TECHNICAL ANALYSIS

Introduction
The Trend is Your Friend
Support & Resistance
Fibonacci Retracement
Round Numbers
Trendlines & Role Reversal
Channels
The Number 3
Percentage Requirements
Reversal Days
Price Gaps
Long Term Charts
Confirmation & Divergence
Major Reversal Patterns
I.
Head and Shoulders
II.
Inverse Head and Shoulders
III.
Double Top
IV.
Double Bottom
V.
Triple Top
VI.
Triple Bottom
VII.
Spike or V Top
VIII.
Spike or V Bottom
IX.
Rounding or Saucer Pattern
X.
Falling Wedge
XI.
Rising Wedge

Moving Averages
Simple/Exponential Moving Average
Double Crossover Method
Bollinger Bands
Oscillators
Relative Strength Indicator (RSI)
Stochastics
Moving
Average
Convergence/Divergence (MAC/D)
Japanese Candlesticks
Introduction
Candlestick Patterns Analysis
Reversal Candle Patterns
Continuation Patterns
Elliot Wave Theory
Introduction
Fractal Nature
Three Rules
Three Guidelines
Technical Checklist
Trade Checklist

Continuation Patterns
I.
Symmetrical / Coil
II.
Ascending
III.
Descending
IV.
Broadening Top
V.
Broadening Bottom
VI.
Cup and Handle
VII.
Flags & Pennants

TECHNICAL ANALYSIS I Introduction

Introduction
While Fundamental Analysis helps the investor determine the What and the Why.
Technical Analysis answers the When.
Technical Analysis is forecasting future price movement based on past price
movements. While it is not an absolute science, it studies market psychology to
anticipate what is likely to happen through a graphic representation. This type of
analysis can be applied to index, sector and individual stocks.
Basic Assumptions
(1) Price discounts everything
(2) Prices move in trends Up, Down, Sideways
(3) History repeats itself
Different types of charts are the Bar chart, Line chart, Point and Figure charts and the
popular Japanese Candlesticks.
A chart graphically represents a series of prices over a set period of time. While the
period can vary from seconds to decades, the more frequently used time scales are
intraday, daily, weekly, monthly, quarterly and annually. For a longer temr perspective,
chartists use the multi-year chart such as the 5-year and 10-year charts.

TECHNICAL ANALYSIS I The Trend is Your Friend, Support & Resistance

The Trend is Your Friend
A trend in motion will tend to remain in motion.
Market moves are made up of a series of zigzags (composed of peaks and troughs) that
move in a certain direction. An Uptrend is a series of successively higher peaks and
troughs. A Downtrend is the inverse a series of declining peaks and troughs. A
Sideways trend is a series of horizontal peaks and troughs.
A Trend has three directions: Up, Down and Sideways or also called a Trading
Range. A trader would go long (buy) in an uptrend, go short (sell) on a downtrend or
stay on the sidelines on a sideways/flat market. More adept traders can decide to Trade
the Range in a Sideways market assuming he has established a range and protective
stops in the case the market turns towards another direction whether up or down.
A Trend generally has three classifications: Major (in effect for longer than a
year), Intermediate (about 3 weeks to as many months) and Near-term (usually
less than 2 or 3 weeks). Each trend is a part of a larger trend as much as it is
comprised of smaller trends. For example, a corrective Intermediate trend could be a
pullback of an upward Major trend.
Support and Resistance & Role-Reversal
A Support is under a current price/level where the buying interest is sufficiently strong
to overcome the selling pressure. In effect, the decline is halted and prices turn back up
again. Usually a support is identified by a previous reaction low.
A Resistance is the opposite, it is over a current price/level where selling pressure
overcomes buying pressure and a price advance is turned back. Usually, a resistance is
identified by a previous peak.
Supports and Resistances are pauses in a Downtrend or Uptrend, respectively. They
can either be exceeded or maintained.
In an uptrend, each successive low (Support level) must be higher than the one
preceding it and each rally high (Resistance) must be higher than the one before it.
However, if a corrective dip in an uptrend retests the previous low, it may be an early
signal that the uptrend is ending or at least moving from an uptrend to a sideways trend.
If a Support level is violated then a trend reversal is likely.
In the case that a Support/Resistance is penetrated by a significant amount, they
reverse their roles. The previous resistance which is now under the market becomes a
support. Or the previous Support which is now over the market becomes a Resistance.

TECHNICAL ANALYSIS I Support & Resistance

Support becomes Resistance

Support becomes Resistance

Significance of a Support/Resistance is increased if (1) prices trade in that level for a

longer period of time, (2) the volume is higher and (3) the more recent the trading took
place.
To explain how a support level works in an uptrend: Think of the investors who are long
(who bought near the support and are delighted to see that prices are higher from their
cost), and the uncommitted (ones who sold too early and want to reposition or ones who
are still waiting to buy). Investors who are long whose purchase was validated with the
continued uptrend may want to add to their existing position on a pullback to the same
support level; while the uncommitted have either resolved to either buy back or initiate a
position at the same support level believing that the uptrend will continue. All these
groups will be interested to buy at the same support level, and if prices do decline to
that support or nearby, renewed buying will push prices up form that support level,
making it more significant.

TECHNICAL ANALYSIS I

Fibonacci Retracement, Round Numbers

Fibonacci Retracement

Discovered in the 13th century by Leonardo Fibonacci, the Fibonacci sequence is simply
the sum of the two preceding terms (1, 1, 2, 3, 5, 8, 13, etc.). However, what is more
important is the quotient of the adjacent terms that possesses an amazing proportion,
roughly 1.618, or its inverse 0.618. It has been called (phi), the Golden Mean or the
Divine Ratio because it seems to have a fundamental function from nature to
architecture to finance.
This tool is popular because it clearly identifies levels of potential support/resistance.
Notice in the chart above how identified levels (dotted lines) are barriers to the shortterm direction of the price.
Typically used are the 38.2%, 50% and 61.80%; however, more multiples can be used
as needed, 0%, 23.6%, 100%, 123.6% and so on. This can also be used to draw arcs,
fans and time zones.
Round Numbers
Round Numbers usually act as psychological Support and Resistance levels such as 1,
5, 10, 15 100 (and multiples of 1,000) which stop advances or declines. In practical
application, a trader should avoid placing orders at these obvious round numbers. This
can also apply to protective stops. For example, if a trader wants to buy into a short
term market dip, it would make more sense to place limit orders just above the
important round number; inversely, traders looking to sell on a bounce, should place sell
orders just below the round number. In some cases, although these round numbers are
hit, they do not represent much of the volume traded for the period.

TECHNICAL ANALYSIS I

Trendlines & Role Reversal

Trendlines & Role Reversal

A Trendline adds a line to a chart to represent the general trend in the market or a
stock. An up trendline is a straight line drawn upward to the right along successive
reaction lows. A down trendline is drawn downward to the right along successive rally
peaks.
In drawing a Trendline, as in drawing a line, the trader must be able to connect 2 points
- 2 successive reaction lows (in an uptrend) or 2 successive rally peaks (downtrend).
But only if prices move higher or lower, respectively, on the third point is the chartist
reasonably confident that a reaction low has been formed. The trader can then make
projections on price movements using the Trendline.
While a Trend in motion will tend to remain in motion, it can also be said that once a
Trend assumes a certain slope or rate of speed, as identified by a Trendline, it will
usually maintain the same slope. The Trendline helps determine extremities of
corrective phases and can even signal when a trend is changing.
Like a Support and Resistance level, a Trendline becomes more significant the longer it
has been intact and the more times it has been tested.
It is good to draw a Trendline along the closing prices as much as the low prices (which
factors in all action). However, there are no hard and fast rules, so a minor breach of the
trendline can be considered noise and ignored.
A trendline can reverse its role. An up trend line (a support line) will usually become a
resistance line once its decisively broken. Inversely, a down trendline (a resistance line)
will often become a support line once its decisively broken.

