Technical Analysis

The Head and Shoulders Bottom, sometimes referred to as an Inverse Head and Shoulders, is a pattern that shares many common characteristics with its comparable partner, but relies more heavily on volume patterns for confirmation.

As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a neckline.

1. Prior Trend: It is important to establish the existence of a prior downtrend for this to be a reversal pattern. Without a prior downtrend to reverse, there cannot be a Head and Shoulders Bottom formation.
2. Left Shoulder: While in a downtrend, the left shoulder forms a trough that marks a new reaction low in the current trend. After forming this trough, an advance ensues to complete the formation of the left shoulder. The high of the decline usually remains below any longer trend line, thus keeping the downtrend intact.
3. Head: From the high of the left shoulder, a decline begins that exceeds the previous low and forms the low point of the head. After making a bottom, the high of the subsequent advance forms the second point of the neckline (2). The high of the advance sometimes breaks a downtrend line, which calls into question the robustness of the downtrend.
4. Right Shoulder: The decline from the high of the head (neckline) begins to form the right shoulder. This low is always higher than the head, and it is usually in line with the low of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack, and the right shoulder will be higher, lower, wider, or narrower. When the advance from the low of the right shoulder breaks the neckline, the Head and Shoulders Bottom reversal is complete.
5. Neckline: The neckline forms by connecting reaction highs 1 and 2. Reaction High 1 marks the end of the left shoulder and the beginning of the head. Reaction High 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two reaction highs, the neckline can slopeup, slope down, or be horizontal. The slope of the neckline will affect the pattern’s degree of bullishness an upward slope is more bullish than a downward slope.
6. Volume: While volume plays an important role in the Head and Shoulders Top, it plays a crucial role in the Head and Shoulders Bottom. Without the proper expansion of volume, the validity of any breakout becomes suspect. Volume can be measured as an indicator or simply by analyzing the absolute levels associated with each peak and trough.
7. Neckline Break: The Head and Shoulders Bottom pattern is not complete, and the downtrend is not reversed until neckline resistance is broken. For a Head and Shoulders Bottom, this must occur in a convincing manner, with an expansion of volume.
8. Resistance Turned Support: Once resistance is broken, it is common for this same resistance level to turn into support. Often, the price will return to the resistance break, and offer a second chance to buy.
9. Price Target: After breaking neckline resistance, the projected advance is found 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. Any price target should serve as a rough guide, and other factors should be considered, as well. These factors might include previous resistance levels, Fibonacci retracements or long-term moving averages.

In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called “the body”. The long thin lines above and below the body represent the high/low range and are called “shadows” (also referred to as “wicks” and “tails”). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body represents the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.

Green Marubozu – Prior trend (Down Trend) / Up Trend and flat trend above consider the same.

Green Candle with open = low and close  = High

Call = BTSt Call

Significant open should be near by previous close

Red Morobozo

Prior Trend = Up Trend / Flat Trend also Consider

Red Candle with Open = High & Low = Close

Significant – This is for STBT call

Call = STBT

The bearishness of the doji star created on the 1st two days is confirmed with the 3rd day. If the penetration of the 3rd day is more than 50 percent, then this formation has a much better chance to succeed for the trader.

This pattern signals a trend…	How to identify…	Similar pattern(s)…
Reversal	1st day is a long white day. 2nd day is a doji which gaps above the 1st day’s close. 3rd day is a black day.	Bearish Doji Star

 

The Hammer candlestick formation is a significant bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends.

The Hammer formation is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, twice the length as the real body.

When the high and the close are the same, a bullish Hammer candlestick is formed and it is considered a stronger formation because the bulls were able to reject the bears completely plus the bulls were able to push price even more past the opening price.

In contrast, when the open and high are the same, this Hammer formation is considered less bullish, but nevertheless bullish. The bulls were able to counteract the bears, but were not able to bring the price back to the price at the open.

The long lower shadow of the Hammer implies that the market tested to find where support and demand was located. When the market found the area of support, the lows of the day, bulls began to push prices higher, near the opening price. Thus, the bearish advance downward was rejected by the bulls.

