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Wednesday, 17 October 2012
Once you are comfortable with various formations of reversal patterns, you can move on to understanding'continuation patterns'. Continuation patterns tend to smoothen the sharp rises or declines in the price of a scrip and predict future price formations. Completion of continuation patterns indicates that the price will follow the original trend. It is always advisable to interpret continuation patterns along with other supporting information, such as the strength and maturity of the trend, volume figures, the time horizon, etc., before taking a position in the market. Let us now analyse the formation of various continuation patterns and their variants.
Triangles
These formations are most common and are formed by plotting the upper and lower trendlines. The upper trendline is formed by joining the tops and the lower by connecting the bottoms. The incline of these trendlines indicate the type of triangle formation such as symmetrical, ascending, descending or broadening triangle. Each of these triangles are depicted by way of following figures.
These formations are most common and are formed by plotting the upper and lower trendlines. The upper trendline is formed by joining the tops and the lower by connecting the bottoms. The incline of these trendlines indicate the type of triangle formation such as symmetrical, ascending, descending or broadening triangle. Each of these triangles are depicted by way of following figures.
Pennant:
Pennants are like symmetrical triangles where the upper trendline is declining and the lower trendline is rising. These formations are generally found over a period of three to four weeks and can be depicted by way of following diagrams:
Pennants are like symmetrical triangles where the upper trendline is declining and the lower trendline is rising. These formations are generally found over a period of three to four weeks and can be depicted by way of following diagrams:
Flags:
Flag formations are like parallelograms - with two trendlines stooping upwards or downwards, indicating formation of a flag like image. This can be exhibited by way of the following diagrams:
Flag formations are like parallelograms - with two trendlines stooping upwards or downwards, indicating formation of a flag like image. This can be exhibited by way of the following diagrams:
Wedges
Wedges are like triangles and have a significant incline indicating upward or downward movements. There are two variants of wedges. These may be rising wedges or declining wedges. These wedges may be depicted in the following manner:
Wedges are like triangles and have a significant incline indicating upward or downward movements. There are two variants of wedges. These may be rising wedges or declining wedges. These wedges may be depicted in the following manner:
Rectangles
Rectangles indicate a sideways movement of prices and are formed by connecting the almost identical tops and bottoms. A violation or penetration of the trendlines indicates a future trend of price movement. Bullish and bearish rectangles may be indicated as under:
Rectangles indicate a sideways movement of prices and are formed by connecting the almost identical tops and bottoms. A violation or penetration of the trendlines indicates a future trend of price movement. Bullish and bearish rectangles may be indicated as under:
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Thursday, 20 September 2012
With the concepts of trends, trend lines, trend reversals and support and resistance under your belt, it is time to have a look at various reversal patterns that can be formed by plotting the bar charts or close prices. Reversal patterns indicate a change in direction or a reversal in the direction of any earlier trend. Reversal patterns can have different time horizon such as daily, weekly or monthly patterns.
There are certain prerequisites for analysing reversal patterns such as:
- There should be an existing trend, which can be reversed and predicted through reversal patterns.
- The existing trendline should be violated or penetrated to indicate the change in trend and reversal of direction of price movements.
- The strength of a reversal pattern may be gauged by the height and width of the reversal pattern. The larger the height and width of the pattern, the stronger is the resultant reversal.
- Formation of patterns in tops and bottoms indicate the possibility of reverse movements. Thus, after completion of topping patterns, prices are expected to come down and after formation of bottoming patterns, prices are expected to rally.
- The volumes indicator may throw light on the strength of reversal patterns especially in case of reversal from bottoming patterns.
TYPES OF REVERSAL PATTERNS:
1. Head and Shoulder Reversal Pattern:
This is by far the most powerful reversal pattern and is depicted by a head and two shoulders (left and right). A neckline is drawn connecting the formations of bottoms, from which point prices move upwards to form the head and the right shoulder. The pattern is complete when this neckline is violated and prices are expected to fall further. The scrip price then tries to pull back by forming a new top, still lower than the neckline. It may be depicted by way of the following figure:
This is by far the most powerful reversal pattern and is depicted by a head and two shoulders (left and right). A neckline is drawn connecting the formations of bottoms, from which point prices move upwards to form the head and the right shoulder. The pattern is complete when this neckline is violated and prices are expected to fall further. The scrip price then tries to pull back by forming a new top, still lower than the neckline. It may be depicted by way of the following figure:
2. Inverse Head and Shoulder Reversal Pattern:
This is the mirror image of head and shoulder reversal pattern and may be depicted by way of the following figure. A penetration of the neckline formed by connecting the tops indicates that the price of the scrip may rally and may face a slight reversal, still above the neckline.