TECHNICAL ANALYSIS I

Channels, The Number 3

Channels

Also known as the Return line, a Channel line is the addition of two parallel Trendlines
that act as strong areas of support and resistance.
Drawing a Channel in an up Trendline involves the basic Trendline along the lows.
Then, a parallel line is drawn along the peaks. The inverse would apply to a down
Trendline.
Just like a basic Trendline, the longer the Channel remains intact and the more often its
successfully tested, the more significant and reliable it is.
In the case of a broken Channel, this could signify an acceleration of the existing trend.
Some traders view the clearing of the upper line in an uptrend as a reason to add to
long positions. Another way to use the channel is to spot failure.
The Number 3
For some reason, the Number 3 shows up in the study of technical analysis and the
important role it plays in many technical approaches. There are 3 major phases in both
the Dow Theory and the Elliot Wave Theory, there are 3 trend directions and 3 trend
classifications, 3 kinds of gaps, commonly known reversal patterns have three
prominent peaks like the triple top and the head and shoulders, and among the
generally accepted continuation patterns, there are 3 types of triangles (the
symmetrical, ascending and descending).
In the local market for example, traders tend to follow the 3-day rule on short-term
trades, wherein one can expect the peak (uptrend) or the trough (downtrend) of any
move on the third day (intraday or not), prompting the trader to sell on the second day
(to be conservative) or early on the third day on an uptrend or buy on the second day (if
buying more than one unit or so as not to miss the market) or early on the third day.

TECHNICAL ANALYSIS I

Percentage Requirements, Reversal Days

Percentage Requirements
After a particular market move, prices retrace a portion of the previous trend before
resuming in the original direction. These countertrend moves tend to fall into certain
predictable % parameters. If a trader is looking to buy under the market, a 33-38% to
50% is a general frame of reference for buying opportunities. The maximum
retracement area is 62-66% which becomes an especially critical area. While this
becomes a relatively low-risk buying or selling area in a downtrend, if prices move
beyond this the point, the odds will stack towards a trend reversal than just a
retracement. If so, the move can retrace the entire 100% of the prior trend.
This approach is used in the Dow Theory, Elliot Wave & Fibonacci.
Reversal Days
Also called the Top Reversal Day/Buying Climax, Bottom Reversal Day/Selling Climax,
and the Key Reversal Day. It takes place either at a top or bottom.

Top Reversal Day is usually a new high in an uptrend, followed by a lower close on the
same day. This means that prices set a new high (usually at or near the opening) then
weaken and actually close lower than the previous days closing. This can be
interpreted as sellers dominating buyers.
Bottom Reversal Day would be a new low during the day followed by a higher close on
the same day. This is when all the discouraged longs have been forced out of the
market on heavy volume and the subsequent absence of selling pressure allows prices
to quickly rally. This can be interpreted as buyers dominating the sellers. While this may
not mark the final bottom of a market, it may signal that a significant low has been seen.

TECHNICAL ANALYSIS I

Reversal Days, Price Gaps

The wider the range for the day and the heavier the volume, the more significant is the
signal for a possible near term trend reversal. Note that both the high and the low on the
reversal day exceed the range of the previous day, forming an outside day (when the
high is above the previous day's high and the low is below the previous day's low).
While not a requirement, the existence of an outside day carries more significance.
Weekly and Monthly Reversals show up on weekly and monthly charts, respectively.
An Upside Weekly Reversal would occur when the market trades lower during the
week, makes a new low for the move, but on Friday closes above the previous Fridays
close. Weekly reversals are much more significant than daily reversals. Meanwhile,
monthly reversals are even more important.
Price Gaps
Areas on the bar chart where no trading has taken place. In an uptrend, prices open
above the highest price of the previous day, leaving a gap or open space on the chart
that is not filled during the day. In a downtrend, the days highest price is below the
previous days low.
While upside gaps are signs of market strength, downside gaps are usually signs of
weakness. Although commonly seen on day charts, on long-term weekly and monthly
charts, they are usually very significant.
Although it is often said that gaps are always filled, it is not a hard and fast rule.
Different types of gaps have different forecasting implications depending on the type
and when they occur. The three general types are the Breakaway, the Runaway (or
Measuring Gap) and Exhaustion Gaps.

TECHNICAL ANALYSIS I

Price Gaps

The Breakaway Gap usually signals an important market move. After a market has
completed a major basing pattern, the breaking of resistance often occurs on a
breakaway gap. Major breakouts from topping or basing areas are breeding grounds for
this type of gap. The breaking of a major trendline, signaling a trend reversal, might also
see a breakaway gap. More often, breakaway gaps are not filled, meaning prices may
just return to to the upper end of the gap (in the case of a bullish breakout), or close just
a portion of the gap, with another portion unfilled. Upside gaps usually act as support
areas on subsequent market corrections. But when prices close below an upward gap, it
is a sign of weakness.
The Runaway or Measuring Gap occurs somewhere around the middle of the move,
prices will leap forward to form a second type of gap (or a series of gaps). In an uptrend,
its a sign of market strength while in a downtrend, its a sign of market weakness.
Runaway gaps act as support under the market on subsequent corrections and are
often not filled. But like in the Breakaway Gap, when prices move below the runaway
gap, it is a negative sign in an uptrend. Because it usually occurs mid-way of a move, a
trader can estimate the probable extent of the move by doubling the amount already
achieved.
The Exhaustion Gap appears near the end of a market move. After the two types of
gaps have been achieved, the trader must expect the Exhaustion Gap. Near the end of
an uptrend, prices leap forward in a last gap. However that upward leap quickly fades
and prices turn lower within a couple of days or within a week. When prices close under
the last gap, it is usually a dead giveaway that the exhaustion gap has made its
appearance. This would also work in a downtrend that has finally reached its trough.
The Island Reversal is when prices trade in a narrow range for a couple of days or
weeks before gapping to the downside. The few days/weeks of price action then looks
like an island surrounded by a space or water. This combination of gaps usually
signals an important reversal.

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TECHNICAL ANALYSIS I

Long Term Charts

Long Term Charts

While the daily bar chart is the most popular tool used in forecasting, the use of weekly
and monthly charts for longer range trend analysis and forecasting is very useful and
rewarding. Long term charts manage to compress more action providing a larger
perspective on the market.
Price patterns may appear to be more prominent such as Double Tops and Bottoms or
the Head and Shoulder Reversals. Triangles, which are usually continuation patterns,
are frequently seen. A trader will also be able to spot Weekly and Monthly Reversals
using this.
In chart analysis is best to begin with the long range and gradually work to the near
term. Once the analyst knows where the market is from a longer range perspective, the
analyst can zero in on the shorter term saving the trouble of constantly revising
conclusions as more price data is considered.
Long term charts are useful in the analytical process to help determine the major trend
and price objectives. For timing an entry and exit, daily and intraday charts are best
used.
Confirmation and Divergence
Confirmation refers to the comparison of all technical signals and indicators to ensure
the most of these indicators are pointing in the same direction and are confirming one
another.
Divergence is the opposite of confirmation and refers to a situation where different
technical indicators fail to confirm one another. Divergence is a valuable concept in
market analysis, and one of the best early warning signals of impending trend reversals.

