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Saturday, December 15, 2007

BEARISH FLAG PATTERN – Part 2: Important Characteristics

Go back to Part 1: Bearish Flag Formation.

Important Characteristics of Bearish Flag Pattern

Shape of Bearish Flag:
1) Flagpole:
For Bearish Flag pattern to be more reliable, there should be a very sharp / steep price decrease (almost vertical, and may contain gaps) on heavy volume that makes the “Flagpole” part of the pattern.
Without a steep price decrease, the pattern might be less reliable and riskier.

2) Flag:
A Flag part of the pattern is formed when the price movement is contained within two parallel lines, representing a brief consolidation after the sharp decline.
This consolidation forms a small rectangle that frequently slopes against the preceding trend (i.e. the trend of the Flagpole part).
Therefore, in case of Bearish Flag, since the preceding trend is down, the rectangle flag often slightly slopes upward, although it could be horizontal as well.

Volume:
Volume should be heavy during the formation of the Flagpole part, then decreasing during the formation of the Flag part, and the volume should spike when the price break down through the support of the lower parallel line of the Flag.
High volume during the breakout increases the chances of continuation of the preceding trend.
Without a volume spike on the breakout, the pattern might be less reliable.

During the formation of the Flag, if the volume remains constant or was even increasing, then the reliability of this pattern would be doubtful and might signal a trend reversal instead.

Duration:
The duration of the pattern depends on the price fluctuation during consolidation.
The greater the fluctuation, the longer a pattern will take to form.

On a daily chart, this pattern might take about 1 to 12 weeks to develop.
Ideally, this pattern should form between 1 and 4 weeks.

When the duration is between 4 and 12 weeks, the pattern might carry more risk. After 4 weeks, interest in the stock might have decreased and make it unlikely to continue in a strong downtrend.

When the duration is more than 12 weeks, it would be classified as a Rectangle pattern.

Breakout Direction:
For Bearish Flag pattern, the breakout should happen to the downside (i.e. breakout through the lower parallel line).
However, in some rare cases, the price might break against the previous trend, and create a reverse of trend. This reversal pattern may be signaled during the Flag formation by a significant increase in volume, instead of decreasing.

Potential Price Target:
1) Compute the height of the Flagpole.
The height of the Flagpole is the distance from the start (highest point) of the sharp price decrease to the end (lowest point) of the decrease. (See picture in Part 1).
2) Calculate the potential price target:
Subtract the result from the top the Flag to get the Potential Price Target.

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to breakout level for an immediate test of this resistance level. (Remember, the previous support level has now become resistance level).
However, if the price closes above this resistance level, the pattern could be considered invalid.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* FREE Trading Educational Resources You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Friday, December 14, 2007

BEARISH FLAG PATTERN – Part 1: Formation

Bearish Flag is a short term bearish continuation pattern that occurs during a downtrend, indicating a pause / small consolidation before continuing its downward moves.
This pattern normally appears following a sharp price decrease on high volume.

The Formation of Bearish Flag



Bearish Flag Pattern is usually preceded by a very steep (almost vertical) decrease in price on heavy volume. This steep price decrease makes the “Flagpole” of the pattern.
The sharp decline in price may occur due to negative market sentiments toward unfavorable events / developments, such as negative earning surprises, downward guidance, fraud / court cases, etc.

After the sharp decrease, the price movement is then contained within two parallel lines, forming a small rectangle “Flag” shape, on decreasing volume.
The rectangle flag is often slightly sloping upward, although it could be horizontal as well.
This flag represents a brief pause / consolidation in the midst of a downtrend before resuming its downward movement.

The completion of the pattern occurs when prices break to the downside through the support level (i.e. lower parallel line) of the Flag with a spike in volume. This would mark the resumption of the original downtrend.

The Psychology Behind Bearish Flag Pattern
A Bearish Flag pattern takes place because prices seldom decline sharply in a straight line for an extended period. Hence, during a sharp price movement, prices will typically take brief pause periods to "catch their breath" before continuing their move.

During the 1st stage of the Bearish Flag pattern (Flagpole part), as a result of negative market reactions toward some unfavorable events / developments (e.g. negative earnings surprises, downward guidance, etc.), prices keep on dropping sharply as nervous sellers and new short sellers who were caught-up in the euphoria at that moment, are willing to sell at even lower prices.

As the prices drop, some early sellers who have sold short the stock at higher levels would begin to cover their short position. In addition, some investors might also start bargain-hunting. At this point, the 2nd stage of the Bearish Flag pattern begins (i.e. the Flag part).
At first, most of the stocks bought by the early sellers were easily absorbed by nervous new sellers, since the news and market sentiments are still very negative. Nevertheless, as time passes, the selling pressures subside and more investors come for bargain hunting. Consequently, the prices begin to climb up gradually, but the increase is slow and volume is diminishing, as the bearish sentiment is actually still very strong.

After some time, just as it starts to look as if a real increase is underway, new negative news come out. As a result, the price begin to collapse again and break out through the lower line of the Flag with a surge in volume, as new sellers now overwhelm those bargain hunting.
In the following days, there might be more unfavorable news / comments or less optimistic earnings forecast coming, leading the prices to drop even lower.

To be continued to Part 2: Important Characteristics of Bearish Flag pattern.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Monday, December 10, 2007

Chart Patterns

Click the following links to read each article:

1) Technical Analysis – Definition & Assumptions
2) Chart Patterns – Introduction

CONTINUATION PATTERNS:
3) ASCENDING TRIANGLE PATTERN
* Part 1: Ascending Triangle Formation
* Part 2: Ascending Triangle Important Characteristics

4) DESCENDING TRIANGLE PATTERN
* Part 1: Descending Triangle Formation
* Part 2: Descending Triangle Important Characteristics

5) SYMMETRICAL TRIANGLE
* Part 1: Symmetrical Triangle Formation
* Part 2: Symmetrical Triangle Important Characteristics

6) BULLISH FLAG PATTERN
* Part 1: Bullish Flag Formation
* Part 2: Bullish Flag Important Characteristics

7) BEARISH FLAG PATTERN
* Part 1: Bearish Flag Formation
* Part 2: Bearish Flag Important Characteristics

8) BULLISH PENNANT PATTERN
* Part 1: Bullish Pennant Formation
* Part 2: Bullish Pennant Important Characteristics

9) BEARISH PENNANT PATTERN
* Part 1: Bearish Pennant Formation
* Part 2: Bearish Pennant Important Characteristics

