Interface brokerage and research ltd ; umang

1. A REPORT
ON
“BASICS OF TECHNICAL
ANALYSIS”
By
UMANG BHAVSAR
INTERFACE BROKERAGE & RESEARCH LTD

2. A REPORT
ON
“BASICS OF TECHNICAL
ANALYSIS”
By
UMANG BHAVSAR
A Report submitted in partial fulfillment of
The requirements of
2

3. MBA Programme of
GUJARAT UNIVERSITY
Acknowledgement
First of all I would like to thank Mr. Himal Parikh (Director, Interface
Brokerage & Research Ltd.) for providing me an opportunity to work in
their team as summer trainee.
I would also like to thank Ms. Binny Vora, Ms. Heta Jani, Ms. Megha
Shah and Mr. Hitesh Patel; employees of the company working in
research department for their invaluable guidance, cooperation and
encouragement which helped me lot in my Summer Training.
I am also thankful to Prof. Mayank Joshipura for his guidance and
valuable inputs and advice during my project.
At the last, I would like to thank each individual who some or other
way helped me to complete my project.
3

4. Table of Contents
Abstract 6
Introduction 7
Company Profile 9
The Philosophy of Technical Analysis 10
Dow Theory 14
Charts 18
Support & Resistance 23
Trend lines & Channels 28
Chart Pattern Analysis 36
Reversal Patterns
1. Double Top 37
2. Head & Shoulder Top 41
3. Head & Shoulder Bottom 45
4. Falling Wedge. 48
5. Rising Wedge 52
6. Rounding Bottom 55
7. Triple Top. 59
8. Triple Bottom 62
Continuation Patterns
1. Pennant/Flag. 65
2. Symmetric Triangle 68
3. Ascending Triangle 72
4. Descending Triangle 76
5. Rectangle 80
4

5. 6. Price Channel 84
Technical Indicators 87
Trend Indicators
1. Moving Averages 88
2. MACD 92
-MACD Histogram 96
3. ADX 98
Momentum Indicators
1. Rate Of Change (ROC) 99
2. RSI. 100
3. William’s % R 102
Bombay Stock Exchange (BSE) 104
National Stock Exchange (NSE) 113
Leading Stocks’ Short term & Medium Term Analysis 118
Report Summery 125
References 126
5

6. Abstract
Technical analysis is study of predicting prices of securities for future. The main aim of
Technical analysis is to generate returns by letting person decide when to enter and
when to exit in the security. Bottom line is to buy at tough (deep decline) and to sell at
peak to get substantial amount of return/profit. By study of technical analysis person
will be able to take decision of his trades/investments.
Technical analysis uses various charts for analysis. This project throws lights on various
basic aspects of technical analysis. It is not possible to cover each and every aspect of
technical analysis. But I have tried to cover main and basics of technical analysis. As
today in stock market decisions are very important and most of the people make
investment on advises of brokers. Through this report any person who doesn’t know
anything about Technical Analysis can also study it easily and make decisions on his
own.
In this final report I have covered different various types of charts, various formations of
chart patterns, some theories related to technical analysis, technical indicators for better
analysis. I have covered as much examples of various charts and indicators as possible
so that one can understand them. In terms of charts I have used mostly candlestick
charts amongst all three charts for analysis of security as they give clear picture of price
movements during particular period.
I have referred some of the books on technical analysis and some of the Websites for
charts. At last I have analyzed price movements of various Leading Stocks of Indian
stock market through their charts using technical analysis and with the use of available
data I have set short to medium term targets.
6

7. Introduction
Technical Analysis is the forecasting of future price movements based on study of past
price movements. It may not give you the absolute predictions but it can give you
general idea of the price movement which is likely to be in future. Technical Analysis is
applicable to stocks, commodities, indices, futures or tradable instruments where the
prices are influenced by force of demand and supply. Price refers to any combination of
open, low, close, and high of any stock over a specific period of time. Time frame can
be intraday (daily), weekly, monthly or yearly. Technical analysis is focused directly on
the bottom line i.e. what is the price? , where has it been? , and what can it be in the
future? It is used to make investment decisions by analyzing strengths and weaknesses
of any stock with use of various chart patterns and other indicators.
In technical analysis various types of charts are used. For any investor or people who are
involved in the stock market it is very important to know what will happen to prices of
stocks tomorrow. Technical Analysis is one of the ways to forecast future price
movements. By studying the basics of Technical Analysis one can know that when to
exit and when to enter in the markets.
There are four types of charts.
1. Line Charts
2. Bar Charts
3. Candle Stick Charts
4. Point and Figure Charts
Chart patterns analysis can be used to make short term or long term forecasts. There are
generally two types of chart patterns
1. Reversal Chart Patterns
2. Continuation chart patterns.
Some different types of chart patterns are as follows.
 Double Top (Reversal)
 Double Bottom (Reversal)
 Head and Shoulders Top (Reversal)
 Head and Shoulders Bottom (Reversal)
7

8.  Falling Wedge (Reversal)
 Rising Wedge (Reversal)
 Rounding Bottom (Reversal)
 Triple Top (Reversal)
 Triple Bottom (Reversal)
 Bump and Run Reversal (Reversal)
 Flag, Pennant (Continuation)
 Symmetrical Triangle (Continuation)
 Ascending Triangle (Continuation)
 Descending Triangle (Continuation)
 Rectangle (Continuation)
 Price Channel (Continuation)
Chart patterns are used along with the market and technical indicators to study the
price movements and historical data. Market indicators are presentation of the
historical data in a line form.. Volume as an indicator also plays very important role.
Each and every indicator has its own meaning and interpretation. But to be more
accurate in analysis one should use more than one indicator to confirm the price trend or
movements. There are many technical indicators and chart overlays which can be used
for analysis. Some of them are as follows:
 Average Directional Index (ADX) - A technical indicator system that attempts to
quantify how strongly a stock is trending.
 Moving Average Convergence/Divergence (MACD) - A technical indicator
system that combines several moving averages to better show a stock's trend and
momentum.
 Moving Averages – Different types of moving averages.
 Rate of Change (ROC) and Momentum - A technical indicator that shows the
speed at which a stock's price is changing.
 Relative Strength Index (RSI) - A technical indicator that tries to quantify a
stock's current direction and strength.
 Williams %R - A technical indicator that uses Stochastics to determine
overbought and oversold levels.
8

9. I have analyzed the charts of leading stocks of Indian Stock Market indices using
technical analysis and some of the indicators.
COMPANY PROFILE
INTERFACE BROKERAGE & RESEARCH LTD
Interface Group is in Finance business since 1988. The group is well diversified into
various activities viz. Operations into Primary Market and Secondary Market in the
Stock Market, intermediary in the Debt Market, Fund based activities under the flagship
company the Interface Financial Services Ltd.
Interface Group has a Corporate Membership of Ahmedabad Stock Exchange, National
Stock Exchange of India for Capital Market Segment and Dealership on OTC Exchange
of India.
Interface Group has achieved remarkable growth as Broker Underwriter and has
established its presence as a leading Primary Market Player at National Level.
Interface Group is engaged in fund based activities such as lease Hire Purchase, Car
Finance, securitization, ICD, Loan against shares etc.
Interface group is also engaged in the field of Marketing Financial Instruments and
Marketing Fixed Deposits of state as well as National Level reputed Manufacturing
And finance companies, States and central Government Undertakings, private sector
Banks. The Group is acting as Managers for the Fixed Deposits of several corporate of
repute. The group is also acting as Direct Brokers for more than 50 companies for
mobilizing their fixed deposits. The group is also marketing RBI Tax Free Relief Bonds,
Mutual Funds of reputed AMCs, UTI Schemes etc. and mobilizing huge amount.
Interface group is actively engaged in the Money Market and doing good business in
Central as well as State Government Dated Securities and is registered Money Market
Broker with RBI. Besides the group is also dealing in Rated Bonds of Public Sector,
Private sector as well as Nationalized Banks.
Interface Group has large network of Sub-brokers in all most major centers of the state
for Primary Market, Fixed Deposits Mobilization, and Mutual Funds etc. Besides the
group has a very good relationship with high net worth clients all over Gujarat.
9

10. The Philosophy of Technical Analysis
Introduction:
The methods used to analyze and predict the performance of a company's stock fall
into two broad categories:
1) Fundamental Analysis
2) Technical Analysis
Those who use technical analysis look for peaks, bottoms, trends, patterns and other
factors affecting a stock's price movement and then make buy/sell decisions based on
those factors. It is a technique many people attempt, but few are truly successful at it.
The world of technical analysis is huge today. There are literally hundreds of different
patterns and indicators that investors claim to have success with.
The term “technical” in its application to the stock market has come to have a very
special meaning, quite different from its ordinary dictionary definition. It refers to the
study of the market itself as opposed to the study of the goods in which the market
deals. Technical Analysis is the science of recording, usually in graphic form, the
actual history of trading (price changes, volume of transactions, etc.) in a certain stock
or in “the Averages” and then deducing from that pictured history the probable future
trend.
Some History of Technical Analysis:
The term “technical analysis” is a complicated-sounding name for a very basic
approach to investing. Simply put, technical analysis is the study of prices, with charts
being the primary tool.
The roots of modern-day technical analysis stem from the Dow Theory, developed
around 1900 by Charles Dow. Stemming either directly or indirectly from the Dow
Theory, these roots include such principles as the trending nature of prices, prices
discounting all known information, confirmation and divergence, volume-mirroring
changes in price, and support/resistance.
10

