Technical Analysis Overview

TECHNICAL ANALYSIS
Overview
What is Technical Analysis?
 Forecasting of future financial price movements based on an

examination of past price movements
 help investors anticipate what is "likely" to happen to prices over

time.
 uses a wide variety of charts that show price over time.
Fundamental analysis Technical analysis:

• Depends on Macroeconomic
• Depends on internal
data to forecast
• Appeals primarily to long market data price and
term investors volume
• Appeals mostly to short
term traders
Derived from 355 Wall street journals written by Charles H. Dow
journalist, founder and first editor of the Wall Street Journal and co-
founder of Dow Jones and Company.
Following his death, William Peter Hamilton, Robert Rhea and E.

George Schaefer organized and collectively represented Dow theory,
based on Dow's editorials. Dow himself never used the term Dow theory
The Dow theory

Principles of DOW theory
 There are 3 major movements in the market:
 A) Daily Fluctuation/ Short Swing
 B) Secondary Movements ( 2weeks to 3 months)/ Medium Swing
 C) Primary Trends( Long term)/ Main Movement

 Maybe bullish / bearish
 Daily fluctuations and secondary movements only important to the extent
that they reflect on the final long term primary trend
Charles Dow noticed that markets tend to move in an orderly fashion,

repeating the same patterns over and over again .
Trading charts
 Day traders use trading charts to watch the

markets that they trade, and decide when to
make their trades.
 Main charts:
 Bar charts
 Line charts
 Candlestick charts
 Point and figure charts
Line Charts
 Single line represents the stocks closing price
on each day.
 Dates are displayed along the bottom of the

chart and prices are displayed on the side(s).

Line charts are typically displayed using stocks

closing prices.
Bar Chart
 Perhaps the most popular charting method is

the bar chart.
 The high and low are represented by the
top and bottom of the vertical bar and the close is the
short horizontal line crossing the vertical bar.
 On a daily chart, each bar represents the high,
low and close for a particular day.
 Weekly charts would have a bar for each week based
on Friday's close and the high and low for that week.
Chart Patterns
 HEAD & SHOULDERS:
 Criteria: High (left shoulder) followed by a higher high (head) and
then a lower high (right shoulder) which is comparable to the left
shoulder.
Head and Shoulder pattern
 The Left shoulder and head are created during an

uptrend.
 Volume in the formation of the left shoulder is often
higher than volume in the formation of the head
 => Price is advancing with less participation =>

potential price fall
 Neckline is the line joining the minor lows of the left
and right shoulders.
 If price falls below the neckline, time to sell or short
sell.
Inverted Head and shoulders
 Just the opposite pattern which occurs after an extended downtrend.

Also called Head and Shoulders Bottom. It’s completion marks a
change in trend.
 Similar pattern in the reverse: two shoulders, a head and a neckline.

The neckline is drawn through the highest points of the two
intervening peaks.
 If there is a breakout above the neckline, a price rise is expected =>

signal to buy.

Triangle or coil Formation
 The basic construct of this chart pattern is the convergence of

two trendlines- flat, ascending or descending - with the price of
the security moving between the two trendlines.
There are two types of triangles, : the symmetrical triangle, and

asymmetric triangle.
 Symmetric Triangle:
 Two converging trend lines that create a shape of triangle that
bounds price. You should not trade this chart pattern as it is
highly unreliable.
 The triangle can break in either way, either up or down, and price
frequently reverses after the breakout, so this pattern is not good
enough for us to trade.
Asymmetric Triangle
 Consists of two trend lines – one that is

horizontal and serves as support or resistance,
and one that converges into the horizontal one,
creating a shape of half a triangle.
 This chart pattern is highly reliable and

generates very powerful trading signals.
Descending triangle pattern
Ascending triangle pattern
Ascending triangle
 Bullish chart pattern showing an uptrend

