Lecture 9: Technical Analysis - Price Patterns 1

Question 1

In general, patterns can be classified as ? or ? patterns.

Answer 1

In general, patterns can be classified as continuation or reversal patterns.

Question 2

? patterns indicate a change in trend.

Answer 2

Reversal patterns indicate a change in trend.

Question 3

Continuation patterns indicate a ? ? to the current trend, after which the prevailing trend will resume.

Answer 3

Continuation patterns indicate a temporary interruption to the current trend, after which the prevailing trend will resume.

Question 4

? is often seen to be important in confirming a price pattern.

Answer 4

Volume is often seen to be important in confirming a price pattern.

Question 5

The ? & ? Pattern:
Achelis (2001, p.246) describes it as “the most reliable and well-known chart pattern”
Murphy (1999, p.103) describes head and shoulders as “probably the best known and most reliable of all major reversal patterns”.

Answer 5

The Head & Shoulders Pattern:
Achelis (2001, p.246) describes it as “the most reliable and well-known chart pattern”
Murphy (1999, p.103) describes head and shoulders as “probably the best known and most reliable of all major reversal patterns”.

Question 6

Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move ? the previous trend.

Answer 6

Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend.

Question 7

Head and Shoulder top:

=> signal to ?

Answer 7

Head and Shoulder top pattern:
=> signal to SELL
image: slide 46/ google

Question 8

Head and shoulder bottom pattern:

=> signal to ?

Answer 8

Head and shoulder bottom pattern:
=> signal to BUY
image: slide 47/ google

Question 9

Double tops and bottoms trend pattern:
The pattern is created when a price movement tests ? or ? levels ? and is ? to break through.
This pattern is often used to signal ? and ?-term trend reversals.

Answer 9

Double tops and bottoms trend pattern:
The pattern is created when a price movement tests SUPPORT or resistance levels TWICE and is UNABLE to break through.
This pattern is often used to signal IMMEDIATE and LONG-term trend reversals.
Images: slides 52-53

Question 10

Double Tops pattern:
=> signal to ?
image: slide 52

Answer 10

Double Tops pattern:
=> signal to sell
image: slide 52

Question 11

Double Bottoms pattern:
=> signal to ?
image: slide 53

Answer 11

Double Bottoms pattern:
=> signal to buy
image: slide 53

Question 12

Cup and Handle pattern:
a ? continuation pattern in which the ? trend has paused but will continue in an ? direction once the pattern is confirmed.

Answer 12

Cup and Handle pattern:
a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.
image: slide 58

Question 13

Gaps & Spikes:
Gaps occur when the lowest price traded today is above the high of the previous day or, conversely, when the highest price traded is below the previous day’s low.
When low(t) ? high(t−1) or high(t) ? low(t−1), leaving an unfilled ‘gap’ on the chart.
=> Gaps in a downward (upward) trend indicate possible further ? (?) movement!

Answer 13

Gaps & Spikes:
Gaps occur when the lowest price traded today is above the high of the previous day or, conversely, when the highest price traded is below the previous day’s low.
When low(t) > high(t−1) or high(t) < low(t−1), leaving an unfilled ‘gap’ on the chart.
=> Gaps in a downward (upward) indicate possible further downward (upward) movement and vice versa!
image: slide 61-63

Question 14

Schwager (1999) identified 4 gap types:
?: occurs within a trading range and not particularly useful for trading.
?: surge in prices outside current trading range.
Runaway: when a trend ?.
Exhaustion: occurs after ? trend and is followed by a ?.

Answer 14

Schwager (1999) identified 4 gap types:
Common: occurs within a trading range and not particularly useful for trading.
Breakaway: surge in prices outside current trading range.
Runaway: when a trend accelerates.
Exhaustion: occurs after prolonged trend and is followed by a reversal.

Question 15

Important rules related to Gaps:

1. Avoid trading on ? gaps
2. Only trade gaps when they are confirmed by ?.

Answer 15

Important rules related to Gaps:

1. Avoid trading on COMMON gaps
2. Only trade gaps when they are confirmed by volume.

Question 16

Common gaps:

• no strong ?
• gaps filled ?

Some gaps are caused by events and should be ignored:

• ?? gaps occur as price adjusts on the day after a dividend becomes payable;
• New ? issues.

Answer 16

Common gaps: (image: slide 66)

• no strong trends
• gaps filled quickly

Some gaps are caused by events and should be ignored:

• Ex-dividend gaps occur as price adjusts on the day after a dividend becomes payable; and
• New share issues.