11. Technical analysis is the study of specific securities and the overall market based on
demand/supply relationship.
A technician is a person who uses technical analysis to make investment decisions. The
technical analyst bases market forecasting on price movement and other indicators.
Technical analysis approaches should be tied to the individual investor’s perspective,
temperament, personality, and risk profile.
What Is Technical Analysis?
Technical Analysis is the science of recording, usually in graphic form, the actual
history of trading (price changes, volume of transactions, etc.) in a certain stock or in
“the Averages” and then deducing from that pictured history the probable future trend.
Technical analysis is a method of evaluating securities by analyzing statistics generated
by market activity, past prices and volume. Technical analysts do not attempt to
measure a security's intrinsic value; instead they look at stock charts for patterns and
indicators that will determine a stock's future performance.
Technical analysis has become increasingly popular over the past several years, as
more and more people believe that the historical performance of a stock is a strong
indication of future performance. The use of past performance should come as no
surprise. People using fundamental analysis have always looked at the past
performance of companies by comparing fiscal data from previous quarters and years
to determine future growth. The difference lies in the technical analyst's belief that
securities move according to very predictable trends and patterns. These trends
continue until something happens to change the trend, and until this change occurs,
price levels are predictable. There are many instances of investors successfully trading
a security using only their knowledge of the security's chart, without even
understanding what the company does.
However, although technical analysis is a terrific tool, most agree it is much more
effective when used in combination with fundamental analysis.
The Basic Assumptions:
The field of technical analysis is based on three assumptions:
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
1. The Market Discounts Everything
11

12. A major criticism of technical analysis is that it only considers price movement,
ignoring the fundamental factors of the company. However, technical analysis
assumes that, at any given time, a stock's price reflects everything that has or
could affect the company - including fundamental factors. Technical analysts
believe that the company's fundamentals, along with broader economic factors
and market psychology, are all priced into the stock, removing the need to
actually consider these factors separately. This only leaves the analysis of price
movement, which technical theory views as a product of the supply and demand
for a particular stock in the market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This
means that after a trend has been established, the future price movement is
more likely to be in the same direction as the trend than to be against it. Most
technical trading strategies are based on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself,
mainly in terms of price movement. The repetitive nature of price movements is
attributed to market psychology; in other words, market participants tend to
provide a consistent reaction to similar market stimuli over time. Technical
analysis uses chart patterns to analyze market movements and understand
trends. Although many of these charts have been used for more than 100 years,
they are still believed to be relevant because they illustrate patterns in price
movements that often repeat themselves.
Adaptability to Different Markets and Investment Time Horizons:
The beauty of technical analysis is that it can be applied effectively to virtually any
trading medium and investment time horizon. A technician can analyze stocks, bonds,
options, mutual funds, commodities, and many other forms of investment for buy or
sell opportunities. And one can do so by examining tic-by-tic, intraday, daily, weekly,
monthly, or some other interval of data to use technical analysis for a wide range of
time horizons- from very short-term to very long-term perspectives.
The best manner in which to use technical analysis depends on one’s approach to the
market. Everyone invests differently. We all have different levels of stress, different
temperaments, and different amounts of capital. It is important to apply technical
analysis in a manner that complement’s one’s own personality and individual
investments philosophy. Obviously, those whose time, nerves, and capital are limited
will want to pass up very short-term trading opportunities (such as intraday trading of
stock index futures) and, perhaps, use longer-term technical analysis derived buy and
sell signals for stocks or mutual funds. By recognizing one’s individual investment
12

13. strengths and weakness, users of technical analysis can find the trading medium and
time horizons that are best for their individual investment situations.
Technical analysis is done from four important view points which are as follows:
Price: Changes in price reflect changes in investor attitude and demand
for and supply of securities.
Time: The longer time price takes for a reversal in trend, the greater the
price change that would follow.
Volume: The intensity of price change is reflected in the volume of
transactions. An increase in price supported by low volumes indicates that the
change in the price is not so strong
.
Breadth: Breadth of the market indicates the extent to which price changes
have taken place in the market in accordance with the overall market trend. It
indicates that whether a change in trend of prices spread across the most sectors
or it is concentrated in only few types of scrip.
Technical analysis is subjective as the interpretation of the analysis varies from person
to person for the same stock because it depends on the style of individual investors.
13

14. DOW THEORY
The basic principles of the Technical Analysis originated form the Dow Theory. Dow
Theory only describes the direction of market trends, and does not attempt to forecast
future price movements or measures size of such market trends.
The five basic tenets of the Dow Theory are as follows:
1. The Average Discounts Everything:
The share prices that are determined in the market evolved out of a discounting
process that takes all known and predictable factors into account.
2. The Market has three types of Movements:
Primary Movements
Primary movements, which last from about a year to several years, represent
the major market trends. It can either be a rising (bull) trend or a falling trend
(bear).
Primary trends are long term movements in prices, interrupted by swings in the
opposite direction.
Secondary Movements
A secondary movement is defined as an important decline in a bull market, or
advance in a bear market lasting from three weeks to as many months. When
reaction is more than 50% of the preceding primary trend, it is difficult to say
whether the reaction is secondary or it signals a new primary trend in the
opposite direction.
Minor Movements
14

15. Movements in prices that form only a part of a primary trend or a secondary
movement are called Minor Movements. Generally intraday movements are
called minor movements.
In this chart of SBI for the last 5 years, the major trend foe the last 5 years is
uptrend (Green Line). But from middle of 2004 to middle of 2005 the stock has
reacted against its major trend i.e. uptrend (Red line). So it can be called as
Secondary Reactions. Now for this 5 year trend, the weekly or daily
fluctuations are called Minor trend. Here the purple rectangles show the minor
trends in the stock.
3. Price Action Determines the Trend:
A trend can be called primarily bullish when successive rallies lead to peaks
those are higher than the preceding ones (Green Lines) and when troughs
reached by the intervening secondary reactions are above the preceding troughs.
15

16. In the above chart a bearish trend is marked by a series of descending peaks and
troughs. (Red Lines) A reversal in primary trend is indicated when the above
condition is not satisfied.
4. Lines Indicate Movement
In certain cases, price movements which initially look like secondary
movements persist within a narrow range and form “lines” (Green lines).
A line is formed by price movements within a range of 5 percent of its mean
average. This is called an “accumulation”. (i.e. when a line is formed in
between a primary bear trend).If prices advance above an accumulation, it
16

17. marks a reversal in the bearish trend and if price continues to fall after an
accumulation, the line is only a consolidation of the bearish trend and it is a
secondary price movement.
5. Price volume relationship provide background
Volume plays very major role in technical analysis. The relation between prices
and volume is very important. The volume is normally expected to complement
the movement in prices. A reversal trend is signaled if dull volume supports a
rally, or a high volume, a downtrend.
17

18. Charts
A price chart is a sequence of prices plotted over a specific time frame. Technical
analysis is based on charts. Therefore sometimes technical Analysts are called Chartists.
On the chart, the y-axis (vertical axis) represents the price scale and the x-axis
(horizontal axis) represents the time scale. Prices are plotted from left to right across the
x-axis with the most recent plot being the furthest right.
A graphical historical record makes it easy to spot the effect of key events on a
security's price, its performance over a period of time and whether it's trading near its
highs, near its lows, or in between.
There are basically four types of charts which are as follows:
1. Line Charts
2. Bar Charts
3. Candle Stick Charts
4. Point and Figure Charts
But only first three of the charts are used very frequently for the analysis part.
Line Charts:
A line Chart is the simplest type of chart. Line Chart is drawn by plotting the closing
price of the stock on a given day and connecting them to make charts. They are widely
used charts. The price is marked on the Y-axis and the period of time on the X-axis.
Line chart’s strength comes from its simplicity. The line chart of SENSEX for last 3
months is as below.
18

19. Bar Charts:
A bar chart displays any security’s open, low, high and closing prices. As illustrated in
the bar chart below, the top of each vertical bar represents the highest price of a security
during that period and the bottom of the bar represents the lowest price. The close is the
short horizontal line crossing the vertical bar. On a daily chart, each bar represents the
high, low and close for a particular day. Weekly charts would have a bar for each week
based on Friday's close and the high and low for that week.
The open price is displayed as a short horizontal line extending to the left of the bar and
the close price is displayed as a short horizontal line extending to the right of the bar.
Candlestick Charts:
For a candlestick chart, the open, high, low and close are all required. A daily
candlestick is based on the open price, the intraday high and low, and the close. A
weekly candlestick is based on Monday's open, the weekly high-low range and Friday's
close.
19

20. Many investors believe that candlestick charts are easy to read because of the
relationship between the open and the close. White (clear) candlesticks form when the
close is higher than the open and black (solid) candlesticks form when the close is lower
than the open. The white and black portion formed from the open and close is called the
body (white body or black body). The lines above and below are called shadows and
represent the high and low.
Price Scaling:
There are two methods for displaying the price scale along the y-axis: arithmetic and
logarithmic. An arithmetic scale displays different points (or price in rupees) as the
same vertical distance. Whatever may be the price of security on Y-axis, the distance
between the prices is same. Each unit of measure is the same throughout the entire scale.
20

21. If a stock advances from 10 to 80 over a 6-month period, the move from 10 to 20 will
appear to be the same distance as the move from 70 to 80. Even though this move is the
same in absolute terms, it is not the same in percentage terms.
A logarithmic scale measures price movements in percentage terms. It is also known as
“Semi-Log Scale”. An advance from 10 to 20 would represent an increase of 100%. An
advance from 20 to 40 would also be 100%, as would an advance from 40 to 80. All
three of these advances would appear as the same vertical distance on a logarithmic
scale.
(Arithmetic Scale)
(Logarithmic/ Semi Log Scale)
The above graphs show the candlestick charts of “Bharti Airtel” for the last 9 months.
Both graphs are the same but their price scaling on Y-axis is done differently.
21