10) RECTANGLE PATTERN
* Part 1: Rectangle Formation
* Part 2: Rectangle Important Characteristics

11) CHANNEL PATTERN
* Ascending Channel Pattern
* Descending Channel Pattern


REVERSAL PATTERNS:
12) DOUBLE TOP PATTERNS
* Part 1: Double Top Formation
* Part 2: Double Top Important Characteristics

13) DOUBLE BOTTOM PATTERNS
* Part 1: Double Bottom Formation
* Part 2: Double Bottom Important Characteristics

14) TRIPLE TOPS PATTERNS
* Part 1: Triple Tops Formation
* Part 2: Triple Tops Important Characteristics

15) TRIPLE BOTTOMS PATTERNS
* Part 1: Triple Bottoms Formation
* Part 2: Triple Bottoms Important Characteristics

16) HEAD AND SHOULDERS TOP PATTERN
* Part 1: Head and Shoulder Top Formation
* Part 2: Head and Shoulder Top Important Characteristics

17) HEAD AND SHOULDERS BOTTOM PATTERN
* Part 1: Head and Shoulder Bottom Formation
* Part 2: Head and Shoulder Bottom Important Characteristics


Analysis Tool:
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Related Topics:* 10 Important Trading Lessons
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* Options Trading Basic – Part 2
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BULLISH FLAG PATTERN – Part 2: Important Characteristics

Go back to Part 1: Bullish Flag Formation.

Important Characteristics of Bullish Flag Pattern

Shape of Bullish Flag:
1) Flagpole:
For Bullish Flag pattern to be more reliable, there should be a very sharp / steep price increase (almost vertical, and may contain gaps) on heavy volume that makes the “Flagpole” part of the pattern.
Without a steep price increase, the pattern might be less reliable and riskier.
2) Flag:
A Flag part of the pattern is formed when the price movement is contained within two parallel lines, representing a brief consolidation after the sharp increase.
This consolidation forms a small rectangle that frequently slopes against the preceding trend (i.e. the trend of the Flagpole part).
Therefore, in case of Bullish Flag, since the preceding trend is up, the rectangle flag often slightly slopes downward.
However, the Flag could be horizontal as well.

Volume:
Volume should be heavy during the formation of the Flagpole part, then decreasing during the formation of the Flag part, and the volume should spike when the price break out through the resistance of the upper parallel line of the Flag.
High volume during the breakout increases the chances of continuation of the preceding trend.
Without a volume spike on the breakout, the pattern might be less reliable.

During the formation of the Flag, if the volume remains constant or was even increasing, then the reliability of this pattern would be doubtful and might signal a trend reversal instead.

Duration:
The duration of the pattern depends on the price fluctuation during consolidation.
The greater the fluctuation, the longer a pattern will take to form.

On a daily chart, this pattern might take about 1 to 12 weeks to develop.
Ideally, this pattern should form between 1 and 4 weeks.
When the duration is between 4 and 12 weeks, the pattern might carry more risk. After 4 weeks, interest in the stock might have decreased and make it unlikely to continue in a strong uptrend.

When the duration is more than 12 weeks, it would be classified as a rectangle.

Breakout Direction:
For Bullish Flag pattern, the breakout should happen to the upside (i.e. breakout through the upper parallel line).
However, in some rare cases, the price might break against the previous trend, and create a reverse of trend. This reversal pattern may be signaled during the Flag formation by a significant increase in volume, instead of decreasing.

Potential Price Target:
1) Compute the height of the Flagpole.
The height of the Flagpole is the distance from the start (lowest point) of the sharp price increase to the end (highest point) of the increase. (See picture in Part 1).
2) Add the result to the bottom the Flag to get the Potential Price Target.

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to breakout level for an immediate test of this support level. (Remember, the previous resistance level has now become support level).
However, if the price closes below this support level, the pattern could be considered invalid.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Friday, December 7, 2007

Wednesday, December 5, 2007

BULLISH FLAG PATTERN – Part 1: Formation

Bullish Flag is a short term bullish continuation pattern that occurs during an uptrend, indicating a pause / small consolidation before continuing the uptrend.
This pattern normally appears following a sharp price increase on high volume.

The Formation of Bullish Flag



Bullish Flag Pattern is usually preceded by a very steep (almost vertical) increase in price on heavy volume. This steep price increase makes the “Flagpole” of the pattern.
The sharp rise in price may occur due to positive market sentiments toward favorable events / developments, such as positive earnings surprises, new product launch, etc.

After the sharp increase, the price movement is then contained within two parallel lines, forming a small rectangle “Flag” shape, on decreasing volume.
The rectangle flag is often slightly sloping downward, although it could be horizontal as well.

This flag represents a brief pause / consolidation in the midst of an uptrend before resuming its upward movement.
Consolidation happens when prices tend to bounce between an upper and lower price limit.
This may occur after strong price movement due to market excitement over certain events / developments.
When the excitement is beginning to subside, fewer buyers are willing to purchase at the high price (resistance), but at the same time sellers are also unwilling to sell below a lower limit (support).

The completion of the pattern occurs when prices break out to the upside through the resistance level (i.e. upper parallel line) of the Flag with a spike in volume. This would mark the resumption of the original uptrend.

The Psychology Behind Bullish Flag Pattern
A Bullish Flag pattern takes place because prices seldom move higher in a straight line for an extended period. During a sharp price movement, prices will typically take brief pause periods to "catch their breath" before continuing their move.

During the 1st stage of the Bullish Flag pattern (Flagpole part), as a result of positive market reactions toward some favorable events (e.g. positive earnings surprises, upward guidance, new product launch, etc.), prices keep on soaring sharply as new buyers, who were caught-up in the euphoria at that moment, are willing to buy at even higher prices.

As the prices rises, some early buyers who have bought the stock at lower levels would begin to sell to take profits. At this point, the 2nd stage of the Bullish Flag pattern begins (i.e. the Flag part).
At first, most of the stocks sold by the early buyers are easily absorbed, since the news and market sentiments are still very positive. Nevertheless, as time passes, buying pressures abated and fewer buyers are willing to purchase at the current, high price. Consequently, the prices begin to decrease gradually, but the decrease is slow and volume is diminishing, as the bullish sentiment is actually still very strong.

After some time, just as it starts to look as if a real decline is underway, a new positive development comes out. As a result, the price begins to move higher and break out through the upper line of the Flag with a surge in volume, as new buyers now have overwhelmed those taking profits.
In the following days, there might be more positive news and/or “buy” recommendations coming out, leading the prices to lead to escalate even higher.