This is the mirror image of head and shoulder reversal pattern and may be depicted by way of the following figure. A penetration of the neckline formed by connecting the tops indicates that the price of the scrip may rally and may face a slight reversal, still above the neckline.
3. Complex Head and Shoulder Reversal Pattern:
This reversal pattern is formed by more than one left and right shoulder. These patterns may again be 'complex' as well as 'complex inverse' patterns as depicted by way of the following two figures:
This reversal pattern is formed by more than one left and right shoulder. These patterns may again be 'complex' as well as 'complex inverse' patterns as depicted by way of the following two figures:
4. Failed Head and Shoulder Reversal Pattern:
When head and shoulder reversal patterns, as depicted in earlier figures fail, it is termed as a 'failed head and shoulder' reversal pattern. The formation of this pattern clearly indicates the need for a stop loss order and covering short position, as the price tends to move up again. This can be depicted by way of following figure:
When head and shoulder reversal patterns, as depicted in earlier figures fail, it is termed as a 'failed head and shoulder' reversal pattern. The formation of this pattern clearly indicates the need for a stop loss order and covering short position, as the price tends to move up again. This can be depicted by way of following figure:
5. Triple Top Reversal Pattern:
The formation of triple tops and the subsequent reversal of the price below the neckline formed by connecting the bottoms are depicted by a triple top reversal pattern. This is explained by way of the following figure:
The formation of triple tops and the subsequent reversal of the price below the neckline formed by connecting the bottoms are depicted by a triple top reversal pattern. This is explained by way of the following figure:
6. Triple Bottom Reversal Pattern:
This is just the mirror image of the triple top reversal pattern and can be depicted by way of the following figure. Penetration of the neckline indicates an upward movement of the price.
This is just the mirror image of the triple top reversal pattern and can be depicted by way of the following figure. Penetration of the neckline indicates an upward movement of the price.
7. Double Top Reversal Pattern:
Also called the 'M type' reversal pattern, the Double Top Reversal Pattern price formation rises twice to form two tops with an intervening bottom. The formation of reversal is complete when prices fall below the previous bottom from where price had risen to form the second top. This is an indication that suggests selling. The formation may be depicted by way of the following figure:
Also called the 'M type' reversal pattern, the Double Top Reversal Pattern price formation rises twice to form two tops with an intervening bottom. The formation of reversal is complete when prices fall below the previous bottom from where price had risen to form the second top. This is an indication that suggests selling. The formation may be depicted by way of the following figure:
8. Double Bottom Reversal Pattern:
The double bottom reversal pattern is a mirror image of the double top reversal pattern. The formation is complete when the price of the scrip penetrates the line drawn by connecting the top in between the two bottoms horizontally to the rising price trend. This may be depicted by way of the following figure:
The double bottom reversal pattern is a mirror image of the double top reversal pattern. The formation is complete when the price of the scrip penetrates the line drawn by connecting the top in between the two bottoms horizontally to the rising price trend. This may be depicted by way of the following figure:
9. Rounding Bottom or Rounding Top Reversal Pattern:
Also known as a saucer type of reversal pattern, this indicates a steady but gradual shift in the trend from top to bottom followed by a rise back to the top (in case of rounding bottoms) and from bottom to top to bottom again (in case of rounding tops). A graphical representation will be as follows:
Also known as a saucer type of reversal pattern, this indicates a steady but gradual shift in the trend from top to bottom followed by a rise back to the top (in case of rounding bottoms) and from bottom to top to bottom again (in case of rounding tops). A graphical representation will be as follows:
10. V - shaped or Spike Reversal Pattern:
This reversal pattern is recognized by the V formation in the prices of a scrip and can be depicted by way of the following diagram:
This reversal pattern is recognized by the V formation in the prices of a scrip and can be depicted by way of the following diagram:
11. Broadening Patterns:
A top or bottom broadening patterns may be formed to depict the price levels. In the case of a top broadening pattern, a horizontal line is drawn connecting the almost equal bottoms and rising tops. The formation is complete when the price dips below the horizontal line (in the case of a top pattern) and rallies above the horizontal line in the case of a bottom pattern. A graphical representation of these patterns is as below:
