Technical Analysis

Unit 1(Part 2)
Sem –V
TYBFM
Dr. Riya Nathani
Three candle pattern-Morning Star
 Morning Star
• It is a bullish 3 candle bottom reversal pattern.
• Found at bottom of downtrend.

Large Bearish Candle (Day 1)

Small Bullish or Bearish Candle (Day 2)
Large Bullish Candle (Day 3)

•
The first day of a Morning Star reversal pattern is a large bearish red candle.
• The second day begins with a bearish gap down. It is clear from the opening of
Day 2 that bears are in control.
• Day 3 begins with a bullish gap up, and bulls are able to press prices even further
upward, often eliminating the losses seen on Day 1.
Evening Star Pattern
Evening Star Pattern
 Evening Star
• It is a bullish 3 candle bottom reversal pattern.
• Found at top of Uptrend.

•Large Bullish Candle (Day 1)

•Small Bullish or Bearish Candle (Day 2)
•Large Bearish Candle (Day 3)

•
The first day of a Evening Star reversal pattern is a large bullish green candle.
• The second day begins with a bullish gap up. It is clear from the opening of Day 2
that bulls are in control.
• Day 3 begins with a bearish gap down, and bears are able to press prices even
further downward, often eliminating the gains seen on Day 1.
Three White Soldiers
 Three White Soldiers
• 3 Candle Pattern
• Exits at bottom of Downtrend.
• After reversal Bullish pattern exist.
• The pattern consists of three consecutive long-bodied candlesticks that open
within the previous candle's real body
• And a close that exceeds the previous candle's high.
• These candlesticks should not have very long shadows and ideally open within the
real body of the preceding candle in the pattern.
• Suggests a strong change in market sentiment in terms of the stock, commodity or
pair making up the price action on the chart.
• Buy Signal.
• Leaving no Gap.
Three Black Soldiers
Three Black Soldiers
 Three Black Soldiers
• 3 Candle Pattern

• Exits at Top of Uptrend.

• After reversal Bearish pattern exist.
• The black crow pattern consists of three consecutive long-bodied candlesticks that have
opened within the real body of the previous candle.
• And closed lower than the previous candle.
• The three black crows pattern occurs when bears overtake the bulls during three consecutive
trading sessions.

• SellSignal.

• Leaving no Gap.
SUPPORT AND RESISTANCE LEVEL
 Support and Resistance
• In stock market technical analysis, support and resistance are
certain predetermined levels of the price of a security at
which it is thought that the price will tend to stop and
reverse.
• These levels are denoted by multiple touches of price
without a breakthrough of the level.
• Technical analysts use support and resistance levels to
identify price points on a chart where the probabilities favor a
pause or reversal of a prevailing trend.
• Support occurs where a downtrend is expected to pause due
to a concentration of demand.
• Resistance occurs where an uptrend is expected to pause
temporarily, due to a concentration of supply.
 SUPPORT
• A support level is a level where the price tends to find support as it falls.
• This means that the price is more likely to "bounce" off this level rather than
break through it.
• In a downtrend, each lower low will be a support level.
• Support level, refers to the price level that an asset does not fall below for period
of time.
• An asset's support level is created by buyers entering the market whenever the
asset dips to a lower price.
• upport level is the level at which buyers tend to purchase or enter into a stock.
• In technical analysis, the simple support level can be charted by drawing a line
along the lowest lows for the time period being considered.
• When a price of stock falls towards its support level, the support level holds and is
confirmed, or the stock continues to decline and the previously demonstrated
support level must change to incorporate the new lows.
 Resistance
• A resistance level is the opposite of a support level. It is where the price tends to
find resistance as it rises.
• Resistance line refers to that line beyond which a stock’s price will not increase.
• Again, this means that the price is more likely to "bounce" off this level rather than
break through it.
• In an uptrend, each consecutive higher peak will be a resistance level.
• Resistance level, is the price at which the price of an asset meets pressure on its
way up by the emergence of a growing number of sellers who wish to sell at that
price.
• Resistance can be contrasted with support.
• This is possible where supply is more than the demand and excess supply will force
the prices lower.
 Head and Shoulders
• The head and shoulders chart pattern is a popular and easy to
spot pattern in technical analysis that shows a baseline with
three peaks, the middle peak being the highest. The head
and shoulders chart depicts a bullish-to-bearish trend
reversal and signals that an upward trend is nearing its end.

• In technical analysis, a head and shoulders pattern describes a

specific chart formation that predicts a bullish-to-bearish
trend reversal, while an inverse head and shoulders indicates
the reverse.
Head and Shoulders Top
 Head and Shoulders Top
• Formation of the pattern (seen at market tops):
• Left shoulder: Price rise followed by a price peak, followed by a decline.
• Head: Price rise again forming a higher peak.
• Right shoulder: A decline occurs once again, followed by a rise to form the right
peak which is lower than the head.

• Head and Shoulders Potential Sell Signal

• If prices break the confirmation support line, it is clear that the bears are in charge;
thus, when price closes below the confirmation line, a potential sell signal is given.
Note that a downward sloping confirmation line is generally seen as a more
powerful Head & Shoulders pattern, mainly because a downward sloping
confirmation line means that prices are making lower lows.
 Head and Shoulders Top
• Left Shoulder: Bulls push prices upwards making new highs; however
these new highs are short lived and prices retreat.

• Head: Prices don't retreat for long because bulls make another run, this
time succeeding and surpassing the previous high; a bullish sign. Prices
retreat again, only to find support yet again.