To be continued to Part 2: Important Characteristics of Bullish Flag pattern.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Monday, December 3, 2007

SYMMETRICAL TRIANGLE PATTERN – Part 2: Important Characteristics

Go back to Part 1: Symmetrical Triangle Formation.

Important Characteristics of Symmetrical Triangle Pattern

Existing Trend:
There should be an established existing trend (either uptrend or downtrend) in order for the pattern to qualify as a continuation pattern.

Shape of Symmetrical Triangle:
* There should be at least 4 reversal points to draw two converging lines, i.e. two successively lower peak (high) points forming a downward sloping upper line and two successively higher trough (low) points forming an upward sloping lower line, which converge if both line were extended right.
* There should be some distance between the two peaks as well as the two troughs
In other words, prices should increase and hit the descending upper line then decline for at least twice (forming at least two peaks). Prices should drop and hit the ascending lower line then bounce up for at least twice (forming at least two troughs).
* Prices should bounce back and forth in a fairly regular pattern as prices move towards the apex.

Volume:
Volume should be diminishing; heavy at the beginning and contracts as the pattern develops.
However, when breakout occurs, there should be a significant increase in volume.

This is because during the development of the pattern, investors / traders are still indecisive. Some are holding on to their stocks, awaiting the market's next move, whereas the others are buying and selling sooner, which translates into a narrowing range of the peaks and troughs.
When breakout finally occurs, volume should increase significantly, because investors finally have enough conviction about the market direction and they are eager to release their pent-up supply or demand.

Duration:
On a daily chart, this pattern usually may take about 1 to 3 months to form.
If the pattern duration is less than 3 weeks, it is usually considered as a bullish / bearish pennant.

Generally, the longer it takes to form the triangle (or the longer the timeframe of the triangle formation), the stronger the breakout would be.

Breakout Direction:
For Symmetrical Triangle, the breakout can happen in either direction (upside or downside).
Hence, the direction of the breakout can only be determined after the breakout has occurred.
Although triangle as a continuation pattern is supposed to break out in the direction of the existing trend, this is not always the case.

Potential Price Target:
1) Compute the height of the triangle at its widest part (on the left of the chart).
The height is determined by projecting & measuring a vertical line from the highest high point on upper line to the lowest low point on the lower line.
2) To compute the potential price target:
When the breakout is to the upside of the upper line: Add the result to the breakout point at the upper line to get the potential price target.
When the breakout is to the downside of the lower line: Subtract the result from the breakout point at the lower line to get the potential price target.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the apex or the support / resistance level around the breakout level for an immediate test of this new support / resistance before resuming their moves in the direction of the breakout.
However, the prices should not reenter the triangle and move outside the opposite line of the breakout line.

When Breakout Should Occur:
The breakout from a triangle pattern should occur well before the pattern reaches the apex of the triangle (i.e. should be somewhere between two-thirds and three-quarters of the horizontal width of the triangle).
If breakout does not occur beyond the three-quarter point, it might mean that prices would continue to drift out to the apex and beyond. In other words, the pattern may no longer valid.

False Breakout:
Premature / false breakouts or "shakeouts" often happen to this pattern as well.

The following are a few points to take note in order to try to avoid false breakout:

* A minimum penetration criteria for a breakout should be price closes outside the upper line (for breakout to the upside) or lower line (for breakout to the downside), not just an intraday penetration.
Some investors / traders may apply certain price criteria (e.g. 3% - 5% break from the upper / lower line depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

* Normally, a breakout from a triangle pattern occurs due to an “event” or new development that is able to provide enough conviction to the investors / traders to move strongly one way or the other.
Therefore, some possible confirmation for a valid breakout could be price gaps or accelerated price movements, which are accompanied by a significant increase in volume.

* When a breakout is not accomplished by high volume, investors / traders should be cautious. Because a good breakout from a triangle formation should occur with a surge in volume. However, not all breakouts with high volume are reliable either. A false breakout may also occur with high volume.
Therefore, the price action on the following days should be watched carefully. It is wise to wait a few days to determine whether the breakout is a valid one. Hence, some investors / traders prefer to take positions when the prices return to the breakout level to test the new support / resistance before resuming their moves to the breakout direction (although this return does not always happen), because this may offer an opportunity to participate in the breakout with a better reward to risk ratio.

* When the breakout occurs very near to the apex, investors / traders should be extra cautious. Because the chances of a false breakout are very high as the volume is thin at this point. Hence, it would only take very little activity to cause an erratic and false movement that takes the price outside of the upper or lower lines.

To read about other chart patterns, go to: Learning Charts Patterns

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* FREE Trading Educational Videos You Should Not Miss

Friday, November 30, 2007

Wednesday, November 28, 2007

SYMMETRICAL TRIANGLE PATTERN – Part 1: Formation

Symmetrical Triangle is a neutral pattern that normally forms during a trend (either uptrend or downtrend) as a continuation / consolidation pattern. The breakout usually occurs in the same direction as the existing trend.

The Formation of Symmetrical Triangle Pattern



Symmetrical Triangle Pattern contains at least two lower highs (peaks) and two higher lows (troughs). When the peak as well as trough points are connected by separate lines and then extended to the right, they would respectively form a descending upper line and an ascending lower line, creating a pattern that looks like a symmetrical triangle.
In this case, the descending upper line acts as resistance, whereas the ascending lower line as support.

This pattern occurs because the highs (peaks) are moving progressively lower, whereas the lows (troughs) are moving progressively higher.
As the range between the peaks and troughs are narrowing, the upper & lower lines converge at the "Apex", which is located at the right of the triangle.
The completion of the pattern occurs when prices break out through either the upper line (i.e. breakout to the upside) or lower line (i.e. breakout to the downside) before finishing the apex of the triangle.

A triangle pattern may sometimes be associated with a “coil”. A “coil” needs to recoil (contract) in order to build up enough potential energy for its next expansion.

The pattern implies that buyers and sellers are in a period where they still hesitate where the market is heading. However, in the end, either the buyers or sellers managed to find enough conviction to break out to one side with great force.

To be continued to Part 2: Important Characteristics of Symmetrical Triangle pattern.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Monday, November 26, 2007

DESCENDING TRIANGLE PATTERN – Part 2: Important Characteristics

Go back to Part 1: Descending Triangle Formation.

