CHART PATTERNS

CHART PATTERNS

In financial market, the force of buyers and sellers creates a unique formation of
price patterns in the charts. These chart price patterns, if understand correctly

gives meaningful buy signal or sell signal. These chart patterns classified as 

continuous  patterns and reversal patterns. Below we present numerous 

Indian stock market chart patterns.

Continuous chart patterns.
Continuous chart patterns means if you found the particular chart pattern in the 

chart, the price tend to continue the trend. Common continuous chart patterns 

are ascending triangle, flags, pennants, running triangle etc.
Reversal chart patterns
The reversal chart patterns means if your found the reversal chart pattern 

in the chart, the price tend to reverse the trend. Common reversal chart 

patterns are head and shoulders, round bottom, double top, double bottom, 

triple top, triple bottom etc

Ascending triangle
Ascending triangle pattern formed by sellers sell the stock at constant prices, 

buyers buy the stock by higher and higher prices. If  the market sentiment 

turns bullish, buyers buy all quantity offered by the sellers. We may call it 

bullish consolidation. Generally it is considered as continuation pattern.
Below the chart image of TATAPOWER showing the ascending triangle.

Bull Flag
Flags considered as continuation pattern. Normally it is found in bull stage

and bear stage. Sellers sell the stock at lower and lower prices; buyers 

buy the stock at lower and lower prices. At the end of pattern the

positive fundamental or the positive market sentiment drive the 

buyers to buy the price at higher prices.
Below the image of  UNITECH showing the bull flag chart pattern.

Bullish Pennants
Pennants are most reliable continuation pattern. It rarely produces the trend 

reverse result. These are the temporary halting area in the continuous up 

trend or the downtrend of the script. It is much like the flag. Here the 

buyer’s trend line slopes upward towards the seller’s trend line.
The image below is SESAGOA  showing the pennant chart pattern.

Cup with handle
It is a chart pattern found in the stock market resembling the cup with handle. 

The bottom formed by the negative sentiment in the market. Then the 

positive fundamentals of the scripts drive the buyers to buy at 

the bottom. Generally it is considered as the continuation pattern found 

in the bull stage and bear stage.
Below the image of BEL in Indian stock market showing cup with handle pattern.

Symmetrical triangles
Symmetrical triangle is a continuous chart pattern found in bull stage and 
bear stages of the market. It is easily recognizable with clear shape. 
The seller sells the script at lower  and lower prices. The buyers buy 
the script at higher and higher prices. Due to these two forces gives the
symmetrical triangle shape to chart. If the market sentiment turns to 
positive the buyers will get the edge and drive the prices to breakout
the seller’s trend line.
The chart image of BEL is given below with symmetrical triangle chart pattern.

Bear flags
Flags considered as continuation pattern. Normally it is found in bull 

stage and bear stage. Sellers sell the stock at higher and higher 

prices; buyers buy the stock at higher and higher prices. At 

the end of pattern the negative fundamental or the negative market 

sentiment drive the seller to sell the price at lower prices
The image below is HDIL  in Indian stock market showing the bear

flag chart pattern.

Bearish pennants
Pennants are most reliable continuation pattern. It rarely produces

the trend reverse result. These are the temporary halting area in the 

continuous up trend or the downtrend of the stock. It is much like 

the flag. Here the sellers’ trend line slopes downward towards the buyers’ 

trend line.
The image below is HDIL  in Indian stock market showing the bearish 

pennants.

Descending triangles
Descending triangle pattern formed by buyers buy the stock at 

constant prices, sellers sell the stock by lower and lower prices. 

Or the market sentiment turns bearish. We may call it bearish 

consolidation. Generally it is considered as continuation pattern.

But here below the descending triangle pattern of wockhardt pharma

is reversal pattern
Below the chart image of WOCKHARDT PHARMA in Indian stock market 

showing the descending triangle pattern.

Wedge pattern
Wedge pattern in stock prices formed by two converging trend

lines both formed by the sellers and buyers. The wedge may be 

rising in nature or falling in nature. It is commonly found in the

bull market and bear market. The interpretation of wedge is 

complicated as the resultant price movement may go either 

direction. It is looks like the pennant and resemble like the flags.
Below the chart image of VSNL showing the rising wedge pattern.

The reliability of chart patterns vary widely depends on the
chart patterns. Some chart patterns give more reliability than
the others. We should not totally depend on the chart patterns
alone. If you found the chart pattern correctly then other you
own indicators give the positive signal in confirmation with the
chart pattern you can take buy or sell.

The author MAHENDRAVARMAN.MA, is one among the technical anlaysts, and  the head

of the risk management team in traderangers.com. As a trader and technical 

analyst he has wide experience in Forex market and indian stock market.