22. Key points on the benefits of arithmetic and semi-log scales:
Arithmetic scales are useful when the price range is confined within a relatively tight
range.
Arithmetic scales are useful for short-term charts and trading. Price movements
(particularly for stocks) are shown in absolute rupee terms and reflect movements for
each rupee.
Semi-log scales are useful when the price has moved significantly, be it over a short or
extended time frame
Trend lines tend to match lows better on semi-log scales.
Semi-log scales are useful for long-term charts to gauge the percentage movements over
a long period of time.
The choice of which charting method to use will depend on personal preferences and
trading or investing styles.
22

23. SUPPORT AND RESISTANCE
In this section, the concepts of support and resistance will be more fully explained. In
addition, two sophisticated applications of support and resistance, namely percentage
retracements and speed resistance lines, will be examined.
Support and Resistance:
In the Wall Street environment, the terms support and resistance are almost synonymous
with demand and supply, respectively. Support is a price level at which there is adequate
demand for a security to stop its downward price movement and, normally, turn prices
upward. Support occurs at reaction lows
Support:
95
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BALLARPUR INDS (104.900, 109.500, 104.500, 107.750, +3.45000)
Support
Nov Dec 2001 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2002 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2003 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb
Resistance is a price level at which there is a significant supply of a stock causing prices
to halt an upward move and, typically, turn prices down. (Sec Figure 7-2.) Resistance
occurs at reaction highs.
23

24. Resistance
85
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RELIANCE CAPITAL (594.000, 673.800, 594.000, 670.300, +77.7500)
Aug Sep Oct Nov Dec 2002 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2003 Feb Mar Apr May Jun Jul Aug Sep Oct
85
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Resistance
In an uptrend, both support and resistance levels rise as illustrated in Figure 7-3.
Typically, support levels hold while resistance offers temporary halts to upward movements
in prices. Resistance levels are repeatedly broken until the uptrend is reversed.
Rising support and resistance
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N D 2003 M A M J J A S O N D 2004 M A M J J A S O N D 2005 M A M J J A S O N D 2006 M A M J J A S
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Resistance
Resistance
Support
Support
IDBI (74.2000, 83.4000, 73.6000, 81.2500, +7.85000)
24

25. Role Reversal
In an uptrend, resistance levels often become support levels after they are broken
significantly as illustrated in Figure
Up trend role reversal from resistance to support
540
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PUNJAB TRACTORS (314.000, 314.000, 305.100, 305.400, -6.55002)
1997 Nov Dec 1998 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1999 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2000 Feb
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Resistance become support
In a downtrend, the opposite occurs as support levels frequently become resistance
levels.
Down trend role reversal from support to resistance
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TN NEWSPRINT (82.0000, 86.5000, 81.2500, 83.6500, +1.45000)
Support becomes resistance
Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 Feb Mar Apr May Jun
The likelihood of role reversal, from support to resistance or resistance to support,
depends on three factors. First, the greater the volume that occurs at a support or
25

26. resistance level, the more significant the level is and, thus, the more likely a candidate
the level is for role reversal. Second, the longer that prices trade near the support or
resistance level, the greater the chance of role reversal. For example, the probability of
role reversal is enhanced if consolidation occurs near a support or resistance level for a
few weeks rather than a few days. Finally, the more recently that trading occurred at
the level, the fresher it is in traders' minds, and the more likely it is that role reversal will
occur.
Trend Reversals
In an uptrend, a trend reversal occurs when prices are held at a resistance level. A double
top or some other reversal formation develops at that point and the trend changes direction
as illustrated in Figure
Trend reversal at Top
4J
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une
11 18 25 2 July
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August
TN NEWSPRINT (82.0000, 86.5000, 81.2500, 83.6500, +1.45000)
20 27 3 10
September
Resistance
17 24 1 9
October
15 21 29 5 12
November
19 25 3 10
December
17 24 31 7 14
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support
A trend reversal occurs in a downtrend when prices are unable to penetrate a support level.
In this case, a bottom reversal pattern is formed, and the trend changes direction to the upside
as illustrated in Figure
T
26

27. rend reversal at bottom
10.5
10.0
1 8
June
15 22 29 6J
uly
13 20 27 3 10
August
17 24 31 7 14 21
September
DENA BANK (29.9000, 34.1500, 29.1000, 33.8000, +4.10000)
28 5 12
October
Resistance
19 25 2 9 15
November
23 29 7 14 21
December
28 4 11
2002
18 25 1 8
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15 22 1 8
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8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
5.0
Support
Keep in mind that a trend reversal is not signaled by the first failure to break through a
resistance level (in an uptrend) or a support level (in a down- trend). A reversal pattern must
fully develop before one gets the signal that the trend has changed. In other words, a
trader should not rush to sell all of his or her securities or sell short just because prices have
held at a resistance level. Likewise, one should not load up on securities or cover short
positions just because prices initially fail to penetrate a support level. Wait for more
evidence that a trend reversal is occurring.
Percentage Retracements
After prices move either up or down for a period of time, they usually move in the opposite
direction, retracing a portion of the previous move. Subsequently, prices continue in
the original trend direction.
Countertrend price moves frequently move by a percentage range amount. Often prices
will retrace from a minimum of one-third (or 33 percent) to a maximum of two-thirds
(67 percent) of its previous move before continuing in its original trend direction.
Some traders view a retracement of 33 percent to 50 percent as a buying opportunity in
an uptrend or a selling opportunity in a downtrend. The two-thirds level is a critical
area. If prices move past the two-thirds retracement level, a trend reversal is likely.
27

28. Trend lines and Channels
As shown above, one of the principles of technical analysis is that prices move in trends.
These trends can be up, down, or sideways as illustrated in Figure An uptrend is
characterized by successively higher highs and higher lows. A downtrend occurs on
successively lower highs and lower lows. A sideways trend reflects horizontal price
movement.
Trends can be brief or of long duration. They are typically classified as short-, intermediate-,
or long-term. Although there are no generally accepted definitions of these three terms,
short-term roughly refers to the next three months; intermediate-term is about three to six
months from the present time; and long-term is considered to be approximately six months to
one year from the current period.
Investors try to determine when prices are in an uptrend or downtrend. They profit by
determining the trend and then following it until it is reversed. Of the many charting tools
available, the trendline is most widely used by technicians to identify trends and trend
reversals.
UP TREND
750
700
650
600
550
500
450
400
350
300
26 3 10
October
17 24 31 7 14
November
21 28 5 12
December
19 26 2
2006
9 16 23 30 6
February
13 20 27 6
March
13 20 27 3
April
10 17 24 2
May
8 15
250
750
700
650
600
550
500
450
400
350
300
250
AUROBINDO PHARMA (614.900, 635.000, 606.100, 627.100, +17.0000)
28

29. DOWN TREND
29
February
5 12 19 26
March
109
108
107
106
105
104
103
102
101
100
99
98
97
96
95
94
93
92
91
90
89
88
87
86
85
84
83
82
81
5 12 19 26 2
April
109
108
107
106
105
104
103
102
101
100
99
98
97
96
95
94
93
92
91
90
89
88
87
86
85
84
83
82
81
80
80
DABUR (I) (91.8500, 94.6000, 90.1000, 93.4000, +2.70000)
SIDEWAYS
158
157
156
155
154
153
152
151
150
149
148
147
146
145
144
143
142
141
140
139
138
137
136
135
134
133
132
131
130
129
128
127
126
125
19 26 3J
uly
10 17 24 31
DABUR (I) (91.8500, 94.6000, 90.1000, 93.4000, +2.70000) 158
August
7 14 21 28 4
September
11 18 25 3
October
157
156
155
154
153
152
151
150
149
148
147
146
145
144
143
142
141
140
139
138
137
136
135
134
133
132
131
130
129
128
127
126
125
9 16 23 30 6
November
124
124
How Trendlines Are Drawn
Drawing trendlines is easy. A trendline is simply a straight line that connects a series of
security prices, either tops or bottoms.
An up trendline is a straight line that connects a series of reaction lows, as illustrated in
Figure.Note that the trendline appears at the bottom of the price pattern and is drawn up
and to the right.
29

30. UP TREND LINE
February
760
750
740
730
720
710
700
690
680
670
660
650
640
630
620
610
600
590
580
570
560
550
540
6 13 20 27
March
AUROBINDO PHARMA (614.900, 635.000, 606.100, 627.100, +17.0000) 760
6 13 20 27 3
April
10 17 24 2
May
750
740
730
720
710
700
690
680
670
660
650
640
630
620
610
600
590
580
570
560
550
540
8 15
530
530
A down trendline is a straight line that connects a series of rally tops as illustrated in
Figure. Note that, in this case, the trendline is at the top of the price pattern. It is drawn
down and to the right.
DOWN TRENDLINE
31
2005
1
April
4 5 6 7 8 11 12 13 15 18 19 20 21 22 25 26 27 28 29 2
May
230
225
220
215
210
205
200
195
190
185
180
175
3 4 5 6 9 10
230
225
220
215
210
205
200
195
190
185
180
175
170
170
BANK OF BARODA (224.000, 227.900, 219.150, 220.550, -6.20000)
Some guidelines to use when drawing trendlines are appropriate. First of all, there must be at
least two tops or bottoms to begin a trendline. This only makes sense, because one must
30