Important Characteristics of Descending Triangle

Existing Trend:
There should be an established existing trend (normally downtrend) in order for the pattern to qualify as a continuation pattern

Shape of Descending Triangle:
* There should be at least two equal troughs (lows) forming a horizontal lower line, and two successively lower peaks (highs) forming a descending upper line that converges on the lower line as it slopes downward (If both lines were extended right).
* There should be some distance between the two peaks as well as the two troughs.
In other words, prices should increase and hit the downward sloping upper line then decline for at least twice (forming at least two peaks). Prices should drop and hit the lower line then bounce up for at least twice (forming at least two troughs).
* The lower line does not need to be completely horizontal, but it should be close to horizontal.
* The troughs (lows) do not have to be exactly the same in value, but they should be reasonably close.
* Prices should bounce back and forth in a quite regular pattern as the Triangle develops.

Volume:
Volume should be diminishing; heavy at the beginning and contracts as the pattern develops.
However, when breakout occurs, there should be a significant increase in volume.

This is because during the development of the pattern, investors are still undecided. Some are holding on to their stocks, awaiting the market's next move, whereas the others are buying and selling sooner, which translates into a narrowing range of the peaks and troughs.
When breakout finally occurs, volume should increase significantly, because investors finally have enough conviction about the market direction and they are eager to release their pent-up supply or demand.

Duration:
On a daily chart, this pattern usually may take about 1 to 3 months to form.

Generally, the longer it takes to form the triangle (or the longer the timeframe of the triangle formation), the stronger the breakout would be.

Potential Price Target:
1) Compute the height of the triangle at its widest part (on the left of the chart).
The height is determined by projecting & measuring a vertical line from the highest high point on upper line to the horizontal lower line.
2) Subtract the result from the breakout point (i.e. the horizontal lower line) to get the potential price target.

Return to Breakout Level:
After the breakout through the lower line occurred, it is common that prices could bounce back to the lower line for an immediate test of this new resistance before resuming their downward moves.
This is because the lower line that previously acted as support now turns into resistance.
(Remember the basic principle of technical analysis that resistance turns into support, or vice versa).
However, it should not reenter the triangle and/or even close above the upper line.

Breakout Direction:
Although Descending Triangle is generally considered as bearish pattern (i.e. the breakout should be to the downside), it may sometimes break to the upside instead (i.e. break out through the upper line).

When Breakout Should Occur:
The breakout from a triangle pattern should occur well before the pattern reaches the apex of the triangle (i.e. should be somewhere between two-thirds and three-quarters of the horizontal width of the triangle).
If breakout does not occur beyond the three-quarter point, it might mean that prices would continue to drift out to the apex and beyond. In other words, the pattern may no longer valid.

False Breakout:
Premature / false breakouts or "shakeouts" often happen to this pattern as well. The following are a few points to take note in order to try to avoid false breakout:

* A minimum penetration criteria for a breakout should be price closes below the lower line (when breakout to the downside) or the upper line (when breakout to the upside), not just an intraday penetration.
Some investors / traders may apply certain price criteria (e.g. 3% - 5% break from the upper / lower line, depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

* Normally, a breakout from a triangle pattern occurs due to an “event” or new development that is able to provide enough conviction to the investors / traders to move strongly to a certain direction.
Therefore, some possible confirmation for a valid breakout could be price gaps or accelerated price movements, which are accompanied by a significant increase in volume.

* When a breakout is not accomplished by high volume, investors / traders should be cautious. Because a good breakout from a triangle formation should happen with a noticeable surge in volume. However, not all breakouts with high volume are reliable either. A false breakout may also occur with high volume.
Therefore, the price action on the following days should be watched carefully. It is sometimes wise to wait a few days to determine whether the breakout is a valid one. Hence, some investors / traders prefer to take positions when the prices return to the breakout level to test the new support / resistance before resuming their moves to the breakout direction (although this return does not always happen), because this may offer an opportunity to participate in the breakout with a better reward to risk ratio.

* When the breakout occurs very close to the apex, investors / traders should be extra cautious. Because the chances of a false breakout are very high as the volume is thin at this point. Hence, it would only take very little activity to cause an erratic and false movement that takes the price outside of the upper or lower lines.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* Learn Technical Analysis from LINDA RASCHKE for FREE
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Wednesday, November 21, 2007

DESCENDING TRIANGLE PATTERN – Part 1: Formation

Descending Triangle is a bearish pattern that normally forms in the midst of a downtrend as a continuation / consolidation pattern.
However, sometimes this pattern may also be found at the top of an uptrend, signaling a potential reversal of trend.

The Formation of Descending Triangle



Descending Triangle has a decreasing (downward sloping) upper line and a flat / horizontal lower line, forming a pattern that looks like a flat-bottom triangle.
In this case, the decreasing upper line acts as resistance, whereas the horizontal lower line as support.

This pattern occurs because the lows (troughs) are maintaining at about the same price levels, whereas the highs (peaks) are moving gradually lower.
As the range between the peaks and troughs are narrowing, the upper & lower lines converge at the "Apex", which is located at the right of the triangle.
The completion of the pattern occurs when prices break down through the horizontal lower line before finishing the apex of the triangle.

This pattern is usually considered as bearish pattern. The progressively lower highs that form the declining upper line indicate increased selling pressures, which give the Descending Triangle pattern a bearish bias.

The pattern implies that buyers and sellers are in a period where they are still hesitant about where the market is heading. However, sellers seem to be more aggressive than buyers, as the highs progressively get lower, while the lows are always holding about the same level. In the end, the sellers overpower the buyers and break down to the downside with great force.

Therefore, a triangle pattern may sometimes be associated with a “coil”. A “coil” needs to recoil (contract) in order to build up enough potential energy for its next expansion.

To be continued to Part 2: Important Characteristics of Descending Triangle pattern.

To read about other chart patterns, go to: Learning Charts Patterns

Related Posts:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Monday, November 19, 2007

ASCENDING TRIANGLE PATTERN – Part 2: Important Characteristics

Go back to Part 1: Ascending Triangle Formation

Important Characteristics of Ascending Triangle Pattern

Existing Trend:
There should be an established existing trend (normally uptrend) in order for the pattern to qualify as a continuation pattern.

Shape of Ascending Triangle:
* There should be at least two equal peaks (highs) forming a horizontal upper line, and two successively higher troughs (lows) forming an ascending lower line that converges on the upper line as it slopes upward.
* There should be some distance between the two peaks as well as the two troughs.
In other words, prices should increase and hit the upper line then decline for at least twice (forming at least two peaks). Prices should drop and hit the upward sloping lower line then bounce up for at least twice (forming at least two troughs).
* The upper line does not need to be completely horizontal, but it should be close to horizontal.
* The peaks (highs) do not have to be exactly the same in value, but they should be reasonably close.
* Prices should bounce back and forth in a quite regular pattern as the Triangle develops.