SUPPORT AND RESISTANCE ACCURACY IN TRADING  

Almost all traders whether they are trading in intra day level, short term level or long  term level  rely on  the support and resistance  for making trading set ups. We say this because there are many chart evidence found in the stocks and forex market. Here we present the importance of support and resistance levels and how to draw them with various examples of charts.

Support 
Support is a level in chart where buyers halted the falling price of the stock by buying more and more. Generally buyers consider this price level is cheaper than before. Here buying pressure exceeds the selling pressure. The demand of the stock is more than the supply of the stock.

Resistance 
Resistance is a level in chart where sellers stopped the raising price of the stock by selling more and more. Here the selling pressure exceeds the buying pressure. The supply of the stock is more than the demand of the stock. Usually sellers consider this price level is costlier than before. These support and resistance levels are not exact lines in the stock charts. Some buying, selling may occur just above the level or just below the level. So instead of calling it as level we can call it as support zone and resistance zone.
Support zone and resistance zones ((S/R) zone) act as barriers for the bears and bulls respectively. Once the ((S/R) zone is broken the stock price will go on its way. So finding the ((S/R) zone is very important to make the entry and exit setups.
 After the breakout of resistance level, the resistance becomes support level for the future movement of price. Same like support level will become resistance level in future. The validity of ((S/R) zone should be tested both sides; support will become resistance and resistance will become support. A zone that tested on both sides proves to be strong and stable enough for extended period of time as support or as resistance.

How to draw support – resistance?
A support and resistant line should connect at least 2 lows or highs. They are usually drawn to connect double /triple highs or lows. Some times they are drawn on more than three lows/highs. An s/r line becomes much more valid with 3 or more touches that occur in a straight line.

Support –resistance with charts
Now we are going see the support and resistance levels in actual market with the help of chart.
Below you can see the first chart that is ONGC 90 minutes chart.
1A, 1C are support lines drawn on price around 1020 and 1155.  Both lines have two touches of price in the support line. The resistance lines drawn on price around 1055 and 1200 marked as 1B and 1D respectively. The resistance line 1B has 4 touches around the price level 1055.
After crossing the 1B resistance line the price went up to 1140.  Then the price got support from 1B line. The 1B resistance line now turns in to support line.
1D resistance line has 2 touches of around the price level 1200. After the breakout of the 1D resistance line the price makes the high of 1340.
 Here one more specialty is the previous high of 1230, which is   the line 1E acts like a support line for next price movement of ONGC.

The second one   is ESSOROIL daily chart
You can see the price of ESSOROIL starts from 2006 June to 2007 November. Here the support line 2A starts from July 06 to 07 November and drawn .on the price level Rs. 48 to 50.  Price ESSOROIL l touches the support line five times, giving more validity.  The 2B line which runs on the price level 63 is a resistant line. It resisted the price four times.

The third chart is also ESSOROIL, but the price coverage starts from June 2006 to May 2010.  Around 2007 November the price breakout the 2B resistant line and reached Rs. 340 level within two months.  It is marked in chart by red arrow.
That is the beauty of technical analysis; once the resistant line is broken the price will go on its way. Now the 2B resistant line turns into support line. At the end of 2008 to the beginning of 2009, the price got support from the 2B line which acted as resistance line throughout 2007.  Now the 2B line has more validity. So the price level 63 in ESSOROIL will be the strong support zone for extended future.

The fourth chart is HCL INFO, which covers from AUG 2009 to July 2010.
3A resistant line is drawn on the price level at 168. Support line 3B is drawn on the price level at 143. Around 2010 Jan, the price breakdown the 3B support line. The price falls up to 128 levels before bounce back. The previous support line 3A now turns in to resistant line at 143 price level. The 128 price level acts like support line 3C. Again the 3C support line breakdown by the price. Same like 3B line, the 3C support line turns into resistant line.

Conclusion
A support zone is defensive wall for the bull side traders and investors. A resistance zone is defensive wall for the bear side traders and investors. Both parties always try to safeguard the walls. If the resistance wall broken, Bulls will be victorious. Bear will be victorious if they broke the support walls. That is the beauty of S/R zones. Yes it gives the traders and investors the decisive edge in trading.


The author MAHENDRAVARMAN.MA is one among the technical analysts, and the head of the risk management team in traderangers.com.  As a trader and technical analyst, he has wide experience in Forex market and Indian stock market.

THE MARKET STAGES

                                         THE MARKET STAGES                                               

“Bull market born in Pessimism grow on skepticism   and die on optimism ‘’

 To time the market for precise entry and exact exit is always a hard job for the
 traders and investors. If all traders and investors knew that skill then they exited the
2008 bear market, and have reentered in the 1st quarter of 2009. Here we present
what market stages are all about, and how to profit from them.


THE SIX STAGES
The market or stock consists of 6 stages which are cyclical in nature.
These are
1. The recovery stage
2. The accumulation stage
3. The bull stage                                         
4. The warning stage
5. The distribution stage
6. The bear stage.