A top or bottom broadening patterns may be formed to depict the price levels. In the case of a top broadening pattern, a horizontal line is drawn connecting the almost equal bottoms and rising tops. The formation is complete when the price dips below the horizontal line (in the case of a top pattern) and rallies above the horizontal line in the case of a bottom pattern. A graphical representation of these patterns is as below:
12. Horizontal Pattern:
This may again be top horizontal pattern or bottom horizontal pattern and give indication of buy or sell depending upon whether price breaks out above or below the line connecting the tops or bottoms formations. These reversal patterns may be depicted graphically as per the following figures:
This may again be top horizontal pattern or bottom horizontal pattern and give indication of buy or sell depending upon whether price breaks out above or below the line connecting the tops or bottoms formations. These reversal patterns may be depicted graphically as per the following figures:
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Thursday, 6 September 2012
Bar reversals are good indicators of the probability of counter moves or reversals in the direction of the price movement of a scrip or an index. Bar reversals are often used by technical analysts to understand price movements and predict the future behaviour of the scrip. You are familiar with the concept of bar charts, explained in Part 2. As explained earlier, bar charts denote the close, high and low prices. These prices may be plotted on a daily, weekly or a monthly basis. The time horizon may vary but the depiction will remain the same. Thus, a daily bar chart will show the high, low and close for a day. A weekly and monthly bar chart will show the high, low and close achieved by the scrip on a weekly or a monthly basis, as the case may be.
Types of bar reversals
There are two types of bar reversals- the upward bar reversal and the downward bar reversal. An upward bar reversal indicates bullish tendencies in the market and may lead to a rise in the price of the scrip or value of the index under consideration. A downward bar reversal indicates a bearish phase and may lead to a fall in the price of the scrip or in the value of the index. Upward and downward bar reversals are further categorized as 'simple' upward or downward bar reversals and 'perfect' upward or downward bar reversals. These bar reversals can be explained by way of the following figure:
The upward and downward bar reversals along with their variants are explained further by way of the following examples:
Upward bar reversal
In case of an upward bar reversal, the low, high and close of the current day are plotted on the chart as against the previous low, high and close. If the low of the current day is lower than the previous low and if the close of the current day is higher than the close of the previous, the phenomenon is known as an upward bar reversal.
In case of a perfect upward bar reversal, the current low is lower than previous low and the current close is higher than the previous close as well as the previous high. This phenomenon signifies significant reversal of trend and may lead to a sharp upswing in the price of the scrip or index and hence needs to be analysed in detail. The upward bar reversal with both the variants (simple and perfect) is exemplified by of the above figure.
Downward bar reversal
In case of a downward bar reversal also, the low, high and close of the current day is plotted on the price chart as against the previous low, high and close. If the high on the current day is higher than the previous high and if the close of the current day is lower than the previous close, the phenomenon is known as downward bar reversal.
In case of a perfect downward bar reversal, the high of the current day is higher than the previous high and the close is lower than the previous close as well as the previous low. This phenomenon signifies a significant reversal in the upward trend and may lead to a sharp downswing in the price of the scrip or index.A perfect downward bar reversal means that the scrip is moving intothe red and needs to be analysed in detail. This also means an opportunity to exit the scrip well in time, to avoid potential losses. The downward bar reversal with both the variants (simple and perfect) is exemplified by of the above figure.
Importance of bar reversals
In the case of an upward bar reversal, the pattern shows that the scrip touches a low which is lower than the previous low. However, at the end of the trading day, due to short covering or the entry of bulls into the fray, the scrip has a close which is higher than the previous close. Thus, the price of the scrip touches a higher close. This indicates buying pressure and the trend may continue in future for smart gains to be made by the scrip or the index, which is the subject matter of study. If the scrip charts indicate that it is oversold, the upward bar reversal becomes more important for the purpose of indicating a possible upswing in the price.