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TECHNICAL ANALYSIS I

Major Reversal Patterns

Major Reversal Patterns

Price patterns are pictures or formations on charts that have predictive value.
Two major types of patterns are Reversal and Continuation. While Reversal Patterns
indicate a reversal in trend taking place, Continuation Patterns, suggest that the market
is only pausing for a while, possibly to correct a near term overbought or oversold
condition, after which the existing trend will be resumed.
Most price patterns also have certain measuring techniques to determine minimum
price objectives, thus, assists in determining risk-reward ratio. Note that the maximum
objective would be the total extent of the prior move, or the point at which it all began.
Preliminary points common to all reversal patterns:
1. The existence of a prior trend.
2. The first signal of an impending trend reversal is often the breaking of an
important trendline.
3. The larger the pattern, the greater the subsequent move. This refers to the height
(measures volatility) and the width (amount of time required to build and
complete the pattern).
4. Topping patterns are usually shorter in duration and more volatile than bottoms.
5. Bottoms usually have smaller price ranges and take longer to build.
6. Volume is usually more important on the upside. Volume should generally
increase in the direction of the market trend and is an important confirming factor
in the completion of all price patterns. In a market top, volume is not as
important, but at bottoms, the volume pick-up is absolutely essential. If the
volume pattern does not show a significant price increase during the upside
breakout, the entire price pattern should be questioned.
Some of the most commonly used major reversal patterns are the Head and Shoulders
(I) and the Inverse Head and Shoulders (II), Double Top (III) and Double Bottom (IV),
Triple Tops (V) and Triple Bottom (VI), Spike or V Tops (VII) and Spike or V Bottoms
(VIII), Rounding Bottom or Saucer Pattern (IX), Falling Wedge (X) and the Rising
Wedge (XI).

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TECHNICAL ANALYSIS I

Major Reversal Patterns (I) Head & Shoulders Reversal (Bearish)

I. Head & Shoulders Reversal (Bearish)

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.
1. There must be a Prior Trend to reverse. In this case, an uptrend.
2. 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. 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. 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, it not a strict requirement. The decline from the peak of the right shoulder should break
the neckline.
5. The Neckline forms by connecting low points 1 (end of left shoulder, beginning of the head) and
2 (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 pattern's 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. As the Head and Shoulders pattern unfolds, Volume plays an important role in confirmation.
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 and 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 completes the head and shoulders pattern and reverses the uptrend, usually in a
convincing manner such as increased 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. After breaking neckline support, the projected price decline (Price Target) is found by (1)
measuring the distance from the neckline to the top of the head; (2) subtracting the figure from
the neckline to reach a rough guide to a price target which can be used with other technical tools
such as Fibonacci retracement, Moving Average, etc.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (II) Inverse H&S Reversal (Bullish)

II. Inverse Head & Shoulders Reversal (Bullish)

The price action forming both Head and Shoulders Top and Head and Shoulders
Bottom patterns remains roughly the same, but reversed. The role of volume marks the
biggest difference between the 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.
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. After the reaction high forms the second neckline point, the
right shoulder's 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. 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.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (III) Double Top (Bearish)

III. Double Top (Bearish)

The pattern is made up of two consecutive peaks that are roughly equal, with a
moderate trough in-between. Although there can be variations, the classic Double Top
Reversal marks at least an intermediate change, if not a long-term change, in trend from
bullish to bearish. Many potential Double Top Reversals can form along the way up, but
until key support is broken, a reversal cannot be confirmed.
1. There must be a Prior Trend to reverse. In the case of the Double Top Reversal, a significant
uptrend of several months should be in place.
2. 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. After the first peak, a decline takes place that typically ranges from 10 to 20% called the Trough.
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. The Second Peak occurs when 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 Reversal 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. 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.
6. Even after trading down to support, the Double Top Reversal and trend reversal are still not
complete. Breaking Support from the lowest point between the peaks completes the Double Top
Reversal. This too should occur with an increase in volume and/or an accelerated descent.
7. 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. 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.

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TECHNICAL ANALYSIS I

Major Reversal Patterns Avoid Deceptive Double Top Reversals

Avoid deceptive Double Top Reversals.

1. The peaks should be separated by about a month. If the peaks are too close,
they could just represent normal resistance rather than a lasting change in the
supply/demand picture.
2. Ensure that the low between the peaks declines at least 10%. Declines less 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 trouble moving back up, demand could be drying up.
3. When the security does advance, look for a contraction in volume as a further
indication of weakening demand.
4. Wait for support to be broken in a convincing manner, and usually with an
expansion of volume. A price filter might require a 3% support break before
validation. A time filter might require the support break to hold for 3 days before
considering it valid. The trend is in force until proven otherwise. This applies to
the Double Top Reversal as well.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (IV) Double Bottom (Bullish)

IV. Double Bottom (Bullish)

The Double Bottom Reversal is the bullish reversal pattern counterpart of the Double
Top. The pattern is made up of two consecutive troughs that are roughly equal, with a
moderate peak in-between.
This is an intermediate to long-term reversal pattern that will not form in a few days.
Even though formation in a few weeks is possible, it is preferable to have at least 4
weeks between lows. Bottoms usually take longer than tops to form and patience can
often be a virtue. Give the pattern time to develop and look for the proper clues. The
advance off of the first trough should be 10-20%. The second trough should form a low
within 3% of the previous low and volume on the ensuing advance should increase.
Volume can be used to look for signs of buying pressure. Just as with the double top, it
is paramount to wait for the resistance breakout. The formation is not complete until the
previous reaction high is taken out.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (V) Triple Top (Bearish)

V. Triple Top (Bearish)

The Triple Top Reversal is a bearish reversal pattern. There are three equal highs
followed by a break below support. As major reversal patterns, these patterns usually
form over a 3 to 6 month period.
1. There should be a Prior Trend to reverse. In this case, an uptrend.
2. All Three Highs should be reasonably equal, well spaced and mark clear turning points to
establish resistance. The highs do not have to be exactly equal, but should be reasonably
equivalent to each other.
3. As the Triple Top Reversal 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. The Triple Top Reversal 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. Broken support becomes potential resistance, and there is sometimes a test of this newfound
resistance level with a subsequent reaction rally.
6. The distance from the support break to the highs can be measured and subtracted from the
support break for a Price Target. The longer the pattern develops, the more significant the
ultimate break. Triple Top Reversals that are 6 or more months old represent major tops and a
price target is less likely to be effective.
7. Throughout the development of the Triple Top Reversal, it can start to resemble a number of
other patterns. Before the third high forms, the pattern may look like a Double Top Reversal.
Three equal highs can also be found in an ascending triangle or rectangle. Of these patterns
mentioned, only the ascending triangle has bullish overtones; the others are neutral until a break
occurs. In this same vein, the Triple Top Reversal should also be treated as a neutral pattern until
a breakdown occurs. The inability to break above resistance is bearish, but the bears have not
won the battle until support is broken. Volume on the last decline off resistance can sometimes
yield a clue. If there is a sharp increase in volume and momentum, then the chances of a support
break increase.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (VI) Triple Bottom (Bullish)