Volume:
Volume should be diminishing; heavy at the beginning and contracts as the pattern develops.
However, when breakout occurs, there should be a significant increase in volume.

This is because during the development of the pattern, investors are still undecided. Some are holding on to their stocks, awaiting the market's next move, whereas the others are buying and selling sooner, which translates into a narrowing range of the peaks and troughs. (They profit take or short sell at the upper line that acts as resistance).
When breakout finally occurs, volume should increase significantly, because investors finally have enough conviction about the market direction and they are eager to release their pent-up supply or demand.

Duration:
On a daily chart, this pattern usually may take about 1 to 3 months to form.

Generally, the longer it takes to form the triangle (or the longer the timeframe of the triangle formation), the stronger the breakout would be.

Potential Price Target:
1) Compute the height of the triangle at its widest part (on the left of the chart).
The height is determined by projecting & measuring a vertical line from the horizontal upper line to the lowest low point on the lower line.
2) Add the result to the breakout point (i.e. horizontal upper line) to get the potential price target.

Return to Breakout Level:
After the breakout through the upper line has occurred, it is common that prices could retrace to the upper line for an immediate test of this new support before resuming their upward moves.
This is because the upper line that previously acted as resistance has now turned into support.
(Remember the basic principle of technical analysis that resistance turns into support, or vice versa).
However, it should not reenter the triangle and/or even close below the lower line.

Breakout Direction:
Ascending Triangle is generally considered as bullish pattern (i.e. the breakout should be to the upside).
Nevertheless, it may sometimes break to the downside too (i.e. break down through the lower line).

When Breakout Should Occur:
The breakout from a Triangle pattern should occur well before the pattern reaches the apex of the triangle (i.e. should be somewhere between two-thirds and three-quarters of the horizontal width of the triangle).
If breakout does not occur beyond the three-quarter point, it might mean that prices would continue to drift out to the apex and beyond. In other words, the pattern may no longer valid.

False Breakout:
Premature / false breakouts or "shakeouts" often happen to this pattern as well.
The following are a few points to take note in order to try to avoid false breakout:

* A minimum penetration criteria for a breakout should be price closes outside the upper line (when breakout to the upside) or lower line (when breakout to the downside), not just an intraday penetration.
Some investors / traders may apply certain price criteria (e.g. 3% - 5% break from the upper / lower line, depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

* Normally, a breakout from a triangle pattern occurs due to an “event” or new development that is able to provide enough conviction to the investors / traders to move strongly to a certain direction.
Therefore, some possible confirmation for a valid breakout could be price gaps or accelerated price movements, which are accompanied by a significant increase in volume.

* When a breakout is not accomplished by high volume, investors / traders should be cautious. Because a good breakout from a triangle formation should happen with a significant increase in volume. However, not all breakouts with high volume are reliable either. A false breakout may also occur with high volume.
Therefore, the price action on the following days should be watched carefully. It is sometimes wise to wait a few days to determine whether the breakout is a valid one. Hence, some investors / traders prefer to take positions when the prices return to the breakout level to test the new support / resistance before resuming their moves to the breakout direction (although this return does not always happen), because this may offer an opportunity to participate in the breakout with a better reward to risk ratio.

* When the breakout occurs very close to the apex, investors / traders should be extra cautious. Because the chances of a false breakout are very high as the volume is thin at this point. Hence, it would only take very little activity to cause an erratic and false movement that takes the price outside of the upper or lower lines.

To read about other chart patters, go to: Learning Charts Patterns

Related Posts:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* FREE Trading Videos from Famous Trading Gurus

Friday, November 16, 2007

Wednesday, November 14, 2007

ASCENDING TRIANGLE PATTERN – Part 1: Formation

Ascending Triangle is a bullish pattern that normally forms in the midst of an uptrend as a continuation / consolidation pattern.
However, sometimes this pattern may also be found at the bottom of a downtrend, signaling a potential reversal of trend.

The Formation of Ascending Triangle



Ascending Triangle has a flat / horizontal upper line and an ascending (upward sloping) lower line, forming a pattern that looks like a flat-top triangle.
In this case, the horizontal upper line acts as resistance, whereas the rising lower line as support.

This pattern occurs because the highs (peaks) are maintaining at about the same price levels, whereas the lows (troughs) are moving progressively higher.
As the range between the peaks and troughs are narrowing, the upper & lower lines converge at the "Apex", which is located at the right of the triangle.

The completion of the pattern occurs when prices break out through the horizontal upper line before finishing the apex of the triangle.

This pattern is usually considered as bullish pattern.
The progressively higher lows that form the ascending lower line indicate increased buying pressures, which give the Ascending Triangle pattern a bullish bias.

The pattern implies that buyers and sellers are in a period where they are still hesitant about where the market is heading. Nevertheless, buyers seem to be more aggressive than sellers, as the lows gradually get higher, while the highs are always holding about the same level. In the end, the buyers find enough conviction to break out to the upside with great force.

Therefore, a triangle pattern may sometimes be associated with a “coil”.
A “coil” needs to recoil (contract) in order to build up enough potential energy for its next expansion.

Continue to Part 2: Important Characteristics of Ascending Triangle pattern.

To read about other chart patterns, go to: Learning Charts Patterns

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Getting Started Trading

Monday, November 12, 2007

Chart Patterns – Introduction

What Is Chart Patterns?
Chart Patterns
provide a complete, concise pictorial documentation of all buying and selling (supply and demand) forces.
Chart Patterns allow investors / traders to analyze the battle between bulls (buyers) & bears (sellers) and help determine who win the battle, so that they can position themselves accordingly.

Why Chart Patterns Can Help In Trading / Investing?
Because price patterns form as a result of market psychology.
Although a chart only presents stock prices & volume, it actually reflects human behavior, psychology and reactions towards the forces of supply vs. demand.
For example:
A consolidation pattern (sideways movement) does not develop because the pattern is controlling price movement.
A consolidation pattern develops because there is no enough belief or confidence in the market that the price should be heading up or down. Here, investors / traders are still trying to analyze the market to come at a conclusion about where they think the stock price should be heading based on their new price expectations for the stock.
Usually, the price will trade sideways until an “event” occurs to shift the market’s psychology one way or the other, which then results in a price breakout from the consolidation pattern.
The investors / traders who observe the pattern could then assume positions to trade or “ride” the breakout move.

