to start the reversal advance, a price channel during the reversal advance, an ascendingtriangle to mark the consolidation and another price channel to mark the continuation advance.During multi-year bull markets (or bear markets), a series of Bullish Measured Moves can form.While the projections for the continuation advance can be helpful for targets, they should only beused as rough guidelines. Securities can overshoot their targets, but also fall short – technicalassessments should be ongoing.Intel (INTC) broke out of a multi-year slump and began a Measured (Bull) Move.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 113
  • 113. • Prior Trend: After a large downward sloping trading range throughout most of 1997 and 1998, Intel broke above resistance in early November (blue arrows) and started the first leg of a Measured (Bull) Move.• Reversal Advance: The breakout occurred with a strong move above resistance at 22 with 2 weeks of strong volume (green arrows). The advance began from 17.44 and ended at 35.92.• Consolidation/Correction: After an extended advance, the stock declined within a set range that resembled a large descending flag. The decline retraced about 54% of the previous advance.• Continuation Advance - Length: The estimated length of the advance was 18.48 points from the June low at 25.94, which would target 44.42. The actual high was 44.75 for a 18.81 advance.• Continuation Advance - Entry: Because the consolidation/correction portion formed a continuation pattern, entry could have been based on a break above the resistance line (red arrow).• Volume: Volume increased in early November at the beginning of the reversal advance. There was a decrease from March to May 1999. And, volume increased at the beginning of the continuation advance (green arrows).Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 114
  • 114. Measured Move - Bearish (Continuation)The Measured Move is a three-part formation that begins as a reversal pattern and resumes as acontinuation pattern. The Bearish Measured Move consists of a reversal decline,consolidation/retracement and continuation decline. Because the Bearish Measured Move cannotbe confirmed until after the consolidation/retracement period, it is categorized as a continuationpattern. The pattern is usually long-term and forms over several months.1. Prior Trend: For the first decline to qualify as a reversal, there must be evidence of a prior uptrend to reverse. Because the Bearish Measured Move can occur as part of a larger advance, the length and severity of the prior decline may vary from a few weeks to many months.2. Reversal Decline: The first decline usually begins near the established highs of the previous advance and extends for a few weeks or many months. Sometimes this reversal pattern can mark the initial trend change, other times a new downtrend is established by new reaction lows or a break below support. Ideally, the decline is fairly orderly and lengthy with a series of declining peaks and troughs that may form a price channel. Less erratic declines are satisfactory, but run the risk of turning into a different pattern.3. Consolidation/Retracement: After an extended decline, some sort of consolidation or retracement can be expected. As a retracement rally (or reaction rally), prices could recoup 33% to 67% of the previous decline. Generally speaking, the bigger the decline is, the bigger the reaction rally. Some retracement formations might include an upward sloping flag or rising wedge. If the formation turns out to be a consolidation, then a continuation pattern such as a rectangle or descending triangle could form.4. Continuation Decline - Length: The distance from the high to the low of the first decline can be applied to the high of the consolidation/retracement to estimate the length of the next decline. Some technicians like to measure by points, others in percentage terms. If a security declines from 60 to 40 (20 points) and the consolidation/retracement rally returns to the security to 50, then 30 would be the target of the second decline (50 - 20 = 30). Using the percentage method, the decline from 60 to 40 would be -33% and projected decline from 50 would be 16.50. (50 X 33% = 16.50 : 50 - 16.5 = 33.50). Deciding which method to use will depend on the individual security and your analysis preferences.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 115
  • 115. 5. Continuation Decline - Entry: If the consolidation/retracement forms a continuation pattern, then an appropriate second leg entry point can be identified using traditional technical analysis rules. However, if there is no readily identifiable pattern, then some other signal must be sought. In this case, much will depend on your trading preferences, objectives, risk tolerance and time horizon. One method might be to measure potential retracements (33%, 50% or 62%) and look for short-term reversal patterns. Another method might be to look for a break below the reaction low set by the first decline as confirmation of continuation. This method would make for a late entry, but the Measured (bear) Move pattern would be confirmed.6. Volume: Volume should increase during the reversal decline, decrease at the end of the consolidation/retracement and increase again during the continuation decline. This is the ideal volume pattern, but volume confirmation for bearish patterns is not as important as for bullish patterns.More than one pattern can exist within the context of a Bearish Measured Move. A double topcould mark the first reversal and decline, a price channel could form during this decline, adescending triangle could mark the consolidation and another price channel could form during thecontinuation decline.During multi-year bear markets (or bull markets), a series of Bearish Measured Moves can form. Abear move consisting of three down legs might include a reversal and decline for the first leg, aretracement, a decline for the second leg, a retracement and finally the third leg decline.While the projection targets for the continuation decline can be helpful, they should only be usedas rough guidelines. Securities can overshoot their targets, but also fall short and technicalassessments should be ongoing.As illustrated in the XIRCOM (XIRC) chart above, the second decline of a Bearish MeasuredMove may not be as orderly as the first, especially when volatile stocks are involved.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 116
  • 116. • Prior Trend: After a multi-year bull move, XIRC reached its all-time high at 69.69 on 31-Dec- 99.• Reversal Decline: The stock broke trend line support in Jan-00 and a lower low was recorded when the stock dropped below 45 in Feb-00. The decline took the stock to 29.13 in Apr-00 for a total of 40.56 points down.• Consolidation/Correction: In April, May and June, the stock recouped about 50% of its previous decline with a retracement rally to 52.75. Including the spike high at 52.75, a parallel price channel formed (resembling a large flag) with support marked by the lower trend line. Excluding the spike high, the interpretation could have been a rising wedge. Either way, support was marked by the lower trend line.• Continuation Decline - Length: The estimated length of the continuation decline was 40.56 points from the June high at 52.75, which would target 12.19. Percentage estimates can sometimes be more applicable to Measured (Bear) Moves, especially if the target appears unusually low. The decline from 69.69 to 29.13 was 58%. A 58% decline from 52.75 would mark a target around 22.16 (52.75 x .58 = 30.59 : 52.75 - 30.59 = 22.16).• Continuation Decline - Entry: Because the consolidation/retracement portion formed a continuation pattern, entry could have been based on a break below the support trend line line (red arrows).• Volume: Volume increased just prior to the trend line support break in Jan-00 and again when the stock broke below its previous reaction low (blue arrows). Later when the stock broke trend line support in July, volume also increased significantly (red arrows).Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 117
  • 117. Cup with Handle (Continuation)The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed bya breakout. It was developed by William ONeil and introduced in his 1988 book, How to MakeMoney in Stocks.As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms afteran advance and looks like a bowl or rounding bottom. As the cup is completed, a trading rangedevelops on the right hand side and the handle is formed. A subsequent breakout from thehandles trading range signals a continuation of the prior advance.1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.2. Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.3. Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which is conforms with Dow Theory.4. Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cups advance, but usually not more. The smaller the retracement is, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.5. Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 118
  • 118. 6. Volume: There should be a substantial increase in volume on the breakout above the handles resistance.7. Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.As with most chart patterns, it is more important to capture the essence of the pattern than theparticulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed bya breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements,but a particular stocks pattern may still capture the essence of the Cup with Handle.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 119
  • 119. • Trend: EMC established the bull trend by advancing from 10 and change to above 30 in about 5 months. The stock peaked in March and then began to pull back and consolidate its large gains.• Cup: The April decline was quite sharp, but the lows extended over a two month period to form the bowl that marked a consolidation period. Also note that support was found from the Feb-99 lows.• Cup Depth: The low of the cup retraced 42% of the previous advance. After an advance in June and July, the stock peaked at 32.69 to complete the cup (red arrow).• Handle: Another consolidation period began in July to start the handle formation. There was a sharp decline in August that caused the handle to retrace more than 1/3 of the cups advance. However, there was a quick recovery and the stock traded back up within the normal handle boundaries within a week. I believe the essence of the formation remained valid after this sharp decline.• Duration: The cup extended for about 3 months and the handle for about 1 1/2 months.• Volume: In early Sept-00, the stock broke handle resistance with a gap up and volume expansion (green arrow). In addition, Chaikin Money Flow soared above +20%.• Target: The projected advance after breakout was estimated at 9 points from the breakout around 32. EMC easily fulfilled this target over the next few months.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 120