VI. Triple Bottom (Bullish)

The Triple Bottom Reversal is a bullish reversal pattern counterpart of the Triple Top.
There are three equal lows followed by a break above resistance. As major reversal
patterns, these patterns usually form over a 3 to 6 month period

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TECHNICAL ANALYSIS I

Major Reversal Patterns (VII) Spike or V Top

VII. Spike or V Top

1. Uptrend: Look for price to make a straight-line run upward with few or no pauses, often fitting
inside a channel (two parallel trendlines).
2. Reversal: Price at the top of the inverted V will form a one-day reversal, island reversal, or tail,
usually on heavy volume.
3. After the reversal, price pierces an up-sloping trendline drawn along the price lows,
confirming the trend change.
4. Downtrend: Price trends down, usually at the mirror angle of the uptrend. If price climbed by 45
degrees, price will tumble following a 45 degree trend. The price trend tends to be a straight-line
run with few or no pauses, often fitting inside a channel.

Trading V tops is not an easy proposition. Draw a trendline along the bottoms as price
rises in the first part of the V. When price pierces the trendline, then check for any
fundamental news that would account for a reversal. Check other stocks in the same
industry to see how they are behaving. Sometimes, one stock will pull the industry down
with it. If you find no fundamental news and other stocks in the industry look good, then
the turn may not be at hand. Wait for 3 days and if price continues declining, then sell.
Of course, you can also sell once price closes below the trendline.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (VII) Spike or V Bottom

VIII. Spike or V Bottom

1.
2.
3.
4.

Downtrend: Look for price to make a straight-line run downward with few or no pauses, often
fitting inside a channel.
Reversal: Price at the bottom of the V will form a one-day reversal, island reversal, or tail,
usually on heavy volume, perhaps gapping upward.
After the reversal, price pierces a down-sloping trendline drawn along the price tops,
confirming the trend change.
Uptrend: Price trends up, usually at the mirror angle of the downtrend. If price dropped by 30
degrees, price will rise following a similar angle. The price trend tends to be a straight-line run
with few or no pauses, often fitting inside a channel.

Trading a V bottom is difficult because calling the turn at the bottom of the V is tough to
do correctly. You can use a down trendline (drawn along the descending price tops
leading to the V bottom) pierce as the buy signal but it's best to wait 2 or 3 days for price
to confirm the tend change. You can also check the mirror angle. Often price will rise in
an angle similar to the descent. If that appears to be the case, then buy. Check other
stocks in the same industry for a trend change. Usually the industry moves as a group
and a reversal in one still will appear in other stocks in the industry as well.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (IX) Rounding Bottom/Saucer Pattern (Bullish)

IX. The Rounding Bottom or Saucer Pattern (Bullish)

The Rounding Bottom is a long-term
reversal pattern that is best suited for
weekly charts. It is also referred to as a
saucer bottom, and represents a long
consolidation period that turns from a
bearish bias to a bullish bias.

1. 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. 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. 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. 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.
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. 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 identifiable shoulders. The head represents the low and is fairly central to the
pattern. The volume patterns are similar and confirmation comes with a resistance
breakout. While symmetry is preferable on the rounding bottom, the left and right side
do not have to be equal in time or slope. The important thing is to capture the essence
of the pattern.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (X) Rising Wedge (Bearish)

X. Rising Wedge (Bearish)

The Rising Wedge is a bearish pattern that
begins wide at the bottom and contracts as
prices move higher and the trading range
narrows. In contrast to symmetrical triangles,
which have no definitive slope and no bullish
or bearish bias, rising wedges definitely slope
up and have a bearish bias.
The pattern can also fit into the continuation
category. As a continuation pattern, the rising
wedge will still slope up, but the slope will be
against the prevailing downtrend. As a
reversal pattern, the rising wedge will slope
up and with the prevailing trend. Regardless
of the type (reversal or continuation), rising
wedges are bearish.

1. 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. 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. At least two reaction lows are required to form the Lower Support Line. Each reaction low
should be higher than the previous low.
4. The upper resistance line and lower support line contract and 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.
5. 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. Ideally, volume will decline as prices rise and the wedge evolves. An expansion of volume
on the support line break can be 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 gives the pattern its bearish bias. However, the series of higher highs
and higher lows keeps the trend inherently bullish. The final break of support indicates
that the forces of supply have finally won out and lower prices are likely. There are no
measuring techniques to estimate the decline other aspects of technical analysis
should be employed to forecast price targets.

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TECHNICAL ANALYSIS I

Major Reversal Patterns (XI) Falling Wedge (Bullish)

XI. Falling Wedge (Bullish)

The Falling Wedge is a bullish pattern that
begins wide at the top and contracts as prices
move lower. This price action forms a cone
that slopes down as the reaction highs and
reaction lows converge. In contrast to
symmetrical triangles, which have no definitive
slope and no bias, falling wedges definitely
slope down and have a bullish bias. However,
this bullish bias cannot be realized until a
resistance breakout.
The falling wedge can also fit into the
continuation category. As a continuation
pattern, the falling wedge will still slope down,
but the slope will be against the prevailing
uptrend. As a reversal pattern, 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. 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. 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.
3. At least two reaction lows are required to form the lower Support Line. Each reaction low should
be lower than the previous lows.
4. The upper resistance line and lower support line contract and 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. 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. While Volume is not particularly important on rising wedges, Volume 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.
7. As with rising wedges, the falling wedge can be one of the most difficult chart patterns to
accurately recognize and trade. When lower highs and lower lows form, as in a falling wedge, a
security remains in a downtrend. The falling wedge is designed to spot a decrease in downside
momentum and alert technicians to a potential trend reversal. Even though selling pressure may
be diminishing, demand does not win out until resistance is broken.

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TECHNICAL ANALYSIS I

Continuation Patterns

Continuation Patterns
These patterns usually a sideways price action or a pause in the prevailing trend, and
that the next move will be in the same direction as the trend that preceded the
formation.
Reversals usually take much longer to build and represent major trend changes.
Continuation patterns, on the other hand, are usually shorter in duration and are more
accurately classified as near term or intermediate patterns.
In chart pattern analysis, there are always exceptions. Triangles are usually
continuation patterns, but sometimes act as reversal patterns. Although triangles are
usually considered intermediate patterns, they may occasionally appear on long term
charts and take on major trend significance. A variation of the triangle the inverted
variety, usually signals a market top. Conversely, the head and shoulders pattern, the
best known of the major reversal patterns, will on occasion be seen as a consolidation
pattern.
There are three types of triangles Symmetrical / Coil (I), Ascending (II) and
Descending (III). Other notable continuation patterns include the Broadening Top (IV),
Broadening Bottom (V), and the Cup and Handle (VI). There are also short-term
continuation patterns like the Flags and Pennants (VII). Like the major reversal patterns,
each type has a slightly different shape and has different forecasting implications.

