Techincal analysis chart patterns part 2

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Techincal analysis chart patterns part 2

  1. 1. Technical AnalysisChart Patterns
  2. 2. Rectangles• Signifies an important Consolidation/ContinuationPattern.• Equal pressure between buyers and sellers and thecombat is indecisive until a break out occurs.• Volume is usually high when rectangle begins to formand tapers off significantly as rectangle extends.• The breakout from the rectangle is fairly reliable, asprices do not return to the rectangle.
  3. 3. Rectangles• Rectangles can extend for few weeks to months.• If the duration is less than three weeks it isconsidered a flag, also a continuation pattern.• It is preferable that highs and lowsalternate( although not a pre-requisite)• Target price increase or decrease is usually thebreadth of the rectangle.
  4. 4. Rectangles
  5. 5. Flags• Usually a flag takes 5 days to 2 weeks toform.• Flags in a rising market are formed withslight downtrend.• Flags in a falling market are formed withslight uptrend
  6. 6. Flags
  7. 7. Rounding Bottom/Saucers• Rounding Bottoms occurs at marketbottoms when the investors interest in theshare is at its lowest ebb.• It is a long-term reversal pattern.• It represents a long consolidation patternsthat turns from bearish pattern to bullishpattern.
  8. 8. Saucers/Rounding Bottom
  9. 9. Saucers/Rounding Bottom
  10. 10. Gaps• Three types of Gaps• Runaway gaps• Breakaway Gaps• Exhaustion gaps
  11. 11. Runaway Gaps• Occurs when prices are in Uptrend orDowntrend.• Also Called Measuring Gaps• Generally occur halfway through the trend.
  12. 12. Runaway Gaps
  13. 13. Breakaway Gap• Usually occurs when price breaks out of aprice pattern.• Breakaway gap emphasizes the bullish orbearishness of the break out.
  14. 14. Breakaway Gap
  15. 15. Exhaustion Gaps• These gaps appear near the end of goodup or down trend.
  16. 16. Exhaustion Gaps
  17. 17. Rising Wedge• The rising wedge is a bearish pattern that begins wide atthe bottom and contracts as prices move higher and thetrading range narrows.• In contrast to symmetrical triangles, which have nodefinitive slope and no bullish or bearish bias, risingwedges definitely slope up and have a bearish bias.• The boundary line slope upwards with the lower linebeing at a steeper angle than the upper line.• Volume will decline as prices rise and the wedge evolves
  18. 18. Falling Wedge
  19. 19. Using the Moving Average• Shows the average value of a security’s priceover a period of time– Using compared or used in conjunction with EMA• The most commonly used averages are of20,30,50, 100 and 200 days– The longer the time span, the less sensitive themoving average to daily price changes– Moving averages are used to emphasize the directionof a trend and smooth out price and volumefluctuations (“noise”).
  20. 20. Moving Average
  21. 21. Moving Average (Continued)• Notice in April when the stock price dropped wellbelow its 50-day average (the green line).– Bearish signal• February it rose above its 50-day average andcontinued to rise for several weeks– Bullish signal• Typically, when a stock moves below its movingaverage it is a bad sign, above it is a good sign
  22. 22. Moving Averages (Continued)• What do the different days mean?– 20 days - choppy line. It isnt the most accurate,but is probably the most useful for short termtraders.– 30 day - similar to 20 day but provides a bit morecertainty for the trend.– 50 day - moving averages provide a much lessvolatile, smooth line. This can be used to detectsomewhat longer term trends.
  23. 23. – 100 day - similar to the 50 day, it is lessvolatile, and one of the most widely used forlong term trends.– 200 day - even less volatile, more of a rollingchart or smooth line. It doesnt react to quickmovements in the stock price therefore it isused for long term trends.