In case of a downward bar reversal, the trend shows that the scrip touches a new high due to increased buying pressure. However, as selling intensified during the close of the trading day, the scrip closes at lower levels than the previous close and logically, this pattern is expected to continue for the next day also. If the downward bar reversal is exhibited during the indicators of an overbought position in a scrip, the reversal is said to have significant strength and can continue to hold its ground. Upward as well as downward bar reversals indicate the potential movement and reaction to price levels based on an analysis of the price pattern seen in the past.
Both these bar reversals are important tools available to technical analysts to give credence to their analysis about the potential upward or downward movement and can be used in conjunction with other tools and theories. No wonder bar reversal patterns offer a great deal of understanding and analysis for those who want to understand why the markets behave the way they do.
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Monday, 27 August 2012
The legend of technical analysis, Charles Dow, is the father of what is popularly known as the "Dow theory". Though developed more than a century ago, his theory is used even today by analysts to evaluate market behaviour.
A.J. Nelson, a friend of Charles Dow, formalised the theory for the purpose of analysis and predicting market behaviour and named it the "Dow theory". Today, the Dow theory is a basic tool for the purpose of analysing and predicting market behaviour and stock prices.
The Dow theory was developed to analyse the movement of indices and was based on the 'closing' price of the indices. It did not use other variables such as 'open', 'high' or 'low'. However, as the concept remains the same, the theory can be extended to explain and predict even individual stock prices. Now, we will have a look at a few of the assumptions behind this theory..
Assumptions
1) The primary trend or the broad direction of the price movement cannot be influenced by external factors. Thus, no one can manipulate the overall rising or falling trend in prices in the long-term (long-term is defined as a year or so). In such a scenario, the market is termed as a 'bull market' or a 'bear market' respectively. However, in the short-term, it is possible that the price levels are manipulated. Short-term consists of a period lasting up to a maximum of 3-4 months.
2) The market discounts everything. In other words, stock prices exhibit their true value as all the information about the future earnings, inflation, economic parameters, etc. is already discounted in the stock prices. In fact, this assumption is the very basis of technical analysis.
3) The theory is not foolproof. In other words, the theory only helps to understand the broad price movements of indices or stocks. It cannot accurately predict the likely price targets or when the share price reaches the peak or the bottom.
Trends
The Dow theory explains that there are three types of trends applicable in a market. These trends are known as primary trends, intermediate trends and short term trends. A primary trend is the broad upward or downward movement and lasts for over one year. It shows the market movement over the long term. An intermediate trend lasts for a period of two to three months. Short term trends last for a period ranging from two to three days to a maximum of a week or so. Thus, in a given market, these three trends are always in operation.
The Dow theory explains that there are three types of trends applicable in a market. These trends are known as primary trends, intermediate trends and short term trends. A primary trend is the broad upward or downward movement and lasts for over one year. It shows the market movement over the long term. An intermediate trend lasts for a period of two to three months. Short term trends last for a period ranging from two to three days to a maximum of a week or so. Thus, in a given market, these three trends are always in operation.
Primary trend
This is the long-term direction in the price movement and lasts for a year or a number of years. It also consists of three phases, wherein each phase is interrupted by an intermediate trend reversal lasting up to two to three weeks. This intermediate trend takes away 33-66 per cent of the earlier price movements, upward or downward. Thus, in the case of an upward movement, the intermediate trend will lead to an erosion of valuation to this extent and vice versa for a downward long-term trend. Each bull as well as bear market leads to the formation of three distinct peaks and bottoms, respectively. In the case of a rising market, factors such as confidence in business prospects, better corporate earnings and a bull frenzy come into play. In the case of a downward movement, factors such as loss of hope, a downfall in business performance and distress selling would come into play. The primary trends (both in case of a rising or falling market) can be explained by way of the following figures:
This is the long-term direction in the price movement and lasts for a year or a number of years. It also consists of three phases, wherein each phase is interrupted by an intermediate trend reversal lasting up to two to three weeks. This intermediate trend takes away 33-66 per cent of the earlier price movements, upward or downward. Thus, in the case of an upward movement, the intermediate trend will lead to an erosion of valuation to this extent and vice versa for a downward long-term trend. Each bull as well as bear market leads to the formation of three distinct peaks and bottoms, respectively. In the case of a rising market, factors such as confidence in business prospects, better corporate earnings and a bull frenzy come into play. In the case of a downward movement, factors such as loss of hope, a downfall in business performance and distress selling would come into play. The primary trends (both in case of a rising or falling market) can be explained by way of the following figures:
Similarly, in the case of a broadly falling trend, the three phases of a bear market would be as follows:
Thus, it can be seen that each bull trend and bear trend is made up of three phases, each that lasts for a considerable period of time. In case of a bull run, each new top and bottom is higher than the previous top and bottom. However, in case of a bear run, the scrip witnesses new bottoms and tops which are lower than the earlier ones. This phenomenon explains the behaviour of market movements from the long-term point of view.
