• Signifies an important Consolidation/Continuation
• Equal pressure between buyers and sellers and the
combat is indecisive until a break out occurs.
• Volume is usually high when rectangle begins to form
and tapers off significantly as rectangle extends.
• The breakout from the rectangle is fairly reliable, as
prices do not return to the rectangle.
• Rectangles can extend for few weeks to months.
• If the duration is less than three weeks it is
considered a flag, also a continuation pattern.
• It is preferable that highs and lows
alternate( although not a pre-requisite)
• Target price increase or decrease is usually the
breadth of the rectangle.
7. Rounding Bottom/Saucers
• Rounding Bottoms occurs at market
bottoms when the investors interest in the
share is at its lowest ebb.
• It is a long-term reversal pattern.
• It represents a long consolidation patterns
that turns from bearish pattern to bullish
17. 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.
• In contrast to symmetrical triangles, which have no
definitive slope and no bullish or bearish bias, rising
wedges definitely slope up and have a bearish bias.
• The boundary line slope upwards with the lower line
being at a steeper angle than the upper line.
• Volume will decline as prices rise and the wedge evolves
20. Using the Moving Average
• Shows the average value of a security’s price
over a period of time
– Using compared or used in conjunction with EMA
• The most commonly used averages are of
20,30,50, 100 and 200 days
– The longer the time span, the less sensitive the
moving average to daily price changes
– Moving averages are used to emphasize the direction
of a trend and smooth out price and volume
22. Moving Average (Continued)
• Notice in April when the stock price dropped well
below its 50-day average (the green line).
– Bearish signal
• February it rose above its 50-day average and
continued to rise for several weeks
– Bullish signal
• Typically, when a stock moves below its moving
average it is a bad sign, above it is a good sign
23. Moving Averages (Continued)
• What do the different days mean?
– 20 days - choppy line. It isn't the most accurate,
but is probably the most useful for short term
– 30 day - similar to 20 day but provides a bit more
certainty for the trend.
– 50 day - moving averages provide a much less
volatile, smooth line. This can be used to detect
somewhat longer term trends.
24. – 100 day - similar to the 50 day, it is less
volatile, and one of the most widely used for
long term trends.
– 200 day - even less volatile, more of a rolling
chart or smooth line. It doesn't react to quick
movements in the stock price therefore it is
used for long term trends.
25. Strategies for Moving Averages
– Used to increase confidence about an indicator
• No set rules or things to look out for when filtering, just
whatever makes you confident enough to invest your money
• For example you might want to wait until a security crosses
through its moving average and is at least 10% above the
average to make sure that it is a true crossover.
– Remember, setting the percentile too high could result in
"missing the boat" and buying the stock at its peak.
• Another filter is to wait a day or two after the security crosses
over, this can be used to make sure that the rise in the
security isn't a fluke or unsustained.
– Again, the downside is if you wait too long then you could end
up missing some big profits.
26. Strategies for Moving Averages
– Several different types of crossover's, but all of them involve two
or more moving averages.
• In a double crossover you are looking for a situation where the
shortest MA crosses through the longer one. This is almost always
considered to be a buying signal since the longer average is
somewhat of a support level for the stock price.
• For extra insurance you can use a triple crossover, whereby the
shortest moving average must pass through the two higher ones.
This is considered to be an even stronger buying indicator.
• Moving average represents a smoothened trend and
therefore acts as a Support/Resistance Line.
30. SMA,WMA, EMA
• The simple moving average gives equal weight to all data points.
• By nature, it is the "true" average.
• The exponential and weighted moving averages give the most
recent data points the highest rankings or "weightings".
• Therefore, the simple moving average tends to lag (by representing
all data points equally) the exponential and weighted moving
averages during large price changes.
• However, during "normal" or "flat" markets the differences become
32. Breadth of the Market
• Advance Decline Line
• Stocks in positive trends
• Percentage of stocks over moving
• High Low Statistics
33. AD LINE
• The AD line and the Market generally move
• A divergence in the AD line is indicative of a
Day Issues Traded Advances Declines
34. Generic P/V relationships
• Volume is an indication of intensity of a price
• A price rise that is accompanied by expanding
volume is normal. Hence not an indication of any
potential trend reversal.
• A New high reached with a volume that is
actually diminishing is a warning to a reversal in
35. P/Volume Relationships (Contd..)
• If you have two consecutive peaks/rally. Lower
volume at the later rally is usually a trend
• Selling Climax occurs when prices fall for a
considerable time at an accelerated price and
accompanied by expanding volume.