Types of Chart Patterns
Chart patterns can generally be grouped into 2 types of patterns:

1) Continuation patterns:
Continuation patterns are price patterns that are formed in periods of price consolidation during a trend. They suggest that the market is still not sure where the price should be heading, but ultimately deciding to confirm the existing trend.
Hence, when price breaks out from this consolidation period, it is usually in the direction of the trend.
Continuation patterns offer opportunities to take or add to a position.
The following are some Continuation patterns:
Ascending Triangle, Descending Triangle, Symmetrical Triangle, Bullish / Bearish Flag, Bullish / Bearish Pennant, Rectangle, Price Channel, Cup and Handle.

2) Reversal patterns:
Reversal patterns are price patterns that occur at the end of the trend.
These patterns imply the market momentum is slowing and provide signals that a trend may be coming to an end and that prices may change direction.
The following are some Reversal patterns:
Head And Shoulders Top, Head And Shoulders Bottom, Double Tops, Double Bottom, Triple Tops, Triple Bottoms, Falling Wedge, Rising Wedge, Saucer / Rounding Bottom.

A Few Caution Notes
* Identifying, analyzing & interpreting chart patterns are more of an art than science. It’s quite subjective and needs some degree of imagination & skills to identify them.
* Some patterns are easier to identify and repeat themselves quite frequently, while others are more difficult to be recognized and rarely formed.
* Different market, industries and stocks can behave differently.
For instance, some stocks are more volatile than the others; some stocks often experience gaps, whereas the gaps seldom occur in the other stocks, etc.
* No pattern provides certainty even though all the signals it gives comply the pattern characteristics / rules perfectly. Even a “perfect” pattern merely presents us a higher probability that it may behave as what we expect from the pattern. Pattern failures do happen frequently. Therefore, what is more important is money management.

In the next posts, we’ll cover various common chart patterns further.
Hope it can be useful for you. Stay tune. :)

Update:
To read about chart patterns, go to: Learning Charts Patterns

Related Posts:
* FREE Trading Educational Resources You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Friday, November 9, 2007

Technical Analysis – Definition & Assumptions

Many investors / traders use Technical Analysis to help them in their entry & exit strategies. Ideally, Technical Analysis should be used hand in hand with Fundamental Analysis, as the two methods have their own pros & cons.
However, some people argue that for short term trading (e.g. day trading, 1 – 5 days swing trading), Fundamental Analysis may not be as critical as that for longer term trading / investing.

The following would discuss further what Technical Analysis is and its basic assumptions.

What Is Technical Analysis?
Technical Analysis
is a method used to attempt to predict future stock prices based on historical prices and stock chart patterns / trends.
Technical analysis uses no information about the actual business or financial performance of the underlying company.
Technical analysis can be applied to an individual stock as well as market as a whole.

In contrast, Fundamental Analysis attempts to make investment decision based on the evaluation on the company's business & operation, overall financial health / condition, management quality, marketing aspects, future outlook of the company, industry factors, as well as economic and political conditions.
The Fundamental analysis will then compare the valuation with the prevailing market price to ascertain whether the stock is overpriced, underpriced, or priced in proportion to its market value.

The Basic Assumptions of Technical Analysis
* A stock price has factored in all known information (e.g. the stock’ fundamental / intrinsic values, events, economic outlook and market psychology, etc.) about a stock.
As such, there is no need to study each factor individually, but instead just need to focus on the price behaviors only.
* Disregarding minor fluctuation, prices tend to move in trends.
However, prices do not move in a trend forever. When prices change direction, the move normally does not occur directly & obviously. Prices tend to move sideways first, fluctuating up and down, as investors try to analyze the market and arrive at a conclusion about where they think the stock price should be heading based on their new price expectations for the stock. These sideways movements cause price patterns to form on the chart.
* History will repeat itself, over and over again.
The price patterns tend to repeat, offering investors a prediction of where prices may be heading.This is possible because human behavior will never change. The repetitive & predictable human behavior, psychology and reactions towards various supply vs. demand forces are the foundation of technical analysis.

History repeats itself in the stock market. Many price patterns and price consolidation structures that stocks form are repeated over and over again.

William J. O'Neil


As Technical Analysis mainly uses charts patterns to predict future stock price behavior, it is commonly called as “Charting”.

In the next posts, we’ll discuss about chart patterns.
In the meantime, have a good weekend ahead. :)

Related Posts:
* Learning Charts Patterns
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Tuesday, November 6, 2007

Example On How Implied Volatility (IV) Affects Option’s Price Significantly

As discussed earlier, in options trading, Implied Volatility (IV) has a considerable impact on an option’s price. An option’s price can go up or down due to changes in IV, although there is no change in the stock price. Some times, for instance, we also find a stock price has increased, yet the Call option of the stock did not increased, but it dropped instead.
Now, let’s see a simple example on how IV affects an option’s price considerably.

In the prior post, it’s shown that IV will normally begin to rise starting from a few weeks before the announcement day. And once the announcement is out, the IV will drop significantly.

The fact that the IV will drop considerably right after the announcement is extremely important to note, particularly when you’re trading options by buying straight call / put options (directional play) or buying strangle / straddle (non-directional play) over earnings announcement.
This is typically the reason why you might see that the stock price has gapped up / down in your direction, but yet the option’s prices do not move profitably.
Why is it so?
Remember that, for both Call & Put options, an increase in IV will increase an option’s price, whereas a decrease in IV would decrease an option’s price.
(You may want to refer to the posts on Vega or Options Pricing for further discussion).

The increase in IV before the earnings announcement is to “anticipate” the volatility as a result of the announcement. In other words, certain magnitude of the price movement (either up or down) has been “priced in” by the increase in IV, which causes the option’s price to be more “expensive” than normal.
Once the announcement is out, the IV will drop significantly, which would affect the option’s price negatively.

Therefore, to be profitable in such cases, the increase / decrease in stock price must be big enough to offset the negative impact of the drop in IV on option’s prices.
And for strangle / straddle, the stock price movement must be even much bigger in order to offset both the drop on option’s prices at both legs (call & put legs) due to the drop in IV as well as the drop on option’s price at the other leg after the stock price moves to certain direction.

Therefore, in this case, it’s important to first assess the Reward / Risk ratio of a potential trade by inputting different scenarios of IVs and expected / target stock prices (using Options Calculator / Pricer).
By doing this, you can anticipate what your best & worst scenarios are, have your risk & return calculated, and determine if the trade is worth taking.

To understand more about Implied Volatility, go to: Understanding Implied Volatility (IV).