  • 120. Introduction to CandlesticksHistoryThe Japanese began using technical analysis to trade rice in the 17th century. While this earlyversion of technical analysis was different from the US version initiated by Charles Dow around1900, many of the guiding principles were very similar:• The "what" (price action) is more important than the "why" (news, earnings, and so on).• All known information is reflected in the price.• Buyers and sellers move markets based on expectations and emotions (fear and greed).• Markets fluctuate.• The actual price may not reflect the underlying value.According to Steve Nison, candlestick charting first appeared sometime after 1850. Much of thecredit for candlestick development and charting goes to a legendary rice trader named Hommafrom the town of Sakata. It is likely that his original ideas were modified and refined over manyyears of trading eventually resulting in the system of candlestick charting that we use today.FormationIn order to create a candlestick chart, you must have a data set that contains open, high, low andclose values for each time period you want to display. The hollow or filled portion of the candlestickis called "the body" (also referred to as "the real body"). The long thin lines above and below thebody represent the high/low range and are called "shadows" (also referred to as "wicks" and"tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lowershadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with thebottom of the body representing the opening price and the top of the body representing the closingprice. If the stock closes lower than its opening price, a filled candlestick is drawn with the top ofthe body representing the opening price and the bottom of the body representing the closing price.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 121
  • 121. Compared to traditional bar charts, many traders consider candlestick charts more visuallyappealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of priceaction. Immediately a trader can see compare the relationship between the open and close as wellas the high and low. The relationship between the open and close is considered vital informationand forms the essence of candlesticks. Hollow candlesticks, where the close is greater than theopen, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicateselling pressure.Long Versus Short BodiesGenerally speaking, the longer the body is, the more intense the buying or selling pressure.Conversely, short candlesticks indicate little price movement and represent consolidation.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 122
  • 122. Long white candlesticks show strong buying pressure. The longer the white candlestick is, thefurther the close is above the open. This indicates that prices advanced significantly from open toclose and buyers were aggressive. While long white candlesticks are generally bullish, muchdepends on their position within the broader technical picture. After extended declines, long whitecandlesticks can mark a potential turning point or support level. If buying gets too aggressive aftera long advance, it can lead to excessive bullishness.Long black candlesticks show strong selling pressure. The longer the black candlestick is, thefurther the close is below the open. This indicates that prices declined significantly from the openand sellers were aggressive. After a long advance, a long black candlestick can foreshadow aturning point or mark a future resistance level. After a long decline a long black candlestick canindicate panic or capitulation.Even more potent long candlesticks are the Marubozu brothers, Black and White. Marubozu do nothave upper or lower shadows and the high and low are represented by the open or close. A WhiteMarubozu forms when the open equals the low and the close equals the high. This indicates thatbuyers controlled the price action from the first trade to the last trade. Black Marubozu form whenthe open equals the high and the close equals the low. This indicates that sellers controlled theprice action from the first trade to the last trade.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 123
  • 123. Long Versus Short ShadowsThe upper and lower shadows on candlesticks can provide valuable information about the tradingsession. Upper shadows represent the session high and lower shadows the session low.Candlesticks with short shadows indicate that most of the trading action was confined near theopen and close. Candlestick with long shadows show that traded extended well past the open andclose.Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominatedduring the session, and bid prices higher. However, sellers later forced prices down from theirhighs, and the weak close created a long upper shadow. Conversely, candlesticks with long lowershadows and short upper shadows indicate that sellers dominated during the session and droveprices lower. However, buyers later resurfaced to bid prices higher by the end of the session andthe strong close created a long lower shadow.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 124
  • 124. Candlesticks with a long upper shadow, long lower shadow and small real body are called spinningtops. One long shadow represents a reversal of sorts; spinning tops represent indecision. Thesmall real body (whether hollow or filled) shows little movement from open to close, and theshadows indicate that both bulls and bears were active during the session. Even though thesession opened and closed with little change, prices moved significantly higher and lower in themeantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff.After a long advance or long white candlestick, a spinning top indicates weakness among the bullsand a potential change or interruption in trend. After a long decline or long black candlestick, aspinning top indicates weakness among the bears and a potential change or interruption in trend.DojiDoji are important candlesticks that provide information on their own and as components of in anumber of important patterns. Doji form when a securitys open and close are virtually equal. Thelength of the upper and lower shadows can vary and the resulting candlestick looks like a cross,inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based onpreceding price action and future confirmation. The word "Doji" refers to both the singular andplural form.Ideally, but not necessarily, the open and close should be equal. While a doji with an equal openand close would be considered more robust, it is more important to capture the essence of thecandlestick. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Pricesmove above and below the opening level during the session, but close at or near the opening level.The result is a standoff. Neither bulls nor bears were able to gain control and a turning point couldbe developing.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 125
  • 125. Different securities have different criteria for determining the robustness of a doji. A $20 stockcould form a doji with a 1/8 point difference between open and close, while a $200 stock mightform one with a 1 1/4 point difference. Determining the robustness of the doji will depend on theprice, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji shouldhave a very small body that appears as a thin line. Steven Nison notes that a doji that formsamong other candlesticks with small real bodies would not be considered important. However, adoji that forms among candlesticks with long real bodies would be deemed significant.Doji and TrendThe relevance of a doji depends on the preceding trend or preceding candlesticks. After anadvance, or long white candlestick, a doji signals that the buying pressure is starting to weaken.After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish.Doji indicate that the forces of supply and demand are becoming more evenly matched and achange in trend may be near. Doji alone are not enough to mark a reversal and furtherconfirmation may be warranted.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 126
  • 126. After an advance or long white candlestick, a doji signals that buying pressure may be diminishingand the uptrend could be nearing an end. Whereas a security can decline simply from a lack ofbuyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may bemore significant after an uptrend or long white candlestick. Even after the doji forms, furtherdownside is required for bearish confirmation. This may come as a gap down, long blackcandlestick, or decline below the long white candlesticks open. After a long white candlestick anddoji, traders should be on the alert for a potential evening doji star.After a decline or long black candlestick, a doji indicates that selling pressure may be diminishingand the downtrend could be nearing an end. Even though the bears are starting to lose control ofthe decline, further strength is required to confirm any reversal. Bullish confirmation could comefrom a gap up, long white candlestick or advance above the long black candlesticks open. After along black candlestick and doji, traders should be on the alert for a potential morning doji star.Long-Legged DojiLong-legged doji have long upper and lower shadows that are almost equal in length. These dojireflect a great amount of indecision in the market. Long-legged doji indicate that prices traded wellabove and below the sessions opening level, but closed virtually even with the open. After a wholelot of yelling and screaming, the end result showed little change from the initial open.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 127
