Reversal Trends-SAPM

8/14/2019 Reversal Trends-SAPM

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Reversal patternsReversal patterns

Price trends, whether upwards or downwards, have to end atPrice trends, whether upwards or downwards, have to end atsome point. The problem comes in predicting how and when.some point. The problem comes in predicting how and when.

Technical analysts have identified a number of so-called Technical analysts have identified a number of so-called"reversal patterns" which"reversal patterns" which indicate the end of a trendindicate the end of a trend. One. Oneimportant factor in identifying reversal patterns isimportant factor in identifying reversal patterns is volume -volume -the number of shares traded in the stockthe number of shares traded in the stock. Often a chart. Often a chartwill look like it is developing one of the accepted reversalwill look like it is developing one of the accepted reversalpatterns, but then the reversal will fail to materialise and thepatterns, but then the reversal will fail to materialise and theprice will continue on its upward or downward trend (i.e. notprice will continue on its upward or downward trend (i.e. not'reverse'). Volume can help you distinguish between a real'reverse'). Volume can help you distinguish between a realreversal pattern and a dummy one.reversal pattern and a dummy one.


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Reversal patterns: BullishReversal patterns: Bullish

patternspatterns Inverted head and shouldersInverted head and shoulders

SaucerSaucer

Double bottomDouble bottom

Triple bottomTriple bottom

UptrendUptrend Falling wedgeFalling wedge


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Reversal patterns: BearishReversal patterns: Bearish

trendstrends Head and shouldersHead and shoulders

Inverted SaucerInverted Saucer

Double topDouble top

Triple topTriple top

DowntrendDowntrend Rising wedgeRising wedge


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Continuation patternsContinuation patterns

Continuation patterns usuallyContinuation patterns usually

represent brief pauses in the arepresent brief pauses in the a

dynamic market. They are usuallydynamic market. They are usuallyseen after a big move. The marketseen after a big move. The market

then again takes off again in thethen again takes off again in the

same direction.same direction.


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Trend LinesTrend Lines

There are threeThere are three

basic kinds ofbasic kinds of

trends:trends: An Up trend whereAn Up trend where

prices are generallyprices are generally

increasing.increasing.

A Down trendA Down trendwhere prices arewhere prices are

generallygenerally

decreasing.decreasing.

A Trading Range.A Trading Range.


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Trends are stronger . . . .Trends are stronger . . . .

The longer the trendlineThe longer the trendline

The more contacts between pricesThe more contacts between prices

and the trendlineand the trendline

When volume expands in theWhen volume expands in the

direction of the trenddirection of the trend


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Resistance and SupportResistance and Support Price levels at which movement shouldPrice levels at which movement should

stop and reverse direction.stop and reverse direction. Act as floor and ceilingAct as floor and ceiling

Different strengths (major and minor)Different strengths (major and minor) SupportSupport

Price level below the current market price atPrice level below the current market price atwhich buying interest should be able towhich buying interest should be able toovercome selling pressure and thus keep theovercome selling pressure and thus keep theprice from going any lowerprice from going any lower

ResistanceResistance Price level above the current market price, atPrice level above the current market price, at

which selling pressure should be strongwhich selling pressure should be strong

enough to overcome buying pressure and thusenough to overcome buying pressure and thus


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Resistance and SupportResistance and SupportOne of two things can happen when stockOne of two things can happen when stock

approaches resistance/supportapproaches resistance/support

Can act as aCan act as a

reversal pointreversal point

When price drops toWhen price drops toa support level, ita support level, it

will go back upwill go back up

When price rises toWhen price rises to

a resistance level, ita resistance level, itwill go back downwill go back down

Support/ResistanceSupport/Resistancereverse roles oncereverse roles oncepenetrated.penetrated. Market price fallsMarket price falls

below a supportbelow a supportlevel, then thelevel, then theformer supportformer support

level becomes alevel becomes aresistance levelresistance levelwhen the marketwhen the marketlater trades back uplater trades back upto that levelto that level


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Support & ResistanceSupport & Resistance

Support andSupport and

resistance linesresistance lines

indicate likely ends ofindicate likely ends of

trends.trends. Resistance resultsResistance results

from the inability tofrom the inability to

surpass prior highs.surpass prior highs.

Support results fromSupport results fromthe inability to breakthe inability to break

below to prior lows.below to prior lows.

