Technical Analysis: Part 7 ( Head & Shoulder Pattern)

Head and Shoulder Pattern: Head and shoulder pattern is strong reversal pattern. Its formation consist of left shoulder, a head and a right shoulder and a line drawn as a  neckline which is support level of this pattern.

Important points to be noted:

• High volume at left shoulder, moderate volume at head & low volume at right shoulder.
• Sharp increase in the volume below the neckline indicates downtrend.
•  Downward sloping neckline indicates that the prices are making lower lows & is powerful head and shoulder pattern.

 Trading signal is shown in below chart.

 Inverted Head & Shoulder: This pattern is opposite of head & shoulder pattern. It forms in downtrend & after breaking the neckline moves upward with sharp rise in volume.

Technical Analysis: Part 6 (Chart Pattern)

Pennants Pattern:

• Pennants is a continuation pattern which is formed when there is a large movement in stock price, followed by a consolidation period with converging trend lines. This pattern forms with lower highs & higher lows, over one to five weeks.

Flag Pattern:

• Flag pattern is short term continuation pattern that mark a small consolidation before the previous move resumes. This pattern is usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move. A flag pattern is formed when parallel lines is drawn through the peaks & the troughs in a correction (or a rally during a down-trend)

  
Cup & Handle Chart Pattern:

• The cup & handle chart pattern is a bullish continuation patterns that takes the form of a consolidation period followed by a break out to the upside.

Important Characteristics of Cup & Handle:

1. Trend: A cup & handle formation should be followed by an uptrend.
2.  Shape: The cup must always precede handle. The cub should form a rounded bowl  or U shape, must avoid V shape cup.
3. Depth: The cup should not too deep. The handle should form in the top half of the cup pattern & should not be too deep.
4. Volume:  Volume should be low at the bottom of the cup & should rise when the stock moves up & test the old high.

Technical Analysis: Part 5 ( Triangle Chart Pattern)

What does Triangle means?

• Triangle is a chart pattern formed by drawing trend lines along a price range that gets narrower over time because of lower tops & higher bottoms. The triangle patterns are of three types Symmetrical Triangle, Ascending Triangle, Descending Triangle.

1. Symmetrical Triangle:  The symmetrical triangle is formed when the market makes lower highs & higher lows. This pattern can act as either continuation or reversal pattern because of there shape.

2. Ascending Triangle:  The ascending triangle is formed when the market makes higher lows & the   same level highs. This pattern is normally seen in uptrend & act as continuation pattern. But when it is formed in downtrend, it can be powerful reversal signal.

 3. Descending Triangle: The descending triangle is formed when the market makes lower highs & the same level lows. This pattern is normally seen in downtrend. But when it is formed in uptrend, it can be powerful reversal signal.

What does Wedge means?

• A wedge pattern is considered to be temporary halt of primary trend. It is a type of formation in which trading activities are confined within converging straight lines which form a pattern. The boundary lines either slopes up or down, which differs from triangle.  There are two types of wedges: Rising Wedge & Falling Wedge.

Rising Wedge: When higher highs & higher lows is formed in the chart is called as rising wedge. A bearish signal, usually found in downtrend. When formed in uptrend, it can act as strong reversal signal.

Falling Wedge: When lower highs & lower lows is formed in the chart is called as falling wedge. A bullish signal, usually found in uptrend. when formed in downtrend, it can act as strong reversal signal.

 

In the next blog, we will see Flag and Cup & Handle chart pattern.

Technical Analysis: Part 4

Support & Resistance are two important terms used in technical analysis. Let's see how support & resistance is identified.

• The number of times that level has been tested.
• The amount of volume that has been traded near the level.
• Whether the level is old or new.. recent level has greater importance.
• Whether the level is new high or new low- more extreme levels has greater impact.

Trading Ranges:

• When price fluctuate within the support & resistance band and there is no clear indication ie sideways market. Avoid trading in such market.
• Trading ranges may signal distribution when they occur in an uptrend and accumulation  in a down trend. Breakouts from a range can occur in either direction.
• A target for the breakout move can be calculated by, measuring the height of the trading range& projecting this upwards from the point of breakout ( or downwards if there is a downside breakout).
• Volume should be average during the formation of trading range & huge on the breakout above or below the range.

Trend line: A line that is drawn over pivot highs or under pivot lows to show the prevailing direction of the price.  Trend lines are visual representation of support and resistance in any time frame. It is used to show direction & speed of  price. Following are the points to be noted.

• There should be at least two points to draw the trend line. In upward trend, the second low point should be higher than first low point & vice versa in downtrend.
•  Trend line is drawn from left to right.
• Trend line should be drawn at 45 degree (approx), otherwise it may give false indication.