Intermediate trend
In case of an intermediate trend, the intermittent price movements would correct the earlier gains or losses made by the scrip. This trend lasts for a period ranging from two to three weeks to a maximum of two to three months and takes away 33-66 per cent of the gain or loss of the earlier period. Thus, in case of a rising trend, the secondary trend will lead to a fall by this extent and in the case of a bear market, it will lead to a gain to this extent. This can be explained by way of the following figure where the primary trend is rising and intermediate trend takes away a portion of the gains made by the scrip:
In case of an intermediate trend, the intermittent price movements would correct the earlier gains or losses made by the scrip. This trend lasts for a period ranging from two to three weeks to a maximum of two to three months and takes away 33-66 per cent of the gain or loss of the earlier period. Thus, in case of a rising trend, the secondary trend will lead to a fall by this extent and in the case of a bear market, it will lead to a gain to this extent. This can be explained by way of the following figure where the primary trend is rising and intermediate trend takes away a portion of the gains made by the scrip:
Short term trend
Short term trends are also known as minor trends and can be witnessed intra day or during a few days. These trends correct the over bought and over sold positions in the scrip caused by reversals made in the intermediate trends. For the purpose of analysis, it makes sense to ignore short-term trends and analyse the primary and secondary trends in prices.
Short term trends are also known as minor trends and can be witnessed intra day or during a few days. These trends correct the over bought and over sold positions in the scrip caused by reversals made in the intermediate trends. For the purpose of analysis, it makes sense to ignore short-term trends and analyse the primary and secondary trends in prices.
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Friday, 17 August 2012
After having understood the basics of technical analysis and plotting of prices on a chart, it is time to learn about trends and trend analysis. The word 'trend' is often used for the purpose of analysis and forms the foundation for the interpretation of charts. A trend may be defined as a consistent direction in price movement.
The price of a scrip can logically move in three directions. Compared to its previously established prices it can progress up or move down or remain stable and not witness much of a rise or a fall. Thus, there can be three trends possible in the price of a scrip - if prices are going up, it is called a rising trend, if they are falling over a period of time, it is called a falling trend and if prices remain range bound, the phenomenon is called a flat trend. These three directions in trends are explained in much detail in subsequent paragraphs...
The price of a scrip very rarely moves in a single direction. It means that even if the scrip is witnessing a rising trend, there will be intermittent downward movements. Conversely, if the price is showing a downward trend, there will be counter moves that take the price to intermittent high levels. These counter moves are also known as reactions to trends. It is because of these reactions that price trend graphs are often zigzagged and not unidirectional. These zigzag movements in prices give rise to the phenomenon of new tops and bottoms. A top is a price level from where the scrip changes direction and sees a downward trend. A bottom is a price level from where the scrip breaks free and witnesses an upward movement. These new tops and new bottoms determine the trend direction in a scrip.
Rising trend
In a rising trend, the scrip price will witness an upward trend. The price movement graph will show higher tops and higher bottoms over a period. This can be explained by way of the following figure:
In a rising trend, the scrip price will witness an upward trend. The price movement graph will show higher tops and higher bottoms over a period. This can be explained by way of the following figure:
In case of a rising trend, the scrip witnesses an upward movement in its price, leading to higher tops and higher bottoms over a period. For example in the above figure, T2 is higher than T1 and B2 is higher than B1 too.
Falling trend
In case of a falling trend, the zigzag movement of the price curve shows a downward trend with intermittent upward counter moves. Here the scrip witnesses new bottoms and tops that are lower than the earlier bottoms and tops seen by the scrip. The figure above reveals this pattern. Price T2 is lower than price T1 and price B2 is below price B1.