31. have two points in order to draw a straight line (Second, after drawing a trendline based on
two tops or bottoms, one will frequently find that a higher top or lower bottom has been
made, requiring the trendline to be redrawn.
SIGNIFICANCE OF A TRENDLINE
The significance of a trendline is determined by two factors, namely the number of points
(tops or bottoms) that the trendline goes, through and the length of time the trendline has
persisted without being penetrated.
Many technicians argue that although it only takes two points (tops or bottoms) to
draw a trendline, connection to a third point (top or bottom) is required for the
trendline to be confirmed as valid. Each time prices move back to the trendline and
then renew their advance (in the case of an up trendline) or decline (in the case of a
down trendline) the significance of the trendline is enhanced.
The length of the trendline indicates the period of time that prices have remained above
or below the trendline. Obviously, the longer that period is, the greater the significance
of the trendline. For example, a trendline that has not been penetrated for 10 months is
more significant than one that has held for 10 weeks or 10 days.
I addition to the number of points that a trendline goes through and the length of time
the trendline has persisted, some technicians feel the angle of the trendline adds to the
significance of a trendline. In general, the closer to horizontal the trendline is, the
greater the significance of any penetration through it. Very steep trendlines can easily
be broken by brief sideways consolidation moves; trendlines that are less steep are not
subject to many short-term price movements (that are often inconsistent with the
current trend).
VALIDITY OF TRENDLINE PENETRATION
Once a trendline has been established, a change in the direction of the trend is signaled
by prices breaking through the trendline. In the case of an up trend-line, this occurs as
illustrated in Figure 6—4. Figure 6-5 shows the penetration of a down trendline.
31

32. PENETRATION OF UP TRENDLINE
255
250
245
240
235
230
225
220
215
210
3
October
BANK OF BARODA (224.000, 227.900, 219.150, 220.550, -6.20000)
10 17 24 31 7
November
14 21 28 5
December
255
250
245
240
235
230
225
220
215
210
12
205
205
Trendline
penetration
PENETRATION OF DOWN TRENDLINE
Two criteria are used to determine the validity of a trendline penetration. The first
criterion is the extent of penetration — how far prices have moved past the trendline.
There is no right answer to the question: How far do prices have to move before the
breaking of a trendline is considered valid? It depends to a great degree on the
volatility of the security. However, some technicians use a three percent rule in regard
to stocks. If the closing price for the day is three percent lower (for an up trendline) or
higher (for a down trend-line) then the penetration is viewed as decisive and valid. The
three percent move does not have to happen in one day, although it is not unusual for
prices to do so.
Some technicians also use a time filter. For example, if prices close above an up
trendline or below a down trendline for two days in a row, it is viewed as a valid
penetration and prices are likely to continue their reversal
The second criterion relates to the volume. The validity of a trendline penetration is
enhanced if it is accompanied by expanding volume (especially when down trendlines
are broken). However, it is not essential for volume to increase for there to be a valid
penetration. In other words, the extent of penetration is more important than its volume
characteristics.
Trendline Role Reversal
32

33. Once a TRENDLINE is decisively penetrated, it normally changes its role from one of
support to one of resistance for an up trendline or resistance to support for a down
trendline
Note in both Figures prices first moved away from the trendline, then back lo it, then
away again. This is called a pull-back and is not uncommon. Pull-backs offer investors
great entry points for buying or selling short.
ROLE REVERSAL FROM SUPPORT TO RESISTANCE
170
165
160
155
150
145
140
135
130
125
17 24 31 7
November
14 21 28 5
December
12 19 26 22
006
9 16
120
170
165
160
155
150
145
140
135
130
125
120
Support
Resistance
MPHASIS BFL (290.000, 295.850, 287.100, 290.300, +0.94998)
ROLE REVERSAL FROM RESISTANCE TO SUPPORT
33

34. 3 July
BHARAT FORGE (323.900, 327.000, 317.000, 322.950, +2.70001)
10 17 24 31
August
7 14
340
335
330
325
320
315
310
305
300
295
290
285
280
275
270
340
335
330
325
320
315
310
305
300
295
290
285
280
275
270
Support
Resistance
TREND CHANNEL
In many instances, prices repeatedly move about the same distance away from a
trendline before returning to the trendline. In these cases, a straight line can be drawn
connecting the peaks of rallies in an uptrend or the bottoms of declines in a downtrend.
That line is often parallel to the trendline and is called a return or channel line. Together
the channel line and trendline create a trend channel, a range within which prices are
moving.
Figures illustrate trend channels in an uptrend and downtrend, respectively
UP TREND CHANNEL
440
435
430
425
420
415
410
405
400
395
390
385
380
375
370
365
360
355
350
345
340
335
330
325
320
315
310
26 3
October
CORPORATION BANK (275.000, 298.500, 265.000, 292.000, +17.6000) 440
10 17 24 31 7
November
14 21 28 5
December
12 19 26
305
435
430
425
420
415
410
405
400
395
390
385
380
375
370
365
360
355
350
345
340
335
330
325
320
315
310
305
DOWN TREND CHANNEL
34

35. 1750
1700
1650
1600
1550
1500
1450
1400
1350
12 19 26 3 July
10 17 24 31
August
7 14 21 28 4
September
1300
1750
1700
1650
1600
1550
1500
1450
1400
1350
1300
AVENTIS PHARMA (1,259.00, 1,275.00, 1,240.30, 1,258.40, -11.6000)
Well defined trend channels appear most frequently in charts of actively traded securities.
Thinly traded securities offer little opportunity for trend channels to develop.
Trend channels can be used in many fashions. Novice technicians often use trend
channels to determine good profit-taking levels. For example, in an uptrend, they will sell
a stock when it reaches the upper level of its trend channel.
More experienced technicians watch price movements within the two boundary lines of
the trend channel looking for a warning signal that the trend direction is changing. If, in an
upward trend channel, prices rally up from the trendline but fail to reach the upper channel
line, it signals a deterioration of the trend and probability that the lower line will be
broken. Frequently, the distance from the top of the failed rally to the channel line equals
the distance by which the next move down penetrates the trendline.
Similarly, in a downward trend channel, if prices drop from the trend-line but fail to reach
the bottom channel line, it signals a deterioration of the trend and probability that the
upper line will be broken. Likewise, the distance from the bottom of the failed attempt
to reach the channel line to the channel line often is equal to the distance by which the
next rally penetrates the trendline.
Trend channels can be used in another way. If prices break through the upper line in an
upward trend channel, an acceleration of the existing uptrend is signaled. At this point,
some investors will buy additional positions.
On the other hand, if prices move through the bottom line of a downward trend channel,
the existing downtrend appears to be picking up pace. Short positions may be increased
at this point.
35

36. 36

37. Chart Pattern Analysis
Chart Patterns put all buying and selling into perspective by consolidating the forces of
supply and demand into a concise picture. Chart patterns provide a framework to
analyze the battle raging between bulls and bears. More importantly, chart patterns and
technical analysis can help determine who is winning the battle (bear or bull) and allow
traders and investors to position themselves accordingly.
Chart patterns analysis can be used to make short term or long term forecasts. The data
can be intraday, daily, weekly or monthly and the patterns can be as short as one day or
as long as many years.
There are generally two types of chart patterns
1. Reversal Chart Patterns
2. Continuation chart patterns.
Reversal Patterns:
 Double Top
 Double Bottom
 Head and Shoulders Top
 Head and Shoulders Bottom
 Falling Wedge
 Rising Wedge
 Rounding Bottom
 Triple Top
 Triple Bottom
Continuation Patterns:
 Flag, Pennant
 Ascending Triangle
 Descending Triangle
 Rectangle
 Price Channel
37

38. Reversal Patterns:
1. Double Top:
The double top is a major reversal pattern that forms after an extended uptrend. As its
name implies, the pattern is made up of two consecutive peaks that are roughly equal,
with a moderate trough in-between.
Although there can be variations, the classic double top pattern marks at least an
intermediate change, if not long-term change, in trend from bullish to bearish. Many
potential double tops can form along the way up, but until key support is broken, a
reversal cannot be confirmed.
Key Points in Formation of Double Top Reversal Pattern:
Prior Trend : There must be an existing trend to reverse. A significant uptrend of
several months should be in place.
First Peak : The first peak should mark the highest point of the current trend. The first
peak is fairly normal and the uptrend is not in question at this time.
Trough : After the first peak, a decline takes place that typically ranges from 10 to 20%.
Volume on the decline from the first peak is usually irrelevant.
38

39. Second Peak :: The advance from the lows usually occurs with low volume and meets
resistance from the previous high. Resistance from the previous high should be expected.
The pattern still needs to be confirmed. The time period between peaks can vary from a
few weeks to many months, with the norm being 1-3 months. While exact peaks are
preferable but usually a peak within 3% of the previous high is adequate.
Decline from Peak :: The subsequent decline from the second peak should witness an
expansion in volume and/or an accelerated down trend. Such a decline shows that the
forces of demand are weaker than supply.
Support Break : Even after trading down to support, the double top and trend reversal
are still not complete. Breaking support from the lowest point between the peaks
completes the double top. This too should occur with an increase in volume and/or an
accelerated down trend.
Support Turned Resistance :: Broken support becomes potential resistance.
Price Target : The distance from support break to peak can be subtracted from the
support break for a price target. This would infer that the bigger the formation is, the
larger the potential decline.
To avoid misleading Formation of Double Tops, following should be taken into
consideration.
· The peaks should be separated by about a month. If the peaks are too close, they
could just represent normal resistance.
· Ensure that the low between the peaks declines at least 10%. Declines less than
10% may not be indicative of a significant increase in selling pressures.
· When the security does advance, look for a contraction in volume as a further
indication of weakening demand.
· The most important aspect of a double top is to wait for support to be broken in a
convincing manner, and usually with an expansion of volume.
· Until support is broken in a convincing manner, the trend remains up.
39

