21 June, 2011

Lesson 3 (Technical Price Objectives)

6/21/2011 09:24:00 AM

Technical Price Objectives

Traders who believe in price charts make them work.
Chartists try to find repetitive price patterns which have a high degree of accuracy and usually are self-fulfilling. Gaps and specific formations frequently meet these criteria.
Gaps are one of the most easily recognizable technical indicators. A gap is simply an empty spot formed on a chart when price lines don't overlap the previous day's price action. Sometimes market psychology changes overnight or over a weekend. That change in psychology forces prices to open and stay above or below the previous day's range.

Time-tested rule

'Gaps are filled' is another time-tested rule of the market. That is why gaps become future price objectives. Quite often, prices retreat to fill a gap in a bull market before continuing the move. Likewise, prices often rally in a bear market to fill gaps.

Gaps may serve one of three purposes. They are used to spot the beginning of a move, to measure a move and to signal the end. There are four different kinds of gaps: common or temporary, breakaway, measuring or runaway, and exhaustion.
The most frequently occurring gap is the common gap. When this gap occurs because of a slight change in psychology, traders expect it to be filled soon. Once a gap is filled, it no longer has significance.
The early portion of the soybean chart on this page shows common gaps during the December and January period which were later filled.
The breakaway gap on this chart occurred on May 7 and begins a major bull move. Breakaway gaps often occur after a stretch of sideways trading and in the leading days of an uptrend or downtrend. This type of gap remains unfilled for a long time.
It sometimes is difficult to tell right away that it's a breakaway gap and not a common gap. When the market fails to fill this gap after a couple of weeks, this confirms the breakaway gap.

Additional gaps

A measuring gap typically occurs in the middle of a price move and predicts how much farther the move will go. It is also called a midpoint gap and a runaway gap.
On this soybean chart, the measuring gap, which occurred on June 8, left an empty spot from $6.16 to $6.26. The April 5 low at $4.90 marked the beginning of this move. The distance from the low at $4.90 to the measuring gap is $1.26 to $1.36. Adding this distance to the measuring gap projects a move to at least $7.50. Whether you add the distance to the top, bottom or middle of the measuring gap depends on your preference.

An exhaustion gap shows frustrated bears giving up and aggressive bulls trying to make the market go their way. It is the first sign of sputtering before the end.
Though prices may go higher after an exhaustion gap at the top, the rally will not last long before the market dies. An extreme exhaustion gap may form an island reversal.
What about gaps that remain unfilled? They become future chart objectives.If gaps are unfilled when a futures contract expires, there are usually corresponding gaps on the charts of subsequent contract months.
Gaps also appear on longer-term charts such as weekly commodity charts, but gaps on monthly charts are rare because they generally are constructed to avoid gaps caused by contract changeover. Like those on the daily charts, gaps on weekly charts are also "made to be filled".
A downtrend may slide to a slow, gradual halt in the saucer bottom formation. Open interest and volume follow the same pattern as prices in this formation, reflecting speculator disinterest in a market with little action and little profit potential. Our example on the monthly cocoa chart took three years to form.
Saucer bottoms on daily charts may take at least four weeks to become visible.
Although this bottom formation doesn't meet the requirements of other bottom formations, it's just as significant in signaling a trend change. Usually, the longer it takes to form a saucer bottom, the more violently prices will rise out of their lows.

Key reversals

One of the most easily recognizable technical signals in trend change is the key reversal. A key reversal often has an unusually wide trading range. Its requirements are a day's range outside the previous day's range with a close higher than the previous close for an upward turnaround and a lower close for a downward turn.
Here again, this chart formation reflects market psychology. A key reversal is the climax of a period of buying or selling fever. In extremely volatile markets, two or more key reversals may occur. The key reversal on the silver chart defined the top of its rally and signaled a fall in prices.
 