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TECHNICAL ANALYSIS I

Continuation Patterns (I) Symmetrical / Coil

I. Symmetrical or Coil

The symmetrical triangle, which can also be referred to as a coil, usually forms during a
trend as a continuation pattern. The pattern contains at least two lower highs and two
higher lows. When these points are connected, the lines converge as they are extended
and the symmetrical triangle takes shape. You could also think of it as a contracting
wedge, wide at the beginning and narrowing over time.
While there are instances when symmetrical triangles mark important trend reversals,
they more often mark a continuation of the current trend. Regardless of the nature of the
pattern, continuation or reversal, the direction of the next major move can only be
determined after a valid breakout.
1. 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. 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. 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.

26

4. The symmetrical triangle can extend for a few weeks or many months. Typically,
the time duration is about 3 months. If the pattern is less than 3 weeks, it is
usually considered a pennant.
5. The ideal breakout point occurs 1/2 to 3/4 of the way through the pattern's
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. The future direction of the breakout can only be determined after the break
has occurred. Sounds 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. 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. 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. There are two methods to estimate the extent of the move (Price Target)
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 pattern's trend line that slopes (up or down) in the direction of the
break. The extension of this line will mark a potential breakout target.
10. Edwards and Magee suggest that roughly 75% of symmetrical triangles are
continuation patterns and the rest mark reversals. The reversal patterns can
be especially difficult to analyze and often have false breakouts. Even so, we
should not anticipate the direction of the breakout, but rather wait for it to happen.
Confirmation is especially important for upside breakouts.
11. Prices sometimes return to the breakout point of apex on a reaction move
before resuming in the direction of the breakout. This return can offer a
second chance to participate with a better reward to risk ratio. Potential reward
price targets found by measurement and parallel trend line extension are only
meant to act as rough guidelines.

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TECHNICAL ANALYSIS I

Continuation Patterns (II) Ascending or Right-Angle Triangle (Bullish)

II. Ascending or Right-Angle Triangle (Bullish)

The ascending triangle is a bullish formation that usually forms during an uptrend as a
continuation pattern. There are instances when ascending triangles form as reversal
patterns at the end of a downtrend, but they are typically continuation patterns.
Regardless of where they form, ascending triangles are bullish patterns that indicate
accumulation.

Two or more equal highs form a horizontal line at the top. Two or more rising troughs
form an ascending trend line that converges on the horizontal line as it rises. If both
lines were extended right, the ascending trend line could act as the hypotenuse of a
right triangle. If a perpendicular line were drawn extending down from the left end of the
horizontal line, a right triangle would form.
1. 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. At least 2 reaction highs 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. 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.

28

4. 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: 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. Once the breakout has occurred, the price projection (Price Target) is found by
measuring the widest distance of the pattern and applying it to the resistance
breakout.
8. In contrast to the symmetrical triangle, an ascending triangle has a definitive
bullish bias before the actual breakout. If you will recall, the symmetrical triangle
is a neutral formation that relies on the impending breakout to dictate the
direction of the next move. On the ascending triangle, the horizontal line
represents overhead supply that prevents the security from moving past a certain
level. It is as if a large sell order has been placed at this level and it is taking a
number of weeks or months to execute, thus preventing the price from rising
further. Even though the price cannot rise past this level, the reaction lows
continue to rise. It is these higher lows that indicate increased buying pressure
and give the ascending triangle its bullish bias.

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TECHNICAL ANALYSIS I

Continuation Patterns (III) Descending or Right-Angle Triangle (Bearish)

III. Descending Triangle or Right Angle-Triangle (Bearish)

The descending triangle is the bearish pattern counterpart of the Ascending Triangle.
The pattern that usually forms during a downtrend as a continuation pattern. There are
instances when descending triangles form as reversal patterns at the end of an uptrend,
but they are typically continuation patterns. Regardless of where they form, descending
triangles are bearish patterns that indicate distribution.
Two or more comparable lows form a horizontal line at the bottom. Two or more
declining peaks form a descending trend line above that converges with the horizontal
line as it descends. If both lines were extended right, the descending trend line could act
as the hypotenuse of a right triangle. If a perpendicular line were drawn extending up
from the left end of the horizontal line, a right triangle would form.
In contrast to the symmetrical triangle, a descending triangle has a definite bearish bias
before the actual break. The symmetrical triangle is a neutral formation that relies on the
impending breakout to dictate the direction of the next move. For the descending
triangle, the horizontal line represents demand that prevents the security from declining
past a certain level. It is as if a large buy order has been placed at this level and it is
taking a number of weeks or months to execute, thus preventing 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 selling pressure
and give the descending triangle its bearish bias.

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TECHNICAL ANALYSIS I

Continuation Patterns (IV) Broadening Top (Bearish)

IV. Broadening Top (Bearish)

1. Price trend: Upward leading to the pattern.

2. A megaphone: Higher peaks and lower troughs. At least two peaks and two
valleys should touch their respective trendlines. It is also known by the name
Megaphone or Expanding Triangle.
3. The top trendline slopes upward, the bottom one slopes downward.
4. Volume is often often U-shaped.
5. Breakout: Can occur in any direction (about 50%) and it happens when price
pierces a trendline or moves beyond the end of the pattern.
A pattern that occurs during high volatility, when a security shows great movement with
little direction. As the two trendlines diverge from the apex, the pattern resembles a
reverse version of a symmetrical triangle. This pattern is considered quite rare, but is
useful in helping technicians to identify swing trades, rather than trend trades.

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TECHNICAL ANALYSIS I

Continuation Patterns (V) Broadening Bottom (Bullish)

V. Broadening Bottom (Bullish)

1. Price trend: Downward 85% of the time leading to the pattern.

2. Megaphone Shape: Higher peaks and lower torugh. At least two peaks and two
valleys should touch the associated trend line. It is also known by the name
Megaphone or Expanding Triangle.
3. The top trend line slopes upward, the bottom one slopes downward.
4. Volume: Upward 57% to 58% of the time.
5. Breakout: Can occur in any direction (upward 53% of the time) and it happens
when price pierces a trendline or moves beyond the end of the pattern.
Notice that if you draw the top trendline to connect point B instead of C, the pattern
would take on the appearance of a right-angled and descending broadening formation
because the top trendline would be flat or nearly so. Also, price at E bounces to D and
then makes a lower low at F. Point D looks like a partial rise which fails when the
predicted breakout at F does not occur. This is one example of why trading broadening
bottoms for profit is difficult, even if relying on a partial decline or partial rise.

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TECHNICAL ANALYSIS I

Continuation Patterns (VI) Cup and Handle (Bullish)

VI. Cup and Handle (Bullish)

The Cup with Handle is a bullish continuation pattern that marks a consolidation period
followed by a breakout.
There are two parts to the pattern: the cup and the handle. The cup forms after an
advance and looks like a bowl or rounding bottom. As the cup is completed, a trading
range develops on the right hand side and the handle is formed. A subsequent breakout
from the handle's trading range signals a continuation of the prior advance.
1. 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. 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. 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 conforms with Dow Theory.
4. 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 it is just a short pullback. The handle represents
the final consolidation/pullback before the big breakout and can retrace up to 1/3
of the cup's advance, but usually not more. The smaller the retracement, 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.