40. The double top in Pfizer Ltd. took about 6 months to form.
1. From a low near 750 in November-05, Pfizer advanced to 1200 by January-06.
The trend line extending up from November-05 is an internal trend line.
2. From the first peak, the stock declined around 16.67% to form the trough.
3. After reaching a low near 975 in Mid February, the trough was formed.
40

41. 4. The decline from 1220 occurred with three black crows and increased volume
(red oval). Furthermore, RSI showed overbought level (>70) and then good amount
of selling pressure was seen from RSI.
5. From mid April to mid May, the stock traded for about 1 month at support of the
inner trend line. The double formation would not be complete until support was
broken.
Support was broken in Mid June when the stock fell below 850, which was more than
12% below support at 975. Stock sharply fell down to 675 and also negative divergence
of MACD (black line) with crossover of MACD line (Pink Oval & Circle) indicated the
intense selling pressure in the stock.
After this sharp drop, there was an equally sharp advance back above the newfound
resistance level. The advance to 975 in mid September formed resistance at 975.Thus
the previous support of 975 had now become resistance level.
41

42. 2. Head And Shoulder Top:
A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks
a trend reversal. The pattern contains three successive peaks with the middle peak
(head) being the highest and the two outside peaks (shoulders) being low and roughly
equal. The reaction lows of each peak can be connected to form support, or a neckline.
42

43. As its name implies, the Head and Shoulders reversal pattern is made up of a left
shoulder, a head, a right shoulder, and a neckline. Other parts playing a role in the
pattern are volume, the breakout, price target and support turned resistance. We will
look at each part individually.
Prior Trend : It is important to establish the existence of a prior uptrend for this to be a
reversal pattern.
Left Shoulder: While in an uptrend, the left shoulder forms a peak that marks the high
point of the current trend. After making this peak, a decline ensures to complete the
formation of the shoulder (1). The low of the decline usually remains above the trend
line, keeping the uptrend intact.
Head : From the low of the left shoulder, an advance begins that exceeds the previous
high and marks the top of the head. After peaking, the low of the subsequent decline
marks the second point of the neckline (2). The low of the decline usually breaks the
uptrend line.
Right Shoulder : The advance from the low of the head forms the right shoulder. This
peak is lower than the head (a lower high) and usually in line with the high of the left
shoulder. The decline from the peak of the right shoulder should break the neckline.
Neckline : The neckline forms by connecting low points 1 and 2. Low point 1 marks the
end of the left shoulder and the beginning of the head. Low point 2 marks the end of the
head and the beginning of the right shoulder. Depending on the relationship between the
two low points, the neckline can slope up, slope down or be horizontal. The slope of the
neckline will affect the pattern's degree of bearishness: a downward slope is more bearish
than an upward slope. Sometimes more than one low point can be used to form the
neckline.
Volume : As the Head and Shoulders pattern unfolds, volume plays an important role in
confirmation. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or
simply by analyzing volume levels. Ideally, but not always, volume during the advance
of the left shoulder should be higher than during the advance of the head. This decrease
in volume and the new high of the head, together, serve as a warning sign. The next
warning sign comes when volume increases on the decline from the peak of the head.
43

44. Final confirmation comes when volume further increases during the decline of the right
shoulder.
Neckline Break : The head and shoulders pattern is not complete and the uptrend is not
reversed until neckline support is broken. Ideally, this should also occur in a convincing
manner, with an expansion in volume.
Support Turned Resistance : Once support is broken, it is common for this same
support level to turn into resistance. Sometimes, but certainly not always, the price will
return to the support break, and offer a second chance to sell.
Price Target : After breaking neckline support, the projected price decline is found by
measuring the distance from the neckline to the top of the head. This distance is then
subtracted from the neckline to reach a price target. Any price target should serve as a
rough guide, and other factors should be considered as well.
44

45. Wockhardt Limited formed a Head and Shoulder reversal with a straight neckline. Key
points are as follows:
1. The low at 480 marked the end of the left shoulder and the beginning of the
head1
45

46. 2. During the advance to 560, volume was still high, but not as high as during the
left shoulder advance. However, during the next advance to 545, volume tapered off
significantly.
3. Volume continued to decline until the breaking of the neckline. (Note red line on
volume bars.)
4. The decline from 560 to 480 formed the second low point (2).
5. During the decline of the right shoulder and neckline break, volume expanded
(red oval), and MACD formed negative divergence.
6. After the initial decline, there was a return to the neckline break (black arrow).
Even during this decline, MACD remained in negative divergence and RSI showed
level of less than 30 i.e. stock was oversold. The subsequent decline took the stock
below 360.
7. The measurement from neckline to the top of the head was 80 (marked with red
line and number-3). With the neckline break at 480, this would imply a move to
around 400. The Mid May low was 400(long black candlestick).
The head and shoulders pattern is one of the most common reversal formations. It is
important to remember that it occurs after an uptrend and usually marks a major trend
reversal when complete. While it is preferable that the left and right shoulders be
symmetrical, it is not an absolute requirement. They can be different widths as well as
different heights.
Identification of neckline support and volume confirmation on the break can be the most
critical factors. The support break indicates a new willingness to sell at lower prices.
Lower prices combined with an increase in volume indicate an increase in supply.
Measuring the expected length of the decline after the breakout can be helpful, but it may
not be the exact target.
3. Head And Shoulder Bottom:
The Head and Shoulders bottom is also known as an Inverse Head and Shoulders. It
relies more heavily on volume patterns for confirmation.
46

47. The Head and Shoulders Bottom forms after a downtrend. The pattern contains three
successive troughs with the middle trough (head) being the deepest and the two outside
troughs (shoulders) being shallower. The two shoulders would be equal in height. The
reaction highs in the middle of the pattern can be connected to form resistance, or a
neckline.
The price action forming both Head and Shoulders Top and Head and Shoulders Bottom
patterns remains the same, but reversed. The difference between two of them is Volume.
Volume plays a larger role in bottom formations than top formations. While an increase
in volume on the neckline breakout for a Head and Shoulders Top is absolutely required
for a bottom.
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.
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 (1).
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).
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. Sometimes 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.
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. The neckline can slope up,
slope down, or be horizontal. An upward slope is more bullish than downward slope.
Volume : Volume plays a crucial role in the Head and Shoulders Bottom. Without the
proper expansion of volume, the validity of any breakout becomes suspect.
47

48. Volume on the decline of the left shoulder is usually heavy and selling pressure quite
intense. The intensity of selling can even continue during the decline that forms the low
of the head. After this low, volume patterns should be watched carefully to look for
expansion during the advances.
The advance from the low of the head should show an increase in volume and/or better
indicator readings, e.g., CMF > 0 or rise in OBV. With light volume on the pullback,
indicators like CMF and OBV should remain strong. The most important moment for
volume occurs on the advance from the low of the right shoulder. For a breakout to be
considered valid, there needs to be an expansion of volume on the advance and during
the breakout.
1. Neckline Break : The Head and Shoulders Bottom pattern is not complete until
neckline resistance is broken. A neckline break should occur with an expansion of
volume.
2. Resistance Turned Support : Once resistance is broken, same resistance level to
turn into support.
3. 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 added to the neckline to reach a price target.
1. The stock began a downtrend in early July, and declined from 60 to 26.
48

49. 2. The low of the left shoulder formed with a large spike in volume on a sharp
down day (red arrows).
3. The reaction rally at around 42 1/2 formed the first point of the neckline (1).
Volume on the advance was respectable with many gray bars exceeding the 60-day
SMA.
4. Chaikin Money Flow was mostly positive when the lows around 26 were
forming in formation of Head.
5. The advance from the low saw a large expansion of volume (green oval) and gap
up. The strength behind the move indicated that a significant low formed.
6. After the reaction high around 39, the second point of the neckline could be
drawn (2).
7. The decline from 39 to 33 occurred on light volume until the final two days,
when volume reached its highest point in a month. Also notice how trend line
resistance near 35 became support around 33 on the price chart.
8. The advance from the low of the right shoulder occurred with above average
volume. Chaikin Money Flow was at its highest levels, and surpassed +20% shortly
after neckline resistance was broken.
After breaking neckline resistance, the stock returned to its new support.
4. Falling Wedge:
The falling wedge is a bullish pattern that begins wide at the top and contracts as prices
move lower. This price action forms a cone that slopes down as the reaction highs and
reaction lows converge. The falling wedges slope down and have a bullish bias. This
bullish bias cannot be realized until a resistance breakout.
The falling wedge can also fit into the continuation category. As a continuation pattern,
the falling wedge will still slope down, but the slope will be against the prevailing
uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing
trend. Regardless of the type (reversal or continuation), falling wedges are regarded as
bullish patterns.
49

50. Prior Trend: To qualify as a reversal pattern, there must be a prior trend to reverse.
Ideally, the falling wedge will form after an extended downtrend and mark the final low.
The pattern usually forms over a 3-6 month period and the preceding downtrend should
be at least 3 months old.
Upper Resistance Line: It takes at least two reaction highs to form the upper resistance
line, ideally three. Each reaction high should be lower than the previous highs.
Lower Support Line: At least two reaction lows are required to form the lower support
line. Each reaction low should be lower than the previous lows.
Contraction: The upper resistance line and lower support line converge to form a cone
as the pattern matures. Shallower lows indicate a decrease in selling pressure and create a
lower support line with less negative slope than the upper resistance line.
50

51. Resistance Break: Bullish confirmation of the pattern does not come until the resistance
line is broken. It is better to wait for a break above the previous reaction high for further
confirmation.
Volume : Volume is an essential ingredient to confirm a falling wedge breakout.
Without an expansion of volume, the breakout will lack confirmation and it can lead to
failure.
When lower highs and lower lows form, as in a falling wedge, a security remains in a
downtrend. The falling wedge is designed to indicate a decrease in downside momentum.
Even though selling pressure may be diminishing, demand does not win out until
resistance is broken. It is important to wait for a breakout and combine other aspects of
technical analysis to confirm signals.
51