To be a valid key reversal top, trading volume must be heavy and the daily trading range should be wide. Prices first surge to new highs, but fall back and close lower for the day.
For a key reversal bottom, the characteristics are the same. The selling climax has to have heavy volume with a wide trading range which first breaks to new lows, rebounds above the previous day's high and closes higher. Frequently, the highest trading volume and the highest or lowest price of the year will be set on a key reversal day.
An island reversal takes gaps to the extreme. It receives its name for obvious reasons. An island reversal can be only one day or a few days of trading above (or below) the previous and following day's trading activity The action is isolated by gaps on both sides. Thus, it leaves a day or a few days of price action surrounded by empty space.
The Japanese yen chart shows two island reversals. The 1-day island top of marked the climax of a bull move and the beginning of falling prices. The 3-day island reversal bottom in mid-May signaled a halt to the decline and the Island reversal beginning of a bear market rally.
Island reversals occur less frequently than key reversals. The exhaustion gap which marks the beginning of the island reversal will remain unfilled for a lengthy period because the island reversal is usually the climax to an existing trend.
Technical analysis is not an absolute tool. Because it is more an art than a science, individuals will interpret formations and trends differently.
"Thin markets" - those with very low open interest and trading volume - will create false technical signals. These markets, as well as deferred contracts which also have low open interest, should be avoided by inexperienced traders.
Despite these cautions, technical analysis is a powerful tool and if used with common sense, can enhance a trader's perspective and profits.
Now it's your turn - can you spot the Key Reversal in this chart from the MarketClub member's area:

The answer is given here: Show me the Key Reversal


Lesson 3

Answer Page


The Key Reversal is circled in red. Its day's range is outside the previous day's range on both the high AND the low end. And it closed lower than on the previous day...
This signaled a very strong likelihood that a significant, new downward trend was about to begin.
As you can see, on the MarketClub chart this was automatically detected - and visually indicated - by our Trade Triangle algorithm (note the red triangle on the next day's bar)...
...making it much quicker and easier to spot than it would have been if you were manually scanning for reversal bars.

 SOURCE :- MarketClub

Posted by Nifty Statistics
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20 June, 2011

Lesson 2 (Finding a Friend in the Trend)

6/20/2011 12:10:00 PM

Lesson 2

Finding a Friend in the Trend

"The trend is your friend" may very well be the most common pearl of wisdom in the trading world - and for good reason...
Because trends persist for long periods, a position taken with the trend is much more likely to be successful than one taken randomly or against the trend. Trading with the trend in a bull market means buying on dips; in a bear market, selling on rallies.
First though, a quick refresher about bar charts (the two trend examples we'll see in a moment are illustrated on bar charts):
  • on a bar chart, each vertical line - or bar - connects that day's, week's, or month's high and low; and
  • the tiny, horizontal tick sticking out from the right of the bar indicates that closing price for that day, week, or month
Now, on to the trend...
An uptrend is a series of higher lows and higher highs. Uptrend lines are drawn under the lows of the market and give support. A downtrend is a series of lower lows and lower highs. Downtrend lines are drawn across the highs and give resistance to the market. The soybean chart shown below has both an uptrend line and a downtrend line.

Lows and highs vs. closes

A trendline can be drawn when two points are available. The more times a trendline is touched, the more technically significant this support or resistance line becomes.
While some chartists draw trendlines through lows and highs, others may prefer drawing lines through closes in hopes of detecting a change in trend more quickly.
Trendlines may change angles, requiring another line drawn through new high or low points. For example, the sideways trading action in March and April broke the steeper uptrend line connecting the Feb. 13 and March 20 lows. But when the uptrend resumed in early May, a more shallow uptrend line can be drawn connecting the February and late-April lows.
The most reliable trendlines are those near a 45° angle. If about four weeks have elapsed between the two connecting points, this increases the trendline's validity. However, steep trendlines that don't fit these guidelines, like the uptrend line in the early portion of the soybean chart, may be just as useful.
Often, minor uptrends or downtrends will confuse the beginner. It may seem the market has turned around. However, sharp chartists will see these minor trends as small ripples within a major wave. Remember, if the trendline isn't broken, that trend remains intact. Two closes outside the trendline are the criteria for detecting a change in trend. However, very seldom do markets go directly from uptrend to downtrend. At the end of a move, traders become less aggressive and prices may swing in a sideways pattern or consolidation period.
Many times, markets break into an uptrend or downtrend out of a sideways trading pattern or consolidation period. In the soybean chart, prices traded in a 50
Because traders need time to be convinced that they should put their money into the market, sideways patterns are more likely to occur near the bottom of a move. The beginning of a downtrend often will be sharp and sudden as investors pull money out of the market.

