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Support and Resistance - An elementary but essential piece of a trader's arsenal is the ability to establish basic areas of support and resistance. Previous tops (former resistance) become support areas as prices decline and previous bottoms (former support) become resistance as prices advance. Support is simply an area where sufficient demand exists to stop prices from falling and resistance is an area where selling pressure halts an advance.
Gaps - Breakaway Gaps almost always occur where prices break from an area of consolidation or break out over a major moving average or trendline. Prices breakaway from the range they were trapped in by major resistance. Continuation or Runaway Gap is a very useful gap to trade. This gap is found when prices have made an advance, frequently proportional to the first move, as prices accelerate. Exhaustion Gaps are found when skyrocketing prices have exhausted themselves. This move is generally found at the top of a wild run-up. Island Reversal is a rare formation signaled by a gap up, a short trading range of a day or two and then a gap down, usually not a major trend reversal, but an interesting phenomena.
Reversal Formations - Head and Shoulders top is the most reliable and common of all the major reversal formations. There are many variations on the formation including multiple shoulders and heads. They seem to develop with amazing symmetry and are present at most market tops.
Symmetrical Triangles - are the most common form of triangles. A sideways formation with a top that can be more of less defined by a down sloping boundary and whose bottom can be more or less defined by an up sloping boundary. This pattern can also be referred to as a coil.
Double and Triple Tops and Bottoms - as reversal formations are quite rare as a matter of fact and it is extremely difficult to decide if one is observing a major reversal phenomena or a consolidation formation until prices have moved significantly. Tops that are relatively close together and quickly formed are generally not reversals. The true reversal takes time, generally a month or more. Triple bottoms and tops are quite rare but they do occur and they are very compelling formations. The quickest test and one that most fail at first blush is diminishing volume on each respective peak.
One Day Reversals - are largely minor trend phenomena and are often referred to as a selling climax.
Bollinger Bands - Bollinger Bands are considered some of the most useful bands in technical analysis, for they vary in distance from the moving average of a security’s price based on the security’s volatility. During periods of increased fluctuation, the bands widen to take this into account.
Directional Movement Index - Directional Movement Index is a unique filtered momentum indicator. It is based on the assumption that markets exhibit strong trends only about 30% of the time and provides entry only when markets exhibit significant trending characteristics. Directional Movement is the largest amount of daily movement a security has up or down. In other words, if the rise of today’s high, relative to yesterdays high, is larger than the drop of today’s low, relative to yesterday’s low, then the Directional Movement is said to be up and equal to the difference between today’s high and yesterday’s high. Likewise, for the case where the drop in low prices is larger. +DI and – VDI are the sums of the up and down directional movements respectively over the past days specified by the sum of the True Range for the specified time range. The Directional Movement Index relates the +DI and the –VDI to give a measure of trend. The Average Directional Movement (ADX)is simply a moving average variation of the Directional Movement Index (DX). The Average Directional Movement Rating (ADXR) takes an average of today’s current versus a past ADZ value. If you employ a trend-following technique a long is triggered when +DI crosses over the -VDI line and a sell when the –DI crosses over the +DI line Welles Wilder originally defined directional Movement in 1978. His book, New Concepts in Technical Trading Systems, offers a full explanation of all the facets of using Directional Movement.
MACD - This is a two-component indicator based on two exponential moving price averages. Because of the early signals which can be derived from this indicator, it is regarded by many analysts as helpful in the trading of stock options. The first component of the MACD is a line which represents different period of time. This first component is called Price Phase Line. The second component, which is called the Signal Line, is an exponential average of the first component. The two lines are charted together on the same time scale. As a general rule, it is considered bullish when the Price Phase Line is rising and is above the Signal Line. Conversely, it is bearish when the Price Phase Line is falling and is below the signal Line. Buy and sell signals are generated by the crossing of the two lines. In general, a buy signal occurs when the Price Phase Line crosses from below to above the Signal Line. A sell signal is indicated when the Price Phase Line crosses from above to below the Signal Line.
Momentum - Momentum is a relatively straightforward indicator that measures the acceleration or deceleration of prices as opposed to price itself. It is calculated by subtracting the price of x periods ago from the price now. This indicator is constructed to measure the speed of rate of change and can also be referred to as rate-of-change (ROC). One of the benefits of the indicator is that it leads price action at market turning points.
Money Flow - This indicator measures the flow of money into and out of a stock. Money flow is similar to the Accumulation / Distribution indicator in that it attempts to measure the balance of supply and demand. Money Flow is computed by multiplying total trading dollars by a factor called the flow factor. Total dollars is estimated by multiplying average price for the period's activity by the total volume for the period. The average price is computed as the average of the high, the low, and the close. The factor is determined from the relation of the closing price to the interday high and low. If the closing price is midway between the high and the low, then money flow pressure is balanced and the factor is zero. If the day's closing price is equal to the day's highest price, the the flow factor is positive. If the day's closing price is equal to the intraday low, then the flow is negative, which is interpreted to mean a total outflow of dollars from the ticker.
Moving Averages - Moving Averages (MA) is perhaps the oldest and the most widely used technical indicator. It shows the average value of a security's price over time. Moving averages can be calculated in a number of ways. A simple moving average (SMA) is calculated by adding the prices over a given number of periods, then dividing the sum by the number of periods. For example, a nine-day simple moving average would add together the closing prices for the last nine days, and then divide the number by nine. An exponential moving average (EMA) gives more weight to recent prices, and is calculated by applying a percentage of today's closing price to yesterday's moving average. The longer the period of the exponential moving averages are also used to plot values other than price, for example, volume.
On Balance Volume - On Balance Volume (OBV), developed by Joe Granville, is a volume trend that relates price to volume, and tries to capture the buying and selling pressure in the market. The indicator's objective is to show if volume is flowing into or out of a security. Money is flowing into the security when the indicator is rising and out of the security when the indicator is falling. Adding the volume to a cumulative total when prices close higher and subtracting the volume from the total when prices close lower calculate OBV.
Relative Strength Index - This is a single value indicator that weighs buyer dominated volume (accumulation) against seller dominated volume (distribution). It is computed as a running total of weighted volume. A weighting factor derived from price action is applied to the day's volume and the result is added to the accumulated total. The volume weighting factor is determined from the closing price in relationship to the intraday high and intraday lows. If the closing price is midway between the high and the low, the accumulation and distribution pressures are balanced, and the factor is zero. If the closing price is equal to the day's highest price, then the accumulation factor is positive. If the day's closing price is equal to the intraday low, then the accumulation factor is negative, which indicates distribution.
Stochastics - The Stochastic Oscillation shows closing price relative to the range of prices over a user-determined number of periods. The Stochastic Oscillator is based on the premise that during an upward trading market, prices tend to close near their high, and during a downward trading market, prices tend to close near their low. Stochastics measures at what point the price of a security is within the entire price range of the security over a given period. A popular and dynamic indicator developed by Dr. George Lane, it is widely followed and is interpreted in a similar manner to RSI. Signals can be given from the crossing of thresholds, crossing of the one or more of its own smoothings and / or divergence with price. There are many variation of Stochastics employed but the basic premise is that %K is the primary indicated and either %D or %D Slow is the second indicator. %D and %D Slow are merely smoothed valued of the original %K. There are also exponential, simple and weighted versions of the oscillator.
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