Category: Your Money

Technical Analysis of the Financial Markets: Ch 5

This is a review of the fifth chapter of John J. Murphy’s Technical Analysis of the Financial Markets.

The Head & Shoulders Reversal Pattern

image

The basic ingredients are:

  1. A prior uptrend
  2. A left shoulder (A) followed by a corrective dip (B)
  3. A rally into a high on light volume (C)
  4. A decline (D) that moves below (A)
  5. A third rally (E) that fails to reach (C)
  6. A close below the neckline (F)
  7. A return move back to the neckline (G) followed by new lows.

Once prices move through a neckline and completed the h&s pattern, they should not re-cross the neckline again. A decisive penetration of the neckline might indicate a false alarm.

The inverse head & shoulders is pretty much the inverse of the image above.

Next up: Triple Tops & Bottoms

Everybody (and their mother) is getting out of the Euro

Maps shows a group of countries known as the P...

Image via Wikipedia

Not to kick a man when he is down, but the news about institutions, depositors and finally money market funds getting rid of Euros have been piling up. US funds have been cutting exposure to both European banks as well as PIIGS debt. Even a German holiday company (TUI) started preparing for a Euro pull-out. Warren Buffet thinks the EU cannot be saved in its current form and Soros has been a hater all along.

The latest meme in this train-wreck is that PIIGS under pressure in the bond-market should offer gold as their collateral! If it worked for India in the 90’s, it should work for Europe in the 10’s, yeah? Even though I was ten at that time, I still remember the popular outrage when India shipped 47 tons of gold to England. What a reversal of fortunes it would be if Europe were forced to ship their gold to China. Italy holds about 2,400 tons of gold in its vaults, I hope the Chinese have built a big enough room to hold all that metal.

Sunder’s List

Essential reading this AM:

While we debate whether Kingfisher Airlines needs to be bailed out, here’s something that we should consider:

How Iceland survived the fire

I guess women are scared to have babies in this economy. US birthrate falls to 11-year lows: Bloomberg

Tech slowdown in the pipeline? Here are a bunch to keep the outsourcers awake:

  • US Governments cutting IT spending: Bloomberg
  • INFY may miss the top end of its estimates: WSJ
  • NTAP seeing “unexpected weakness”: SA

China seeing a global slowdown? MarketWatch

Amidst all this, lets not forget that at the end of the day, stick to the rules.

Follow me on twitter: @SunderStockViz

Technical Analysis of the Financial Markets: Ch 5

This is a review of the fifth chapter of John J. Murphy’s Technical Analysis of the Financial Markets.

Major Reversal Patterns

The 5 most commonly used reversal patterns are:

  1. Head & Shoulders
  2. Triple Tops & Bottoms
  3. Double Tops & Bottoms
  4. Spike (or V) Tops & Bottoms
  5. Rounding (or Saucer)

Things to keep in mind while looking at reversal patterns:

  1. A prior trend should exist (the market should have something to reverse)
  2. The first sign of impending reversal is the breaking of a trendline
  3. The larger the pattern, the greater the impending move
  4. Topping patterns are usually steeper and more volatile than bottoms
  5. Bottoms have smaller price ranges and take longer to build
  6. Volume is more important on the upside

We will examine each of the 5 patterns above in subsequent posts.