False breakouts

Another way beginners might be fooled is seeing false breakouts of tops and bottoms. As prices begin to make their move in switching from a downtrend to an uptrend, traders with short positions will "cover." This buying many times will cause the market to rally above the downtrend line. This short covering rally seldom holds, and prices may drop back to the breakout point. The uptrend is confirmed when prices close above the high of the short rally.
On a topping formation, long liquidation takes prices through the uptrend line on a short break. Before the downtrend begins, the market sometimes rallies back to "test" the uptrend line as shown on the soybean chart in September. As the downtrend unfolds, the second reaction rally could not top the highs of the first rally.
Channel lines are an extension of the trendline theory. The October through January downtrend on the soybean chart shows prices staying in a "channel" between the downtrend line and a line drawn parallel to it, connecting the lows. A channel line in a downtrending market helps identify where support may be found.
Speedlines are another line which show where prices may find support or resistance. Frequently, speedlines and trendlines will overlap, emphasizing that line's importance to the market.
The speedline on the soybean chart starts from the June 29 low. To find the points to connect with the low, divide the range between the low ($6.40) and the high($9.94) into thirds and subtract from the high.
Plot the point obtained by subtracting one-third of the range from the high on the day the high was made. A line drawn between this point ($8.76) and thelow established the 1/3 speedline. The 2/3 speedline is drawn through the point that is two-thirds of the range subtracted from the high ($7.58) plotted on the day the high was made.
Another way to detect a change in trend is by looking for a price from which the market reacts two or three times.
A double bottom, such as the one on the T-Bill chart, indicated the 87.10 to 87.20 area gave support to the market. Although a recovery had begun from the late-May low, prices broke the short-term uptrend in mid-June. The question then became: Will aggressive short-selling and long liquidation overwhelm the short-covering and new buying that come from support at the May low?
The soybean chart displays a triple top, where prices met resistance in approximately the same area three times before falling. Just the inverse of making the double bottom goes through traders' minds as the market makes a top: Will new buying and short-covering be able to overwhelm the new selling and long liquidation coming from the triple-top resistance area?
As with trendlines, the more time that elapses between the tests of support and resistance in double or triple tops or bottoms, the more valid the formation becomes. Also, the greater the reaction between tests of the support or resistance, the more likely the point will hold.
Though these examples are from daily bar charts, technical analysis works just as well on weekly and monthly charts. Because the longer-term charts cover more time, their trendlines are more important in identifying areas of support and resistance to the market.

How do I know?

In identifying the trend in a market, it is wise to start with the longer term charts to identify the long-term trend. The daily charts offer trends for the shorter-run.
Technical analysis is more an art than a science. The answer to your question, "How do I know where to draw the trendlines?" is, "They're your charts, draw them wherever they seem to work best for you."
And, of course, the only way to get a feel for what works best for you is to practice - let's give it a try now...
This chart from the MarketClub member's area depicts a few different trends - find the major uptrend and mentally draw the uptrend line and trend channel line on the chart:

To see if you spotted the major uptrend and correctly applied the trend line and channel line, take a peek at the answer here: Reveal the major uptrend


Lesson 2

Answer Page

The major uptrend is identified by the lower line or 'trend line', and the upper line or 'channel' line. (Note: if it were a downward trend, the upper line would be the trend line and the lower line would be the channel line.)

Did you also notice the green triangle on the price line near the start of the trend? How about the red one on the price line near the end of the trend?
These are MarketClub's proprietary Trade Triangles. We developed the Trade Triangles to make spotting the trend as easy as can be. No more need to spend hours scanning charts or plotting trend lines and channel lines - the Trade Triangles instantly alert you to any potential trend change: green for an upward shift and red for a downward shift.

 SOURCE  :- MarketClub

Posted by Nifty Statistics
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