Trend: June 2013

Monday, June 10, 2013

Double top reversal chart pattern

This is continuation of my article series on chart patterns. Last time I discussed bullish reversal pattern: double bottom. What could I do today if not discuss bearish reversal pattern: double top? Like any other technical structure it can be found of various time frames and all of them can be both valid and fake. Everything depends on whether the pattern is broken in the direction it should break. A reversal pattern should change a current trend and continuation pattern should be broken in the direction of a current trend after consolidation period is over. As double top is a bearish pattern it means that an upward trend is about to end and bears will show their strength soon. Let us look at some necessary conditions that have to be that we might state that the picture we see is a valid double top pattern.

Key components in double bottom pattern

As it is a reversal pattern the first thing that there has to be is a previous uptrend. The security had to go up for some time in order for the pattern we are discussing to be formed. Depending on the structure the uptrend could have been from a few days (weeks, months) to a year and even more.

There has to be the first sharp rise that marks the first spot in the top or peak. It is known as the highest point in the current uptrend. At this point we cannot say whether the tendency has changed or not as there still isn’t any indication of a reversal and increase in supply.

The first sharp fall! Reaching the first top the price of the security crashes. It indicates that smart money is distributing the security and it is good time to sell it short and so selling starts. After some time (hours, days or even weeks) the first bottom (or important support) is formed.

Back to the top! At some point inertia of the bulls kicks in and they continue buying assuming that the uptrend is not over yet. So, the price of the security soars to the first spot of resistance (top) and this time the spot becomes the second spot of a double top pattern.

The second sharp fall! After hitting the first resistance (top) the security starts collapsing, which indicates that there really is serious distribution of the security taking place at current prices. In most cases the prices will reach the first spot in support. Likewise, in most cases the price after hitting the support will go up (rally) a little.

Break of the support. The two points of support that were made as the security fell sharply after reaching the top is finally broken. That is the point where the double top pattern becomes a valid one.

Resistance becomes support. That is a classical rule of technical analysis. It is not a necessity, but a security sometimes comes back to test previous support (that is now resistance) and if the break was not fake the resistance will hold.

Traditional target for the exit of your short trade is the distance from the break point to the highest point of the pattern added to the breakout point. That is the smallest distance that the price is expected to travel. It may go further, or it may fail to reach the expected target. However, if you need some guidelines where to exit this could be one of those. Additionally, you can move your stop above clusters of hourly or daily candles (depending on the strength of reversal).

US dollar index example

US dollar index has been in a clear uptrend for a prolonged period of time. On the 22^nd of May it may a strong rally upwards and on the 23^rd of May it fell sharply. So we can say that the rally on the 22^nd of May formed the first peak (resistance) in the pattern at 10 876 level. The fall formed the first point of support at 10 766.

It then made an attempt to come back to the peak and break it, but the attempts were futile and after failing to make new highs US dollar collapsed to previous support (just a little lower). It then consolidated for a few days. Then the security broke down again jumped back to test previous support, which is now resistance and failing to break that it collapsed.

Watch the video to see for yourselves.

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts.

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

Double bottom formation

Inverted head and shoulders

Pennants

Flags

Wedge technical structure

How to do technical chart analysis

Six key elements of technical analysis

Triangle pattern

Head and shoulders

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Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Sunday, June 2, 2013

Double bottom

Today we continue analyzing various chart patterns and double bottom technical pattern is the topic of the post. You can find this structure on various time frames and it is pretty go indication that a trend is about to change. So, this particular pattern indicates a reversal. You probably remember that we either have continuation or reversal patterns. This is a bullish reversal pattern. It means that the bears will probably lose their fight soon and bulls will start reigning in a particular security double bottom is formed. Let us look at some necessary conditions that have to be that we might state that the picture we see is a valid double bottom pattern.

When you finish this article I also highly recommend reading other posts on chart patters:

Inverted head and shoulders

Pennants

Flags

Wedge

How to do technical chart analysis

Six key elements of technical analysis

Triangle formation

Trading head and shoulders

Key components in double bottom pattern

As it is a reversal pattern the first thing that there has to be is a previous downtrend. The security had to go down for some time in order for the pattern we are discussing to be formed. Depending on the structure the downtrend could have been from a few days (weeks, months) to a year and more.

There has to be the first sharp fall that marks the first spot in the bottom. It is known as the lowest point in the ongoing downtrend. At this point we cannot say whether the tendency has changed or not as there still isn’t any indication of a reversal and increase in demand.

The first rally! Reaching the first bottom the price of the security rallies upwards. It indicates that smart money assumes it is good time to accumulate the security and so buying ensues. After some time (hours, days or even weeks) the first top (or important resistance) is formed.

Back to the bottom! At some point inertia of the bears kicks in and they continue selling assuming that the downtrend is not over. So, the price of the security collapses to the first spot of support (bottom) and this time the spot becomes the second spot of a double bottom pattern.

The second rally! After hitting the first support (bottom) the security starts rallying, which indicates that there really is serious demand for the security at current prices. In most cases the prices will reach the first spot in resistance. In most cases the price after hitting the resistance will retrace a little.

Break of the resistance. The two points of resistance that were made as the security rallied after reaching the bottom is finally broken. That is the point where the double bottom pattern becomes a valid one.

Support becomes resistance. That is a classical rule of technical analysis. It is not a necessity, but a security sometimes comes back to test previous resistance (that is now support) and if the break was not fake the support will hold.

Traditional target for the exit of your long trade is the distance from the break point to the lowest point of the pattern added to the breakout point. That is the smallest distance that the price is expected to travel. It may go further, or it may fail to reach the expected target. However, if you need some guidelines where to exit this could be one of those. Additionally, you can move your stop below clusters of hourly or daily candles (depending on the strength of reversal).

Time frames

As I said, you can find the pattern on all time frames. The longer the time frames the more valid it becomes. There have been a few of those patterns (on smaller time frames) in various currencies. Let us look an example that happened on a small time frame.

gbp/usd example

After a prolonged move upwards gbp/usd pair started collapsing on the 9^th of May (2013). The downward move continued for about two weeks till the sharp move down ended on the 23^rd of May (2013) with a strong rally upwards. The rally continued for four days and formed the first peak or resistance on the 27^th of May at 1.5156 level.

The pair then retraced to its’ previous bottom and failed to break it. On the 29^th of May the second point in the double bottom pattern was formed. On the same day it rallied to previous resistance and formed second high (resistance) at 1.5145. It then retraced and consolidated for a few sessions before breaking the resistance and rallying to 1.5240 on the next day. One had to place a buy stop above the resistance (1.5156) with a stop loss below the bounce after second rally’s high (at 1.5098) and take profit order around 1.5300 level.

According to our rules the exit target should be around 1.5300 level, so it has not been reached yet. The pair came to visit previous resistance (now support) and support held. The pair bounced from 1.5140 level.

This week will show whether gbp/usd will reach our target or not. Looking at technical price action we can see clear demand coming at previous resistance. So, let us be patient and wait for confirmations during European session whether we could add to our position or let the pair go down.

Conclusion

Double bottom pattern is a bullish reversal pattern that can be found on various time frames. The pattern can be found in various securities regularly. One should wait for a break of resistance to enter market with buy orders.