  • 127. Dragon Fly and Gravestone DojiDragon Fly DojiDragon fly doji form when the open, high and close are equal and the low creates a long lowershadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow.Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session.By the end of the session, buyers resurfaced and pushed prices back to the opening level and thesession high.The reversal implications of a dragon fly doji depend on previous price action and futureconfirmation. The long lower shadow provides evidence of buying pressure, but the low indicatesthat plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, adragon fly doji could signal a potential bullish reversal or bottom. After a long uptrend, long whitecandlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversalor top. Bearish or bullish confirmation is required for both situations.Gravestone DojiGravestone doji form when the open, low and close are equal and the high creates a long uppershadow. The resulting candlestick looks like an upside down "T" with a long upper shadow and nolower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higherduring the session. However, by the end of the session, sellers resurfaced and pushed prices backto the opening level and the session low.As with the dragon fly doji and other candlesticks, the reversal implications of gravestone dojidepend on previous price action and future confirmation. Even though the long upper shadowindicates a failed rally, the intraday high provides evidence of some buying pressure. After a longdowntrend, long black candlestick, or at support, focus turns to the evidence of buying pressureand a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focusturns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is requiredfor both situations.Before turning to the single and multiple candlestick patterns, there are a few general guidelines tocover.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 128
  • 128. Bulls Versus BearsA candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period oftime. An analogy to this battle can be made between two football teams, which we can also call theBulls and the Bears. The bottom (intra-session low) of the candlestick represents a touchdown forthe Bears and the top (intra-session high) a touchdown for the Bulls. The closer the close is to thehigh, the closer the Bulls are to a touchdown. The closer the close is to the low, the closer theBears are to a touchdown. While there are many variations, I have narrowed the field to 6 types ofgames (or candlesticks):1. Long white candlesticks indicate that the Bulls controlled the ball (trading) for most of the game.2. Long black candlesticks indicate that the Bears controlled the ball (trading) for most of the game.3. Small candlesticks indicate that neither team could move the ball and prices finished about where they started.4. A long lower shadow indicates that the Bears controlled the ball for part of the game, but lost control by the end and the Bulls made an impressive comeback.5. A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback.6. A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the game, but neither could put the other away, resulting in a standoff.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 129
  • 129. What Candlesticks Dont Tell YouCandlesticks do not reflect the sequence of events between the open and close, only therelationship between the open and the close. The high and the low are obvious and indisputable,but candlesticks (and bar charts) cannot tell us which came first.With a long white candlestick, the assumption is that prices advanced most of the session.However, based on the high/low sequence, the session could have been more volatile. Theexample above depicts two possible high/low sequences that would form the same candlestick.The first sequence shows two small moves and one large move: a small decline off the open toform the low, a sharp advance to form the high, and a small decline to form the close. The secondsequence shows three rather sharp moves: a sharp advance off the open to form the high, a sharpdecline to form the low, and a sharp advance to form the close. The first sequence portrays strong,sustained buying pressure, and would be considered more bullish. The second sequence reflectsmore volatility and some selling pressure. These are just two examples, and there are hundreds ofpotential combinations that could result in the same candlestick. Candlesticks still offer valuableinformation on the relative positions of the open, high, low and close. However, the trading activitythat forms a particular candlestick can vary.Prior TrendIn his book, Candlestick Charting Explained, Greg Morris notes that for a pattern to qualify as areversal pattern, there should be a prior trend to reverse. Bullish reversals require a precedingdowntrend and bearish reversals require a prior uptrend. The direction of the trend can bedetermined using trend lines, moving averages, peak/trough analysis or other aspects of technicalanalysis. A downtrend might exist as long as the security was trading below its down trend line,below its previous reaction high or below a specific moving average. The length and duration willdepend on individual preferences. However, because candlesticks are short-term in nature, it isusually best to consider the last 1-4 weeks of price action.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 130
  • 130. Candlestick PositioningStar PositionA candlestick that gaps away from the previous candlestick is said to be in star position. The firstcandlestick usually has a large real body, but not always, and the second candlestick in starposition has a small real body. Depending on the previous candlestick, the star positioncandlestick gaps up or down and appears isolated from previous price action. The twocandlesticks can be any combination of white and black. Doji, hammers, shooting stars andspinning tops have small real bodies, and can form in the star position. Later we will examine 2-and 3-candlestick patterns that utilize the star position.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 131
  • 131. Harami PositionA candlestick that forms within the real body of the previous candlestick is in Harami position.Harami means pregnant in Japanese and the second candlestick is nestled inside the first. Thefirst candlestick usually has a large real body and the second a smaller real body than the first.The shadows (high/low) of the second candlestick do not have to be contained within the first,though its preferable if they are. Doji and spinning tops have small real bodies, and can form inthe harami position as well. Later we will examine candlestick patterns that utilize the haramiposition.Long Shadow ReversalsThere are two pairs of single candlestick reversal patterns made up of a small real body, one longshadow and one short or non-existent shadow. Generally, the long shadow should be at leasttwice the length of the real body, which can be either black or white. The location of the longshadow and preceding price action determine the classification.The first pair, Hammer and Hanging Man, consists of identical candlesticks with small bodies andlong lower shadows. The second pair, Shooting Star and Inverted Hammer, also contains identicalcandlesticks, except, in this case, they have small bodies and long upper shadows. Only precedingprice action and further confirmation determine the bullish or bearish nature of these candlesticks.The Hammer and Inverted Hammer form after a decline and are bullish reversal patterns, while theShooting Star and Hanging Man form after an advance and are bearish reversal patterns.Hammer and Hanging ManThe Hammer and Hanging Man look exactly alike, but have different implications based on thepreceding price action. Both have small real bodies (black or white), long lower shadows and shortor non-existent upper shadows. As with most single and double candlestick formations, theHammer and Hanging Man require confirmation before action.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 132
  • 132. The Hammer is a bullish reversal pattern that forms after a decline. In addition to a potential trendreversal, hammers can mark bottoms or support levels. After a decline, hammers signal a bullishrevival. The low of the long lower shadow implies that sellers drove prices lower during the session.However, the strong finish indicates that buyers regained their footing to end the session on astrong note. While this may seem enough to act on, hammers require further bullish confirmation.The low of the hammer shows that plenty of sellers remain. Further buying pressure, andpreferably on expanding volume, is needed before acting. Such confirmation could come from agap up or long white candlestick. Hammers are similar to selling climaxes, and heavy volume canserve to reinforce the validity of the reversal.The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level.Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. Thelow of the long lower shadow confirms that sellers pushed prices lower during the session. Eventhough the bulls regained their footing and drove prices higher by the finish, the appearance ofselling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearishconfirmation before action. Such confirmation can come as a gap down or long black candlestickon heavy volume.Inverted Hammer and Shooting StarVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 133
  • 133. The Inverted Hammer and Shooting Star look exactly alike, but have different implications basedon previous price action. Both candlesticks have small real bodies (black or white), long uppershadows and small or nonexistent lower shadows. These candlesticks mark potential trendreversals, but require confirmation before action.The Shooting Star is a bearish reversal pattern that forms after an advance and in the star position,hence its name. A Shooting Star can mark a potential trend reversal or resistance level. Thecandlestick forms when prices gap higher on the open, advance during the session and close welloff their highs. The resulting candlestick has a long upper shadow and small black or white body.After a large advance (the upper shadow), the ability of the bears to force prices down raises theyellow flag. To indicate a substantial reversal, the upper shadow should relatively long and at least2 times the length of the body. Bearish confirmation is required after the Shooting Star and cantake the form of a gap down or long black candlestick on heavy volume.The Inverted Hammer looks exactly like a Shooting Star, but forms after a decline or downtrend.Inverted Hammers represent a potential trend reversal or support levels. After a decline, the longupper shadow indicates buying pressure during the session. However, the bulls were not able tosustain this buying pressure and prices closed well off of their highs to create the long uppershadow. Because of this failure, bullish confirmation is required before action. An InvertedHammer followed by a gap up or long white candlestick with heavy volume could act as bullishconfirmation.Blending CandlesticksCandlestick patterns are made up of one or more candlesticks and these can be blended togetherto form one candlestick. This blended candlestick captures the essence of the pattern and can beformed using the following:• The open of first candlestick• The close of the last candlestick• The high and low of the patternVolume 1/3 Your Guide • Financial Charts • Technical analysis • Page 134