  24. 24. Strategies for Moving Averages• Filters– Used to increase confidence about an indicator• No set rules or things to look out for when filtering, justwhatever makes you confident enough to invest your money• For example you might want to wait until a security crossesthrough its moving average and is at least 10% above theaverage to make sure that it is a true crossover.– Remember, setting the percentile too high could result in"missing the boat" and buying the stock at its peak.• Another filter is to wait a day or two after the security crossesover, this can be used to make sure that the rise in thesecurity isnt a fluke or unsustained.– Again, the downside is if you wait too long then you could endup missing some big profits.
  25. 25. Strategies for Moving Averages(Continued)• Crossovers– Several different types of crossovers, but all of them involve twoor more moving averages.• In a double crossover you are looking for a situation where theshortest MA crosses through the longer one. This is almost alwaysconsidered to be a buying signal since the longer average issomewhat of a support level for the stock price.• For extra insurance you can use a triple crossover, whereby theshortest moving average must pass through the two higher ones.This is considered to be an even stronger buying indicator.• Moving average represents a smoothened trend andtherefore acts as a Support/Resistance Line.
  26. 26. Moving Averages• Simple Moving Average• Weighted Moving Average• Exponential Moving Average
  27. 27. SMA
  28. 28. WMA
  29. 29. SMA,WMA, EMA• The simple moving average gives equal weight to all data points.• By nature, it is the "true" average.• The exponential and weighted moving averages give the mostrecent data points the highest rankings or "weightings".• Therefore, the simple moving average tends to lag (by representingall data points equally) the exponential and weighted movingaverages during large price changes.• However, during "normal" or "flat" markets the differences becomenegligible.
  30. 30. Comparing Simple, Weighted andExponential Moving Averages
  31. 31. Breadth of the Market• Advance Decline Line• Stocks in positive trends• Percentage of stocks over movingaverage• High Low Statistics
  32. 32. AD LINE• The AD line and the Market generally movein tandem.• A divergence in the AD line is indicative of aturning pointDay Issues Traded Advances DeclinesNet(A-D) Cumulative
  33. 33. Generic P/V relationships• Volume is an indication of intensity of a pricechange• A price rise that is accompanied by expandingvolume is normal. Hence not an indication of anypotential trend reversal.• A New high reached with a volume that isactually diminishing is a warning to a reversal inprice change
  34. 34. P/Volume Relationships (Contd..)• If you have two consecutive peaks/rally. Lowervolume at the later rally is usually a trendreversal.• Selling Climax occurs when prices fall for aconsiderable time at an accelerated price andaccompanied by expanding volume.– Price may be expected to rise immediately. Indicatestermination of bear market.
  35. 35. Dow Theory• Six Basic tenets of Dow Theory• The average Discounts Everything– The share prices quoted in the market reflect all known andpredictable factors into account.• The market has three movements– Primary movements• One year to several years• Rising (bull) or falling (bearish) trend• Long term movement in prices– Secondary reactions• Run counter to primary trend and are reactionary in nature• Important Decline in a bull market or advance in a bear market.• Lasting three weeks to three months• Retraces 33 to 66% (Check the Next Slide)
  36. 36. Dow Theory
  37. 37. Dow Theory– Minor movements• No implications for long term forecasting• Usually part of primary or secondary movements
  38. 38. Dow Theory
  39. 39. Dow Theory• Price action determines trend– Up trend is formed when successive rallies lead topeaks that are higher than preceding ones.• Lines indicate movement– Accumulation between a primary bear trend– Distribution between a primary bull trend.– If prices advance above accumulation- reversal ofbearish trend.• Price/Volume relationships provide background• The averages must confirm– Transportation and Industrial Average
  40. 40. Oscillators– ROC index– MACD– RSI (Relative Strength Index)
  41. 41. ROC Index• Rate of Change = 100 (Y/Yx)• Y represents the most recent closingprice, and• Yx represents the closing price a specificnumber of days ago.• ROC rising gives a short-term bullishsignal• Bearish sign would have the ROC falling.