Each stage is formed by the result of traders and investors action in the previous stages. We give the
explanation of market stages through the use of 200ema, 50ema which we use more frequently for identification of market stages.



1. THE RECOVERY STAGE.
The recovery stage is full of volatile in nature. The price movement is random. We must use RSI or Stochastic in combination with EMA for entry and exit. Mostly the price of stock is in between the 200 EMA and 50EMA. Frequently the stock price gets support from 50Ema zone and resistance from 200 EMA zone.


Common chart patterns.
The popular patterns for this stage is Reverse Head and shoulders, Double or Treble bottom, valley like formations,Bump and reversal bottoms, cub with handle, Extended V   bottom, Inverted roof, diamond bottom and the rectangle bottoms. These above patterns are all reversal patterns.

How to trade
Day traders, swing traders and short term traders can enter bu=y position at the support zone of 50 EMA and exit at the 200 EMA resistance zone.  Stop loss level should be tight. Investors and long term traders may take buy   position at the support of 50 EMA zone and hold it till the next stage develops.


2. THE ACCUMULATION STAGE
 The 2nd stage after the recovery stage is accumulation stage. Here the recovery stage’s huge volatility is reduced by long-term traders and investors. The stock price crosses the 200 EMA resistances thereby giving the short sellers a huge loss. Then the resistance of 200 EMA zone turns into support zone. Duration of this stage is very short. Once the bottom volatility is over large bull trader and investors will enter into the market.


How to trade
Traders can enter buy position at the support zone of 200 EMA and hold it till the next stage develops.  The investors who entered in previous stage may add position at the break up of 200 EMA resistance zone.


3. THE BULL STAGE
Accumulation stage is followed by the bull stage. The bull stage is the most important of all stages to every kind of traders and investors. For traders it is very easy to make money in this stage.
There is no volatility, upward trend is clear, visible and it is with in the trend lines and channels. Now the stock price is above the 50 EMA backed by the 200 EMA. The stock price gets the support of 50 EMA at regular intervals.




Common chart patterns
Ascending triangles, up channels, falling wedge, flags, high and tight flags, symmetrical triangles, running triangles and up trend lines are the usual patterns that we can see them in this stage.

How to trade
Swing and short term traders can take buy position at the support zone of 50 EMA. After the up trend of price from 50 EMA support, the day traders may enter at the support of 10 EMA.  The stop loss level for this stage should be wide.Fresh investor may take position at the support of 50 EMA. Investors who positioned in previous stages may add position at every correction.


4 THE WARNING STAGE
 Broken trend lines, broken channels, and increased volatility from trendy bull stage are the characters of warning stage. The stock price is in between the 50 EMA and 200 EMA. The 200 EMA and 50 EMA act like the support and resistance zones. Use of RSI and stochastic oscillator in combination of EMA is necessary for entry and exit of positions.



Common chart patterns
Rectangle top, diamond top, rooflike pattern, inverted cub and handle, double and triple top, head and shoulders and bump and reversal top are the common chart patterns found in the warning stage.

How to trade
Traders can go short position at the resistance of 50 EMA and cover their position in the support of 200 EMA.  Stop loss level should be tight.Fresh investors should not take position in this stage.   All the investors who takes buy position in previous stages should exit at the resistance of 50 EMA zone.



5 THE DISTRIBUTION STAGE
The volatility of warning stage is decreased substantially by the actions of traders and investors. The stock price breaks down the 200 EMA support zone. Then the 200 EMA support zone turns into resistance zone.
Duration of this stage is short.  Decreased top volatility attracts bear side trader and investors profit booking.

How to trade
Traders can take short position at the resistance zone of 200 EMA and cover their position at the end of the swing.    Investors should stay away from the market. Those who did not exit in the warning stage must exit in this stage.



6 THE BEAR STAGE
The bear stage has the clear down trend of price. Mostly the price is backed by trend lines and channels with no volatility.   The stock price is below the 50 EMA then by 200 EMA.  Frequent resistance of 50 EMA puts the price to free fall.

Common chart pattern
The usual patterns are descending triangles, down channels, rising wedges, flag, and down trend lines.

How to trade
Short term traders, swing traders can take short position at the resistance zone of 50 EMA.  After the downswing of price from 50 EMA resistances the day traders may enter at the resistance of 10 EMA. Wide stop loss level should be applied. Investors should remain stay away from market.


The six stages which are elaborated above can be applied to all time frames across the markets including commodities, and Forex.Before initiating a trade or an investment traders and investors must find the stage in which the market is trading.  For that question this article can be useful.




The author MAHENDRAVARMAN.MA, is one among the technical analysts, and the head of the risk management team in traderangers.com.  As a trader and technical analyst, he has wide experience in Forex market and Indian stock market.