  • 134. By using the open of the first candlestick, close of the second candlestick, and high/low of thepattern, a Bullish Engulfing Pattern or Piercing Pattern blends into a Hammer. The long lowershadow of the Hammer signals a potential bullish reversal. As with the Hammer, both the BullishEngulfing Pattern and the Piercing Pattern require bullish confirmation.Blending the candlesticks of a Bearish Engulfing Pattern or Dark Cloud Cover Pattern creates aShooting Star. The long, upper shadow of the Shooting Star indicates a potential bearish reversal.As with the Shooting Star, Bearish Engulfing, and Dark Cloud Cover Patterns require bearishconfirmation.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 135
  • 135. More than two candlesticks can be blended using the same guidelines: open from the first, closefrom the last and high/low of the pattern. Blending Three White Soldiers creates a long whitecandlestick and blending Three Black Crows creates a long black candlestick.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 136
  • 136. Candlesticks and SupportSingle candlesticks and candlestick patterns can be used to confirm or mark support levels. Sucha support level could be new after an extended decline or confirm a previous support level within atrading range. In a trading range, candlesticks can help choose entry points for buying nearsupport and selling near resistance. The list below contains some, but not all, of the candlesticksand candlestick patterns that can be used to together with support levels. The bullish reversalpatterns are marked (R). Bullish Engulfing (R) Bullish Harami (R) Doji (Normal, Long Legged, Dragonfly) Hammer (R) Inverted Hammer (R) Long White candlestick or White Marubozu Morning Star or Bullish Abandoned Baby (R) Piercing Pattern (R) Spinning Top Three White Soldiers (R)Bullish reversal candlesticks and patterns suggest that early selling pressure was overcome andbuying pressure emerged for a strong finish. Such bullish price action indicates strong demandand that support may be found.The inverted hammer, long white candlestick and marubozu show increased buying pressurerather than an actual price reversal. With its long upper shadow, an inverted hammer signifiesintra-session buying interest that faded by the finish. Even though the security finished well belowits high, the ability of buyers to push prices higher during the session is bullish. The long whitecandlestick and white marubozu signify sustained buying pressure in which prices advancedsharply from open to close. Signs of increased buying pressure bode well for support.The doji and spinning top denote indecision and are generally considered neutral. These non-reversal patterns indicate a decrease in selling pressure, but not necessarily a revival of buyingpressure. After a decline, the appearance of a doji or spinning top denotes a sudden letup inselling pressure. A stand-off has developed between buyers and sellers, and a support level mayform.Note: All of the patterns above will be covered in this candlestick series in the next few weeks.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 137
  • 137. Electronic Data Systems (EDS) traded in a range bound by 58 and 75 for about 4 months at thebeginning of 2000. Support at 58 was first established in early January and resistance at 75 in lateJanuary. The stock declined to its previous support level in early March, formed a long legged dojiand later a spinning top (red circle). Notice that the doji formed immediately after a long blackMarubozu (long black candlestick without upper or lower shadows). This doji marked a suddendecrease in relative selling pressure and support held. Support was tested again in April and thistest was also marked by a long legged doji (blue arrow).Broadcom (BRCM) formed a bullish engulfing pattern to mark a new support level just below 210(green oval) in late July 2000. A few days later a long white candlestick formed and engulfed theprevious 4 candlesticks. The combination of the bullish engulfing and long white candlestickserved to reinforce the validity of support around 208. The stock has since tested support around208 once in early September and twice in October. A piercing pattern (red arrow) formed in earlyOctober and a large hammer in late October.Medtronic (MDT) established support around 46 in late February with a spinning top (red arrow)and early March with a harami. The stock declined sharply in April and formed a hammer toconfirm support at 46 (green arrow). After a reaction rally to resistance around 57, the stock againdeclined sharply and again found support around 46 (blue arrow). The black candlestick with thelong lower shadow marked support, but the body was too big to qualify as a hammer.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 138
  • 138. Candlesticks and ResistanceSingle candlesticks and candlestick patterns can be used to confirm or mark resistance levels.Such a resistance level could be new after an extended advance, or an existing resistance levelconfirmed within a trading range. In a trading range, candlesticks can help identify entry points tosell near resistance or buy near support. The list below contains some, but not all, of thecandlesticks and candlestick patterns that can be used to identify or confirm resistance levels. Thebearish reversal patterns are marked (R). Bearish Engulfing (R) Bearish Harami (R) Dark Cloud Cover (R) Doji (Normal, Long Legged, Gravestone) Evening Star or Bearish Abandoned Baby (R) Hanging Man (R) Long Black Candlestick or Black Marubozu Shooting Star (R) Spinning Top Three Black Crows (R)Bearish reversal candlesticks and patterns suggest that buying pressure was suddenly overturnedand selling pressure prevailed. Such a quick reversal of fortune indicates overhead supply and aresistance level may form.The hanging man, long black candlestick and black marubozu signify increased selling pressurerather than an actual reversal. After an advance, the hanging mans long lower shadow indicatesintra-session selling pressure that was overcome by the end of the session. Even though thesecurity finished above its low, the ability of sellers to drive prices lower raises a yellow flag. Thelong black candlestick and black marubozu signify sustained selling pressure that moved pricessignificantly lower from beginning to end. Such intense selling pressure signals weakness amongbuyers and a resistance level may be established.The doji and spinning top show indecision and are generally considered neutral. These non-reversal patterns indicate decreased buying pressure, but no noticeable increase in sellingpressure. For an advance to continue, new buyers must be willing to pay higher prices. As notedby the spinning top and doji, a standoff shows lack of conviction among buyers and a possibleresistance level.Note: All of the above patterns will be covered in this candlestick series in the next week or two.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 139
  • 139. In late May, Veritas (VRTS) advanced from 90 to 140 in about two weeks. The final jump camewith a gap up and two doji. These doji marked a sudden stalemate between buyers and sellers,and a resistance level subsequently formed. After a resistance test in mid June, another dojiformed to indicate that buyers lacked conviction. This led to a decline and subsequent reactionrally in early July. The advance carried the stock from 105 to 140, where another doji formed toconfirm resistance set in early June.Lucent (LU) traded in a range bound by 53 and 42 for about 4 months. Resistance was firstestablished in late April with a shooting star and dark cloud cover. Both of these bearish reversalswere confirmed with a gap down two days later and a test of resistance at 52. As the stock nearedsupport at 42, candlesticks with long lower shadow started to form and a reversal occurred at theend of May. After a sharp advance, resistance was met at and another dark cloud cover formed atresistance in early June. Buyers clearly lacked conviction near 53 and sellers were all too eager tounload their stock. A final resistance test occurred in mid July. After a breakout above 53, the stockreversed course and closed back below 52. The rest is history.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 140
  • 140. After a spring advance, Delta Air Lines (DAL) first established resistance at 57 in early April withthe high of a shooting star. The stock declined sharply, but rebounded to test resistance at 57again in May. While at resistance in May, a whole slew of shooting stars formed as well as the oddspinning top and long legged doji. The decline that broke below 56 confirmed these as bearish andthe stock tested support around 50. After another advance to 57, the stock appeared to be on theverge of a breakout. However, a small white candlestick formed in mid July (black circle). The gapup may have been a positive, but the lack of follow through signaled by the small white candlestickraised the yellow flag. The subsequent gap down formed a bearish evening star and the stock fellback to support again.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 141