Related Topics:
* FREE Trading Videos from Famous Trading Gurus
* Options Trading Basic – Part 2
* Option Greeks

Wednesday, October 31, 2007

The Behavior of Implied Volatility (IV) & Historical Volatility (HV) Before & After Earnings Announcement

As mentioned before, Implied Volatility (IV) does factor in future important events / news which are expected to move the option’s price considerably within the next 30 trading days (e.g. earnings announcement, FDA approvals, etc.).

For some regular events, such as earnings announcement, which typically take place on a quarterly basis, we could see some common behavior before & after the announcement.
Generally, IV would normally start to increase since a few weeks before the announcement day.
Once the announcement is out, the IV will usually drop significantly.
On the other hand, the Historical Volatility (HV) may rise drastically should there were a significant gap up / down in stock price after the announcement.

Example:





Note:
RIMM’s Earnings Announcement: 28 Sep 06, 21 Dec 06, 11 Apr 07, 28 Jun 07, 4 Oct 07.

As we can see from the chart, the IV (Implied Volatility) was normally increasing when the announcement approached, and it dropped significantly right after the announcement.

On the contrary, when there was a significant price gap (up / down) after the announcement, the HV (Historical Volatility) increased drastically, reflecting the sudden actual price movement (e.g. Price gapped up after earnings announcement on 28 Jun 07).
Also notice that about 30 trading days after that, HV fell drastically. This is because the price data on the day just before the price gap occurred has been excluded from the HV calculation. (Remember that HV is a measure of the fluctuations of the stock price over the past 30 trading days).

Next, what’s the impact of the above behavior when we’re trading options over the announcement? We’ll discuss it further later. Please stay tune. :)

To understand more about other aspects of Implied Volatility, go to: Understanding Implied Volatility (IV).

Related Posts:
* Trading Videos From Trading Experts You Should Not Miss
* Options Trading Basic – Part 2
* Option Greeks

Monday, October 29, 2007

INVERTED HAMMER vs. SHOOTING STAR

Both Inverted Hammer and Shooting Star have the same shape, i.e. candlesticks with long upper shadows and small real bodies.
The upper shadow should be at least 2 times longer than the body.
There should be no lower shadow, or a very small lower shadow.
The color of the body is not important, although a white body has slightly more bullish implications and a red / black body has slightly more bearish implications.

Inverted Hammer and Shooting Star are reversal patterns which comprised of one candle only.
Whether a pattern is bearish or bullish reversal, it depends on whether it is formed at the end of a downtrend (Inverted Hammer) or an uptrend (Shooting Star).



Note:
The grey candle means the color of the candle’s body can be white or black (red).

INVERTED HAMMER (BULLISH)
Inverted Hammer
is a bottom reversal pattern / bullish reversal pattern.
It can be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

For an Inverted Hammer to form, the price must first trade much higher than where it opened, and then it drops to close near its low at the end of the day. The long upper shadow formed shows some indications that the buyers (bulls) might have started to step in. Although the sellers (bears) managed to regain control and drive the price lower at the close, the appearance of buying pressure gives some warnings.
The next trading day needs to confirm its bullish reversal signal with a strong bullish day (e.g. a gap up or a long white candle on a high volume).

SHOOTING STAR (BEARISH)
Shooting Star
is a top reversal pattern / bearish reversal pattern.
I could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

When the price is in the midst of a strong rally, the price opens and then rises sharply. However, at the end of the session, the price turns and managed to close near its low. This shows some evidence that the sellers (bears) might have begun to take control.
The following day needs to confirm this with a strong bearish day (e.g. a gap down or a long black/red candle on a strong volume).

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks

Saturday, October 27, 2007

Reading Links

Adam from Daily Options Report: Gamma Thoughts

Adam from Daily Options Report: More On Gamma

Afraid To Trade: Six Tips to Assess the Significance of Price Patterns

Afraid To Trade: Amazon Teaches Us the Three Types of Gaps

Kirk Report: Seasonal Trend

A Trade A Day: How To Trade Hammers

Stock Bandit: When Good Trades Go Bad

Simply Options Trading: Is the Trend Changing?

Enjoy your weekends! :)

Related Posts:
* Option Greeks: GAMMA
* Major Candlestick Patterns: HAMMER vs. HANGING MAN

Thursday, October 25, 2007

HAMMER vs. HANGING MAN

Both Hammer and Hanging Man have the same shape, i.e. candlesticks with long lower shadows and small real bodies.
The lower shadow should be at least 2 times longer than the body.
There should be no upper shadow, or a very small upper shadow.
The color of the body is not important, although a white body has slightly more bullish implications and a red / black body has slightly more bearish implications.

Hammer and Hanging Man are reversal patterns which comprised of one candle only.
Whether a pattern is bearish or bullish reversal, it depends on whether it is formed at the end of a downtrend (Hammer) or an uptrend (Hanging Man).



Note:
The grey candle means the color of the candle’s body can be white or black (red).

HAMMER (BULLISH)
Hammer
is a bottom reversal pattern / bullish reversal pattern.
It can be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

When the price is still in the midst of a decreasing trend, the market opens and then sells off sharply. However, at the end of the session, the price turns and managed to close near its high. This shows some evidence that the bulls have begun to step in.
The following day needs to confirm the Hammer’s bullish reversal signal with a strong bullish day (e.g. a gap up or a long white candle on a high volume).

HANGING MAN (BEARISH)
Hanging Man
is a top reversal pattern / bearish reversal pattern.
It may be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

For a hanging man to form, the price must first trade much lower than where it opened, and then it rallies to close near its high at the end of the day. The long lower shadow formed shows some indications that the selling pressures might just begin. Although the bulls managed to regain control and drive the price higher at the close, the appearance of selling pressure raises some concerns.
The next trading day needs to confirm the Hanging Man’s bearish signal with a strong bearish candle (e.g. a gap down or a long red / black candle on a high volume).

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Posts:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Learning Charts Patterns
* Getting Started Trading
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)

Monday, October 22, 2007

PIERCING LINE vs. DARK CLOUD COVER

Both Piercing Line & Dark Cloud Cover are 2-day reversal patterns.
Whether a pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Piercing Line) or an uptrend (Dark Cloud Cover).



PIERCING LINE (BULLISH)
Piercing Line
is a bottom reversal pattern / bullish reversal pattern.
It could be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

This is a 2-candle pattern which can signal a possible turning point:
The 1st day is long black/red candle.
The 2nd day is a long white body candle that opens sharply lower, below the trading range of the previous day, but the price then rises and closes above the midpoint (50%) level of the black/red body of the 1st day candle.
If the following day the price continues to rise and close higher (preferably on a strong volume), it provides confirmation to this bullish reversal pattern.