– Price may be expected to rise immediately. Indicates
termination of bear market.
36. Dow Theory
• Six Basic tenets of Dow Theory
• The average Discounts Everything
– The share prices quoted in the market reflect all known and
predictable factors into account.
• The market has three movements
– Primary movements
• One year to several years
• Rising (bull) or falling (bearish) trend
• Long term movement in prices
– Secondary reactions
• Run counter to primary trend and are reactionary in nature
• Important Decline in a bull market or advance in a bear market.
• Lasting three weeks to three months
• Retraces 33 to 66% (Check the Next Slide)
40. Dow Theory
• Price action determines trend
– Up trend is formed when successive rallies lead to
peaks that are higher than preceding ones.
• Lines indicate movement
– Accumulation between a primary bear trend
– Distribution between a primary bull trend.
– If prices advance above accumulation- reversal of
• Price/Volume relationships provide background
• The averages must confirm
– Transportation and Industrial Average
42. ROC Index
• Rate of Change = 100 (Y/Yx)
• Y represents the most recent closing
• Yx represents the closing price a specific
number of days ago.
• ROC rising gives a short-term bullish
• Bearish sign would have the ROC falling.
• ROC index above reference line implies the
current price is at a higher level prevailing X
• If ROC is above reference line and rises, then
the rate at which price increases grows. Any fall
in ROC represents drop in momentum.
• If index is falling but still above the reference
line, it represents a slow down in the rate of
• MACD uses moving averages, which are lagging
indicators, to include some trend-following
• These lagging indicators are turned into a momentum
oscillator by subtracting the longer moving average from
the shorter moving average.
• The resulting plot forms a line that oscillates above and
below zero, without any upper or lower limits.
• The most popular formula for the "standard" MACD is the difference
between a security's 26-day and 12-day exponential moving
• The 12-day EMA is the faster and the 26-day EMA is the slower.
• Closing prices are used to form the moving averages.
• Usually, a 9-day EMA is plotted along side to act as a trigger line.
• A bullish crossover occurs when MACD moves above its 9-day EMA
and a bearish crossover occurs when MACD moves below
• Measures the strength of a stock/Market against itself.
• The indicator is plotted in a range between zero and 100.
• A reading above 70 is used to suggest that a security is overbought,
• A reading below 30 is used to suggest that it is oversold.
• RSI = 100 - 100 /(1 + RS )
• RS = Average of x days' up closes / Average of x days' down closes
51. Elliot Wave Theory
• One complete cycle has 8 waves, five way advance
followed by three way down.
• Waves one, three and five represent the 'impulse', or
minor up-waves in a major bull move.
• Waves two and four represent the 'corrective,' or minor
down-waves in the major bull move.
• The waves lettered A and C represents the minor down-
waves in a major bear move, while B represents the one
up-wave in a minor bear wave.
56. Elliot Wave Theory Analysis
• The S&P 500 remains in bull mode and continues to
outperform the Nasdaq 100.
• In Elliott terms, the index has taken on a 5-Wave
structure since mid August.
• Wave 1 extends up to 1142,
• Wave 2 declined to 1090,
• Wave 3 advanced to 1218 and
• Wave 4 fell to 1163.
• The recent move above the upper trend line of the falling
wedge represents the beginning of Wave 5.
57. Elliot Wave Theory Analysis
• As a Wave 5 advance, the upside projection would be to
around 1240-1245. Wave 5 is often 62 percent of Wave
3 or equal to Wave 1.
• The 62% stems from the Fibonacci number .618. As a
Fibonacci 62% of Wave 3, the upside target would be to
1242 (1218 – 1090 = 128, 128 x .62 = 79, 1163 + 79 =
• Should a repeat of Wave 1 occur, the upside target
would be to 1245 (1142 – 1060 = 82, 1163 + 82 = 1245).
58. Elliot Wave Theory Analysis
• Regardless of the targets, Wave 5 should
move above the high of Wave 3 (1218).
As long as the blue trend line extending up
from the late October low holds, the bull
trend is firmly in place and further strength
should be expected.
59. Contrary Opinion Theories
• Odd lot theory
• Odd lot index = Odd lot sales/ odd lot
• a decline in this index indicate more
purchases in relation to sales. Small
investors are optimistic
– Contrary theory says it is time to sell.
60. Contrary Opinion Theories
• Mutual Fund Liquidity
– When funds holds large liquid reserves, it
suggests they are bearish. Contrarians think it
is good time to buy.