In case of a falling trend, the zigzag movement of the price curve shows a downward trend with intermittent upward counter moves. Here the scrip witnesses new bottoms and tops that are lower than the earlier bottoms and tops seen by the scrip. The figure above reveals this pattern. Price T2 is lower than price T1 and price B2 is below price B1.
Flat trend
In case of a flat trend, the scrip witnesses sideway movements and no clear new tops or bottoms are formed over time. The new tops and bottoms formed are almost similar to the previous levels.
In case of a flat trend, the scrip witnesses sideway movements and no clear new tops or bottoms are formed over time. The new tops and bottoms formed are almost similar to the previous levels.
Making use of trends
Trading strategies should invariably involve a consideration of the trend in the price of the scrip. Thus, if the trend is rising, it will pay if you are able to enter the market at an early stage of the trend. If the trend is falling, you will be rewarded if you exit the market at the peak or near the peak. In case of a flat trend, it is better to move away from the market, as the scrip is still searching for a direction and you may not reap much benefit trading in the scrip during a flat trend. Thus, it is better to study the trend seen by the scrip and act accordingly while making or exiting an investment.
Trading strategies should invariably involve a consideration of the trend in the price of the scrip. Thus, if the trend is rising, it will pay if you are able to enter the market at an early stage of the trend. If the trend is falling, you will be rewarded if you exit the market at the peak or near the peak. In case of a flat trend, it is better to move away from the market, as the scrip is still searching for a direction and you may not reap much benefit trading in the scrip during a flat trend. Thus, it is better to study the trend seen by the scrip and act accordingly while making or exiting an investment.
Trend Reversal
As the saying goes "what goes up, must come down". So is the case of price levels of scrips - price movement in a scrip is never unidirectional. Thus, the price of a scrip may exhibit an upward trend but after a point, it may witness range-bound trading or even a fall in its price. So is the case with a scrip showing a falling trend. It may recover lost ground, make a smart recovery and handsome gains as time goes by. Thus, the trends in price movements of a scrip are susceptible to changes in direction. These changes in direction of movements of the prices of a scrip are termed as trend reversals.
As the saying goes "what goes up, must come down". So is the case of price levels of scrips - price movement in a scrip is never unidirectional. Thus, the price of a scrip may exhibit an upward trend but after a point, it may witness range-bound trading or even a fall in its price. So is the case with a scrip showing a falling trend. It may recover lost ground, make a smart recovery and handsome gains as time goes by. Thus, the trends in price movements of a scrip are susceptible to changes in direction. These changes in direction of movements of the prices of a scrip are termed as trend reversals.
The objective of understanding trend reversals is to anticipate these before the entire market is aware of a reversal in trend. This would enable you to move much ahead of the entire market. Hence, it pays very well if you are able to anticipate and act in time based on your analysis of trend reversals.
A trend reversal may be exhibited by the following example:
In the above example, after a formation of three new tops (T1, T2 and T3) and three higher bottoms (B1, B2 and B3), the scrip bucks the trend and witnesses a falling trend. This is also clear from the fact that the fourth top, i.e. T4, is lower than the previous top T3 and the scrip also falls below the previous bottom of B3 as is obvious from the areas exhibited by Y. Thus, the trend in the scrip is reversing from rising to falling and is prone to a fall in prices. Similarly, the trend may reverse from falling to rising and from flat to rising or falling.
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Monday, 13 August 2012
Having understood the upward and downward movement of price of a scrip, it is time to understand the concept of trendlines. Trendlines are formed by connecting at least two tops or two bottoms. Thus, trendlines are straight lines that are formed by connecting the tops and bottoms as illustrated by way of a chart. The larger the number of tops and bottoms in a chart, the better will be the output as shown by the trendlines. Trendlines are one of the simplest and yet most effective ways of predicting the market behaviour and expectations of the future prices of a scrip or index. In the previous chapters, we have learnt that there are three types of trends. These are rising, falling and flat trends. Similarly, there are three variants of trendlines. These are rising trendlines, falling trendlines and flat trendlines.