Question 17

Breakaway gaps are normally accompanied by ? volume and occur when prices break out of a trading range.
They are usually followed by a series of ?? in an upside breakout or, a series of ?? in a downside breakout, and are ? closed.

Trading Rules
Upside Breakaway - If the gap is accompanied by heavy volume, go ? and place a ?-? at the ? end of the gap.
Downside Breakaway - If the gap is accompanied by heavy volume, go ? and place a stop-loss at the ? end of the gap.

Answer 17

Breakaway gaps are normally accompanied by heavy volume and occur when prices break out of a trading range.
They are usually followed by a series of new highs in an upside breakout or, a series of new lows in a downside breakout, and are seldom closed.
image: slide 67
Trading Rules
Upside Breakaway - If the gap is accompanied by heavy volume, go long and place a stop-loss at the lower end of the gap.
Downside Breakaway - If the gap is accompanied by heavy volume, go short and place a stop-loss at the upper end of the gap.

Question 18

Runaway gaps occur near the ? of ? trends and are useful in projecting how far the trend will continue.
They are followed by ?? in an up-trend or ?? in a down-trend, which distinguishes them from exhaustion gaps.
They ?? normally closed.

Trading Rules
If volume is strong (up at least 50%), trade as for breakaway gaps. Enter the trade early and wait for new highs (or new lows in a down-trend) to confirm the pattern. If there are none in the next few days then exit immediately — it could be an exhaustion gap

Answer 18

Runaway gaps occur near the middle of strong trends and are useful in projecting how far the trend will continue.
They are followed by new highs in an up-trend or new lows in a down-trend, which distinguishes them from exhaustion gaps.
They are not normally closed.
image: slide 68
Trading Rules
If volume is strong (up at least 50%), trade as for breakaway gaps. Enter the trade early and wait for new highs (or new lows in a down-trend) to confirm the pattern. If there are none in the next few days then exit immediately — it could be an exhaustion gap

Question 19

Exhaustion gaps occur at the ? of a strong trend and are the last surge before the trend ?, normally on ?volume.
They differ from runaway gaps in that they are not followed by ?? (in an up-trend) or ?? (in a down-trend) and are closed ? afterwards.

Trading Rules
Upward Exhaustion Gap - ?? (or close your long position) and protect yourself with a stop above the last high.
Downward Exhaustion Gap - Go ? (or close your short position) with a stop below the latest low point.

Answer 19

Exhaustion gaps occur at the end of a strong trend and are the last surge before the trend expires, normally on heavy volume.
They differ from runaway gaps in that they are not followed by new highs (in an up-trend) or new lows (in a down-trend) and are closed shortly afterwards.
image: slide 69
Trading Rules
Upward Exhaustion Gap - Sell short (or close your long position) and protect yourself with a stop above the last high.
Downward Exhaustion Gap - Go long (or close your short position) with a stop below the latest low point.

Question 20

? occur when the high (low) of a particular day is far higher (lower) than those days that surround it.
The more extreme each of these conditions are, the greater the likelihood of a ?.

Answer 20

Spikes occur when the high (low) of a particular day is far higher (lower) than those days that surround it.
The more extreme each of these conditions are, the greater the likelihood of a reversal.

Question 21

Triangles:

1. Symmetrical: normally a ? pattern.
2. Ascending: Usually ?.
3. Descending: Usually ?.

Answer 21

Triangles: (easier to understand if see image in slide 75)

1. Symmetrical: normally a continuation pattern.
2. Ascending: upper trendline flat, lower trendline rising. Usually bullish.
3. Descending: lower trendline flat, upper descending. Usually bearish.

Question 22

Other Patterns:
? are usually seen as a pause to the prevailing trend.
Two parallel trendlines against current trend.

Answer 22

Other Patterns:
Flags ( See image in slide 79) are usually seen as a pause to the prevailing trend.
Two parallel trendlines against current trend.

Question 23

Other Patterns:
? are usually seen as a pause to the prevailing trend (i.e. continuation pattern).
Two converging triangles (i.e. like a small symmetrical triangle).

Answer 23

Other Patterns:
Pennants are usually seen as a pause to the prevailing trend (i.e. continuation pattern).
Two converging triangles (i.e. like a small symmetrical triangle).
https://images.app.goo.gl/LH2UGfThirMfUq1k7