TECHNICAL

ANALYSIS
 JAPANESE CANDLESTICKS

--- Candlestick charts are thought to have been developed in the 18th century by a Japanese rice trader.

Why ?
1. Visually appealing and easier to interpret.
2. Easy-to-decipher picture of price action.
3. Investor’s psychologically driven forces of fear; greed and hope greatly depicted
CANDLESTICK PATTERNS

Hammer - Hammer is a one candle pattern that occurs in a downtrend when bulls make a start to step into
the rally. It is so named because it hammers out the bottom.

Hanging Man - The hanging man appears during an uptrend, and its real body can be either black or
white. While it signifies a potential top reversal, it requires confirmation during the next trading session. The
hanging man usually has little or no upper shadow.

Important points to remember:

➢The lower shadow should be at least two times the length of the body.
➢There should be no upper shadow or a very small upper shadow.
➢The real body is at the upper end of the trading range.
➢The colour of the body is not important.
➢The following day needs to confirm with a strong bullish/bearish day.
Bullish Engulfing - A “bullish engulfing pattern” consists of a large white real body that engulfs a
small black real body during a downtrend. It signifies that the buyers are overwhelming the sellers. The
Engulfing pattern is a major reversal pattern comprised of two opposite colored bodies. This Bullish
Pattern is formed after a downtrend.

Bearish Engulfing - A “bearish engulfing pattern,” on the other hand, occurs when the sellers are
overwhelming the buyers. This pattern consists of a small white candlestick with short shadows or tails
followed by a large black candlestick that eclipses or “engulfs” the small white one.

Important points to remember:

➢The candlestick body of the previous day is completely overshadowed by the next day’s candlestick.
➢Prices have been declining/increasing definitely, even if it has been in short term.
➢The colour of the first candle is similar to that of the previous one and the body of the second candle is
opposite in colour to that first candle.
➢The probability of a strong reversal increases as the open gaps between the previous and the current
day increases.
Bullish Harami - A candlestick chart pattern in which a large candlestick is followed by a smaller candlestick
whose body is located within the vertical range of the larger body. In downtrends, the harami consists of a large
black candle followed by a small white or black candle (usually white) that is within the previous session’s large
real body. This pattern signifies that the immediately preceding trend may be concluding.

Bearish Harami - consists of a large white candle followed by a small white or black candle that is within the
previous session’s large real body. The body of the first candle is the same colour as that of the current trend.
The open and the close occur inside the open and the close of the previous day. It’s presence indicates that the
trend is over.

Important points to remember:

1) The downtrend/uptrend has been evident for a good period.

2) The first candle is red/green in body; the body of the second candle is green/red.
3) The next day should show strength/weakness.
Dark Cloud Cover - Is a top reversal pattern after an uptrend. The first day of this two candle pattern is a
strong white real body. This second day’s price opens above the prior session’s high. But by the end of the
second day’s session, the market closely deeper within the prior day’s white body. Greater the degree of
penetration into the white real body, the more likely this is a top.

Piercing Pattern – It is the dark-cloud cover’s counterpart. It’s a bottom reversal pattern. The first candle is a
black real body day & the second is a white real body. The second candle opens lower, ideally under the
low of the prior black day. Then prices rebound to push well into the black candle’s real body. An ideal
piercing pattern will have a white real body that pushes more than halfway into the prior session’s black
real body.

Important points to remember:

1) The uptrend/downtrend has to be evident on a chart.

2) The first candle is green/red in body; the body of the second candle is red/green.
Spinning Top - A spinning top is a type of candlestick formation where the real body is small despite a wide
range of price movement throughout the trading day. This candle is often regarded as neutral and used to signal
indecision about the future direction of the underlying asset.

Doji - Doji candlesticks look like a cross, inverted cross or plus sign. Alone, doji are neutral patterns that are also
featured in a number of important patterns. A doji candlestick forms when a security's open and close are
virtually equal for the given time period and generally signals a reversal pattern for technical analysts.
TRENDLINE
A line drawn over highs or lows to show the prevailing direction of price. Trendlines are a visual representation of
support & resistance in any timeframe.

Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a
support) or sell it (in the case of resistance).

There are 3 types of Trendlines used in Technical Analysis viz; Uptrendline, Downtrend Line & Support/Resistance
lines.
Price Patterns
What is a Price Pattern?

➢ Recognizable configuration of price movement.