  • 141. Candlestick Bullish Reversal PatternsThere are dozens of bullish reversal candlestick patterns. I have elected to narrow the field byselecting the most popular for detailed explanations. Below are some of the key bullish reversalpatterns with the number of candlesticks required in parentheses. Bullish Engulfing (2) Piercing Pattern (2) Bullish Harami (2) Hammer (1) Inverted Hammer (1) Morning Star (3) Bullish Abandoned Baby (3)The hammer and inverted hammer were covered in the article Introduction to Candlesticks. Thisarticle will focus on the other six patterns. For a complete list of bullish (and bearish) reversalpatterns, see Greg Morris book, Candlestick Charting Explained.Before moving on to individual patterns, certain guidelines should be established: Most patterns require bullish confirmation. Bullish reversal patterns should form within a downtrend. Other aspects of technical analysis should be used as well.Bullish ConfirmationPatterns can form with one or more candlesticks; most require bullish confirmation. The actualreversal indicates that buyers overcame prior selling pressure, but it remains unclear whether newbuyers will bid prices higher. Without confirmation, these patterns would be considered neutral andmerely indicate a potential support level at best. Bullish confirmation means further upside followthrough and can come as a gap up, long white candlestick or high volume advance. Becausecandlestick patterns are short-term and usually effective for only 1 or 2 weeks, bullish confirmationshould come within 1 to 3 days after the pattern.Existing DowntrendTo be considered a bullish reversal, there should be an existing downtrend to reverse. A bullishengulfing at new highs can hardly be considered a bullish reversal pattern. Such formations wouldindicate continued buying pressure and could be considered a continuation pattern. In the Cienaexample below, the pattern in the red oval looks like a bullish engulfing, but formed near resistanceafter about a 30 point advance. The pattern does show strength, but is more likely a continuationat this point than a reversal pattern.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 142
  • 142. The existence of a downtrend can be determined by using moving averages, peak/trough analysisor trend lines. A security could be deemed in a downtrend based on one of the following: The security is trading below its 20-day exponential moving average (EMA). Each reaction peak and trough is lower than the previous. The security is trading below its trend line.These are just examples of possible guidelines to determine a downtrend. Some traders mayprefer shorter downtrends and consider securities below the 10-day EMA. Defining criteria willdepend on your trading style and personal preferences.Other Technical AnalysisCandlesticks provide an excellent means to identify short-term reversals, but should not be usedalone. Other aspects of technical analysis can and should be incorporated to increase reversalrobustness. Below are three ideas on how traditional technical analysis might be combined withcandlestick analysis.SupportLook for bullish reversals at support levels to increase robustness. Support levels can be identifiedwith moving averages, previous reaction lows, trend lines or Fibonacci retracements.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 143
  • 143. MomentumUse oscillators to confirm improving momentum with bullish reversals. Positive divergences inMACD, PPO, Stochastics, RSI, StochRSI or Williams %R would indicate improving momentumand increase the robustness behind a bullish reversal pattern.Money FlowsMoney Flows: Use volume-based indicators to access buying and selling pressure. On BalanceVolume (OBV), Chaikin Money Flow (CMF) and the Accumulation/Distribution Line can be used inconjunction with candlesticks. Strength in any of these would increase the robustness of a reversal.For those that want to take it one step further, all three aspects could be combined for the ultimatesignal. Look for bullish candlestick reversal in securities trading near support with positivedivergences and signs of buying pressure.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 144
  • 144. A number of signals came together for IBM in early October. After a steep decline since August,the stock formed a bullish engulfing pattern (red oval) and this was confirmed three days later witha strong advance. The 10-day Slow Stochastic Oscillator formed a positive divergence and movedabove its trigger line just before the stock advanced. Although not in the green yet, CMF showedconstant improvement and moved into positive territory a week later.Bullish EngulfingThe bullish engulfing pattern consists of two candlesticks, the first black and the second white. Thesize of the black candlestick is not that important, but it should not be a doji which would berelatively easy to engulf. The second should be a long white candlestick – the bigger it is, the morebullish. The white body must totally engulf the body of the first black candlestick. Ideally, thoughnot necessarily, the white body would engulf the shadows as well. Although shadows are permitted,they are usually small or nonexistent on both candlesticks.After a decline, the second white candlestick begins to form when selling pressure causes thesecurity to open below the previous close. Buyers step in after the open and push prices above theprevious open for a strong finish and potential short-term reversal. Generally, the larger the whitecandlestick and the greater the engulfing, the more bullish the reversal. Further strength isrequired to provide bullish confirmation of this reversal pattern.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 145
  • 145. In Jan-00, Sun Microsystems (SUNW) formed a pair of bullish engulfing patterns thatforeshadowed two significant advances. The first formed in early January after a sharp decline thattook the stock well below its 20-day exponential moving average (EMA). An immediate gap upconfirmed the pattern as bullish and the stock raced ahead to the mid-forties. After correcting tosupport, the second bullish engulfing pattern formed in late January. The stock declined below its20-day EMA and found support from its earlier gap up. This also marked a 2/3 correction of theprior advance. A bullish engulfing pattern formed and was confirmed the next day with a strongfollow-up advance.Piercing PatternThe piercing pattern is made up of two candlesticks, the first black and the second white. Bothcandlesticks should have fairly large bodies and the shadows are usually, but not necessarily,small or nonexistent. The white candlestick must open below the previous close and close abovethe midpoint of the black candlesticks body. A close below the midpoint might qualify as a reversal,but would not be considered as bullish.Just as with the bullish engulfing pattern, selling pressure forces the security to open below theprevious close, indicating that sellers still have the upper hand on the open. However, buyers stepin after the open to push the security higher and it closes above the midpoint of the previous blackcandlesticks body. Further strength is required to provide bullish confirmation of this reversalpattern.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 146
  • 146. In late March and early April 2000, Ciena (CIEN) declined from above 80 to around 40. Thestock first touched 40 in early April with a long lower shadow. After a bounce, the stock testedsupport around 40 again in mid April and formed a piercing pattern. The piercing pattern wasconfirmed the very next day with a strong advance above 50. Even though there was a setbackafter confirmation, the stock remained above support and advanced above 70. Also notice themorning doji star in late May.Bullish HaramiThe bullish harami is made up of two candlesticks. The first has a large body and the second asmall body that is totally encompassed by the first. There are four possible combinations:white/white, white/black, black/white and black/black. Whether they are bullish reversal or bearishreversal patterns, all harami look the same. Their bullish or bearish nature depends on thepreceding trend. Harami are considered potential bullish reversals after a decline and potentialbearish reversals after an advance. No matter what the color of the first candlestick, the smallerthe body of the second candlestick is, the more likely the reversal. If the small candlestick is a doji,the chances of a reversal increase.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 147
  • 147. In his book Beyond Candlesticks, Steve Nison asserts that any combination of colors can form aharami, but that the most bullish are those that form with a white/black or white/white combination.Because the first candlestick has a large body, it implies that the bullish reversal pattern would bestronger if this body were white. The long white candlestick shows a sudden and sustainedresurgence of buying pressure. The small candlestick afterwards indicates consolidation.White/white and white/black bullish harami are likely to occur less often than black/black orblack/white.After a decline, a black/black or black/white combination can still be regarded as a bullish harami.The first long black candlestick signals that significant selling pressure remains and could indicatecapitulation. The small candlestick immediately following forms with a gap up on the open,indicating a sudden increase in buying pressure and potential reversal.Micromuse (MUSE) declined to the mid sixties in Apr-00 and began to trade in a range bound by33 and 50 over the next few weeks. After a 6-day decline back to support in late May, a bullishharami (red oval) formed. The first day formed a long white candlestick, and the second a smallblack candlestick that could be classified as a doji. The next days advance provided bullishconfirmation and the stock subsequently rose to around 75.HammerThe hammer is made up of one candlestick, white or black, with a small body, long lower shadowand small or nonexistent upper shadow. The size of the lower shadow should be a least twice thelength of the body and the high/low range should be relatively large. Large is a relative term andthe high/low range should be large relative to range over the last 10-20 days.After a decline, the hammers intraday low indicates that selling pressure remains. However, thestrong close shows that buyers are starting to become active again. Further strength is required toprovide bullish confirmation of this reversal pattern.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 148
  • 148. Nike (NKE) declined from the low fifties to the mid thirties before starting to find support in lateFebruary. After a small reaction rally, the stock declined back to support in mid March and formeda hammer. Bullish confirmation came two days later with a sharp advance.Morning StarThe morning star consists of three candlesticks:1. A long black candlestick.2. A small white or black candlestick that gaps below the close of the previous candlestick. This candlestick can also be a doji, in which case the pattern would be a morning doji star.3. A long white candlestick.The black candlestick confirms that the decline remains in force and selling dominates. When thesecond candlestick gaps down, it provides further evidence of selling pressure. However, thedecline ceases or slows significantly after the gap and a small candlestick forms. The smallcandlestick indicates indecision and a possible reversal of trend. If the small candlestick is a doji,the chances of a reversal increase. The third long white candlestick provides bullish confirmationof the reversal.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 149
