Basics of

Technical Analysis
Learning Outcomes:

- Understand Reversal and its effects in decision

making.

- Distinguish the different signs of reversals in the

chart.

- Apply the concept in Trading and Investing.

Recognizing Reversal Signals

Price Consolidation (Consolidation)

- when a stock is completing a move, it experiences a
period of deceleration, which is referred to by chartist as
price consolidation.

- is one of the most important signals that a stock is

about to begin a new move (the move can be a continuation in the same
direction, or it can be a reversal in the opposite direction).
Recognizing Reversal Signals

- The area of consolidation represents a battle zone where the

bears are at war with the bulls. The outcome of the battle often
defines the direction of the next move.

- As short-term traders, it is important to identify these areas of

consolidation and enter a trade just as the new move is
beginning.

- During the consolidation period or 'battle zone', traders, both

long and short are patiently waiting on the sidelines watching to
learn the outcome of the battle.
Recognizing Reversal Signals

- As these winners emerge, there is often a scramble of traders -

jumping in with the winning team.

- The candlestick patterns give the trader excellent clues on

when this move is about to take place, and helps the trader time
his entry so that he can get in at the very beginning.
How to identify if a stock is under consolidation?

Consolidation is the term for a stock or security that is neither

continuing nor reversing a larger price trend.

Stocks under consolidation trade in a limited range (within

support and resistance).

Identifying consolidating stocks involves looking for those that

have:
a. steady support and resistance levels
b. trade in a narrow range
c. low trading volumes
Types of Consolidation Patterns

a. Bearish Continuation
b. Bearish Reversal
c. Bullish Continuation
d. Bullish Reversal
a. Bearish Continuation
a. Bearish Continuation

With these patterns, the prices begin with a decline

in prices, then a sideways phase, then a breakdown
phase.
a. Bearish Continuation

Opposite its symmetrical triangle counterpart, an expanding triangle is a

bearish continuation pattern wherein prices expand by reaching higher
highs and lower lows over time. This price movement can be viewed as
the market becoming “more volatile” with its price range expanding prior
to a breakdown occurring. This bearish expanding triangle breaks to the
downside.
a. Bearish Continuation

The symmetrical triangle is a bearish continuation pattern wherein the

slope of the triangle is equal or nearly equal. The slopes converge at a
point and the above symmetrical triangle is a continuation pattern since it
begins with an downtrend and ends with an downtrend.
a. Bearish Continuation

The pattern includes a flat line on the bottom connecting the troughs and
a line with a slope connecting the peaks. This pattern begins with a
downtrend and continues with a downtrend after some consolidation.
a. Bearish Continuation

The bearish flag pattern includes a steep downtrend (flagpole) followed

by a slight uptrend channel. The flag pattern above ends with an
downtrend in price confirming the bearish pattern.
a. Bearish Continuation

Similar to the bearish flag, the bearish pennant starts with a flagpole
(steep downtrend in price). The difference between the bearish flag and
bearish pennant is that the bearish pennant has two converging lines
while the bearish flag includes parallel lines creating a channel.
b. Bearish Reversal
b. Bearish Reversal

Bearish reversals start with a bullish price

movement reverses into a decreasing stock price.
This is because the bullish trend of the stock is
reversing, leading to a downtrend in the stock.
b. Bearish Reversal

The double top (and the triple top) are patterns wherein the price of a
stock will hit a high two (or three) times before leading to a breakdown.
The double and triple top patterns have a neckline that can be drawn
from the lowest point after the first top (and second top for triple tops).
b. Bearish Reversal

The head and shoulders pattern resembles an head (peak) with two
shoulders. The head is the highest point with the bottom of the two
shoulders being the neckline.. The height from the neckline to the head is
used to create a bearish price target. The distance from the head to the
neckline is used as the downward price target.
b. Bearish Reversal

A rising wedge (also known as a bearish wedge) shows a pattern wherein the distance
between the highs and lows are declining in an upward pattern, leading to a wedge-
like pattern. As the distance between the highs and lows is compacting, it leads to a
consolidation in the price. Eventually, if the stock breaks the downtrend line (the line
on the bottom in the above graphic) the stock can breakdown, which is why this is a
bullish reversal (the stock is reversing from a bullish pattern to a bearish pattern).
b. Bearish Reversal

The rounding top is a somewhat rare pattern that begins with a bullish trending price.
The price enters a prolonged consolidation phase (the top) which eventually turns into
a bearish trend. The consolidation phase of the rounding bottom can last for weeks or
months before the bullish trend begins.
c. Bullish Continuation
c. Bullish Continuation

In bullish continuation, the prices begin with

appreciation, then have a consolidation phase, then
a breakout phase.
c. Bullish Continuation

Opposite its symmetrical triangle counterpart, an expanding triangle is a bullish

continuation pattern wherein prices expand by reaching higher highs and lower lows
over time. This price movement can be viewed as the market becoming “more volatile”
with its price range expanding prior to a breakout occurring. This bullish expanding
triangle breaks out at the topside.
c. Bullish Continuation

The symmetrical triangle above is a bullish continuation pattern wherein

the slope of the triangle is equal or nearly equal. The slopes converge at a
point and the above symmetrical triangle is a continuation pattern since it
begins with an uptrend and ends with an uptrend.
c. Bullish Continuation

The ascending triangle includes a flat line on the top connecting the
peaks and a line with a slope connecting the troughs.
c. Bullish Continuation

The bullish flag pattern includes a steep uptrend (known as the flagpole)
followed by a slight downtrend channel. The flag pattern above ends with
an uptrend in price confirming the bullish pattern.
c. Bullish Continuation

Similar to the bullish flag, the bullish pennant starts with a flagpole (steep
uptrend in price). The difference between the bullish flag and bullish
pennant is that the bullish pennant has two converging lines while the
bullish flag includes parallel lines creating a channel.
c. Bullish Continuation

The cup and handle begins with an uptrend in price followed by a longer
consolidation phase. The consolidation phase is then followed by an
uptrend and then a shorter consolidation phase followed by another
breakout.
d. Bullish Reversal
d. Bullish Reversal

Bullish reversal patterns begin with a bearish price

movement that reverses to an increase in the stock
price. This is because the bearish trend of the stock
price is reversing, leading to an uptrend in the stock.
d. Bullish Reversal

The double bottom (and the triple bottom) are patterns wherein the price
of a stock will hit a bottom two (or three) times before leading to a
breakout. The double and triple bottom patterns have a neckline that can
be drawn from the highest point after the first bottom (and second
bottom for triple bottoms).
d. Bullish Reversal

An inverted head and shoulder resembles an upsidedown head with two shoulders
(see below head and shoulders to better see the image of a head with two shoulders).
An inverted head and shoulders pattern has the head as the lowest point and two
shoulders with a neckline. The height from the neckline to the head is used to create a
bullilsh price target. The distance from the head to the neckline is used as the upward
price target.
d. Bullish Reversal

A falling wedge (also known as a bullish wedge) shows a pattern wherein the distance
between the highs and lows are declining, leading to a wedge-like pattern. As the
distance between the highs and lows is compacting in a downward pattern, it leads to
a consolidation in the price action. Eventually, if the stock breaks the downtrend line
(the line on top in the above graphic) the stock can breakout, which is why this is a
bullish reversal (the stock is reversing from a bearish pattern to a bullish pattern).
d. Bullish Reversal

The rounding bottom is a somewhat rare pattern that begins

with a bearish trending price. The price enters a prolonged
consolidation phase (the bottom) which eventually turns into a
bullish trend. The consolidation phase of the rounding bottom
can last for weeks or months before the bullish trend begins.