  42. 42. ROC
  43. 43. ROC• ROC index above reference line implies thecurrent price is at a higher level prevailing Xdays before.• If ROC is above reference line and rises, thenthe rate at which price increases grows. Any fallin ROC represents drop in momentum.• If index is falling but still above the referenceline, it represents a slow down in the rate ofprice increase
  44. 44. MACD• MACD uses moving averages, which are laggingindicators, to include some trend-followingcharacteristics.• These lagging indicators are turned into a momentumoscillator by subtracting the longer moving average fromthe shorter moving average.• The resulting plot forms a line that oscillates above andbelow zero, without any upper or lower limits.
  45. 45. MACD• The most popular formula for the "standard" MACD is the differencebetween a securitys 26-day and 12-day exponential movingaverages.• The 12-day EMA is the faster and the 26-day EMA is the slower.• Closing prices are used to form the moving averages.• Usually, a 9-day EMA is plotted along side to act as a trigger line.• A bullish crossover occurs when MACD moves above its 9-day EMAand a bearish crossover occurs when MACD moves below
  46. 46. MACD
  47. 47. RSI• Measures the strength of a stock/Market against itself.• The indicator is plotted in a range between zero and 100.• A reading above 70 is used to suggest that a security is overbought,• A reading below 30 is used to suggest that it is oversold.• RSI = 100 - 100 /(1 + RS )• RS = Average of x days up closes / Average of x days down closes
  48. 48. Relative Strength Index
  49. 49. Elliott Wave Theory
  50. 50. Elliot Wave Theory• One complete cycle has 8 waves, five way advancefollowed by three way down.• Waves one, three and five represent the impulse, orminor up-waves in a major bull move.• Waves two and four represent the corrective, or minordown-waves in the major bull move.• The waves lettered A and C represents the minor down-waves in a major bear move, while B represents the oneup-wave in a minor bear wave.
  51. 51. Elliot Wave Theory
  52. 52. Elliot Wave Theory• Grand Super cycle (200 years)• Super cycle• Cycle• Primary• Intermediate• Minor• Minute• Minuette• Sub-Minuette (Hours)
  53. 53. Elliot Wave Theory
  54. 54. Elliot Wave Theory Analysis
  55. 55. Elliot Wave Theory Analysis• The S&P 500 remains in bull mode and continues tooutperform the Nasdaq 100.• In Elliott terms, the index has taken on a 5-Wavestructure since mid August.• Wave 1 extends up to 1142,• Wave 2 declined to 1090,• Wave 3 advanced to 1218 and• Wave 4 fell to 1163.• The recent move above the upper trend line of the fallingwedge represents the beginning of Wave 5.
  56. 56. Elliot Wave Theory Analysis• As a Wave 5 advance, the upside projection would be toaround 1240-1245. Wave 5 is often 62 percent of Wave3 or equal to Wave 1.• The 62% stems from the Fibonacci number .618. As aFibonacci 62% of Wave 3, the upside target would be to1242 (1218 – 1090 = 128, 128 x .62 = 79, 1163 + 79 =1242).• Should a repeat of Wave 1 occur, the upside targetwould be to 1245 (1142 – 1060 = 82, 1163 + 82 = 1245).
  57. 57. Elliot Wave Theory Analysis• Regardless of the targets, Wave 5 shouldmove above the high of Wave 3 (1218).As long as the blue trend line extending upfrom the late October low holds, the bulltrend is firmly in place and further strengthshould be expected.
  58. 58. Contrary Opinion Theories• Odd lot theory• Odd lot index = Odd lot sales/ odd lotpurchases• a decline in this index indicate morepurchases in relation to sales. Smallinvestors are optimistic– Contrary theory says it is time to sell.
  59. 59. Contrary Opinion Theories• Mutual Fund Liquidity– When funds holds large liquid reserves, itsuggests they are bearish. Contrarians think itis good time to buy.

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