  • 149. After declining from above 180 to below 120, Broadcom (BRCM) formed a morning doji star andsubsequently advanced above 160 in the next three days. These are strong reversal patterns anddo not require further bullish confirmation, beyond the long white candlestick on the third day. Afterthe advance above 160, a two-week pullback followed and the stock formed a piecing pattern (redarrow) that was confirmed with a large gap up.Bullish Abandoned BabyThe bullish abandoned baby resembles the morning doji star and also consists of threecandlesticks:1. A long black candlestick.2. A doji that gaps below the low of the previous candlestick.3. A long white candlestick that gaps above the high of the doji.The main difference between the morning doji star and the bullish abandoned baby are the gapson either side of the doji. The first gap down signals that selling pressure remains strong. However,selling pressure eases and the security closes at or near the open, creating a doji. Following thedoji, the gap up and long white candlestick indicate strong buying pressure and the reversal iscomplete. Further bullish confirmation is not required.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 150
  • 150. In April, Genzyme (GENZ) declined below its 20-day EMA and began to find support in the lowthirties. The stock began forming a base as early as 17-Apr, but a discernible reversal patternfailed to emerge until the end of May. The bullish abandoned baby formed with a long blackcandlestick, doji and long white candlestick. The gaps on either side of the doji reinforced thebullish reversal.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 151
  • 151. Candlestick Bearish Reversal PatternsThere are dozens of bearish reversal patterns. I have elected to narrow the field by selecting a fewof the most popular patterns for detailed explanations. For a complete list of bearish and bullishreversal patterns, see Greg Morris book, Candlestick Charting Explained. Below are some of thekey bearish reversal patterns, with the number of candlesticks required in parentheses. Bearish Abandoned Baby (3) Engulfing, Bearish (2) Harami, Bearish (2) Dark Cloud Cover (2) Evening Star (3) Shooting Star (1)It is important to remember the following guidelines relating to bearish reversal patterns: Most patterns require further bearish confirmation. Bearish reversal patterns should form within an uptrend. Other aspects of technical analysis should be used as well.Bearish ConfirmationBearish reversal patterns can form with one or more candlesticks; most require bearishconfirmation. The actual reversal indicates that selling pressure overwhelmed buying pressure forone or more days, but it remains unclear whether or not sustained selling or lack of buyers willcontinue to push prices lower. Without confirmation, many of these patterns would be consideredneutral and merely indicate a potential resistance level at best. Bearish confirmation means furtherdownside follow through, such as a gap down, long black candlestick or high volume decline.Because candlestick patterns are short-term and usually effective for 1-2 weeks, bearishconfirmation should come within 1-3 days.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 152
  • 152. Time Warner (TWX) advanced from the upper fifties to the low seventies in less than two months.The long white candlestick that took the stock above 70 in late March was followed by a long-legged doji in the harami position. A second long-legged doji immediately followed and indicatedthat the uptrend was beginning to tire. The dark cloud cover (red oval) increased these suspicionsand bearish confirmation was provided by the long black candlestick (red arrow).Existing UptrendTo be considered a bearish reversal, there should be an existing uptrend to reverse. It does nothave to be a major uptrend, but should be up for the short term or at least over the last few days. Adark cloud cover after a sharp decline or near new lows is unlikely to be a valid bearish reversalpattern. Bearish reversal patterns within a downtrend would simply confirm existing sellingpressure and could be considered continuation patterns.There are many methods available to determine the trend. An uptrend can be established usingmoving averages, peak/trough analysis or trend lines. A security could be deemed in an uptrendbased on one or more of the following: The security is trading above its 20-day exponential moving average (EMA). Each reaction peak and trough is higher than the previous. The security is trading above a trend line.These are just three possible methods. Some traders may prefer shorter uptrends and qualifysecurities that are trading above their 10-day EMA. Defining criteria will depend on your tradingstyle, time horizon and personal preferences.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 153
  • 153. Other Technical AnalysisCandlesticks provide an excellent means to identify short-term reversals, but should not be usedalone. Other aspects of technical analysis can and should be incorporated to increase therobustness of bearish reversal patterns.ResistanceIn Jan-00, Nike (NKE) gapped up over 5 points and closed above 50. A candlestick with a longupper shadow formed and the stock subsequently traded down to 45. This established aresistance level around 53. After an advance back to resistance at 53, the stock formed a bearishengulfing pattern (red oval). Bearish confirmation came when the stock declined the next day,gapped down below 50 and broke its short-term trend line two days later.MomentumUse oscillators to confirm weakening momentum with bearish reversals. Negative divergences inMACD, PPO, Stochastics, RSI, StochRSI or Williams %R indicate weakening momentum and canincrease the robustness of a bearish reversal pattern. In addition, bearish moving averagecrossovers in the PPO and MACD can provide confirmation, as well as trigger line crossovers forthe Slow Stochastic Oscillator.Money FlowsUse volume-based indicators to assess selling pressure and confirm reversals. On BalanceVolume (OBV), Chaikin Money Flow and the Accumulation/Distribution Line can be used to spotnegative divergences or simply excessive selling pressure. Signs of increased selling pressure canimprove the robustness of a bearish reversal pattern.For those that want to take it one step further, all three aspects could be combined for the ultimatesignal. Look for a bearish candlestick reversal in securities trading near resistance with weakeningmomentum and signs of increased selling pressure. Such signals would be relatively rare, butcould offer above-average profit potential.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 154
  • 154. A number of signals came together for RadioShack (RSH) in early Oct-00. The stock traded upto resistance at 70 for the third time in two months and formed a dark cloud cover pattern (redoval). In addition, the long black candlestick had a long upper shadow to indicate an intradayreversal. Bearish confirmation came the next day with a sharp decline. The negative divergence inthe PPO and extremely weak money flows also provided further bearish confirmation.Bearish EngulfingThe bearish engulfing pattern consists of two candlesticks; the first is white and the second black.The size of the white candlestick is not that important, but should not be a doji, which would berelatively easy to engulf. The second should be a long black candlestick. The bigger it is, the morebearish the reversal. The black body must totally engulf the body of the first, white, candlestick.Ideally, the black body should engulf the shadows as well, but this is not a requirement. Shadowsare permitted, but they are usually small or nonexistent on both candlesticks.After an advance, the second black candlestick begins to form when residual buying pressurecauses the security to open above the previous close. However, sellers step in after this openinggap up and begin to drive prices down. By the end of the session, selling becomes so intense thatprices move below the previous open. The resulting candlestick engulfs the previous days bodyand creates a potential short-term reversal. Further weakness is required for bearish confirmationof this reversal pattern.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 155
  • 155. After meeting resistance around 30 in mid-January, Ford (F) formed a bearish engulfing (redoval). The pattern was immediately confirmed with a decline and subsequent support break.Dark Cloud CoverThe dark cloud cover pattern is made up of two candlesticks; the first is white and the secondblack. Both candlesticks should have fairly large bodies and the shadows are usually small ornonexistent, though not necessarily. The black candlestick must open above the previous closeand close below the midpoint of the white candlesticks body. A close above the midpoint mightqualify as a reversal, but would not be considered as bearish.Just as with the bearish engulfing pattern, residual buying pressure forces prices higher on theopen, creating an opening gap above the white candlesticks body. However, sellers step in afterthe strong open and push prices lower. The intensity of the selling drives prices below the midpointof the white candlesticks body. Further weakness is required for bearish confirmation of thisreversal pattern.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 156