52. Orchid Chemicals And Pharmaceuticals Limited showed example of a falling wedge
at the end of a downtrend.
 Prior Trend: The downtrend for Orchid Chemical began in August of 2003.
 Upper Resistance Line: The upper resistance line formed with three
successively lower peaks.
 Lower Support Line: The lower support line formed with four successive lower
lows.
 Contraction: The upper resistance line and lower support line converged as the
pattern matured. Even though each low is lower than the previous low, these lows are
only slightly lower. The shallowness of the new lows indicates that demand is stepping
52

53. almost immediately after a new low is recorded. The slope of the upper resistance line is
more negative than the lower support line.
 Resistance Break: In contrast to the two previous lows, the mid July-2004 low
was flat and consolidated just between 110 and 125 for a week. The subsequent
breakout (pink vertical line) in Mid August occurred with a series of strong advances. In
addition, there was a positive divergence in the PPO (Black Line) and also a crossover
of PPO line (Blue Circle)
 Volume: In Mid Deccember-2003, there is a good amount of volume at the start
of formation of the pattern. But gradually it decreased. Average volume was there
during these five months of pattern. In Mid August-2004 volume expanded (green circle
and red arrow) significantly and the stock broke trend line resistance. Chaikin Money
flows confirmed the strength by surpassing their positive increment and also Moving
averages crossover confirmed the breakout of resistance level.
After the trend line breakout, the stock advanced significantly and then it consolidated
for about a week.
53

54. 5. Rising Wedge:
The rising wedge is a bearish pattern that begins wide at the bottom and contracts as
prices move higher and the trading range narrows. The rising wedges definitely slope up
and have a bearish bias.
The pattern can also fit into the continuation category. As a continuation pattern, the
rising wedge will still slope up, but the slope will be against the prevailing downtrend.
As a reversal pattern, the rising wedge will slope up and with the prevailing trend.
Regardless of the type (reversal or continuation), rising wedges are bearish.
Key Points to be considered:
Prior Trend: In order to qualify as a reversal pattern, there must be a prior trend to
reverse. The rising wedge usually forms over a 3-6 month period and can mark an
intermediate or long-term trend reversal. Sometimes the current trend is totally
contained within the rising wedge; other times the pattern will form after an extended
advance.
Upper Resistance Line: It takes at least two reaction highs to form the upper resistance
line, ideally three. Each reaction high should be higher than the previous high.
Lower Support Line: At least two reaction lows are required to form the lower support
line. Each reaction low should be higher than the previous low.
Contraction: The upper resistance line and lower support line converge as the pattern
matures. The advances from the reaction lows (lower support line) become shorter and
shorter, which makes the rallies unconvincing. This creates an upper resistance line that
fails to keep pace with the slope of the lower support line and indicates a supply
deceases as prices increase.
Support Break: Bearish confirmation of the pattern does not come until the support
line is broken in a convincing fashion. It is sometimes prudent to wait for a break of the
previous reaction low.
Volume: Ideally, volume will decline as prices rise and the wedge evolves. An
expansion of volume on the support line break can taken as bearish confirmation.
54

55. While the rising wedge is a consolidation formation, the loss of upside momentum on
each successive high gives the pattern its bearish bias. However, the series of higher
highs and higher lows keeps the trend bullish. The final break of support indicates that
the forces of supply have finally won out and prices will be lower. There are no
measuring techniques to estimate the decline – other aspects of technical analysis should
be employed to forecast price targets.
55

56. Wyeth Limited provides a good example of the rising wedge as a reversal pattern that
forms in the face of weakening momentum and money flow.
 Prior Trend: From a low around 340 in May-2005, Wyeth surpassed 800 in less
than 9 months. The final leg up was a sharp advance from below 550 in November-
2006. to 775 in February-2006.
 Upper Resistance Line: The upper resistance line formed with three
successively higher peaks.
56

57.  Lower Support Line: The lower support line formed with three successive
higher lows.
 Contraction: The upper resistance line and lower support line converged as the
pattern matured. A visual assessment confirms that the slope of the lower support
line is steeper than that of the upper resistance line.
 Support Break: The support was broken with a long black candlestick. The
previous reaction low was broken a few days later with long black candlestick
(red arrow).
 Volume: Chaikin Money Flow turned negative in mid February and was around
-5% when the support line was broken. There was an expansion of volume when the
previous reaction low was broken.
Support from the January reaction low around 790 turned into resistance and the stock
tested this level in March-2006 before declining further.
6. Rounding Bottom:
The rounding bottom is a long-term reversal pattern that is best suited for weekly charts.
It is also referred to as a saucer bottom, and represents a long consolidation period that
turns from a bearish bias to a bullish bias.
57

58. Prior Trend: In order to be a reversal pattern, there must be a prior trend to reverse.
Ideally, the low of a rounding bottom will mark a new low or reaction low. In practice,
there are occasions when the low is recorded many months earlier and the security trades
flat before forming the pattern. When the rounding bottom does finally form, its low may
not be the lowest low of the last few months.
Decline: The first portion of the rounding bottom is the decline that leads to the low of
the pattern. This decline can take on different forms: some are quite jagged with a
number of reaction highs and lows, while others trade lower in different manner.
Low: The low of the rounding bottom can resemble a "V' bottom, but should not be too
sharp and should take a few weeks to form. Because prices are in a long-term decline,
the possibility of a selling climax exists that could create a lower spike.
58

59. Advance: The advance off of the lows forms the right half of the pattern and should take
about the same amount of time as the prior decline. If the advance is too sharp, then the
validity of a rounding bottom may be in question.
Breakout: Bullish confirmation comes when the pattern breaks above the reaction high
that marked the beginning of the decline at the start of the pattern. As with most
resistance breakouts, this level can become support.
Volume: In an ideal pattern, volume levels will track the shape of the rounding bottom:
high at the beginning of the decline, low at the end of the decline and rising during the
advance. Volume levels are not too important on the decline, but there should be an
increase in volume on the advance and preferably on the breakout.
A rounding bottom could be thought of as a head and shoulders bottom without readily
identifiable shoulders. The head represents the low and is fairly central to the pattern.
The volume patterns are similar and confirmation comes with a resistance breakout.
While symmetry is preferable on the rounding bottom, the left and right side do not have
to be equal in time or slope.
59

60. JB Chemicals and Pharmaceuticals provides an example of a rounding bottom
that formed after a long consolidation period.
 Prior Trend: With the break of support at 70, it appeared that a downtrend had
begun. This decline was not that sharp. JB Chemical was clearly not in an uptrend.
 Decline: The stock declined from 77 to a low of 60 and a hammer and a doji
formed in April-04 to mark the end of the decline (red arrow).
 Low: Prior to the hammers, the stock traded between 60 and 70 for the previous
6 weeks. When the gap up with high volume followed the hammers, it appeared that
a low had been formed. After a short rally, there was another low formed at 47.
60

61.  Advance: From the low at 47, the advance began in earnest and volume started
to increase. In Mid September and October, there was an advance with the highest
volume in 4 months (green arrow).
January-2004 resistance at 77 represented the confirmation line for the pattern. The stock
broke resistance in December-2005 with a further expansion of volume. This breakout
was also confirmed with a new high in OBV.
After breaking resistance, the stock fell to 77 again and thus resistance confirmed into
support. The stock had advanced from 50 to 77 in 7 months and some sort of pullback
could have been expected.
61

62. 7. Triple Top:
The triple top is a reversal pattern made up of three equal highs followed by a break
below support. The triple tops usually form over a shorter time frame and typically
range from 3 to 6 months. The bottoms take longer to form than tops. We will first
examine the individual parts of the pattern and then look at an example.
Prior Trend: With any reversal pattern, there should be an existing trend to reverse. In
the case of the triple top, an uptrend or long trading range should be in place. Sometimes
there will be a definitive uptrend to reverse.
Three Highs: All three highs should be reasonable equal, well spaced and mark
significant turning points. The highs do not have to be exactly equal, but should be
reasonably equivalent to each other.
Volume: As the triple top develops, overall volume levels usually decline. Volume
sometimes increases near the highs. After the third high, an expansion of volume on the
subsequent decline and at the support break greatly reinforces the soundness of the
pattern.
62

63. Support Break: As with many other reversal patterns, the triple top is not complete until
a support break. The lowest point of the formation, which would be the lowest of the
lows of pattern, marks this key support level.
Support Turns Resistance: Broken support becomes potential resistance, and there is
sometimes a test of this newfound resistance level with a subsequent reaction rally.
Price Target: The distance from the support break to highs can be measured and
subtracted from the support break for a price target.
Before the third high forms, the pattern may look like a double top. Three equal highs
can also be found in an ascending triangle or rectangle. Of these patterns mentioned,
only the ascending triangle has bullish overtones; the others are neutral until a break
occurs. The triple top should also be treated as a neutral pattern until a breakout occurs.
If there is a sharp increase in volume and momentum, then the chances of a support
break increase.
63

