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Technical
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Combining Long- and

Short-Term Technicals
Use candle charts to find support levels with GPC
and CNDL. By Dav id Keller
securities often trade between

two key price levels: A support level is

the price at which buyers tend to purchase a security because they think its a
good value. A resistance level is the point
at which investors tend to sell the security because they consider it overpriced.
Indicators such as long-term moving averagesthe average price of a security
over a fixed period of time, generally at
least 200 dayscan help you determine
when other participants may be expecting a turn in the market for the security.
A security experiencing heavy price
movement, or momentum, can proceed
through a moving average without a
pause. A short-term technical approach,
such as candlestick analysis, can help
you determine how a security should behave as it approaches and breaches a key
price level.
On candle charts, such as those on

Candle Charts
Type BNI US <Equity>
GPC <Go>. Adjust the
date range, and enter
200 in one of the M OVING
AVERAGE fields.

the Price Candle Graph (GPC) function,

a solid or open candle represents each
trading day. The vertical line in the middle, called the shadow, represents the
high and low trades for each day. The
body of the candle represents the open
and closing prices. On the Bloomberg
Professional service, the candle is blue if
the close was below the open and clear if
the close was above the open. By using
candle charts instead of bar charts,
youll find that certain price movements
are easier to discern. During a period
of rising prices, for example, youll see
a sequence of clear candles.
In a bull market, a security tends to
trade above the moving average. The
longer the moving average period, the
more time it takes for the price to break
above this line at the beginning of an uptrend. Some market participants use two
moving averages and look for the shorter-term average to cross the longer-term
one. Others just analyze the moving average itself and determine which way
its headed. Finally, some look for the
price to break up or down through a
moving average. By adding candlestick
analysis to this final technique, you can

minimize your risk in identifying potential price movements.

for example, burlington Northern
Santa Fe Corp. broke above its 200-day
moving average in March 2003. Type
BNI US <Equity> GPC <Go>. Add the
200-day moving average by entering
200 in one of the Moving Average
A
fields and pressing <Go>. To make 200
days your moving-average-period default, type PDF <Go> to access the Personal Settings & Defaults screen, and
then type 5 <Go> for Graph, Technical
Analysis Defaults. Under the Historical
heading, enter 200 in either the second
or third Historical Moving Average
Periods field, and type <Go> 1 <Go> to
save your settings. For more information on customizing your personal default settings, press <Help> twice.
After trading as high as $30 a share,
Burlington Northerns stock price
dropped again to its 200-day moving average in August 2003. The stock finally
closed below this long-term indicator on
Aug. 22. On the next trading day, the
opening and closing prices were at about
the same price level. This occurrence
creates whats called a doji candle, which
looks like a cross on the candle chart.
When the market is moving in one
direction, this day of indecision suggests the end of the trend. The presence
of this particular candle provided further indication that Burlington Northern would find support at its 200-day
moving average.
In March, Burlington Northern again
approached its 200-day moving average.
After three straight weeks of trading
lower, the stock showed a pattern of a
short solid candle followed by a long
open candle. In this so-called bullish
engulfing pattern, the second days action engulfs the first days action.

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Bloomberg Markets
August 2004

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Technical
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Analysis
Thinking through the dynamics
of this pattern makes it easier to understand why it often represents support in a bearish market. After
trading within a penny of the 200day moving average on March 10,
Burlington Northern opened below
that average on March 11. By the end
of that trading day, the stock had
moved above the 200-day average, as
well as above the close and open of
the previous day. This move represents solid buying pressure throughout the trading day. The upward
momentum seen with this candle
often continues in the days to follow.
The Candlestick Patterns (CNDL)
function helps you recognize various
candle patterns. Type CNDL <Go>
for a candle chart with a series of
one- or two-letter abbreviations on
certain days. These symbols indicate
various candle patterns on the chart.
Type 1 <Go> to list the abbreviations, and click on one for a description of the pattern. For illustrations
of many candlestick patterns, type
CNDL <Help> 9 <Go> 6 <Go>.
Besides the bullish engulfing pattern, other candle patterns that often
represent a turning point include the
hammer, the inverted hammer and
the bearish engulfing pattern. A
hammer is a solid or clear small body
with a long shadow below it and little or no shadow above it. The hammer represents a buy signal when
seen in a downward trend. The inverted hammer is just the opposite:
a small solid or clear body with little
or no shadow below it and a long
shadow above it. The inverted hammer represents a sell signal when
seen in an upward trend.
The bearish engulfing pattern is
a small clear candle followed the
next day by a long solid candle. The
second days body completely engulfs the first days action. This pattern also indicates a sell signal when
seen in an upward trend.
DAVID KELLER is an application specialist in the

Bloomberg Sales department in New York.

dkeller2@bloomberg.net

Profile Your
Way to Profits

Type MKTP <Go> to examine the price distribution

of trades. By Mat thew Rit ter

market profiles can help traders

profit by tracking a securitys price range

early in the trading day. You can use
market profiles, which chart the distribution of prices over different time intervals of a trading day, to determine
whether the majority of traders in a particular security are initiating or responding to general price rallies or declines.
You can view the market profile for
any security that has intraday pricing
by using the Market Picture function.
For example, type IBM US <Equity>
MKTP <Go> to display market profiles
for recent trading in International
Business Machines Corp. shares. You
can also specify the number of daily
chartsfrom one to threeto display
on MKTP, and you can end the charts
at a specific point within the last 20
trading days. To see two daily market
profiles for IBM stock from five business days ago, type MKTP 2 5 <Go>.
For more-detailed instructions on using
and interpreting MKTP, press <Help>
twice or type MKTP <Help> 9 <Go>.