The rising trendline will track an upward movement in the price of a scrip and is formed by connecting the upwardly moving bottoms in a chart. The falling trendline represents a downward movement in the scrip price and is formed by connecting the falling tops as depicted by way of a price chart. In case of prices moving in a narrow band or remaining flat, the trendline is formed by connecting the even tops as well as even bottoms of the price of a scrip. Each of these market behaviour scenarios may be depicted by way of the following figures:
Importance of Trendlines
Trendlines are a good indicator of directional changes in the price of scrips, if these lines are breached by technical charts. These breaches (which are also termed as a violation of the trendline), give clues about the possible buy or sale decisions an investor can take. Thus, whenever these trendlines intersect the actual price movement as depicted by way of a chart, a reversal of direction may be expected. Hence, it may require you to make an investment or exit an existing investment. This may be explained by way of following figures:
Trendlines are a good indicator of directional changes in the price of scrips, if these lines are breached by technical charts. These breaches (which are also termed as a violation of the trendline), give clues about the possible buy or sale decisions an investor can take. Thus, whenever these trendlines intersect the actual price movement as depicted by way of a chart, a reversal of direction may be expected. Hence, it may require you to make an investment or exit an existing investment. This may be explained by way of following figures:
Violation of Trendlines
It is important to remember that all violations of trendlines do not necessarily mean reversal of trends. It is possible that in case of a rising trendline, if the trendline is violated, it will mean a temporary halt rather than an actual reversal of price movement. Similarly, in case of a falling trendline, it is possible that the violation may lead to a slower fall but the same direction of movement may continue rather than a reversal of movement. Whether a violation indicates a reversal or a temporary setback would depend upon a number of factor such as the volume position, the time period under consideration, the number of points touched, the steepness of the trendline, a reversal pattern formation and so on. It is good to carry out an analysis of the same for the purpose of gaining a positive indication of the potential price movements and direction thereof.
It is important to remember that all violations of trendlines do not necessarily mean reversal of trends. It is possible that in case of a rising trendline, if the trendline is violated, it will mean a temporary halt rather than an actual reversal of price movement. Similarly, in case of a falling trendline, it is possible that the violation may lead to a slower fall but the same direction of movement may continue rather than a reversal of movement. Whether a violation indicates a reversal or a temporary setback would depend upon a number of factor such as the volume position, the time period under consideration, the number of points touched, the steepness of the trendline, a reversal pattern formation and so on. It is good to carry out an analysis of the same for the purpose of gaining a positive indication of the potential price movements and direction thereof.
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Wednesday, 25 July 2012
Very often, you would have heard analysts talking about 'support' and 'resistance' levels being touched by a scrip. The concepts of 'support' and 'resistance' are very simple but extremely important for the purpose of technical analysis. These levels are important for determining turning triggers for price levels and give possible indications about the levels below which a scrip will not normally move, as well the upper levels, which will not be breached. Let us understand the concept of resistance and support by way of a simple example.
Suppose the scrip of BHEL is quoting at say Rs 2,300 for a few weeks. It starts its upward movement and reaches Rs 2,800. From this level, the scrip reverses its direction and again starts moving within the range of Rs 2,300. Again it moves upwards and after reaching levels of Rs 2,800, it starts to come back to the original levels of Rs 2,300. In this example, there is a buying pressure at levels of Rs 2,300, which takes the price to Rs 2800, at which level, the selling starts in the scrip. This brings back the price to its original level where again the buying starts and the price moves upwards again. Here 2,800 is the resistance level, which the scrip finds difficult to breach and 2,300 is the support level where the downward movement of the scrip is halted. The concept of support and resistance can be explained by way of the following figure:
The concept of resistance and support are important for understanding which way the market or the scrip is expected to move. These levels indicate the possible turning point resulting from increased buying or selling pressures at various price levels which cause an upward or downward movement of price levels. If a scrip touches a resistance or support level more than once, it is called a double bottom or double top formation or triple formations where the scrip has touched these levels thrice. These formations are much stronger resistance and support levels and hence, are much more helpful while taking buy or sell decisions. This can be explained by way of the following figure:
Violation of Support levels
If a scrip violates the support level and moves further downwards from these levels, it means that the selling pressure has far exceeded the buying pressure in the scrip. Hence, the price of the scrip would go down further and look for a new support level from which to change direction. Similarly, if the scrip has breached the resistance level, it means that the demand has far exceeded the supply or selling at that level and the price is likely to rise further in pursuit of a new resistance level. These violations, therefore, give good indications of the upward or downward movements of the prices of a scrip and a decision can be taken based on these movements. On the same lines, if double or triple formations are breached, it adds to the strength of the upward or downward movement of these levels. These violations are also called bottom violations or top penetrations and lead to the formation and discovery of new highs and lows for the scrip over a period of time.
