Technical analysis is the attempt to forecast

stock prices on the basis of market-derived

data.
Technicians (also known as quantitative
analysts or chartists) usually look at price,
volume and psychological indicators over
time.
They are looking for trends and patterns in
the data that indicate future price
movements.

Stock market discounts all news

History tends to repeat itself
Price moves in trends.

BEAT THE CROWD!

Markets are 80% psychological and 20%
logical. Thousands and Thousands of people
make their first trade every day, and 90% of
them have no idea what they are doing.
Technicians employ tricks to take advantage
of Dumb Money.

This theory was first stated by Charles Dow

in a series of columns in the WSJ between
1900 and 1902.
Dow (and later Hamilton and Rhea) believed
that market trends forecast trends in the
economy.

Primary Trend
Called the tide by Dow, this is the trend that
defines the long-term direction (up to several
years). Others have called this a secular bull or
bear market.

Secondary Trend
Called the waves by Dow, this is shorter-term
departures from the primary trend (weeks to
months)

Day to day fluctuations

Not significant in Dow Theory

Trends have three phases

1. Accumulation phase
2. Public participation phase
3. Distribution phase

Elliot believed that the market has a rhythmic

regularity that can be used to predict future
prices.
The Elliot Wave Principle is based on a
repeating 8-wave cycle, and each cycle is
made up of similar shorter-term cycles.
Market cycles are composed of two major types of Wave :
Impulse Wave and Corrective Wave
Every impulse wave can be sub-divided into 5 - wave
structure
Every corrective wave can be sub-divided into 3 - wave
structures.

5
B
A
C

3
4

1
2

Chartists use bar charts, candlestick, or

point and figure charts to look for patterns
which may indicate future price
movements.
They also analyze volume and other
psychological indicators.
Strict chartists dont care about
fundamentals at all.

Each bar is composed of

4 elements:

Open
High
Low
Close

Note that the

candlestick body is
empty (white) on up
days, and filled (some
color) on down days

High

High
Close

Open

Open

Close
Low

Standard
Bar Chart

Low

Japanese
Candlestick

Standard
Bar Chart

Japanese
Candlestick

Point and figure charting

is unique in that it does
not plot price against
time
as
all
other
techniques do.
Instead it plots price
against
changes
in
direction by plotting a
column of Xs as the
price rises and a column
of Os as the price falls.
An X represents an up
move.

X
X
X X O
X X O
XO O
XO O
X

Trend Lines (Price Movement)

Moving Averages (Volatility)
Price Patterns (Momentum)
Indicators (Volume)
Cycles

There are three

basic kinds of
trends:
An Up trend where
prices are generally
increasing (Bear).
A Down trend where
prices are generally
decreasing (Bull) .
A Trading Range
(Consolidation).

Uptrend's are characterized by

rising bottoms on the stock
chart and can be described as
periods of optimism

Downtrends are characterized by falling tops

or bottoms on the price chart, and can be
described as periods of pessimism

Support and resistance

lines indicate likely ends
of trends.
Resistance results from
the inability to beat prior
highs.
Support results from the
inability to break below
to prior lows.
What was support
becomes resistance, andSupport
vice-versa-breakout.

Breakout

Resistance

A moving average is
simply the average price
(usually the closing
price) over the last N
periods.

Technicians look for many patterns in the

historical time series of prices.
These patterns are supposed to provide
information regarding the size and timing of
subsequent price moves.
But dont forget that the EMH says these
patterns are illusions, and have no real
meaning. In fact, they can be seen in a
randomly generated price series.

This formation is
characterized
by
two small peaks on
either side of a
larger peak.
This is a reversal
pattern,
meaning
that it signifies a
change in the trend.

H&S Top
Head

Right Shoulder

Left Shoulder

Neckline

H&S Bottom
Neckline

Left Shoulder

Right Shoulder

Head

Sell Signal

Minimum Target Price

Based on measurement rule

These formations
are similar to the
H&S formations, but
there is no head.
These are reversal
patterns with the
same measuring
implications as the
H&S.

Double Top

Target
Target

Double Bottom

Flags result from price fluctuations within a narrow

range and mark a consolidation before the previous
move continuous on
Pennant formations are often treated like flag
formations because they are very similar in
appearance
The key difference is merely that flags have a
parallelogram-like shape, and pennants are more
triangular

Rectangular,
indicating a flag
pattern

Triangles are
continuation
formations.
Three flavors:

Ascending

Ascending
Descending
Symmetrical

Typically, triangles
should break out
about half to threequarters of the way
through the
formation.

Symmetrical
Symmetrical

Descending

Rounding formations
are characterized by
a slow reversal of
trend.

Rounding
Bottom

Rounding Top

These formations
are like reverse
triangles.
These formations
usually signal a
reversal of the
trend.

Broadening Bottoms

Broadening Tops

Nov to Mar
Trading range

Descending
triangles

Double bottom

Gap, should get

filled

MACD
Relative Strength Index RSI

1.
2.
3.

Shows the relationship between two moving

averages of prices
There are three common methods used to
interpret the MACD:
Crossovers
Divergence
Dramatic Rise

SEL
L

BU
Y

BU
Y

compares the magnitude of recent gains to recent

losses in an attempt to determine overbought and
oversold conditions of an asset
The RSI ranges from 0 to 100
Above 70; overvalued
Under 30; undervalued

RSI = 100 [100/1 +RS]

RS = Average of n periods closes up/Average of n
periods closes

Oversold period;
bullish

Bollinger Bands

Standard Deviation

A band plotted 2 standard deviations away from a

simple moving average.
When the markets become more volatile, the bands
widen and during less volatile periods, the bands
contract
The tightening of the bands is often used as an early
indication that the volatility is about to increase
sharply
The closer the prices move to the upper band, the
more overbought the market, and the closer the
prices move to the lower band, the more oversold
the market

Uptrend; staying
within Upper Band

Upper Band
Downtrend;
staying within
Lower Band
Lower Band

Simply indicates the activity of the stock, whether it

is being moved in large amount or barely being
traded at all

Helped to indicate when big movements are likely

Trend is Friend.
Usage of multiple tools can increase your chances of
success
Combining Bollinger Bands with MACD, for
example, can be one traders strategy while another
trades purely off of pattern formations
Play around and see what you find to be most
effective in your particular market