DARK CLOUD COVER (BEARISH)
Dark Cloud Cover is a top reversal pattern / bearish reversal pattern.
It can be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

This is a 2-candle pattern which can signal a possible turning point:
The 1st day is long white candle.
The 2nd day is a long black/red body candle that opens sharply higher, above the trading range of the previous day, but the price then drops and closes below the midpoint (50%) level of the white body of the first day.
If the following day the price continues to drop and close lower (preferably on a strong volume), it provides confirmation to this bearish reversal pattern.

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Topics:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Option Greeks

Friday, October 19, 2007

Book Review: When The Market Moves, Will You Be Ready?

I just finished reading a book: When the Market Moves, Will You Be Ready?, authored by Peter Navarro.
Peter Navarro is the author of "If It's Raining in Brazil, Buy Starbucks", one of the famous books on Sector Rotation.



I found this book to be very well written. It is clear, concise and easy to understand, even for beginners.
Basically, the book introduces a top-down, step-by-step approach of investing, from the basic of fundamental analysis, technical analysis to risk management, money management, trade management, and execution.

Here are the main points what the book is all about:

There are 4 stages of Macrowave investing:

Stage 1: To analyze the 4 dynamic factors that have impacts to the broad market trend:
a) Company earnings: Especially for the big companies. Must take note of their earnings calendar.
b) Macro-economic events, such as government reports on inflation, employment, productivity reports, trade deficit, etc.
c) Fed policy changes (monetary vs. fiscal policy).
d) Exogenous shocks, such as oil price spikes, wars, terrorism, company scandals, etc.

Stage 2: To understand and determine the 3 key cycles that shape the market and sector trend: Business cycle, Stock market cycle and Interest rate cycle

With regards to the stock market & business cycle, Navarro emphasized the importance of Sector Rotation:

It’s well-known that to be successful in investing, one should follow the broad market trend because about 3 out of 4 stocks will follow the broad market. However, that principle only is actually not enough.
At different points of market cycle, there are some sectors that outperform both the general market and the other sectors. Therefore, investors should regularly change sectors as the stock market moves through the patterns of sector rotation.

If you’re in the right sector at the right time, you can make a lot of money very fast.

Peter Lynch

The following are 3 golden rules of Macrowave investing:
1) Buy strong stocks in the strong sectors in an upward trending market.
2) Short weak stocks in the weak sectors in a downward trending market.
3) Stay out of the market and in cash when there is no definable trend

This part of the book explained further the stages of stock market cycle, which sectors that normally outperform the others during each stage of the cycle, and the logics why it is so. Some ways to track the market and sector trend are also discussed.

With regards to the interest rate cycle, the author explained the 4 stages of interest rate cycle, and how interest rates affect stock and bond market.

In addition, Navarro also explained the Yield Curve and how the shapes the curve could possibly signal the possibility of market expansion / boom, or recession.

Stage 3: To screen and pick the strong stocks in the strong sectors or weak stocks in the weak sectors, based on fundamental and technical analysis.
The author offered some ways to screen stocks with strong fundamental and discussed some basics of technical analysis.

Stage 4: To use solid risk management, money management, and trade management as well as the execution itself.

I personally like how the author explained about the basic of money management. Very clear and systematic with a few examples. I think it’s the best explanation on the basic of money management as compared to other books or articles that I ever read on the topic so far. However, he did not explore too much on various money management techniques.

The trade management covers the comparison between market vs. limit order and when to use it, setting trailing stop to prevent a profitable trade from turning into a losing trade, using buying stop order for breakout play, etc.

On the execution, the author discussed the advantages of using Level II quotes as compared to Level I.

You can also take look at the Table of Content as well as excerpt of the book from the link provided above.
I think, it’s really a book worth reading.

Wednesday, October 17, 2007

HARAMI CROSS BULLISH vs. BEARISH

Harami Cross Bullish & Harami Cross Bearish resemble Harami Bullish & Harami Bearish.
Harami Cross can be seen as the variation of Harami pattern.
The difference between Harami & Harami Cross is that for Harami Cross, the 2nd candle is a Doji.

Basically, Harami Cross Bullish & Harami Cross Bearish consist of 2 candles:
The first day is characterized by a long body candle, followed by a Doji candlestick that is completely contained within the range of the previous day's body.

With the appearance of a Doji, these patterns imply market indecision, signaling a possible change of trend.
Harami Cross pattern is usually seen as having higher chances of reversal as compared to Harami pattern.



HARAMI CROSS BULLISH PATTERN
Harami Cross Bullish
is a bottom reversal pattern / bullish reversal pattern.
It may be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

When the price is a declining trend for some time, a two-candle pattern forms.
The body of the 1st candle is the same color as the current trend (should be a long black/red candle).
The body of the 2nd candle is a Doji that is completely within the body of previous day's candle.

What does this pattern imply?
The market has been overwhelmed by strong selling pressure for some time. All of a sudden, the buyers (bulls) step in and open the price higher than the previous day's close.
After the strong opening, the price moves only in a small range and is contained within the previous day’s body. At the end of the day, the price closes at the opening level, forming a Doji. The Doji indicates market indecision and a potential trend reversal. The volume of the doji’s day should also dry up, reflecting complete market indecision.
A higher close on the following day (preferably with strong volume) would be needed to ascertain that the trend may be in a reversal.

HARAMI CROSS BEARISH PATTERN
Harami Cross Bearish
is a top reversal pattern / bearish reversal pattern.
It could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

When the price has been in a rally mode for some time, a two-candle pattern forms.
The body of the 1st candle is the same color as the current trend (should be a long white candle).
The body of the 2nd candle is a doji that is within the body of previous day's candle.

What does this pattern imply?
The buying pressure has been dominating the market for some time. After a long white candle day, on the next day the sellers (bears) suddenly step in and open the price lower than the previous day's close.
After the weak opening, the price fluctuates only in a small range and is contained within the previous day’s body. Subsequently, the price closes at the opening level at the end of the day, forming a Doji. The Doji indicates market indecision and a potential trend reversal. The volume of the doji’s day should also dry up, reflecting complete market indecision.
A confirmation of the reversal on the following day in terms of a lower close (preferably with high volume) would be needed to prove that the trend may be in a reversal.

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Topics:
* Learning Charts Patterns
* FREE Trading Educational Resources You Should Not Miss