Category: Your Money

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

Triple Tops and Bottoms

Triple Tops, as the name indicates, are identified as three peaks at the same level. Volume decreases with each successive peak at the top and should increase at the breakdown point.

Return moves to the lower lines are not uncommon.

Double Tops and Bottoms

This pattern has two peaks (A&C) at about the same levels. The pattern is complete once the middle trough (B) is broken on a closing basis. Volume is lighter on the 2nd peak (C) and increases on the breakdown (D).

Saucers and Spikes

The saucer pattern shows a gradual turn from down to sideways to up and take a long time to form. Spikes are the most difficult to predict and usually occur when the markets are so overextended on one side that a piece of news or event triggers a sudden movement to the other side.

Next: Chapter 6 – Continuation Patterns

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

The Head & Shoulders Reversal Pattern

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

Cover via Amazon

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.

Last part of the review of the 4th chapter of John J. Murphy’s Technical Analysis of the Financial Markets.

Reversal Days

A reversal day happens either at the top of an uptrend (top reversal day) or at the bottom of a downtrend (bottom reversal day). A top reversal day is the setting of an intraday high for the uptrend followed by a close below the previous day’s close. A bottom reversal day is the setting of an intraday low for the downtrend followed by a close above the previous day’s close. The wider the intraday range, the higher the probability of a near term trend reversal.

A reversal pattern can form on monthly and weekly charts and usually bears greater significance compared a reversal day.

Price Gaps

Price gaps are areas in the chart where no trading has taken place. There are three types of gaps:

1. Breakaway: the penetration of a resistance level usually occurs through a Breakaway Gap and signifies a major move. It occurs on heavy volume and upside gaps usually act as support levels. Its important that prices do not fall below these gaps during an uptrend.
2. Runaway: formed after a trend is in play for a while (usually the halfway point), these are prices leaping upward on moderate volume. If these gaps are filled, then its usually a sign of weakness.
3. Exhaustion: as the name suggests, it usually occurs at the end of a trend. After the identification of both the Breakaway and Runaway gaps, one should start expecting the Exhaustion gap. The filling of this gap during an uptrend is a bearish signal.

The Island Reversal Pattern

Sometimes, after an upward exhaustion gap, prices trade within a narrow range before gapping to the downside. This leaves the few days of price action looking like an “island” and indicates a trend reversal that needs to be confirmed with the overall trend structure.

Up Next: Chapter 5: Reversal Patterns