Technical Analysis – 2

Well guys, yesterday I posted some very basics about Technical Analysis. I know people like Mr. Adi might be getting bored while reading this kind of articles. But Adi once you start earning and want to invest then at that time you dot have to approach or depend on anybody’s advice, if you know this technical analysis. You according to Elliot Wave Theory, in this whole universe everything moves in the form of waves and his theory is considered as one of basis for Technical Analysis in addition with the Dow Theory. Okay let me not get into these theories as it might be boring to you people. Coming to practicality of technical analysis, I will continue from yesterday’s point.

Yesterday actually I forgot to mention one more thing. When today Mr. Udit Mehra asked some doubt then I realized that I forgot tell you that in technical analysis following factors plays very important role.

v Open

v High

v Low

v Close

v Volume

v Ask

v Bid

So whenever you guys analyze any particular stock, you have to compare all these with respect to past history.

Now coming to today’s topic, I am posting some basics about the Trend Reversals, which plays very important role in this present kind of market situation. But before that I would like to mention some of the assumption on which Technical Analysis is based on. These are:

v Market value is determined purely by supply and demand.

v Stock prices tend to move in trends.

v Shifts in supply and demand cause reversals in trends.

v These shifts can be detected in charts/graphs.

v Chart patterns tend to repeat themselves.

Before proceeding further, I would like mention some contradictory theory to the predicting the market. The hotly debated "efficient market theory" states that security prices represent everything that is known about the security at a given moment. This theory concludes that it is impossible to forecast prices, since prices already reflect everything that is currently known about the security.

But the problem with this theory is that, investor’s expectations control the prices and they differ from person to person. Any way I am not getting deeply into this, if you people need more explanation you can take my SIP project you will get all the details whatever I am mentioning here in short.

Now coming to today’s topic Trend Reversals, in this these are the following indicators which mention the possible trend reversal in the market:

v Head & Shoulder

v Double Tops & Double Bottoms

v Triple Tops & Triple Bottoms

v Triangles

v Flags & Pennants

v Rounding Bottom

As again I am not posting all the details about all these trend reversals, just I am posting very important and basics.

Double Tops & Double Bottoms

It is considered to be one of the most reliable and is commonly used. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals.

In the case of the double top pattern in the Figure above, the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward.

As shown in the above double top graph, stock has the support at 900 levels and tried to breach it by making two tops. After attaining two tops it falls bellow to 700 levels from support 900 by reversing trends.

As you see in the double bottom picture above, the scrip has resistance at 1000 levels. It tried to bounce back by making two bottoms. But after making two bottoms only it crossed that resistance level. After this, stock is rallied from 1000 to 1150 levels, which is the sign trend reversal.

Flag

The middle section on the flag pattern shows a channel pattern, generally sideways price movement.

Above shown figure is the example for Flag pattern. As mentioned in the above, here price movement is sideways till the Flag ends. After this there is drastic movement is the price and stock plunged 2100 level to 1600 odd levels.

Rounding Bottom

A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years.

A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, make it a difficult pattern to trade.

As explained above the rounding bottom graph of SBI is shown above. The first half of rounding bottom is bear trend, where investors should not enter. After this at the centre of the Rounding Bottom is an excellent time long term investment as bear trend comes to an end bull trend starts. As you can see how the scrip started moving from levels of 900 to 1100 and above. From this point onwards bull trend starts.

Will be continued…

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