What was supportWhat was support

becomes resistance,becomes resistance,

Support Resistance

Breakout


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Resistance and SupportResistance and Support

Resistance

Support

Resistance/Support


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Charting PatternsCharting Patterns

Cup and HandleCup and Handle Pattern on bar chart as short as 7 weeks or asPattern on bar chart as short as 7 weeks or as

long as 65 weekslong as 65 weeks Cup in the shape of a U; Handle has a slightCup in the shape of a U; Handle has a slight

downward driftdownward drift Right hand side of pattern has low tradingRight hand side of pattern has low trading

volumevolume

As the stock comes up to test old highs, theAs the stock comes up to test old highs, thestock will incur selling pressure by the peoplestock will incur selling pressure by the peoplewho bought at or near the old highwho bought at or near the old high

Selling pressure will take the stock priceSelling pressure will take the stock pricesideways for 4 days to 4 weeks, then it takessideways for 4 days to 4 weeks, then it takesoffoff


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Charting PatternsCharting Patterns


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Head and ShouldersHead and Shoulders

Resembles an M in which a stocks priceResembles an M in which a stocks price Rises to a peak and then declines, thenRises to a peak and then declines, then

Rises above the former peak and againRises above the former peak and againdeclines, and thendeclines, and then

Rises again but not as the second peak andRises again but not as the second peak and

again declinesagain declines

The first and third peaks are shoulders,The first and third peaks are shoulders,and the second peak forms the head.and the second peak forms the head.

Very bearish indicatorVery bearish indicator


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Head and ShouldersHead and Shoulders


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Double BottomDouble Bottom

Occurs when a stock price drops to aOccurs when a stock price drops to asimilar price level twice within a few weekssimilar price level twice within a few weeksor monthsor months

The double-bottom pattern resembles aThe double-bottom pattern resembles aWW

In a perfect double bottom, the secondIn a perfect double bottom, the second

decline should normally go slightly lowerdecline should normally go slightly lowerthan the first decline to create a shakeoutthan the first decline to create a shakeoutof jittery investorsof jittery investors

The middle point of the W should not goThe middle point of the W should not go

into new high ground.into new high ground.


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Double BottomDouble Bottom


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TrianglesTrianglesIn triangles widest part of correction occurs at the earliest in theIn triangles widest part of correction occurs at the earliest in the

development of the pattern and then trading range narrows formingdevelopment of the pattern and then trading range narrows forming

a shape of a triangle. The upper trend line acts as resistance anda shape of a triangle. The upper trend line acts as resistance andlower line represents as support.lower line represents as support.

Triangles areTriangles are

continuationcontinuation

formations.formations.

Three flavors:Three flavors: AscendingAscending Break outBreak out

tends to be to upsidetends to be to upside

DescendingDescending Break outBreak out

tends to be to downsidetends to be to downside SymmetricalSymmetrical

Typically, trianglesTypically, triangles

should break outshould break out

about half to three-about half to three-quarters of the wayquarters of the way

Ascending

Descending

Symmetrical

Symmetrical


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Flags and Pennats:Flags and Pennats:

A flag is defined as a parallelogram. LowerA flag is defined as a parallelogram. Lower

tops and lower bottoms characterizetops and lower bottoms characterize

bullish trend while Higher tops and higherbullish trend while Higher tops and higherbottoms indicate bearish trendbottoms indicate bearish trend

Pennats are smaller in size and durationPennats are smaller in size and duration

then triangles and behave same as flagsthen triangles and behave same as flags


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Rounded Tops & BottomsRounded Tops & Bottoms

RoundingRounding

formations areformations are

characterized by acharacterized by aslow reversal ofslow reversal of

trend.trend.Rounding Top

Rounding

Bottom


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Rounded Bottom ChartRounded Bottom Chart

ExampleExample


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Wedge formationsWedge formations

If you drawIf you draw trend linestrend lines along both the bottom and top of a share price chart,along both the bottom and top of a share price chart,

you will sometimes get a trend channel and you'llyou will sometimes get a trend channel and you'll sometimessometimes get a wedge shape.get a wedge shape.

A falling wedge is a bullish pattern while rising wedge is bearish pattern.A falling wedge is a bullish pattern while rising wedge is bearish pattern.wedge formations usually take placewedge formations usually take place over a period of 3-4 weeksover a period of 3-4 weeks. This is. This is

because they occur as reversals of intermediate and minor trends.because they occur as reversals of intermediate and minor trends.


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DJIA Oct 2000 to Oct 2001DJIA Oct 2000 to Oct 2001

ExampleExample

What could you have known,

and when could you have known it?


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DJIA Oct 2000 to Oct 2001DJIA Oct 2000 to Oct 2001

ExampleExample

Double bottomGap, should get

filled

Nov to Mar

Trading rangeDescending

triangles


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A gap occurs when the market dipsA gap occurs when the market dips

or rallies so fast there is no tradeor rallies so fast there is no trade

within a price range. Generally,within a price range. Generally, suchsuchevents occur when a new piece ofevents occur when a new piece of

unexpected information shocks theunexpected information shocks the

marketmarket. The market typically comes. The market typically comesback andback and tries to "fill" the gaptries to "fill" the gap in thein the

following days.following days.


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Criticisms of TACriticisms of TA

Not much statistical analysis supportNot much statistical analysis support

for technical trading rules.for technical trading rules.

Subjective judgment is part of theSubjective judgment is part of thedecision making.decision making.

The brain sees patterns in randomThe brain sees patterns in random

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Reversal Trends-SAPM

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