64. It can be difficult to find a triple top with three highs that are exactly equal. The spirit is
three attempts at resistance, followed by a breakdown below support, with volume
confirmation.
Punjab National Bank (PNB) illustrates an example of a triple top that does not fit
exactly, but captures the spirit of the pattern.
 The stock was in an uptrend and remained above the trend line extending up
from Dec-04 until the break in late April-2006.
 Over a period of about 5 months, the stock bounced off resistance around 495.
The first attempt happened in January, the second in April and the third in May.
 The decline from the second and third high broke trend line support and the
stock continued to fall past support from the previous lows. Triple top support should
be drawn from the lowest low of the pattern, which would be April end low around
405.
 Volume expanded after the stock broke trend line support. The stock paused for
a few days when support at 405 was reached, but volume accelerated when this
support level was broken in second week of June (Brown vertical line). In addition,
the Chaikin Money Flow turned negative and broke below -20%.
 After the support break, the support turned into resistance few weeks later.
Money flows continued to indicate selling pressure and volume expanded when the
stock began to fall again.
The projected decline was 90 points, from 405 down to 315, and the stock reached this
target in few days after it broke its support.
64

65. 8. Triple Bottom:
The triple bottom is a reversal pattern made up of three equal lows followed by a
breakout above resistance. While this pattern can form over just a few months, it is
usually a long-term pattern that covers many months. Because of its long-term nature,
weekly charts can be best suited for analysis.
Prior Trend: With any reversal pattern, there should be an existing trend to reverse. For
the triple bottom, a downtrend or long trading range should be in place. Sometimes there
will be a definitive downtrend to reverse.
Three Lows: All three lows should be reasonable equal, well spaced and mark
significant turning points. The lows do not have to be exactly equal, but should be
reasonably equivalent.
65

66. Volume: As the triple bottom develops, overall volume levels usually decline. Volume
sometimes increases near the lows. After the third low, an expansion of volume on the
advance and at the resistance breakout greatly reinforces the soundness of the pattern.
Resistance Break: As with many other reversal patterns, the triple bottom is not
complete until a resistance breakout. The highest point of the formation, which would be
the highest of the intermittent highs, marks resistance.
Resistance Turns Support: Broken resistance becomes potential support. Because the
triple bottom is a long-term pattern, the test of newfound support may occur many
months later.
Price Target: The distance from the resistance breakout to lows can be measured and
added to the resistance break for a price target. The longer the pattern develops, the more
significant is the ultimate breakout. Triple bottoms that are 6 or more months in duration
represent major bottoms and a price target is less likely to be effective.
As the triple bottom develops, it can start to resemble a number of patterns. Before the
third low forms, the pattern may look like a double bottom. Three equal lows can also be
found in a descending triangle or rectangle. Of these patterns mentioned, only the
descending triangle has bearish overtones; the others are neutral until a breakout occurs.
Similarly, the triple bottom should also be treated as a neutral pattern until a breakout
occurs. If there is a sharp increase in volume and momentum, then the chances of a
breakout increase.
66

67. After a failed double bottom breakout, Arvind Mills formed a large triple bottom.
 Over a 6-month timeframe, three relatively equal lows formed in end of August-
2003, Mid-September-03 and Nov-03. When the October-03 high surpassed the
September-03 high, the possibility of a rectangle pattern was ruled out.
 Resistance at 56.5 was broken in end of November-03. The stock closed above
this key level for 6 consecutive weeks to confirm the breakout.
 The advance from the third low saw a dramatic expansion of volume that lasted
many weeks (red circle). MACD Line formed a positive divergence in November-03
and broke to new highs with the stock in December end. And also CMF turned
positive from negative.
 After the resistance break, the stock was traded around 60 for some days. A new
support level was established at 60. The price target after breakout from the support
level will be around 70 which was achieved in the end of December month.
67

68. Continuation Patterns:
1. Pennant/Flag Pattern:
Flags and Pennants are short-term continuation patterns that mark a small consolidation
before the previous move resumes. These patterns are usually preceded by a sharp
advance or decline with heavy volume, and mark a mid-point of the move.
Sharp Move: To be considered a continuation pattern, there should be evidence of a
prior trend. Flags and pennants require evidence of a sharp advance or decline on heavy
volume. These moves usually occur on heavy volume and can contain gaps. This move
usually represents the first leg of a significant advance or decline and the flag/pennant is
merely a pause.
Flagpole: The flagpole is the distance from the first resistance or support break to the
high or low of the flag/pennant. The sharp advance (or decline) that forms the
flagpole should break a trend line or resistance/support level. A line extending up
from this break to the high of the flag/pennant forms the flagpole.
Flag: A flag is a small rectangle pattern that slopes against the previous trend. If the
previous move was up, then the flag would slope down. If the move was down, then
the flag would slope up. Because flags are usually too short in duration to actually
68

69. have reaction highs and lows, the price action just needs to be contained within two
parallel trend lines.
Pennant: A pennant is a small symmetrical triangle that begins wide and converges as
the pattern matures (like a cone). The slope is usually neutral. Sometimes there will not
be specific reaction highs and lows from which to draw the trend lines and the price
action should just be contained within the converging trend lines.
Duration: Flags and pennants are short-term patterns that can last from 1 to 12 weeks.
There is some debate on the timeframe and some consider 8 weeks to be pushing the
limits for a reliable pattern.
These patterns will form between 1 and 4 weeks. Once a flag becomes more than 12
weeks old, it would be classified as a rectangle. A pennant more than 12 weeks old
would turn into a symmetrical triangle. The reliability of patterns that fall between 8 and
12 weeks is debatable.
1. Break: For a bullish flag or pennant, a break above resistance signals that the
previous advance has resumed. For a bearish flag or pennant, a break below support
signals that the previous decline has resumed.
2. Volume : Volume should be heavy during the advance or decline that forms the
flagpole. Heavy volume provides legitimacy for the sudden and sharp move that
creates the flagpole. An expansion of volume on the resistance (support) break lends
credence to the validity of the formation and the likelihood of continuation.
3. Targets: The length of the flagpole can be applied to the resistance break or
support break of the flag/pennant to estimate the advance or decline.
It is important that flags and pennants are preceded by a sharp advance or decline.
Without a sharp move, the reliability of the formation becomes questionable and trading
could carry added risk. Look for volume confirmation on the initial move and
consolidation of the pattern.
69

70. The above chart of NELCO Limited showed pattern of “Flag” formation.
 Sharp Move : After consolidating for two months, NELCO Limited broke above
resistance at 96 to begin further advance. The 12-November high and trend line
marked resistance and the breakout occurred with a volume expansion. The stock
advanced from 96 to 125 in a mere 4 weeks.
 Flagpole : The distance from the breakout at 96 to the flag's high at 125 formed
the flagpole.
 Flag : Price action was contained within two parallel trend lines that sloped
down.
 Duration : From a high at 125 to the breakout at 112, the flag formed over a 29-
day period.
 Breakout: The first break above the flag's upper trend line occurred on 3-
February with an expansion of volume. However, the stock formed long white
candlesticks two days later and closed strong with above-average volume (red circle)
 Volume : Volume expanded on the advance to form the flagpole, contracted
during the flag's formation and expanded right after the resistance breakout.
 Targets: The length of the flagpole measured 29 points and was applied to the
resistance breakout at 113 to project a target of 127. Then another resistance level
was formed at higher level.
70

71. 2. Symmetrical Triangle:
The Symmetrical triangle, which can also be referred to as a coil, usually forms during a
trend as a continuation pattern. The pattern contains at least two lower highs and two
higher lows. When these points are connected, the lines converge as they are extended
and the symmetrical triangle takes shape. You could also think of it as a contracting
wedge, wide at the beginning and narrowing over time.
Regardless of the nature of the pattern, continuation or reversal, the direction of the next
major move can only be determined after a valid breakout. I will examine each part of
the symmetrical triangle individually, and then provide an example of IFCI.
Trend : In order to qualify as a continuation pattern, an established trend should exist.
The trend should be at least a few months old.
Four (4) Points: At least 2 points are required to form a trend line and 2 trend lines are
required to form a symmetrical triangle. Therefore, a minimum of 4 points are required
to begin considering a formation as a symmetrical triangle. The second high (2) should
be lower than the first (1) and the upper line should slope down. The second low (2)
should be higher than the first (1) and the lower line should slope up. Ideally, the pattern
will form with 6 points (3 on each side) before a breakout occurs.
Volume: As the symmetrical triangle extends and the trading range contracts, volume
should start to diminish. This refers to the tightening consolidation before the breakout.
Duration: The symmetrical triangle can extend for a few weeks or many months. If the
pattern is less than 3 weeks, it is usually considered a pennant. Typically, the time
duration is about 3 months.
Breakout Time Frame: The ideal breakout point occurs 1/2 to 3/4 of the way through
the pattern's development or time-span. The time-span of the pattern can be measured
from the apex (convergence of upper and lower lines) back to the beginning of the lower
trend line (base).
Breakout Direction: The future direction of the breakout can only be determined after
the break has occurred. The attempt of guessing the direction of the breakout can be
dangerous. Even though a continuation pattern is supposed to breakout in the direction of
the long-term trend, this is not always true.
71

72. Breakout Confirmation: For a break to be considered valid, it should be on a closing
basis. Some traders apply a price (3% break) or time (sustained for 3 days) filter to
confirm validity. The breakout should occur with an expansion in volume, especially on
upside breakouts.
Return to Apex: After the breakout (up or down), the apex can turn into future support
or resistance. The price sometimes returns to the apex or a support/resistance level
around the breakout before continuing in the direction of the breakout.
Price Target: There are two methods to estimate the extent of the move after the
breakout. First, the widest distance of the symmetrical triangle can be measured and
applied to the breakout point. Second, a trend line can be drawn parallel to the pattern's
trend line that slopes (up or down) in the direction of the break. The extension of this line
will mark a potential breakout target.
One Technical Analyst sad that roughly 75% of symmetrical triangles are continuation
patterns and the rest mark reversals. The reversal patterns can be especially difficult to
analyze and often have false breakouts. I should not anticipate the direction of the
breakout, but rather wait for it to happen. Confirmation is especially important for upside
breakouts.
Potential reward price targets found by measurement and parallel trend line extension are
only meant to act as rough guidelines. Technical analysis is dynamic and ongoing
assessment is required.
72