➢ Price pattern signals a change in trend direction.
➢ Technical analysts have long used price patterns to examine current movements and forecast future
market movements.

We will look at Bullish Patterns & Bearish Patterns which are also called as Top Reversal pattern & Bottom
Reversal Pattern along with some Continuation patterns.

1. Head and Shoulders (Top reversal )

2. Head and Shoulders (Bottom Reversal)
3. Double Top (Top Reversal)
4. Double Bottom (Bottom Reversal)
5. Cup & Handle (Continuation Pattern)
Head and Shoulders (Top reversal)

➢ Reversal pattern occurs following an extended uptrend.

➢ Pattern contains three successive peaks with the middle peak (head) being the highest and the two
outside peaks (shoulders) being low and roughly equal.

Price target: After breaking neckline support, the projected price decline is found by measuring the
distance from the neckline to the top of the head. Price target is calculated by subtracting the above
distance from the neckline.

Important points to remember:

✓ Head and shoulders pattern is one of the most common reversal formations.
✓ Preferable that the left and right shoulders be symmetrical, it is not an absolute requirement.
Head and Shoulders (Bottom reversal or Inverted Head & Shoulder)

➢ Head and shoulders bottom is the inverse of the H&S Top.

➢ The downward trend reaches a climax, which is followed by a rally.
➢ Head and shoulder bottom is one of the most common and reliable reversal formations.

Price target: Once the neckline resistance is broken, the projected advance is calculated by measuring the
distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a
price target.

Important points to remember:

✓ Occurs after a downtrend and usually mark a major trend reversal when complete.
✓ Preferable but not a necessary requirement that the left and right shoulders be symmetrical.
✓ The neckline resistance breakout combined with an increase in volume indicates an increase in demand at
higher prices.
Double Top (Top Reversal)

➢ Reversal pattern which occurs following an extended uptrend.

➢ Name is given to the pair of peaks which is formed when price is unable to reach a new high.

Price target: Price target is calculated by subtracting the distance from the support break to peak from the
support break. The larger the potential decline the bigger will be the formation.

Important points to remember:

✓ Peaks should be separated by a time period of at least a month.

✓ Low between the peaks declines at least 10%.
✓Is said to be complete when the support breaks from the lowest point between the peaks.
Double Bottom (Bottom Reversal)

➢ Pattern which occurs following an extended downtrend.

➢ Drop in the value of a stock (index), bounces back and then another drop to the similar level as the
previous low and finally rebounds again.

Price target: Target is estimated by adding the distance from the resistance breakout to trough lows on top
of the resistance break. This would imply that the bigger the formation is, the larger the potential advance.

Important points to remember:

✓ Preferable to have at least a time of 4 weeks between the two lows.

✓ Bottoms usually take more time than the top.
✓ Advance off of the first trough should be 10-20%.
✓ Volume gains more importance in the double bottom than in the double top. The advance of the second
trough should be clearly evidenced by the increasing volume and buying pressure.
Triple Top (Reversal) - is a bearish reversal pattern. There are three highs approximately at the same
level which form over a period of 3 to 6 months. After the third fall to the support level, the pattern is
complete when the security falls through the support; the price is then expected to move in a downward trend.

Triple Bottom (Reversal) - is a bullish reversal pattern. There are three lows approximately at the same
level which form over a period of 3 to 6 months. After the third rise to the resistance level, the pattern is
complete when the security breaks out through the resistance; the price is then expected to move in an
upward trend.

Price Target: Distance from the support/resistance break to the highs/lows can be measured and
subtracted/added from the support/resistance break for a price target.

Important points to remember:

✓ Prior Trend of uptrend/downtrend has to exist for a reversal pattern to hold good.
✓ You have to see the 3 highs which are reasonably equal.
✓ Break of support/resistance for the pattern to complete.
CONTINUATION PATTERNS
Ascending Triangle - An ascending triangle is a bullish chart pattern which is easily recognizable by the
distinct shape created by trendlines. One trendline is drawn horizontally at a level that has historically
prevented the price from heading higher, while the second trendline connects a series of increasing troughs.

Descending Triangle - A bearish chart pattern that is created by drawing one trendline that connects a
series of lower highs and a second trendline that has historically proven to be a strong level of support.