Trend blow-off: A steep & rapid increase in price followed by steep & rapid fall in price. In simple terms, sudden changes in trend is called as trend blow-off.

Channel: A price channel is a pair of  parallel trend lines that form a chart pattern for a stock. Channels may be horizontal, ascending or descending. When prices hit the bottom trend line, used as buying area & when it hits the upper trend line, used for selling.

In next coming blogs we will see various types of chart patterns.

Technical Analysis: Part 3 (Terminologies)

 Following terms are used in technical analysis.

• Volume
• Open Interest
• Support & Resistance
• Trend

 What does Volume means?

• The number of shares or contract traded during the period is known as volume. Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. It is related with the price of the security. For e.g. If A bought 1000 shares of APPLE & B sold 1000 shares of APPLE, then the volume of APPLE share will be 2000 shares.

 What does Open Interest means?

• The total number of contracts which are outstanding ( ie. exercised, closed, or expired) is called as Open Interest. Open interest is totally different from Volume. Below is the example of open interest.

 -On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1.
-On January 2, C and D create trading volume of 5 and there are also five more options left open.
-On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1.
-On January 4, E simply replaces C and open interest does not change, trading volume increases by 5.

What does Support & Resistance means?

•  Support: A support level is a price level where the price tends to find support as it is going down. This is the level at which buyers are expected enter the market. When the volume are high at support level, the price moves up. Volume is important indicator in Support & Resistance.

• Resistance: A resistance level is opposite to support level.  It is where the price tends to find resistance as it is going up. In this level sellers are expected to enter the market.

Role Reversal

Once the support or resistance level is broken, its role is reversed. When the price falls below support level, that level becomes resistance & When price rises above a resistance level, it will often become support.

What does trend means?
The trend in simple terms is general direction of a market or of the price of an security ie moving upward, downward & sideways.Trends are classified by their time frames as long-term, medium-term & short-term trends.

There are three types of trend.

• Upward  Trend: In this trend the stock makes continuous higher tops & higher bottoms. This type of trend is good for buying delivery. 
• Downward Trend: In this trend the stock makes  lower tops & lower bottoms, good for short-selling the stock.
• Sideways Trend: This trend is also known as flat market. The sideways trend shows no major difference in the stock price from beginning to the end of a specific period. Traders avoids such type of trend. In this trend chances of loosing money is more.

In Part 4, we will see Identification of Support & Resistance, Trend line, Blow-off & Channels.

Technical Analysis: Part 2 (Chart types)

What is Chart?

A graph of the price movements of a given security over a given time period. Charts are the basis of Technical Analysis which is used for plotting data & predicting future trend. The time frame used for forming a chart depends on the compression of the data: intraday, daily, weekly, monthly, quarterly or yearly.

Types of Charts:

• Line Chart: The line chart connects the points of each day closing price over a period  & creates the line chart. Line charts is used as EOD(End of day) charts. Line chart is not used for intraday market analysis.

• OHCL Charts /Bar charts:  OHCL ( open-high-close-low) charts in simple terms known as bar chart.  This chart consist of four important points:
  
  • High - The top point of the vertical bar.
  • Low - The bottom point of the vertical bar.
  • Open - A small horizontal line to the left of the vertical bar.
  • Close - A small horizontal line to the right of the vertical bar.
  
  There are two types of bars:
  • Bullish Bar: When opening price is lower than closing price.
  • Bearish Bar: When closing price is lower than opening price.
  
  Bar Charts has the capacity to plot price gaps, on the other hand inability to plot the whole price fluctuation, even when plotted for extremely small periods of times. 

• Candlestick charts: In the 1700s, candlestick charts is discovered by Japanese man named Homma. The candlestick chart is quite similar to OHCL /bar chart. The candle consist of high, low, open & close same like OHCL/ bar chart.  The candlesticks has the ability to highlight trend weakness & reversal signals that may not be clear on a normal bar chart.  In technical analyze, mostly the candlestick charts are used because the patterns formed in these charts are convenient to analyze.
  
  Candle has two types.
  • Bullish candle : When closing price is higher than opening price & the body of candle is hollow or unfilled.
  • Bearish candle :When opening price is higher than closing price & the body of candle is filled or shaded.
  
   Below is the example of candlestick graph.
  
   
  In Candlestick charts, bullish candle is filled it means current day opening price & closing price is higher than previous day closing price.
  
  And,
  
  If bearish candle is unfilled it means previous day closing price is higher than current day opening price & closing price.
  
   

Next blog we will see terminologies used in technical analysis.