Category: Technical Analysis


Patterns in Charts – Flags and Pennants

Filed Under: Technical Analysis by Bill — Comments Off
January 2, 2009

Unlike the double top or bottom, flags and pennants are a chart pattern that tell you the direction the stock was heading is going to still be the direction the stock will be heading. 

  1. Both patterns start with a strong volume move.  This creates the flagpole.  If it’s not on higher than average volume than it lowers your chances the pattern will hold true.
  2. Flags form when a short term change of direction occurs on lower volume.  The highs and lows of the new price channel run parallel to each other.
  3. Pennants form when the prices gets locked on low volume with the lows getting higher and the highs getting lower until the two meet.
  4. The price then breaks out on volume again usually with a similar slope to the flagpole.

The psychology is after a big move some people will begin to take profits.  As the true price gets settled out without any real price action the volume slowly dies.  After the volume dies and the price hasn’t fallen hard a new confidence in the original direction is born and the interest moves the low volume stock more easily and the momentum brings in more interest.

 

 

Remember to verify your chart pattern against some other indicator that isn’t related to the pattern you are looking at.  When non correlated indications align you improve your odds of a succesful trade.

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Patterns in Charts – Head and Shoulders

Filed Under: Technical Analysis by Bill — 1 Comment
December 23, 2008

The head and shoulders pattern in a chart is another trade pattern that helps indicate a reversal in a stock’s price.

What you want to see in your head and shoulder pattern is a higher volume on the left shoulder rise and the head rise with lower volume on the right shoulder.  The neckline is the low of the left shoulder connected to the low of the right shoulder.  You also want to verify the low of the right shoulder is lower then the high of the left shoulder.  If this isn’t true it’s often just a pull back before continuing in the same stock price direction. 

Once the price has fallen below the neckline with increasing volume on the down side of the right shoulder the chart pattern is confirmed.  Use your choice of independent verification to verify your price reversal.

There is an inverted head and shoulders chart pattern indicating a change from downward pricing to upward momentum though I find this pattern less reliable in this direction.

Head and Shoulder patterns can also be found in oscillators like your MACD.

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Patterns in Charts – Double Bottoms

Filed Under: Technical Analysis by Bill — 2 Comments
December 17, 2008

Double Bottom chart patterns are probably one of the easiest to recognize patterns, however most people call any time the price touches near a low twice a double bottom and that’s not exactly what the Double Bottom is.

The price has to touch the same low twice (usually within 3%) with a significant retracement in between.  If the price isn’t exactly the same make sure the price isn’t say 4% lower than the first bottom, lean to the high side for trend reversals.  Staggering lower prices may be a confirmation of a trend continuation.  Also, the two bottoms can not be too close together in time or else it’s just normal volatility.  Unfortunately the exact numbers for retracement and time frame vary from stock equities, commodities, options and within each sector.  So working out these details for your trade option of choice can give you an edge. 

The best test for the double bottom pattern is a price breakout on increased volume after the second bottom higher than the in between retracement.  Huh?  I think I just confused myself, it must be picture time!

There I think that should help clear that up.  The line is the point of the retracement.  If the price moves above this line AFTER the second bottom with a “significant” time frame between the two bottoms you have a very high chance of a price reversal.  I’d say in the 80% range.

It’s good to remember what the chart pattern actually represents – people making trades.  As a price gets lower some generally people think it’s worth less that’s what makes the price go down.  At some point a group of people will now think the stock is a deal and buy in.  Some of those people will sell on the retracement or “take profits” and the sellers who wish they had sold earlier will use that as an opportunity to sell again.  When the price reverses again at the same point it indicates to the market there is a reason why the entity being traded is worth buying at the point and a trend reversal can begin.

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Patterns on a Chart

Filed Under: Technical Analysis by Bill — 3 Comments
December 16, 2008

In prior post I’ve been talking about moving averages, support and resistance, and indicators as tools in technical analysis.  The next few post on TA I’d like to talk about chart patterns.  Patterns in charts are perhaps the oldest TA, often credited with early Japanese rice traders using candlestick patterns.  The human brain is a pattern recognizing machine and particularly notices when something changes from the pattern it’s currently on.  The brain loves change!

There are as many chart patterns as there are people to package them up and sell them on the internet.  Oh did I mention for only $9.99 you too can have… no I’m just kidding.  I won’t give away my secrets that cheap! :)

Some of the more well knows patterns are:

I’ll talk about these in more detail this week, but the main point I want to make today is these patterns aren’t just based on cool images, but market psychology.  People in mass tend to react in a predicatble way.  If you see the path in the chart early then there is potential to make some money, not recognizing what is taking place can get you run over.  Even if your fundamentals are correct – mass psychology and can definately over ride pure facts and logic longer than you can stay solvent.

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