The bullish harami is made up of two candlesticks. The first has a large body and the second a small body that is totally encompassed by the first. There are four possible combinations: white/white, white/black, black/white and black/black. Whether they are bullish reversal or bearish reversal patterns, all harami look the same. Their bullish or bearish nature depends on the preceding trend. Harami are considered potential bullish reversals after a decline and potential bearish reversals after an advance. No matter what the color of the first candlestick, the smaller the body of the second candlestick is, the more likely the reversal. If the small candlestick is a doji, the chances of a reversal increase.

In his book Beyond Candlesticks, Steve Nison asserts that any combination of colors can form a harami, but that the most bullish are those that form with a white/black or white/white combination. Because the first candlestick has a large body, it implies that the bullish reversal pattern would be stronger if this body were white. The long white candlestick shows a sudden and sustained resurgence of buying pressure. The small candlestick afterwards indicates consolidation. White/white and white/black bullish harami are likely to occur less often than black/black or black/white.

After a decline, a black/black or black/white combination can still be regarded as a bullish harami. The first long black candlestick signals that significant selling pressure remains and could indicate capitulation. The small candlestick immediately following forms with a gap up on the open, indicating a sudden increase in buying pressure and potential reversal.

Prior Trend is Down Trend

A elongated Red candle followed by a green candle with lower high & higher low & red body of green candle is with in range of red candles is with in create a buy singnal for next day;s trading.

IKn regular harami pattern if rest candle is a dogistar formation it is called as Harami Cross pattern & results are same as like a regular Harami Pattern.

A Doji Shooting Star is a trend reversal indicator. In a downtrend, a long red body is followed by a doji (a period with the same opening and closing price) – this is a bullish Doji Star. During an uptrend, when a long green body is followed by a Doji, then this is a bearish Doji Star.

How to recognise a Doji Shooting Star: It may occur during an uptrend or a downtrend, but the key criteria are that a long green or long red body is followed by a Doji. The Doji is gapped below or above the long body. In the case of a bullish Doji Star, the Doji open/close price level is below the long red body and in the case of a bearish Doji Star, the open/close price is above the long green body.

Shooting Dojistar = Bearish

• Direction: Bearish

• Type: Reversal

• Reliability: Strong

Evening Stars start with a continuation of the bullish move. The second day sees a continuation of the move up, but a sell-off makes the market close at or near the open for the day. The first two candles meekly suggest a loss of bullish momentum. In fact up to day two this formation matches the Bearish Shooting Star weak-to-moderate strength reversal pattern.

Although the example above is a blue shooting star, the shooting star can really be any color.

Bearish Shooting Stars alone are decent signals for additional sell-offs on day three. Since the certainty for a shooting star indicator is low, the trend reversal should be confirmed by a red candlestick the next day.

Thus Bearish Evening Stars require on day three a sharp sell-off after the market open. Analysts want day threes high to be near equal to its open price, suggesting the market sell-off has no uncertainty in the new direction.

The gap down on the 2nd day perpetuates the downtrend. However, the 2nd day’s close is above the midpoint of the 1st day’s body. This suggests to the bears that a bottom could be forming. This price action is not nearly as discernable using bar charts as it is with candlestick charts. The more penetration of the close on the 2nd day to the 1st day’s body, the more probable the reversal signal will succeed.

A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the middle of Day 1′s candle.

In addition, price gaps up on Day 2 only to fill the gap (see: Gaps) and close significantly into the gains made by Day 1′s bullish candlestick.

The rejection of the gap up is a bearish sign in and of itself, but the retracement into the gains of the previous day’s gains adds even more bearish sentiment. Bulls are unable to hold prices higher, demand is unable to keep up with the building supply.