If a scrip violates the support level and moves further downwards from these levels, it means that the selling pressure has far exceeded the buying pressure in the scrip. Hence, the price of the scrip would go down further and look for a new support level from which to change direction. Similarly, if the scrip has breached the resistance level, it means that the demand has far exceeded the supply or selling at that level and the price is likely to rise further in pursuit of a new resistance level. These violations, therefore, give good indications of the upward or downward movements of the prices of a scrip and a decision can be taken based on these movements. On the same lines, if double or triple formations are breached, it adds to the strength of the upward or downward movement of these levels. These violations are also called bottom violations or top penetrations and lead to the formation and discovery of new highs and lows for the scrip over a period of time.
Reversal of role
This is an important phenomenon and should be understood carefully. It means that once a support level of a scrip is violated, it could become a resistance level for all future upward movements. Similarly, if resistance level is penetrated, it could reverse roles and become a support level for future downward movements in prices. This scenario of resistance becoming support and support becoming resistance is termed as a reversal of role. It can be explained by way of the following figures
This is an important phenomenon and should be understood carefully. It means that once a support level of a scrip is violated, it could become a resistance level for all future upward movements. Similarly, if resistance level is penetrated, it could reverse roles and become a support level for future downward movements in prices. This scenario of resistance becoming support and support becoming resistance is termed as a reversal of role. It can be explained by way of the following figures
An understanding of the above two figures is important for the purpose of careful analysis of price movements of scrips in real life situations. This helps in taking an informed decision about the price levels, facilitated by a well thought out analysis of resistance, support and reversals, thereof.
Strength of support/resistance level
The strength of support and resistance levels depends on a combination of many factors. The first factor that needs to be taken into account is the time taken to reach the resistance or support level. So, for example, if the scrip has touched the resistance level very fast in a few trading sessions, a small resistance will be able to hold the prices down. If on the other hand, the scrip has fallen sharply over a period of time and then it meets the support level, chances are that the support will be strong enough to hold the price at that level.
The strength of support and resistance levels depends on a combination of many factors. The first factor that needs to be taken into account is the time taken to reach the resistance or support level. So, for example, if the scrip has touched the resistance level very fast in a few trading sessions, a small resistance will be able to hold the prices down. If on the other hand, the scrip has fallen sharply over a period of time and then it meets the support level, chances are that the support will be strong enough to hold the price at that level.
The volumes transacted at the support and resistance levels. A higher volume traded means that the scrip will be able to hold on to these levels more strongly. It is also a good indication to study the past pattern of trading in the scrip and whether the scrip is able to break free from the pattern or it follows the same. If the scrip is seen to be following the pattern for a considerable period of time, chances are that the same will be repeated and support and resistance reached at these levels will be quite strong.
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Wednesday, 13 June 2012
Previously, we learnt the definition of technical analysis as a study of prices and charts to predict a trend and the assumptions behind this method of forecasting.
This time, we will give you an insight into various prices and price charts that could help you in carrying out the analysis.
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Tuesday, 15 May 2012
Investor & trader to focus on basic do’s and don’t while using technical indicators:
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Thursday, 12 April 2012
There are basically two different methodologies for understanding the market and predicting its future trend. The first one is called fundamental analysis and the second is technical analysis. Fundamental analysis involves studying the financial position of a company, its potential performance in the future, the book value of its assets and other financial ratios. Thus, it analyses the share price with respect to the fundamentals of a company and predicts the future price movements based on the potential earning capacity. Fundamental analysis requires information about balance sheets, cash flow statements, growth patterns and future plans of the company. It also requires a study of the industry to which the company belongs and the economies in which it has its businesses. All these parameters are factored in while predicting the price movement of the scrip.
Labels: basicfundamental, stocks, technical
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