33

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.
6. There should be a substantial increase in Volume on the breakout above the
handle's resistance.
7. The projected advance after breakout (Price Target) 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 the particulars. The cup is a bowl-shaped consolidation and the handle is a short
pullback followed by a breakout with expanding volume. A cup retracement of 62% may
not fit the pattern requirements, but a particular stock's pattern may still capture the
essence of the Cup with Handle.

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TECHNICAL ANALYSIS I

Continuation Patterns (VI) Flags, Pennants

VII. Flags, Pennants

Flags and Pennants are short-term continuation patterns that mark a small
consolidation before the previous move resumes. These patterns are usually preceded
by a sharp advance or decline with heavy volume, and mark a mid-point of the 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.
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.
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.
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.
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
35

symmetrical triangle. The reliability of patterns that fall between 8 and 12

weeks is debatable.
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.
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.
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 (Price Target).

Even though flags and pennants are common formations, identification guidelines
should not be taken 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 could carry added risk. Look for volume confirmation
on the initial move, consolidation and resumption to augment the robustness of pattern
identification.

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TECHNICAL ANALYSIS I

Moving Averages SMA, EMA, Double Crossover Method

Moving Averages
The Moving Average is an average of certain body of data, smoothening data to show
a trend more clearly.

Example
If a 10 day average of closing prices is desired, the prices for the last 10 days are added
up and the total is divided by 10. The term moving is used because only the latest 10
days prices are used in the calculation. Each day the new close is added to the total
and the close 11 days back is subtracted. The new total is then divided by the number
of days (10).
As a trend following device, it tracks the progress of the trend. It is meant to identify or
signal that a new trend has begun or that an old trend has ended or reversed. However,
it does not predict market action in the same sense that standard chart analysis
attempts to do. It never anticipates; it only reacts.
A shorter moving average, such as a 20 day average, would hug the price action more
closely than a 200 day average. The time lag is reduced with shorter averages but can
never be completely eliminated. Shorter term averages are more sensitive to price
action, while longer term averages are less sensitive.
Simple / Exponential Moving Average
The Simple Moving Average (SMA) is used by most technical analysts. However, the
tool only interprets the period covered by the average. The SMA gives equal weight to
each days price but some chartists think that heavier weight should be given to the
more recent price action.

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TECHNICAL ANALYSIS I

Moving Averages SMA, EMA, Double Crossover Method

Some traders just use one moving average wherein a buy signal is triggered when the
closing price is above the moving average. Inversely, a sell signal is triggered when the
closing price moves below the moving average.
While a sensitive signal has the advantage of giving trend signals earlier in the move, it
also signals more possible trades (with higher commission costs) and can result in
many false signals (whipsaws).
The longer average performs better while the trend remains in motion. However, the
insensitivity of the longer average (because it is trailing the trend from a greater
distance), works against the trader when the trend actually reverses.
The longer average works better as long as the trend remains in force, but a shorter
average is better when the trend is in the process of reversing.
The Exponential Moving Average (EMA) assigns a greater weight to the more recent
data; therefore, it is a weighted moving average. The tool is more flexible in that the
user is able to adjust the weighting assigned to give greater or lesser weight to the most
recent days price.
The Double Crossover Method uses two moving averages. A buy signal is produced
when the shorter average crosses above the longer. The technique of using two
averages together lags the market a bit more than the use of a single average but
produces fewer whipsaws. Two popular combinations are the 5 and 20 day averages
and the 10 and 50 day.
Stock Traders usually use a combination of any of the 10, 20, 50, 100 and 200 day
moving averages.

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TECHNICAL ANALYSIS I

Bollinger Bands

Bollinger Bands

Two trading bands are placed around a moving average. Bollinger Bands are placed
two standard deviations above and below the moving average, which is usually 20 days.
Standard deviation is a statistical concept that describes how prices are dispersed
around an average value. Using two standard deviation ensures that 95% of the price
data will fall between the two trading bands.
Prices on the upside are overbought when they touch the upper band and oversold on
the downside when they touch the lower band. Upper and lower bands are used as
price targets. If prices bounce off the lower band and cross above the 20 day average,
the upper band becomes the price target and vice versa. In a strong uptrend, prices will
usually fluctuate between the upper and 20 day average. In this case, the crossing
below the 20 day average warns of a trend reversal to the downside.
Bollinger bands expand (in periods of volatility) and contract (in periods of low volatility)
based on the last 20 days volatility. When the bands are usually far apart, that is often a
sign that the trend may be ending. When the bands have narrowed too much, that is
often a sign that a market may be about to initiate a new trend.

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TECHNICAL ANALYSIS I

Oscillators

Oscillators
Oscillators are alternatives to the trend-following tools and are useful in nontrending
markets where prices fluctuate in a trading range. It is also valuable used in conjunction
with price charts in trending phases, alerting the trader to short term market extremes
referred to as overbought or oversold conditions. The oscillator can also warn that a
trend is losing momentum before the situation becomes evident in the price action itself.
Oscillators can signal a trend may be nearing completion by displaying certain
divergences.
Most oscillators look very much alike, plotted along the of the price chart and resemble
a flat horizontal band. The oscillator band is basically flat while prices may be trading
up, down or sideways. However, the peaks and troughs in the oscillator coincide with
the peaks and troughs on the price chart. Some oscillators have a midpoint value that
divides the horizontal range into two halves, an upper and a lower. Depending on the
formula used, this midpoint line is usually a zero line. Some oscillators also have upper
and lower boundaries ranging from 0 to 100.
As a general rule, when the oscillator reaches an extreme value in either the upper or
lower end of the band, this suggests that the current price move may be due for a
correction or consolidation. The trader should be buying when the oscillator line is in the
lower end of the band (oversold) and selling in the upper end (overbought).
The oscillator is most useful in in three situations:
1. An extreme reading in an oscillator is when it is near the upper (overbought) or
lower part (oversold) of the band.
2. A divergence between the oscillator and the price action when the oscillator is in
an extreme position is usually an important warning.
3. The crossing of the zero (or midpoint) line can give important trading signals in
the direction of the price trend.

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Oscillators, Relative Strength Index (RSI)

The Relative Strength Index (RSI)

While a 14 day period is the standard used, trader can change the period and adjust the
sensitivity. The shorter the time period, the more sensitive the oscillator becomes and
the wider its amplitude. RSI works best when its fluctuations reach the upper and lower
extremes. Therefore, if the user is trading on a very short term basis and wants the
oscillator swings to be more pronounced, the time period can be shortened. Inversely,
the time period is lengthened to make the oscillator smoother and narrower in
amplitude. The amplitude in the 9 day oscillator is greater than the 14 day. Some
technicians use shorter lengths, such as 5 or 7 days, to increase the volatility of the RSI
line. Others use 21 or 28 days to smooth out the RSI signals.
The RSI has a vertical scale of 0 to 100. Moves above 70 are considered overbought,
while an oversold condition would be a move under 30. In bull and bear markets, these
standards can change wherein the 80 level usually becomes the overbought level in bull
markets and the 20 level becomes the oversold level in bear markets. Note that this
standard changes when a shorter or longer time period. In a 3 day RSI, 90 can become
the overbought level while 10 can be oversold.
Failure swings occur when the RSI is above 70 or under 30. A top failure swing occurs
when a peak in the RSI (over 70) fails to exceed the previous peak in a an uptrend,
followed by a downside break of a previous trough. A bottom failure swing occurs when

