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| Chart Basics | |||||||||
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| Double Top | |
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Double Top The double top reversal formation has two peaks that are approximately equal with a reasonable valley in between. This formation is formed after an extended uptrend. This pattern is not established until support is broken which would be around the low of the trough. Volume should increase as support is broken and this will help to confirm the reversal. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Double Bottom | |
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Double Bottom The double bottom reversal formation is the reverse of the double top in that is has two valleys that are approximately equal with a reasonable peak in between. This formation is formed after an extended downtrend. This pattern is not established until resistance has been broken which would be around the high of the peak. Volume should increase as resistance is broken and this will help to confirm the reversal. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Head and Shoulders | |
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Head and Shoulders The head and shoulders pattern is a pattern with 3 distinct peaks, the middle peak being taller than the other two. The head and shoulders top pattern is most often seen in uptrends and is also more reliable in an uptrend. The tallest peak is referred as the head and the peaks on each side are called the shoulder. The neckline is the trendline drawn from the left and right shoulders low. The formation is verified when prices break through the neckline after the right shoulder. Volume patterns help verify this formation. Volume should increase with the higher prices while forming the left shoulder. But the head is formed with lower volume. The right shoulder or the last rally of this formation is accomplished with even less volume than the head had. Volume again should increase on the breakdown through the neckline. |
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Downtrend Reversal The head and shoulders bottom formation is just an upside down top formation. The head and shoulders bottom pattern usually seen in downtrends. The neckline is drawn from the left and right shoulders highs. The formation is verified when prices break through the neckline after the right shoulder. The volume pattern differs from the top formation. Volume should increase while forming the left shoulder. But the head is formed with lower volume but the ensuing rally is on higher volume than the left shoulder. The right shoulder should be formed on the least volume of all. Volume again should increase when breaking through the neckline. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Pipe Bottom | |
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Pipe Bottom Pipe bottoms are long-term reversal patterns hence they are found on weekly charts. They can be identified be two downward spikes next to each other. There should be relatively little difference in the two spike's lows and have a large overlap of each other. Most pipe formations have above average volume on at least one of the spikes. Once a pipe bottom is identified on the weekly charts that would be your buy signal. If prices don't rise in the third week liquidate your position! A stop is also placed just below the low of the pipe bottom. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Pipe Top | |
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Pipe Top Pipe tops are long-term reversal patterns hence they are found on weekly charts. They can be identified be two upward spikes next to each other. There should be relatively little difference in the two spike's highs and have a large overlap of each other. Most pipe formations have above average volume on at least one of the spikes. Once a pipe top is identified on the weekly charts that would be your buy signal. If prices don't rise in the third week liquidate your position! A stop is also placed just below the low of the pipe bottom. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Wedges | |
Wedges are similar to triangles except that they have an obvious upward or downward slant. Volume should decrease during the formation and increase when it breaks out. |
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Falling Wedge Falling wedges has lower highs and lower lows and are considered bullish and is most often found in uptrends. But when found in a downtrend it is still consider bullish. |
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Rising Wedge Rising wedges has higher highs and higher lows and are considered bearish and is most often found in downtrends. But when found in an uptrend it is still consider bearish. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Symmetric Triangle | |
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Symmetric Triangle Symmetrical triangles may be characterized as an area of indecision. The forces of supply and demand during this period are considered nearly equal. Rallies are quickly met by selling, while pullbacks are bought. Drawing an upward trend line along the higher lows and a declining trend line along the lower highs form a sideways triangle. The minimum requirement for a triangle is four reversal points. Research has shown that symmetrical triangles usually break out in the direction of the prevailing trend. The break out should occur between two thirds to three quarters from the base to the apex. Beyond the three quarter point the pattern starts to lose its force. Volume usually decreases during this time period. Eventually, prices will break out of the triangle formation usually on heavy volume. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Ascending Triangle | |
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Ascending Triangle Ascending triangles have relatively equal highs and higher lows. They are usually considered bullish, especially when found during an up trend. The market maybe over bought and this formation may be a period of consolidation before it breaks out for another leg up. Again, the break out is usually accompanied by increase volume. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Descending Triangle | |
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Descending Triangle Descending triangles have relatively equal lows and lower highs. They are usually considered bearish, especially when found during a downtrend. The market maybe over sold and this formation may be a period of consolidation before it breaks out for another leg down. Again, the break out is usually accompanied by increase volume. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Rectangle | |
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Rectangle Rectangles generally break out in the direction of the trend. Rectangles are formed when prices either trend up or down into an area where prices fluctuate between two horizontal trendlines before breaking upward or downward. These areas of consolidation are healthy for a trending stock it gives buyers or sellers a chance to take a breather before the next move in the original direction. Again volume usually increases when prices break out. Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Support and Resistance | |
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Support and Resistance Support and resistance represent key areas where supply and demand meets. Support is an area where demand is strong enough to stop the price from falling. The psychology behind this is as prices drop down to support buyers are more prone to buy and sellers are less willing to sell. As prices reach the support level buyer will exceed sellers and halt the price from declining below support. Resistance is an area where selling is strong enough to stop the price from rising. The psychology behind this is as prices increase to resistance sellers are more prone to sell and buyers are less willing to buy. As prices reach the resistance level sellers will exceed buyers and halt the price from increasing above resistance. Support and resistance areas are said to be more significant when there are multiple reference points. Support and resistance levels are only areas and are not exact. These area can fail and a break of support or resistance may signal a new leg up or down respectively. Support and resistance can be identified as:
Some basic guidelines for support and resistance are:
Refer to Bulkowski, Encyclopedia of Chart Patterns More Info |
| Trend Lines | |
Trend Lines Trendlines are an essential tool in technical analysis for both trend recognition and confirmation. A trendline is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. A lot of the principles for support and resistance are valid and should be used on the trendline. |
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Upward Trend Line To drawing an upward trendline, find the pivot low just before the highest high and this will be the anchor. Then connect that point to the lowest pivot low of the current upward move. The latter point is moveable to the next low above if the trendline crosses to many price points. The strategy used for stocks in uptrends would be to buy pullbacks toward the upward trendline. |
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Downward Trend Line To draw a downward trendline, find the pivot high just before the lowest low and this will become the anchor. Then connect that point to the pivot high of the current downward move. The latter point is moveable to the next high below if the trendline crosses to many price points. The strategy used for stocks in downtrends would be to short rallies toward the downward trendline. |
Trendlines are evolving hence the trendline must be redrawn with each new pivot high or low respectively. The adage "the trend is your friend" is a very important principle to remember! Finding high probability plays is to always trade in the direction of the longer-term trend. |
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| Volume Analysis | |
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Volume Analysis Volume is the best indication of other traders' interest to a stock's trend. Volume is another tool used to help confirm whether or not to enter into a trade. Some rules of thumb are:
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