n Introduction

n Reversal Patterns
n Continuation Patterns
n Volume Studies
n Summary
Lecture 4
Objectives
Reading
Master Textbook
Technical Analysis: The Complete Resource for Financial Market Technicians
Charles D. Kirkpatrick and Julie R. Dahlquist
Chapters 15-17; pp. 299-408
Additional Reading
Techncial Analysis of the Financial Markets
Murphy, John, pages 55-156
Technical Analysis of Stock Trends, 7th Edition
Edwards, Robert & Magee, John, pages 58-167
How Charts Help You in the Stock Market
Jiler, William
COLLEGE LEVEL
INTRODUCTION
TO TECHNICAL
ANALYSIS
This lecture series is produced by
the Market Technicians Association
Educational Foundation
Copyright 2007. All rights are reserved.
PATTERN RECOGNITION
Ma r k e t
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Pattern Recognition Lecture 4, page 2 College Level Introduction to Technical Analysis
Bar Chart Patterns [Chapter 15, page 309]
What is a pattern
Consolidation bounded by a line or curve
Example: rectangle with support and resistance as bounds
Characteristics
Each has an entry and exit direction (breakout)
Continuation vs. reversal
Fractal
Pullbacks and throwbacks
Failures after breakout fails to move a certain distance
Trap failure that turns into a reversal
False vs. premature breakouts return to formation, false means fnal breakout is in
opposite direction.
human bias
desire to see patterns pigeon experiment
too much weight on recent history example: more heads than tails in sequence, expect
more heads to continue when odds favor even number
see the future as the past overstay while signs are changing - dopamine
Patterns [Chapter 15, page 313]
Doubles adam & eve - projection (Chart 1)
Rectangle usually continuation - projection (Chart 2)
Triples same as rectangle better performance with shortfall (Charts 3 and 4)
Triangles defned by slope of the two lines (always two lines) apex and cradle
projection breakout, high range, upward volume, gap = best patterns many false
breakouts (close breakout flters) -
Descending (Charts 5 and 6)
Ascending (Chart 7)
Symmetrical (Chart 8)
Broadening poor patterns for proft (Chart 9)
Diamond combined symmetrical and broadening usually at tops, very proftable
(Chart 10)
Wedge wait for breakout, failure rate is low. Breakout usually in opposite direction of
wedge (Charts 11 and 12)
Rounded Edges [Chapter 15, page 331]
Rounding (saucer, cup, bowl) look for lip and handle for cup and handle pattern only
reliable rounded pattern (Chart 13)
Head and Shoulders most famous and still reliable, especially the failure must wait for break
of neckline. Projection. (Charts 14 and 15)
Short-term continuation usually half mast patterns (Chart 16)
Flag
Pennant
Chart 1
Double Top with Breakout Down
Chart 2
Rectangle with Entry Up and Breakout Up
Chart 3
Triple Top with Breakout Down
Chart 4
Triple Bottom with Breakout Up
Chart 5
Descending Triangle with Breakout Down
Pattern Recognition Lecture 4, page 3 College Level Introduction to Technical Analysis
Most proftable
Rising market
Descending triangle breaking upward
Declining wedge
Head & Shoulders bottom
Symmetrical triangle breaking upward
Declining market
Diamond top, breaking down
Head & Shoulders top
Rising Wedge
Symmetrical, breaking downward
Examples of:
Descending triangle (many)
Wedges (Gold)
H & S (LT Treasury rate)
Symmetrical (SMH)
Flag
Pennant
One-Point Reversal [Chapter 16, page 345]
Continuous prices, (Chart 17)
Consider pattern as a whole not parts
Trend lines (Chart 18)
Count horizontal wall (Charts 19 and 20)
Fulcrum bottom (Chart 21)
Long fat bottoming congestion
Minor breakout that fails (fulcrum)
Test of lows (slightly lower is a delayed ending fulcrum)
Final breakout above fulcrum (catapult)
Count initially along second horizontal congestion but fnal count along entire base
Three-Box Reversal [Chapter 16, page 351]
Points per box, number of boxes, usually 1x3 (Chart 22)
Trend lines 45 degrees
Bullish support begins one box below O column from base after buy signal
Bullish resistance parallel line to bullish support line through peaks, similar to a channel
line in a bar chart
Bearish resistance
Bearish support
Chart 6
Decending Triangle with Breakout Up
Chart 7
Ascending Triangle with Breakout Down
Chart 8
Symmetrical Triangle with Breakout Up
Chart 9
Broadening Formation with Breakout Up
Chart 10
Diamond Pattern with Breakout Down
Pattern Recognition Lecture 4, page 4 College Level Introduction to Technical Analysis
The Count
Horizontal base
Determine walls and width of formation from wall to wall
Calculation (3x number of horizontal boxes x points per box) added to lowest price in
formation. (Chart 23)
Vertical base
Find action signal (buy signal) column
If the base is large and the action column small, two columns combined can be used.