 The demand line, or lower trendline is drawn to touch the base of
the rising lows. The two highs have formed at the top line.
 Once the price action breaks through the top line of the triangle
with increased volume,=> buy .
 Descending triangle:
 Shows a downtrend . Often thought of as a bearish signal.
 It is the upside down image of the ascending triangle.
 The two lows on the above chart form the lower flat line of the
triangle
Flags / Pennants
 flag is a rectangular shape, while the pennant looks

more like a triangle.
 The rectangle is formed by two parallel trendlines that

act as support and resistance for the price until the price
breaks out
 The buy or sell signal is formed once the price breaks

through the support or resistance level, with the trend
continuing in the prior direction
 Double Top : Looks like “M”
Double Top/ Double
Bottom  The first stage of this pattern is the
creation of a new high during the
upward trend, which, after peaking,
faces resistance and sells off to a
level of support.
 The next stage of this pattern will

see the price start to move back
towards the level of resistance found
in the previous run-up, which again
sells off back to the support level.
 The pattern is completed when the

security falls below (or breaks down)
the support level that had
Support price backstopped each move the security
made, thus marking the beginnings
of a downward trend.
 It signals a reversal of the downtrend
into an uptrend. This pattern will
Double Bottom closely resemble the shape of a "W".
 The double bottom is formed when a

downtrend sets a new low in the price
movement. This downward move will
find support, which prevents the
security from moving lower. Upon
finding support, the security will rally
to a new high, which forms the
security's resistance point. The next
stage of this pattern is another sell-off
that takes the security down to the
previous low. These two support tests
form the two bottoms in the chart
pattern. But again, the security finds
support and heads back up. The pattern
is confirmed when the price moves
above the resistance the security faced
on the prior move up.
Support and Resistance Levels
 Chartists attempt to define trading levels where price movements

might face a challenge or barrier . There is :
 A) support level of prices : Lower floor of the trading range

 B) Resistance levels : Upper end of trading range.
 A breakout suggests higher or lower trading values outside the

suggested range . May also mean a change in the demand supply
situation in the market.
Support and Resistance
 Support is the important price level where
demand starts to rise so much that it prevents
the price from further decline. It’s the level
where buyers go into action and start buying.
 Resistance is the price level where supply

begins to be so high that it stops the price from
further growth. It’s the level where sellers find
the price so attractive that they sell heavily.

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What are the different types of charts used in technical analysis?

What are the different types of charts used in technical analysis?

What are the principles of Dow theory?

What are the principles of Dow theory?

TECHNICAL ANALYSIS

 Forecasting of future financial price movements based on an

 help investors anticipate what is "likely" to happen to prices over

Fundamental analysis Technical analysis:

Following his death, William Peter Hamilton, Robert Rhea and E.

The Dow theory

 There are 3 major movements in the market:

 A) Daily Fluctuation/ Short Swing

 B) Secondary Movements ( 2weeks to 3 months)/ Medium Swing

 C) Primary Trends( Long term)/ Main Movement

Charles Dow noticed that markets tend to move in an orderly fashion,

 Day traders use trading charts to watch the

 Dates are displayed along the bottom of the

Line charts are typically displayed using stocks

 Perhaps the most popular charting method is

 The Left shoulder and head are created during an

 => Price is advancing with less participation =>

 Just the opposite pattern which occurs after an extended downtrend.

 Similar pattern in the reverse: two shoulders, a head and a neckline.

 If there is a breakout above the neckline, a price rise is expected =>

 The basic construct of this chart pattern is the convergence of

There are two types of triangles, : the symmetrical triangle, and

 Consists of two trend lines – one that is

 This chart pattern is highly reliable and

 Bullish chart pattern showing an uptrend

 flag is a rectangular shape, while the pennant looks

 The rectangle is formed by two parallel trendlines that

 The buy or sell signal is formed once the price breaks

 The next stage of this pattern will

 The pattern is completed when the

 The double bottom is formed when a

 Chartists attempt to define trading levels where price movements

 A) support level of prices : Lower floor of the trading range

 A breakout suggests higher or lower trading values outside the

 Resistance is the price level where supply

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