The chart below of Boeing (BA) stock illustrates an example of the Dark Cloud Cover Pattern:

Moving Average

1. Simple Average – 20 Days, 100 Days

2. Expentital Moving Average – 50 Days , 200 Days

3. Weighted Moving Average

Exponetial Moving Average

(Current Close – Previous Close) X Factor + Previous Exponential Moving Average

Factor = 2/N + 1 (N = No Of Days)

N = No Of Days Considered for Average

Simple Moving Average

A+B+C+D+E/5

Wighted Moving Average

A X Days No i.e = 1 = m

B X 2 = N

C X 3 = O

D X 4 = P

E X 5 = 9

M + N + O + P + 9 = R

R/1+2+3+4+5 = R/15

Oscillator

Rate of Change

Today’s Price     X 100

14 Days Back

ROC – Over Sold / Over Bought

Intraday = 14 Min Chart

Roc oscillate between 75 and 125 ….. is 100 above 100 near to 125 it is over bought zone below 100 near 75 it is over sold zone.

RSI – Relative Strength Index ( 14 Days)

RSI is an extremely popular momentum indicator that has been featured in a number of articles, interviews and books over the years. In particular, Constance Brown’s book, Technical Analysis for the Trading Professional, features the concept of bull market and bear market ranges for RSI. Andrew Cardwell, Brown’s RSI mentor, introduced positive and negative reversals for RSI. In addition, Cardwell turned the notion of divergence, literally and figuratively, on its head.

Calculation

100

RSI = 100 – ——–

1 + RS

RS = Average Gain / Average Loss

To simplify the calculation explanation, RSI has been broken down into its basic components: RS, Average Gain and Average Loss. This RSI calculation is based on 14 periods, which is the default suggested by Wilder in his book. Losses are expressed as positive values, not negative values.

The very first calculations for average gain and average loss are simple 14 period averages.

• First Average Gain = Sum of Gains over the past 14 periods / 14.
• First Average Loss = Sum of Losses over the past 14 periods / 14

The second, and subsequent, calculations are based on the prior averages and the current gain loss:

• Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.
• Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

Taking the prior value plus the current value is a smoothing technique similar to that used in exponential moving average calculation. This also means that RSI values become more accurate as the calculation period extends. SharpCharts uses at least 250 data points prior to the starting date of any chart (assuming that much data exists) when calculating its RSI values. To exactly replicate our RSI numbers, a formula will need at least 250 data points.

Wilder’s formula normalizes RS and turns it into an oscillator that fluctuates between zero and 100. In fact, a plot of RS looks exactly the same as a plot of RSI. The normalization step makes it easier to identify extremes because RSI is range bound. RSI is 0 when the Average Gain equals zero. Assuming a 14-period RSI, a zero RSI value means prices moved lower all 14 periods. There were no gains to measure. RSI is 100 when the Average Loss equals zero. This means prices moved higher all 14 periods. There were no losses to measure.

MACD is specially designed for trading signals it has two lines one is fast line & slow line. Fast line is made by 12 days EMA (Expontial Moving Average) – 26 days EMA & slow line is 9 days simple average of this difference.

If fast line is crossing slow line from down side to upside it is buy signal & if from up side to down sode it is sell signal.

Divergence are significant in MACD slow cross over is not so significant than that of cross over of that distance.

 

ADX – Average Directional Index

It indicates strength of the trend. While any trend exists it goes up of that trend has strenghth& ADX stop rising when that trend lose its trend.

IMP :- Base to follow positive & negative directional movement lines to predict demand & supply ratio when ever demand is more than supply buying that stock & wise versa.

ADX is working in intraday as well as short term trading.

Stochastic -

It is a short term the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator “doesn’t follow price, it doesn’t follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price.” As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.

A technical momentum indicator that compares a security’s closing price to its price range over a given time period. The oscillator’s sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result. This indicator is calculated with the following formula:

%K = 100[(C - L14)/(H14 - L14)]

C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period.

%D = 3-period moving average of %K

ADL – Acculturation Distribution Line

This line shows trend of the market if it shows negative diversion that is stock price is going up & ADL going down it shows that trend in changing if stock is going down but ADL is going up it is positive diversion stock is likely to go up.

ATR – Average Tissue Range

It is special oscillator which shows a volatility in that stock of ATR is growing means volatility is high & if it is down volatility is down it is compared by previous ATR prices to compare a volatility.