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TECHNICAL ANALYSIS I

Oscillators, Relative Strength Index (RSI)

the RSI is in a downtrend (under 30), fails to set a new low, and then proceeds to
exceed a previous peak.
Divergence between the RSI and the price line, when the RSI is above 70 or below 30,
is a serious signal to note.
Another consideration is that any strong trend, either up or down, usually produces an
extreme oscillator reading. In these cases, claims that a market is overbought or
oversold can be premature and can lead to an early exit from a profitable trend. The
trader can shift time periods to suit his charting needs. The first move into the
overbought or oversold region is usually just a warning. The signal to pay close
attention to is the second move by the oscillator into danger zone. If the second move
fails to confirm the price move into new highs or new lows (forming a double top or
bottom on the oscillator), a possible divergence exists. This can be a cue to take
defensive action by protect existing positions. If the oscillator moves in the opposite
direction, breaking a previous high or low, then a divergence or failure swing is
confirmed. The 50 level is the RSI midpoint value, and will often act as support during
pullbacks and resistances during bounces. Some traders also treat RSI crossings above
and below the 50 level as buying and selling signals respectively.

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TECHNICAL ANALYSIS I

Oscillators Stochastics

Stochastics

Based on the observation that as prices increase, closing prices tend to be closer to the
upper end of the price range. In downtrends, the closing price tends to be near the
lower end of the range. Two lines are used in the Stochastic process the %K line and
the %D line wherein %D is the more important line, providing the major signals. The tool
helps determine where the most recent closing price is in relation to the price range for
a chosen time period. The %D line (3-period moving average of the %K line) produces a
version called fast stochastics and slow stochastics. Most traders use the slow
stochastics because of its more reliable signals.
A very high reading (over 80) would put the closing price near the top of the range,
while a low reading (under 20) near the bottom of the range.
Two lines will oscillate between 0 and 100. The K line is a faster line, while the D line is
a slower line. The major signal to watch for is a divergence between the D line and the
price of the underlying market when the D line is in an overbought or oversold area. The
upper and lower extremes are the 80 and 20 values.
A bearish divergence occurs when the D line is over 80 and forms 2 declining peaks
while prices continue to move higher. A bullish divergence is present when the D line is
under 20 and forms 2 rising bottoms while prices continue to move lower. Assuming all
of these factors have been set up, the actual buy or sell signal is triggered when the
faster K line crosses the slower D line.

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TECHNICAL ANALYSIS I

Oscillators Moving Average Convergence/Divergence (MAC/D)

Moving Average Convergence/Divergence (MACD)

Combines some oscillator principles with a dual moving average crossover approach.
The faster line (MACD line) is the difference between 2 exponentially smoothed moving
averages of closing prices (usually the last 12 and 26 says or weeks). The slower line
(signal line) is usually a 9 period exponentially smoothed average of the MACD line.
The actual buy and sell signals are given when the two lines cross. A crossing by the
faster MACD line above the slower signal line is a buy signal. A crossing by the faster
MACD line below the signal line is a sell signal. The MACD resembles a dual moving
average crossover method but also fluctuates above and below a zero line, resembling
an oscillator.
An overbought condition is when lines are too far above the zero line. An oversold
condition is when the lines are too far below the zero line. The best buy signals are
given when the prices are well below the zero line (oversold). Crossings above and
below the zero line are another way to generate buy and sell signals respectively.
Divergences appear between the trend of the MACD lines and the price line. A
negative, or bearish, divergence exists when the MACD lines are well above the zero
line (overbought) and start to weaken while prices continue to trend higher. Often a
warning of a market top. A positive, or bullish divergence exists when the MACD lines
are well below the zero line (oversold) and start to move up ahead of the price line.
Often an early sign of a market bottom. Simple trendlines can be drawn on the MACD
lines to help identify important trend changes.

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TECHNICAL ANALYSIS I

Japanese Candlesticks

Japanese Candlesticks
Japanese Candlesticks present the same data as a line bar open, high, low and close
but is more easily interpreted and analyzed.
White/Open Body
Close price higher than the open price.
Black/Filled Body
Close price lower than open price.
Wicks/Hairs/Shadows
High and Low prices

Different Body/Shadow combinations have different meanings, for example:

Long Days - Difference between open and close is great. Long white candlesticks
show strong buying pressure while long black candlesticks show strong selling
pressure. Short Days - Difference between open and close is short. Long upper
shadow and short lower shadow indicate that buyers dominated during the
session, and bid prices higher. However, sellers later forced prices down from their
highs, and the weak close created a long upper shadow. Conversely, candlesticks
with long lower shadows and short upper shadows indicate that sellers dominated
during the session and drove prices lower. However, buyers later resurfaced to bid
prices higher by the end of the session and the strong close created a long lower
shadow.

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TECHNICAL ANALYSIS I

Japanese Candlesticks

Marubozu are more potent long candlesticks. They

do not have upper or lower shadows and the high and
low are represented by the open or close. A White
Marubozu forms when the open equals the low and
the close equals the high. This indicates that buyers
controlled the price action from the first trade to the
last trade. Black Marubozu form when the open
equals the high and the close equals the low. This
indicates that sellers controlled the price action from
the first trade to the last trade.
Spinning Tops are small bodies with upper and
lower shadows of greater length. Body color is less
relevant as these are considered indecision days.

Doji. Open and Close prices are equal but can shadows of varying length.
Long-legged Doji. Long upper shadow and lower shadows. Indecision.
Gravestone Doji. Long upper shadow and no longer shadow. Bearish.
Dragonfly Doji. Opposite of a Gravestone Doji, long lower shadow and no upper
shadow. Bullish.

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TECHNICAL ANALYSIS I

Japanese Candlesticks

Candlestick Patterns Analysis

Candlestick Patterns Analysis sees candle patterns as a depiction of traders mentality
at the time. Can consist of a single candlestick or a combination (usually no more than
5). Patterns are used to determine reversals and trend continuation. A pair of patterns
that work in both bullish and bearish situations usually have the same name; however,
in some cases, counterparts have completely different names.
Reversal Candle Patterns
Reversal Candle Patterns must always be bucking the trend. There are 40 reversal
candle patterns from single candlestick to more complex patterns of 5 candlesticks.
Some of the more popular patterns are:

Dark Cloud Cover (Bearish) is 2-day reversal pattern. An uptrend is in place.

The first day is a long white candlestick (confirming uptrend). The next day opens
above the high price of the previous day, adding to the bullishness. However,
trading for the rest of the day is lower with a close price at least below the midpoint of the body of the first day. Since the close price is below the open price, on
the second day, the body is black. This is the dark cloud.

Piercing Line (Bullish) Counterpart of the Dark Cloud Cover. A downtrend is

in place. The first candlestick is a long black day. The next day, prices open at a
new low and then trade higher all day and close above the midpoint of the first
candlesticks body.

Evening Star (Bearish) is a 3-day reversal pattern. The first day is a long white
candlestick enforcing the uptrend. On the second day, prices gap up above the
body of the first day but trading is somewhat restricted and close price is near the
open price, while remaining above the body of the first day. This type of day
following a long day is a Star pattern. A Star is a small body day that gaps away
from a long body day. The third and last day opens with a gap below the body of
the star and closes lower with the close price below the midpoint of the first day.
The Morning Star is the bullish counterpart for this pattern.