T h e M a r ke t
Picture Function
Type IBM US <Equity>
MKTP <Go> to analyze
daily price distributions for
IBM shares over the three
most-recent trading days.

Each letter that appears on an MKTP

market profile represents trades within
a half hour period. Letter A represents
trades from 99:30 a.m. New York time,
B represents 9:3010 a.m. and so forth.
U.S. equity markets open at 9:30 a.m.,
so their initial trades are designated
with the letter B. Market profiles for 24hour futures markets use lowercase letters from midnight to 9 a.m., when they
switch to uppercase, starting with A.
At midnight, they change back to lowercase letters. For example, type TYA
<Cmdty> MKTP <Go> to see the market profile for the current futures contract on the 10-year U.S. Treasury note.
By analyzing the letters that appear
on the vertical axis, for price, you can

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determine the full range of trading prices for any half hour.
The two red lines on each market
profile represent the boundaries of the
so-called value area, in which 68 percent of all trades on the profile take
place. Technical analysts examine any

Type IBM US <Equity> BTST

<Go> to evaluate the results
of applying various technical
analysis trading methods to
IBM shares.

trades outside the value area because

theyre considered to reflect a traders
opinion on the future direction of price.
The right side of the MKTP screen
graphs the volume traded at each price
level on the most recent day. Long horizontal bars on the volume histogram
signal key price levels that technical analysts believe are likely to act as resistance points for rising prices or support
levels for falling prices.
market profiles assume that a securitys price is balanced or imbalanced.
Balanced trading days exhibit strong
horizontal price activity, with letters extending from left to right on the market
profile. During a balanced day there is a
strong consensus between buyers and
sellers; balanced days are not good
times for intraday trading. Theyre
often good days to buy a security in anticipation of strong price moves in the
next couple of days.
Very balanced price movements
often result from a lack of new information. As information appears, the
market often will shift from balanced
to imbalanced, producing trade opportunities. Vertical price activity with letters dispersed from top to bottom of the
market profile represents an imbalanced trading day and a volatile marketplace. This volatility can make
imbalanced days more profitable for intraday trading.
Traders often look to the first hour
or two in the market profile (Bs and Cs
or Ds and Es in the U.S. equity market)
to determine a probable trading range

for the rest of the day. Robin Mesch,

a technical analyst and president of
Robin Mesch Associates in Portland,
Oregon, classifies four different types of
market profile in New Thinking in
Technical Analysis (Bloomberg Press,
2000): nontrending, trending, normal
and normal variation of a normal day.
By examining the market profile early
in the day, a trader can try to determine
the profile type and forecast a trading
range for the security.
The characteristics of a nontrending
profile include a small first-hour trading range, with the majority of trades
that take place later in the day being executed within that same range. This results in a horizontal market profile.
These days dont offer enough volatility
to be profitable for the intraday trader.
They often precede days with large
price movements.
Trending days have much vertical
and little horizontal price movement in
their market profiles, with no more than
six letters extended horizontally. This
type of market profile offers insight into
the direction of the securitys price trend.
In a trending day, prices continue to
move in one direction and close toward
the extreme of the price movement.
In a normal day, the market profile
typically defines 85 percent of the securitys price range in the first hour of trading. The wide price movement in early
trading outlines a top and bottom for
prices during the rest of the day. To try to
profit during a normal day, traders can
buy or sell against extreme price levels,

which are those outside the red value

lines on the market profile. For example,
a trader may sell when prices exceed the
higher border of the value area.
In a normal variation pattern, the
market profile for the first hour of trading represents about half of the securitys price range for the day. Technical
analysts who identify this type of day
from the market profile look for the
first hours trading range to double and
then buy or sell based on that limit. For
example, a trader would buy when prices fall below double the lower limit of
the securitys price range from the first
hour of trading.
MATTHEW RITTER is on the staff of the Bloomberg
Analytics department in New York.
mritter@bloomberg.net

A n a ly z i n g H i s t o r i c a l
M a r ke t P r o f i l e s
Type TYA <Cmdty>
MKTP 2 3 <Go> to analyze two days of market
profilesstarting three
trading days agofor the
10-year U.S. Treasury note
futures contract. To adjust
the prices at the top and
bottom of the charts, tab
in to the LOW and H IGH
fields, enter new prices
and press <Go>. To add
another days market profile to the MKTP screen,
tab in to the small field
in the upper left corner
of the screen, enter 3
and press <Go>.

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