  • 156. After a sharp advance from 37 1/2 to 40.5 in about 2 weeks, Citigroup (C) formed a dark cloudcover pattern (red oval). This pattern was confirmed with two long black candlesticks and markedan abrupt reversal around 40.5.Shooting StarThe shooting star is made up of one candlestick (white or black) with a small body, long uppershadow and small or nonexistent lower shadow. The size of the upper shadow should be a leasttwice the length of the body and the high/low range should be relatively large. Large is a relativeterm and the high/low range should be large relative to the range over the last 10-20 days.For a candlestick to be in star position, it must gap way from the previous candlestick. InCandlestick Charting Explained, Greg Morris indicates that a shooting star should gap up from thepreceding candlestick. However, in Beyond Candlesticks, Steve Nison provides a shooting starexample that forms below the previous close. There should be room to maneuver, especially whendealing with stocks and indices, which often open near the previous close. A gap up woulddefinitely enhance the robustness of a shooting star, but the essence of the reversal should not belost without the gap.After an advance that was punctuated by a long white candlestick, Chevron (CHV) formed ashooting star candlestick above 90 (red oval). The bearish reversal pattern was confirmed with agap down the following dayBearish HaramiThe bearish harami is made up of two candlesticks. The first has a large body and the second asmall body that is totally encompassed by the first. There are four possible combinations:white/white, white/black, black/white and black/black. Whether a bullish reversal or bearishreversal pattern, all harami look the same. Their bullish or bearish nature depends on thepreceding trend. Harami are considered potential bearish reversals after an advance and potentialbullish reversals after a decline. No matter what the color of the first candlestick, the smaller thebody of the second candlestick is, the more likely the reversal. If the small candlestick is a doji, thechances of a reversal increase.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 157
  • 157. In his book, Beyond Candlesticks, Steve Nison asserts that any combination of colors can form aharami, but the most bearish are those that form with a black/white or black/black combination.Because the first candlestick has a large body, it implies that the bearish reversal pattern would bestronger if this body were black. This would indicate a sudden and sustained increase in sellingpressure. The small candlestick afterwards indicates consolidation before continuation. After anadvance, black/white or black/black bearish harami are not as common as white/black orwhite/white variations.A white/black or white/white combination can still be regarded as a bearish harami and signal apotential reversal. The first long white candlestick forms in the direction of the trend. It signals thatsignificant buying pressure remains, but could also indicate excessive bullishness. Immediatelyfollowing, the small candlestick forms with a gap down on the open, indicating a sudden shifttowards the sellers and a potential reversal.After a gap up and rapid advance to 30, Ameritrade (AMTD) formed a bearish harami (red oval).This harami consists of a long black candlestick and a small black candlestick. The decline twodays later confirmed the bearish harami and the stock fell to the low twenties.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 158
  • 158. Merck (MRK) formed a bearish harami with a long white candlestick and long black candlestick(red oval). The long white candlestick confirmed the direction of the current trend. However, thestock gapped down the next day and traded in a narrow range. The decline three days laterconfirmed the pattern as bearish.Evening StarThe evening star consists of three candlesticks:1. A long white candlestick.2. A small white or black candlestick that gaps above the close (body) of the previous candlestick. This candlestick can also be a doji, in which case the pattern would be a evening doji star.3. A long black candlestick.The long white candlestick confirms that buying pressure remains strong and the trend is up.When the second candlestick gaps up, it provides further evidence of residual buying pressure.However, the advance ceases or slows significantly after the gap and a small candlestick forms,indicating indecision and a possible reversal of trend. If the small candlestick is a doji, the chancesof a reversal increase. The third long black candlestick provides bearish confirmation of thereversal.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 159
  • 159. After advancing from 68 to 91 in about two weeks, AT&T (T) formed an evening star (red oval).The middle candlestick is a spinning top, which indicates indecision and possible reversal. The gapabove 91 was reversed immediately with a long black candlestick. Even though the stockstabilized in the next few days, it never exceeded the top of the long black candlestick andsubsequently fell below 75.Bearish Abandoned BabyThe bearish abandoned baby resembles the evening doji star and also consists of threecandlesticks:1. A long white candlestick.2. A doji that gaps above the high of the previous candlestick.3. A long black candlestick that gaps below the low of the doji.The main difference between the evening doji star and the bearish abandoned baby are the gapson either side of the doji. The first gap up signals a continuation of the uptrend and confirms strongbuying pressure. However, buying pressure subsides after the gap up and the security closes at ornear the open, creating a doji. Following the doji, the gap down and long black candlestick indicatestrong and sustained selling pressure to complete the reversal. Further bearish confirmation is notrequired.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 160
  • 160. Delta (DAL) formed an abandoned baby to mark a sharp reversal that carried the stock from 571/2 to 47 1/2. Although the open and close are not exactly equal, the small white candlestick in themiddle captures the essence of a doji. Indecision is reflected with the small body and equal upperand lower shadows. In addition, the middle candlestick is separated by gaps on either side, whichadd emphasis to the reversal.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 161
  • 161. Candlestick Pattern DictionaryAbandoned Baby: A rare reversal pattern characterized by a gap followed by a Doji,which is then followed by another gap in the opposite direction. The shadows on the Doji mustcompletely gap below or above the shadows of the first and third day.Dark Cloud Cover: A bearish reversal pattern that continues the uptrend with a longwhite body. The next day opens at a new high then closes below the midpoint of the body of thefirst day.Doji: Doji form when a securitys open and close are virtually equal. The length of theupper and lower shadows can vary, and the resulting candlestick looks like, either, a cross,inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers andsellers. Prices move above and below the opening level during the session, but close at or nearthe opening level.Downside Tasuki Gap: A continuation pattern with a long, black body followed byanother black body that has gapped below the first one. The third day is white and opens withinthe body of the second day, then closes in the gap between the first two days, but does not closethe gap.Dragonfly Doji: A Doji where the open and close price are at the high of the day. Likeother Doji days, this one normally appears at market turning points.Engulfing Pattern: A reversal pattern that can be bearish or bullish, depending uponwhether it appears at the end of an uptrend (bearish engulfing pattern) or a downtrend (bullishengulfing pattern). The first day is characterized by a small body, followed by a day whose bodycompletely engulfs the previous days body.Evening Doji Star: A three day bearish reversal pattern similar to the Evening Star. Theuptrend continues with a large white body. The next day opens higher, trades in a small range,then closes at its open (Doji). The next day closes below the midpoint of the body of the first day.Evening Star: A bearish reversal pattern that continues an uptrend with a long whitebody day followed by a gapped up small body day, then a down close with the close below themidpoint of the first day.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 162
  • 162. Falling Three Methods: A bearish continuation pattern. A long black body is followedby three small body days, each fully contained within the range of the high and low of the first day.The fifth day closes at a new low.Gravestone Doji: A doji line that develops when the Doji is at, or very near, the low ofthe day.Hammer: Hammer candlesticks form when a security moves significantly lower after theopen, but rallies to close well above the intraday low. The resulting candlestick looks like a squarelollipop with a long stick. If this candlestick forms during an advance, then it is called a HangingMan.Hanging Man: Hanging Man candlesticks form when a security moves significantlylower after the open, but rallies to close well above the intraday low. The resulting candlesticklooks like a square lollipop with a long stick. If this candlestick forms during a decline, then it iscalled a Hammer.Harami: A two day pattern that has a small body day completely contained within therange of the previous body, and is the opposite color.Harami Cross: A two day pattern similar to the Harami. The difference is that the lastday is a Doji.Inverted Hammer: A one day bullish reversal pattern. In a downtrend, the open is lower,then it trades higher, but closes near its open, therefore looking like an inverted lollipop.Long Day: A long day represents a large price move from open to close, where thelength of the candle body is long.Long-Legged Doji: This candlestick has long upper and lower shadows with the Doji inthe middle of the days trading range, clearly reflecting the indecision of traders.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 163
  • 163. Long Shadows: Candlesticks with a long upper shadow and short lower shadowindicate that buyers dominated during the session and bid prices higher. Conversely, candlestickswith long lower shadows and short upper shadows indicate that sellers dominated during thesession and drove prices lower.Marubozo: A candlestick with no shadow extending from the body at either the open,the close or at both. The name means close-cropped or close-cut in Japanese, though otherinterpretations refer to it as Bald or Shaven Head.Morning Doji Star: A three day bullish reversal pattern that is very similar to theMorning Star. The first day is in a downtrend with a long black body. The next day opens lowerwith a Doji that has a small trading range. The last day closes above the midpoint of the first day.Morning Star: A three day bullish reversal pattern consisting of three candlesticks - along-bodied black candle extending the current downtrend, a short middle candle that gappeddown on the open, and a long-bodied white candle that gapped up on the open and closed abovethe midpoint of the body of the first day.Piercing Line: A bullish two day reversal pattern. The first day, in a downtrend, is along black day. The next day opens at a new low, then closes above the midpoint of the body ofthe first day.Rising Three Methods: A bullish continuation pattern in which a long white body isfollowed by three small body days, each fully contained within the range of the high and low of thefirst day. The fifth day closes at a new high.Shooting Star: A single day pattern that can appear in an uptrend. It opens higher,trades much higher, then closes near its open. It looks just like the Inverted Hammer except that itis bearish.Short Day: A short day represents a small price move from open to close, where thelength of the candle body is short.Spinning Top: Candlestick lines that have small bodies with upper and lowershadows that exceed the length of the body. Spinning tops signal indecision.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 164