Determine length of column in boxes
Multiply length times three and add to lowest box in column
If a top, multiply by 2 and subtract from the highest box in the column
Patterns 8 standard should act only when the general market is headed in the same
direction as the stock, the stock is above or below its trend line respectively, and the relative
strength chart is also in the same direction.
Double (Chart 24) 3rd
Rising bottom, declining top (Chart 25) 3rd
Triple (Chart 26) 2nd
Ascending triple top or descending triple bottom (Chart 27) low proft
Spread triple (Chart 28) low proft
Triangle (Chart 29) low proft
Rising trend line (Chart 30) best, but infrequent
Declining trend line (Chart 31) worst
Other patterns
Catapult (Chart 32)
Spike 10 to 20 boxes without a correction needed short-term pattern (Chart 33)
Shakeout (Chart 34)
Relative strength
Ratio of weekly close of stock to its industry group or a market average plotted in a 3 box
reversal chart.
Short-term Patterns must be aware of underlying trend [Chapter 16,
page 407]
construction
More complex, the less frequent the more frequent, the less reliable
Variables combination of factors
Open, high, low, close
Number of bars
Range
Change from earlier bar(s)
Volume, sometimes
traditional
Chart 11
Rising Wedge with Breakout Down from a
Climax Peak
Chart 12
Declining Wedge with Breakout Up from
Climax Trough
Chart 13
Cup or Bowl and Handle Variety of a
Rounding Bottom with Breakout Up
Chart 14
Head and Shoulders Top with Breakout Down
Chart 15
Head & Shoulders Bottom with Breakout Up
Pattern Recognition Lecture 4, page 5 College Level Introduction to Technical Analysis
Gaps empty space on chart where no trading occurred (Chart 35) [Chapter 16, page
369]
Can be due to illiquidity be careful if many, as meaning declines
Breakaway initial move, one to watch because showing sudden change in direction
Pivot pattern (Chart 36)
Opening (Chart 37)
Runaway
Exhaustion
Minor
Dead Cat Bounce (Chart 38)
Two or more bar patterns
Inside (Charts 39 and 40)
Hikkake (Chart 41)
Outside - less proftable because volatility has already occurred.
Trend correction patterns [Chapter 16, page 387]
KO strong persistent uptrend, 10 points in 20 days, trend line touches all bars,
throwback of two to fve days of lower lows (bullish trend) = set up. Action = buy stop
at high of second lower low. Move stop to successive highs for fve days of lower lows,
then cancel if not triggered. Protective stop at lowest low. (Chart 42)
Volatility patterns signals on expansion of volatility, usually range [Chapter 16, page 390]
Shark 3 bar, two successive inside bars = set up. Action = breakout from third bar back.
Symmetry important. (Chart 43)
Narrow range bar NR range of current bar less than for x days before. Narrow range
is different than inside bar. (Chart 44)
Candlestick
Parts
Body
Shadow
Variations of short-term bar patterns
Example: Harami similar to the inside bar but shadow need not be inside, only the body.
(Chart 45)
Best patterns
Three inside Up or Down (Chart 46)
Hammer and hanging man - peaks (Chart 47)
Evening and morning star (Chart 48)
Chart 16
Flag and Pennant in Upward Trend
Chart 17
Consolidation Area with Most of Price
Action at Lower Level
Chart 18
One-Box Reversal Chart with a Triangle
Chart 19
Determining the Count in a Consolidation
Area
Chart 20
Target Determined by Rotating Count Around
the Right-Hand Edge in the Direction of the
Breakout
Pattern Recognition Lecture 4, page 6 College Level Introduction to Technical Analysis
Chart 21
Fulcrum Bottom
Chart 22
Trend Lines
Chart 23
Horizontal Count
Chart 24
Double Top and Double Bottom
Chart 25
Rising Bottom and Declining Top
Chart 26
Triple Top and Triple Bottom Breakouts
Chart 27
Ascending Triple Top and Descending Triple
Bottom
Chart 28
Spread Triple Top and Spread Triple Bottom
Chart 29
Bullish and Bearish Triangles
Chart 30
Breakouts from Resistance and Support
Lines
Chart 31
Breakouts from Resistance and Support
Lines
Chart 32
Bullish and Bearish Catapults
Chart 33
Spike Pattern or Long Tail Download
Pattern Recognition Lecture 4, page 7 College Level Introduction to Technical Analysis
Chart 34
Shakeout Pattern
Chart 35
A Gap Down
Chart 37
Opening Down Gap
Chart 38
Dead Cat Bounce
Chart 36
Explosion Gap Pivot
Chart 39
Inside Bar
Chart 40
Inside Bar with Higher Close
Pattern Recognition Lecture 4, page 8 College Level Introduction to Technical Analysis
Chart 41
Hikkake Buy Failure
Chart 44
Narrow-Range Bar
Chart 42
Landry KO Pattern - Nikkei 225 Index
Chart 43
Shark Pattern with Break to the Upside
Chart 45
Harami Candlestick Pattern
Chart 46
Inside Down and Inside Up Candlestick
Patterns
Chart 47
Hanging Man and Hammer
Chart 48
Evening Star and Morning Star Candlestick
Patterns