Note: Some patterns may not meet each detail exactly. Details can be subjective when
viewing a candlestick chart.

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TECHNICAL ANALYSIS I

Japanese Candlesticks

40 Major Candlestick Patterns

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TECHNICAL ANALYSIS I

Japanese Candlesticks

Continuation Patterns
Each trading day, a decision has to be made whether it is to exit a trade, enter a trade,
or remain in a trade. The continuation pattern will help answer the question as to
whether or not to remain in a trade. There are 16 continuation patterns. A bullish
continuation pattern can only occur in an uptrend while a bearish continuation pattern
can only occur in a downtrend.

Rising Three Methods (Bullish) The first day is a long white day, supporting
the uptrending market. However, over the course of the next 3 trading periods,
small body days occur which, as a group, trend downward but remain within the
range of the first days long white body and at least two of these three smallbodied days have black bodies; also known as a period of rest. On the fifth day,
another long white day develops which closes at a new high. As prices break out
of the short-term trading range, the uptrend will continue.

Note: Some patterns may not meet each detail exactly. Details can be subjective when
viewing a candlestick chart.

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TECHNICAL ANALYSIS I

Japanese Candlesticks

40 Advanced Candlestick Patterns

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TECHNICAL ANALYSIS I

Elliot Wave Theory

Elliot Wave Theory

Developed by R.N. Elliott and popularized by Robert Prechter in the 70s.
Suggests that crowd behavior ebbs and flows in clear trends. Identified a certain
structure to price movements in the financial markets. The theory has a basic 5-wave
impulse sequence and 3-wave corrective sequence. The theory gets more complicated
than the 5-3 combination, but here only basic will be discussed.
2 Types of Waves: impulse and corrective. Impulse waves, also called motive waves,
move in the direction of the larger degree wave, the bigger trend. While corrective
waves move against the larger degree wave.
When the larger degree wave is up, advancing waves are impulsive and declining
waves are corrective. When the larger degree wave is down, impulse waves are down
and corrective waves are up.
Complete 8 Wave Cycle

A basic impulse wave forms a 5-wave sequence, labeled above as Bigger Wave I (1-23-4-5). Waves 1, 3 and 5 are impulse waves because they move with the trend. Waves
2 and 4 are corrective waves because they move against this bigger trend.
A basic corrective wave forms with three waves, typically a, b and c, labeled above as
Bigger Wave II (a-b-c). In this wave, a and c are impulse waves (green). This is
because they are in the direction of the larger degree wave. This entire move is clearly
down, which represents the larger degree wave. Wave b, on the other hand, moves
against the larger degree wave and is a corrective wave (red).

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TECHNICAL ANALYSIS I

Elliot Wave Theory

Fractal Nature

Fractal means that wave structure for the GrandSuper Cycle is the same as for the
minuette. No matter how big or small the wave degree, impulse waves take on a 5-wave
sequence and corrective waves take on a 3-wave sequence. Any impulse wave
subdivides into 5 smaller waves. Any corrective wave subdivides into three smaller
waves. The charts below show the fractal nature of Elliott Wave in action.
Note: The Elliott Wave Theory assigns a series of categories to the waves from largest
to smallest. They are: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate,
Minor, Minute, Minuette, Sub-Minuette.

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TECHNICAL ANALYSIS I

Elliot Wave Theory

Three Rules

Rule 1:
Rule 2:

Rule 3:

Wave 2 cannot retrace more than 100% of Wave 1. A break below this low
would call for a re-count.
Wave 3 can never be the shortest of the three impulse waves. 1 or 5 can
be longer than Wave 3, but both cannot be longer than Wave 3. Wave 3
must exceed the high of Wave 1. Failure to exceed this high would call for
a re-count. Impulse moves are all about making progress.
Wave 4 can never overlap Wave 1. The low of Wave 4 cannot exceed the
high of Wave 1. A break would call for a re-count.

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TECHNICAL ANALYSIS I

Elliot Wave Theory

Three Guidelines

Guideline 1:

When Wave 3 is the longest impulse wave, Wave 5 will approximately

equal Wave 1. The first guideline is useful for targeting the end of Wave
5, or at least initial projections.

Guideline 2:

The forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp
correction, Wave 4 will be a flat correction. If Wave 2 is flat, Wave 4 will be
sharp. Useful for determining the time of correction for Wave 4. In
practice, Wave 2 tends to be a rather sharp wave that retraces a large
portion of Wave 1. Wave 4 comes after an extended Wave 3. This Wave 4
marks more of a consolidation that lays the groundwork for a Wave 5
trend resumption.

Guideline 3:

After a 5-wave impulse advance, corrections (abc) usually end in the area
of prior Wave 4 low. Waves 1-2-3-4-5 are lesser degree waves within
Wave I. Once the Wave II correction unfolds, chartists can estimate its
end by looking at the end of the prior wave 4 (lesser degree wave 4).
Waves I and II are part of a larger degree uptrend.

Elliott Wave Theory application is highly subjective. In the case of using less emphasis
on the correct wave count, a trader can still be profitable by determining the primary
direction of the trend, properly differentiate between the primary and corrective waves,
and use tight stops and realistic profit targets.
In the 1970s, Frost and Prechter published a book entitled "The Elliott Wave Principle
The Key to Stock Market Profits". In this book, the authors predicted the bull market of
the 1970s, and Robert Prechter called the crash of 1987. However, Prechter's record at
the end of the twentieth century has not been stellar. In his book, "At The Crest Of The
Tidal Wave" (1995), he publicly called for the end of the great bull market in 1995, was
nearly five years and many Dow points premature; he was advising clients to exit the
market even though the ascent was nowhere near its end.

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TECHNICAL ANALYSIS I

Technical Checklist, Trade Checklist

Technical Checklist
1. Direction of overall Market, Sector, Stock. Up, Down or Sideways?
2. Multi-year, Monthly, Weekly, Daily and Intradaily charts
3. Major, Intermediate and Minor Trends. Up, Down or Sideways?
4. Supports and Resistances. (Use 33-38%, 50% and 62-68% as guide)
5. Trendlines and/or Channels
6. Volume (Note: More important in downtrends)
7. Price Gaps
8. Major Reversal or Continuation Patterns
9. Price Objectives (Note: Applies to both Upside/Downside)
10. Moving Average trend
11. Oscillators (Overbought or Oversold), Divergences
12. Elliot Wave Pattern
13. Candlesticks

Trade Checklist
1. Investment Time Frame. Market trend (major, intermediate or minor) within that
time frame.
2. Buy, Sell or Trade the Range (Buy and Sell within an established trading range,
ensure protective stop when market decides on a direction).
3. Investment units (Trading and/or Core)
4. Risk-Reward Ratio. Loss threshold. Protective Stop.
5. Profit Objective
Increasing the odds of winning in the market involves Knowledge (Know the rules),
Discipline (Apply the rules) and Patience (Invest/Trade at a low-risk, high-reward
opportunity).

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TECHNICAL ANALYSIS
References:
Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by
John J. Murphy
Stockcharts.com
Investopedia.com
www.thepatternsite.com

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