  • 164. Stars: A candlestick that gaps away from the previous candlestick is said to be in starposition. Depending on the previous candlestick, the star position candlestick gaps up or down andappears isolated from previous price action.Stick Sandwich: A bullish reversal pattern with two black bodies surrounding a whitebody. The closing prices of the two black bodies must be equal. A support prices is apparent andthe opportunity for prices to reverse is quite good.Three Black Crows: A bearish reversal pattern consisting of three consecutive blackbodies where each day closes near below the previous low and opens within the body of theprevious day.Three White Soldiers: A bullish reversal pattern consisting of three consecutive whitebodies, each with a higher close. Each should open within the previous body and the close shouldbe near the high of the day.Upside Gap Two Crows: A three day bearish pattern that only happens in an uptrend.The first day is a long white body followed by a gapped open with the small black body remaininggapped above the first day. The third day is also a black day whose body is larger than the secondday and engulfs it. The close of the last day is still above the first long white day.Upside Tasuki Gap: A continuation pattern with a long white body followed by anotherwhite body that has gapped above the first one. The third day is black and opens within the bodyof the second day, then closes in the gap between the first two days, but does not close the gap.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 165
  • 165. Gaps and Gap AnalysisHave you ever wondered what causes gaps in price charts and what they mean? Well, youvecome to the right place. Just in case, a gap is an area on a price chart in which there were notrades. Normally this occurs between the close of the market on one day and the next days open.Lots of things can cause this, such as an earnings report coming out after the stock market hasclosed for the day. If the earnings were significantly higher than expected, many investors mightplace buy orders for the next day. This could result in the price opening higher than the previousdays close. If the trading that day continues to trade above that point, a gap will exist in the pricechart. Gaps can offer evidence that something important has happened to the fundamentals or thepsychology of the crowd that accompanies this market movement. Before we get into the differenttypes of gaps, here is a chart showing a gap so you will know what we are talking about.Gaps appear more frequently on daily charts, where every day is an opportunity to create anopening gap. Gaps on weekly or monthly charts are fairly rare: the gap would have to occurbetween Fridays close and Mondays open for weekly charts and between the last day of themonths close and the first day of the next months for the monthly charts. Gaps can be subdividedinto four basic categories: Common, Breakaway, Runaway, and Exhaustion.Common GapsSometimes referred to as a trading gap or an area gap, the common gap is usually uneventful. Infact, they can be caused by a stock going ex-dividend when the trading volume is low. These gapsare common (get it?) and usually get filled fairly quickly. "Getting filled" means that the price actionat a later time (few days to a few weeks) usually retraces at the least to the last day before the gap.This is also known as closing the gap. Here is a chart of two common gaps that have been filled.Notice that after the gap the prices have come down to at least the beginning of the gap? That iscalled closing or filling the gap.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 166
  • 166. A common gap usually appears in a trading range or congestion area, and reinforces the apparentlack of interest in the stock at that time. Many times this is further exacerbated by low tradingvolume. Being aware of these types of gaps is good, but doubtful that they will produce a tradingopportunities.Breakaway GapsBreakaway gaps are the exciting ones. They occur when the price action is breaking out of theirtrading range or congestion area. To understand gaps, one has to understand the nature ofcongestion areas in the market. A congestion area is just a price range in which the market hastraded for some period of time, usually a few weeks or so. The area near the top of the congestionarea is usually resistance when approached from below. Likewise, the area near the bottom of thecongestion area is support when approached from above. To break out of these areas requiresmarket enthusiasm and, either, many more buyers than sellers for upside breakouts or moresellers than buyers for downside breakouts.Volume will (should) pick up significantly, for not only the increased enthusiasm, but many areholding positions on the wrong side of the breakout and need to cover or sell them. It is better if thevolume does not happen until the gap occurs. This means that the new change in market directionhas a chance of continuing. The point of breakout now becomes the new support (if an upsidebreakout) or resistance (if a downside breakout). Dont fall into the trap of thinking this type of gap,if associated with good volume, will be filled soon. It might take a long time. Go with the fact that anew trend in the direction of the stock has taken place, and trade accordingly. Notice in the chartbelow how prices spent over 2 months without going lower than about 41. When they did, it waswith increased volume and a downward breakaway gap.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 167
  • 167. A good confirmation for trading gaps is if they are associated with classic chart patterns. Forexample, if an ascending triangle suddenly has a breakout gap to the upside, this can be a muchbetter trade than a breakaway gap without a good chart pattern associated with it. The chart belowshows the normally bullish ascending triangle (flat top and rising, lower trend line) with abreakaway gap to the upside, as you would expect with an ascending triangle.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 168
  • 168. Runaway GapsRunaway gaps are also called measuring gaps, and are best described as gaps that are causedby increased interest in the stock. For runaway gaps to the upside, it usually represents traderswho did not get in during the initial move of the up trend and while waiting for a retracement inprice, decided it was not going to happen. Increased buying interest happens all of a sudden, andthe price gaps above the previous days close. This type of runaway gap represents an almostpanic state in traders. Also, a good uptrend can have runaway gaps caused by significant newsevents that cause new interest in the stock. In the chart below, note the significant increase involume during and after the runaway gap.Runaway gaps can also happen in downtrends. This usually represents increased liquidation ofthat stock by traders and buyers who are standing on the sidelines. These can become veryserious as those who are holding onto the stock will eventually panic and sell – but sell to whom?The price has to continue to drop and gap down to find buyers. Not a good situation.The term measuring gap is also used for runaway gaps. This is an interpretation that is hard to findexamples for, but it is a way of helping one decide how much longer a trend will last. The theory isthat the measuring gap will occur in the middle, or half way, through the move.Sometimes, the futures market will have runaway gaps that are caused by trading limits imposedby the exchanges. Getting caught on the wrong side of the trend when you have these limit movesin futures can be horrifying. The good news is that you can also be on the right side of them.These are not common occurrences in the futures market despite all the wrong information beingtouted by those who do not understand it, and are only repeating something they read from anuninformed reporter.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 169
  • 169. Exhaustion GapsExhaustion gaps are those that happen near the end of a good up- or downtrend. They are manytimes the first signal of the end of that move. They are identified by high volume and large pricedifference between the previous days close and the new opening price. They can easily bemistaken for runaway gaps if one does not notice the exceptionally high volume.It is almost a state of panic if the gap appears during a long down move and pessimism has set in.Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps arequickly filled as prices reverse their trend. Likewise, if they happen during a bull move, somebullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap upwith huge volume; then, there is great profit taking and the demand for the stock totally dries up.Prices drop, and a significant change in trend occurs. Exhaustion gaps are probably the easiest totrade and profit from. In the chart, notice that there was one more day of trading to the upsidebefore the stock plunged. The high volume was the giveaway that this was going to be, either, anexhaustion gap or a runaway gap. Because of the size of the gap and the near doubling of volume,an exhaustion gap was in the making here.ConclusionThere is an old saying that the market abhors a vacuum and all gaps will be filled. While this mayhave some merit for common and exhaustion gaps, holding positions waiting for breakout orrunaway gaps to be filled can be devastating to your portfolio. Likewise, waiting to get on-board atrend by waiting for prices to fill a gap can cause you to miss the big move. Gaps are a significanttechnical development in price action and chart analysis, and should not be ignored. Japanesecandlestick analysis is filled with patterns that rely on gaps to fulfill their objectives.Volume 1/3 Your Guide • Financial Charts • Technical analysis • Page 170
  • 170. Volume 1/3Soft copy of “Your Comprehensive Guideto Technical Analysis of theStock Markets" can be obtained fromwww.stox.vn.This guide is partly available inVietnamese and video clips atwww.stox.vn

×