Symmetrical Triangle - A chart pattern used that is easily recognized by the distinct shape created by two
converging trendlines. The pattern is identified by drawing two trendlines that connect a series of sequentially
lower peaks and a series of sequentially higher troughs. A break below the lower trendline is used to signal
a move lower, while a break above the upper trendline signals the beginning of a move upward.
Flag - A flag is a rectangular shaped pattern that slopes against the previous trend. If the previous move
was up, then the flag would slope down. If the move was down, then the flag would slope up. The rectangle is
formed by two parallel trendlines that act as support and resistance for the price until the price breaks out.

Pennant - A pennant is a small symmetrical triangle that begins wide and converges as the pattern matures
(like a cone). Converging trendlines act as a support & resistance. The slope is usually neutral.

Note: It is important that flags and pennants are preceded by a sharp advance or decline.
Cup & Handle - is a bullish continuation pattern . A cup and handle pattern on resembles its namesake, a
cup with a handle. The cup is shaped as a "U" and the handle has a slight downward drift. Handle should
form in the top half of the cup pattern.

The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week
to many weeks and ideally completes within 1-4 weeks.

Price Target : The projected advance after breakout can be estimated by measuring the distance from the
right peak of the cup to the bottom of the cup.
Gap Theory
- A gap is an area on a price chart in which there were no trades.
- Normally this occurs after the close of the market on one day and the next day’s open.
- Reason for gaps could be earnings report, major economic news, fundamental changes etc.
- Gaps can offer evidence that something important has happened to the fundamentals or the psychology of
the crowd that accompanies this market movement.
- Gaps appear more frequently on daily charts, where every day is an opportunity to create an
opening gap.
Technical Indicators
A Technical indicator is a mathematical formula applied to the security’s price or volume. In short it
“indicates”.

Technical indicators provide unique outlook on the strength and direction of the underlying price action for a
given timeframe.

Why use them?

1. Indicator acts as an alert to study price action.

2. Indicators can be used to confirm other technical analysis tools.
3. Investor & traders can use indicators to predict the direction of future prices.

Tip: The buy and sell signals generated by the indicators, should be read in context with other technical
analysis tools like candlesticks, trends, patterns etc.
Types of indicators

Indicators can broadly be divided into two types “LAGGING” and “LEADING”.

Lagging Indicators are the indicators that would follow a trend.

Leading indicators are designed to lead price movements.

LAGGING INDICATORS

Simple Moving Average: Formed by computing the average (mean) price of a security over a
specified number of periods.

Exponential moving average: Calculated by applying more weight to recent prices relative to older
prices hence they are more responsive.
LEADING INDICATORS (OSCILLATORS)

An oscillator is an indicator that moves back and forth across a reference line or between prescribed upper
and lower limits.

Benefits of leading indicators are early signalling for entry and exit, generating more signals and allow
more opportunities to trade.

1. Relative Strength Index (RSI) - RSI is a momentum oscillator generally used in sideways or ranging
markets. most useful technical tool employed by many traders to measure the velocity of directional
price movement.

Application:

Overbought and Oversold: Generally, technical analysts use 30% oversold and 70% overbought lines
to generate the buy and sell signals.
• Go long when the indicator moves from below to above the oversold line.
• Go short when the indicator moves from above to below the overbought line.

Divergence: Disagreement between the indicator and price is called divergence, and it can have
significant implications on the price of a stock.
2. Stochastic Oscillator

Most popularly stochastic indicator is used as per below:

a. To define overbought and oversold zone- Generally stochastic oscillator reading above 80 is considered
overbought and stochastic oscillator reading below 20 is considered oversold.

It basically suggests that:

• Book profit in buy side positions and should avoid new buy side positions in an overbought zone.
• Book profit in sell side positions and should avoid new sell side positions in an oversold zone.

b. Buy when %K line crosses % D line to the upside in oversold zone and sell when %K line crosses % D line
to the downside in overbought zone.

c. Divergence – Divergences are of two types i.e. positive and negative.

Positive Divergence- are formed when price makes new low, but stochastic oscillator fails to make new low.
This divergence suggests a reversal of trend from down to up.

Negative Divergence- are formed when price makes new high, but stochastic oscillator fails
to make new high. This divergence suggests a reversal of trend from up to down.
“ If your goal is to be a pro trader, your question should not be how much you will make
this year. Your question should be how to survive for 30 years ”

Peter Brandt

THANK YOU !!!!!!!!!!!!