73. IFCI formed a rather large symmetrical triangle over a 5-month period before breaking
out on the downside.
1. The stock advance from 8 in December-03 to 12 in April-04 before beginning to
firm and consolidate. The long-term trend in IFCI was up and established for almost
a year.
2. After the first 6 points formed, the lines of the symmetrical triangle were draw.
The stock traded within the boundaries for another 1 month to form the last 2 points.
3. After the gap up from point 4 to point 5, volume slowed over the next few
months. There was some increase in volume in late June, but the average volume was
in a downtrend as the pattern took shape.
4. After points 6 and 7 formed, the price action moved to the lower boundary of the
pattern. At this point, the direction of the breakout was look like down trend. The
break occurred with an increase in volume and accelerated price decline. Chaikin
Money Flow declined past -20% and RSI was below 30 levels (oversold level) and
then they are positive and volume was also expanded.
5. After the increment from 9 ½ to 12 and stock again fell down to 10 but it did not
sustain. It moved up to resistance level.
73

74. 6. The widest point on the pattern was estimated 3 points. With a break support at 9
½, the measured increment was estimated to around 12 ½. By drawing a trend line
parallel to the lower boundary of the pattern, the extension estimates an increment to
around 13 to 14.
74

75. 3. Ascending Triangle:
The ascending triangle is a bullish formation that usually forms during an uptrend as a
continuation pattern. Regardless of where these patterns form, ascending triangles are
bullish patterns that indicate accumulation.
Because of its shape, the pattern can also be referred to as a right-angle triangle. Two or
more equal highs form a horizontal line at the top. Two or more rising troughs form an
ascending trend line that converges on the horizontal line as it rises. If both lines were
extended right, the ascending trend line could act as the hypotenuse of a right triangle. If
a perpendicular line were drawn extending down from the left end of the horizontal line,
a right triangle would form.
Trend: In order to qualify as a continuation pattern, an established trend should exist.
However, because the ascending triangle is a bullish pattern, the length and duration of
the current trend is not as important as the robustness of the formation, which is more
important.
75

76. Top Horizontal Line: At least 2 reaction highs are required to form the top horizontal
line. The highs do not have to be exact, but they should be within reasonable proximity
of each other. There should be some distance between the highs, and a reaction low
between them.
Lower Ascending Trend Line: At least two reaction lows are required to form the
lower ascending trend line. These reaction lows should be successively higher, and there
should be some distance between the lows. If a more recent reaction low is equal to or
less than the previous reaction low, then the ascending triangle is not valid.
Duration: The length of the pattern can range from a few weeks to many months with
the average pattern lasting from 1-3 months.
Volume: When the upside breakout occurs, there should be an expansion of volume to
confirm the breakout. While volume confirmation is preferred, it is not always necessary.
Return to Breakout: When the horizontal resistance line of the ascending triangle is
broken, it turns into support. Sometimes there will be a return to this support level before
stock move further.
Target: Once the breakout has occurred, the price projection is found by measuring the
widest distance of the pattern and applying it to the resistance breakout.
An ascending triangle has a definitive bullish bias before the actual breakout. In the
ascending triangle, the horizontal line represents overhead supply that prevents the
security from moving past a certain level. It is as if a large sell order has been placed at
this level and it is taking a number of weeks or months to execute, thus preventing the
price from rising further. It is these higher lows that indicate increased buying pressure
and give the ascending triangle its bullish bias.
76

77. Praj Industries Limited formed an ascending triangle over a 5-month period before
breaking resistance with an expansion of volume.
 From a low of 110 in January-2006, the stock established an uptrend by forming
a higher low at 118 and advancing to a new reaction high early March. (The
beginning of the trend is not included on this chart.) After a few months, the stock
met resistance at 190.
 In June and august, the stock hit resistance at 170 twice. The stock bounced off
190 three times in 5 months to form the horizontal resistance line. It was as if
portions of a large block were being sold each time the stock neared 190.
 The reaction lows were progressively higher, and formed an ascending trend
line. The first low in Mid-June, 2006, occurred with a large spike down to 125. The
ascending trend line could have been drawn to start at 125. The important thing is
that there are at least two distinct reaction lows that are consecutively higher.
77

78.  The duration of the pattern is around 5 months, which may seem a bit long.
However, all the key ingredients for a robust pattern were in place.
 Volume declined from late May until early October. There was a huge expansion
when the stock was up from 160 (point 6) to 192 on four-five heavy trading days in
October. In keeping with the ideal pattern, the next expansion of volume occurred in
early January when the stock broke resistance at 255. The stock traded at above
average. Chaikin Money Flow dragged a bit, but recovered to +20% five days after
the breakout of newfound resistance level.
 The stock advanced to 250 and then to 375. CMF at this level were found to be
strongly positive which showed strength of the stock.
The initial advance was projected to be 65 (190-125 = 65) points from the breakout at
190, making a target of 255. This target was reached within 4 months.
78

79. 4. Descending Triangle:
The descending triangle is a bearish formation that usually forms during a downtrend as
a continuation pattern. Regardless of where this pattern forms, descending triangles are
bearish patterns that indicate distribution.
Because of its shape, the pattern can also be referred to as a right-angle
triangle. Two or more comparable lows form a horizontal line at the bottom. Two
or more declining peaks form a descending trend line above that converges with the
horizontal line as it descends. If both lines were extended right, the descending trend
line could act as the hypotenuse of a right triangle. If a perpendicular line were drawn
extending up from the left end of the horizontal line, a right triangle would form.
Trend: In order to qualify as a continuation pattern, an established trend should exist.
The descending triangle is definitely a bearish pattern, the length and duration of the
current trend is not as important. The robustness of the formation is more important.
Lower Horizontal Line: At least 2 reaction lows are required to form the lower
horizontal line. The lows do not have to be exact, but should be within reasonable
proximity of each other. There should be some distance separating the lows and a
reaction high between them.
79

80. Upper Descending Trend Line: At least two reaction highs are required to form the
upper descending trend line. These reaction highs should be successively lower and there
should be some distance between the highs. If a more recent reaction high is equal to or
greater than the previous reaction high, then the descending triangle is not valid.
Duration: The length of the pattern can range from a few weeks to many months, with
the average pattern lasting from 1-3 months.
Volume: As the pattern develops, volume usually contracts. When the downside break
occurs, there would ideally be an expansion of volume for confirmation. While volume
confirmation is preferred, it is not always necessary.
Return to Breakout: When the horizontal support line of the descending triangle is
broken, it turns into resistance. Sometimes there will be a return to this newfound
resistance level before the price moves further.
Target: Once the breakout has occurred, the price projection is found by measuring the
widest distance of the pattern and subtracting it from the resistance breakout.
A descending triangle has a definite bearish bias before the actual break. For the
descending triangle, the horizontal line represents demand that prevents the security from
declining past a certain level. It is as if a large buy order has been placed at this level and
it is taking a number of weeks or months to execute, thus preventing the price from
declining further. Even though the price does not decline past this level, the reaction
highs continue to decline. It is these lower highs that indicate increased selling pressure
and give the descending triangle its bearish bias.
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81. After recording a lower high just below 265 in May-06, Sakhti Sugar Limited formed a
descending triangle in May-end in 2006. In late August, the stock broke support with a
long black candlestick and increase in volume to complete the formation.
 The stock declined from above 260 to the low 100s before finding some support
and mounting a reaction rally. The rally started just below 200 and a series of lower
reaction highs began to form. The long-term trend was down and the resulting pattern
was classified as continuation.
 Support at 137 0r 138 was first established with a bounce in June. After that, the
stock touched this level two more times before breaking down. After the second
touch in July end (about a month later), the lower support line was drawn.
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82.  After each bounce off support, a lower high formed. The reaction highs at points
1, 3 and 5 formed the descending trend line to mark the possible descending triangle
pattern.
 The duration of the pattern was approximately 4 months.
 The last touch of support at 138 occurred in late August. The stock spiked down
through support, but managed to close above this key level. The final break occurred
a few days later with a considerable black candlestick and an expansion in volume.
The way support is broken can offer insight into the general weakness of a security.
Volume jumped to the second highest level in many months and money flows broke
below -25%.
 After falling from 140 to 130, the stock mounted a feeble reaction rally that only
lasted fifteen-twenty days and new resistance level was confirmed.
The initial decline was projected to be 70 points (208-138 = 70). If this is subtracted
from the support break at 138, the downside projection is to around 68. And in
February-2007 this target was achieved and stock fell up to 60.
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83. 5. Rectangle:
A Rectangle is a continuation pattern that forms as a trading range during a pause in the
trend. The pattern is easily identifiable by two comparable highs and two comparable
lows. The highs and lows can be connected to form two parallel lines that make up the
top and bottom of a rectangle. Rectangles are sometimes referred to as trading ranges,
consolidation zones or congestion areas.
Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend
should be a few months old and not too mature. The more mature the trend, the less
chance that the pattern marks a continuation.
Four (4) Points: At least two equivalent reaction highs are required to form the upper
resistance line and two equivalent reaction lows to form the lower support line. They do
not have to be exactly equal, but should be within a reasonable proximity. Although not a
prerequisite, it is preferable that the highs and lows alternate.
Volume: Rectangles do not exhibit standard volume patterns. Sometimes volume will
decline as the pattern develops. Other times volume will increase as the prices bounce
between support and resistance. If volume declines, it is best to look for an expansion on
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