• Right Shoulder: The bulls push higher again, but this time fail to make a
higher high. This is very bearish, because bears did not allow the bulls to
make a new higher or even an equal high. The bears push prices back to
support (Confirmation line); this is a pivotal moment – Will bulls make
another push higher or have the bears succeeded in stopping the move
higher.
Inverse Head and Shoulders
Inverse Head and Shoulders
 Inverse Head and Shoulders

• Formation of the pattern (seen at market bottoms):

• Left shoulder: Price declines followed by a price bottom, followed
by an increase.
• Head: Price declines again forming a lower bottom.
• Right shoulder: Price increases once again, then declines to form
the right bottom.
• Reverse Head and Shoulders Potential Buy Signal
• When price closes above the confirmation line, a potential signal is
given. Usually an upward sloping confirmation line is seen as a
more powerful Reverse Head & Shoulders pattern, mainly because
an upward sloping confirmation line means that prices are making
higher highs.
 Inverse Head and Shoulders
• Left Shoulder: Bears push prices downwards making new lows;
however, bulls begin to return and push prices slightly higher.

• Head: Price gains don't last long before bears return and push
prices even lower than before; a bearish sign. Prices then find
buyers at the new lower prices.

• Right Shoulder: The bears push downward again, but this time fail
to make a lower low. This is generally seen as bullish sign, bears
were unable to push prices further down. Decision time occurs
when the price is pushed higher back to support (Confirmation
line); either bears will push prices back down or bulls will push
prices higher, regaining control of the stock, future, or currency
pair.
 What is Double Top and Bottom?
• Double top and bottom patterns are chart patterns that occur
when the underlying investment moves in a similar pattern to
the letter "W" (double bottom) or "M" (double top).
• Double top and bottom analysis is used in technical
analysis to explain movements in a security or other
investment, and can be used as part of a trading strategy to
exploit recurring patterns.
 Double Top
• A double top has an 'M' shape and indicates a bearish reversal in trend.
• A double top pattern is formed from two consecutive rounding tops.
• The first rounding top forms an upside-down U pattern.
• The double top is a frequent price formation at the end of a bull market. It
appears as two consecutive peaks of approximately the same price on a
price-versus-time chart of a market.
• The two peaks are separated by a minimum in price, a valley. The price
level of this minimum is called the neck line of the formation.
• The formation is completed and confirmed when the price falls below
the neck line, indicating that further price decline is imminent or highly
likely.
 Double Bottom
• A double bottom has a 'W' shape and is a signal for a bullish price
movement.
• A double bottom is formed following a single rounding bottom pattern
which can also be the first sign of a potential reversal.
• Rounding bottom patterns will typically occur at the end of an extended
bearish trend.
• A double bottom is the end formation in a declining market.
• It is identical to the double top, except for the inverse relationship in
price.
• The pattern is formed by two price minima separated by local peak
defining the neck line.
• The formation is completed and confirmed when the price rises above
the neck line, indicating that further price rise is imminent or highly likely.
 Gap-Theory
• A gap is defined as an unfilled space or interval. On
a technical analysis chart, a gap represents an area where no
trading takes place. On the Japanese candlestick chart, a
window is interpreted as a gap.

Types of gaps
• 1. Common gap
• 2. Breakaway gap
• 3. Runaway Gap
• 4. Exhaustion gap
 Types of gaps

• 1. Common gap – also known as an area gap / trading gap, pattern gap,
or temporary gap, tend to occur when trading is bound between support
and resistance level on a short span of time and market price is moving
sideways ("where the price trend...has been experiencing neither an
uptrend nor a downtrend.
• As the name suggests, Common Gaps are commonly found on a price
chart and get filled within a few days or few weeks. By saying filled, we
mean that the gap gets closed as price retraces back into the gap zone.
They could result due to a stock going ex-dividend.

• One can also see them in price congestion area. Usually, the price moves
back or goes up in order to fill the gaps in the coming days.
Common Gap
• 2. Breakaway gap – occurs when prices break away from an area of
congestion.
• As the name suggests, Breakaway Gaps are those gaps on a price chart
that occur after price breaks out of a congestion zone or trading range.
These breakouts or breakdowns are usually associated with an increase
in volume and don’t get filled up quickly.

• One must keep an eye on the volume. If it is heavy after the gap is formed
then there is a good chance that market does not return to fill the gap.
When the price is breaking away on a low volume, there is a possibility
that the gap will be filled before prices resume their trend.
Breakaway Gap
• 3. Runaway Gaps: Runaway Gaps are also known by the name
of Measuring Gaps and occur halfway through a strong trend. It is
believed that a stock moves an equal distance in price before the
Measuring Gap and hence it helps us to measure the probable target area
of the price move and hence the name.

• Formed usually in the half way of a price move. It is not associated with
the congestion area, it is more likely to occur approximately in the middle
of rapid advance or decline. It can be used to measure roughly how much
further ahead a move will go. Runaway gaps are not normally filled for a
considerable period of time.
Runaway Gap
Runaway Gap
Runaway Gap
• 4. Exhaustion Gap: As the name suggests, Exhaustion Gaps are those gaps that
indicate towards the end of an extended move that has got exhausted to
continue further. They often mark the end of a prolonged uptrend or downtrend
and are usually associated with high volume and a wide price spread.

• Signals the end of a move. These gaps are associated with a rapid, straight-line
advance or decline. A reversal day can easily help to differentiate between the
Measuring gap and the Exhaustion gap. When it is formed at the top with heavy
volume, there is significant chance that the market is exhausted and prevailing
trend is at halt which is ordinarily followed by some other area pattern
development. An Exhaustion gap should not be read as a major reversal.
Exhaustion Gap
Exhaustion Gap