Pubblicato in data 04/02/2015 nella categoria ebook

Technical analysis provides charts that reinforce the current trends. These chart formations are known as continuation patterns. They consist of fairly short consolidation periods. The breakouts occur in the same direction as the original trend. The most important continuation patterns are:

Flags. The flag formation provides signals for direction and price objective. This formation represents a brief consolidation period within a solid and steep upward or downward trend. The consolidation itself is bordered by a support line and a resistance line, which are parallel to each other or very mildly converging, making it look like a flag (parallelogram) and tends to be sloped in the opposite direction from the slope of the original trend, or is simply flat. The previous sharp trend resembles a flagpole. If the original trend is going down, the formation is called a bearish flag (See Figures 4.29 and 4.30). As Figure 4.29 shows, the original trend is sharply down. The flagpole is measured between points A and B. The consolidation period occurs between the support line ВE and the resistance line СD. When the price penetrates the support line at point E, the trend resumes its fall, with the price objective F, measured from E. The price target is of about equal with the flagpoles length AB, measured from the breakout point through the support line BE. Outgoing from prices in Figure 4.29, the height of the flagpole is measured as the difference between 140.00 120.00 = 20.00. Once the support line is broken at 125.00, the price target is 125.00 – 20.00 = 105.00.

Figure 4.29. Diagrams of a bear flag formation Figure 4.30. Example of bullish flags in the Swiss franc chart

Pennants. The pennants are closely related to the flags, so the same principles apply. The sole difference is that the consolidation area better resembles a pennant, as the support and resistance lines converge. If the original trend is bullish, then the chart pattern is a bullish pennant. In Figure 4.31, the pennant pole is AВ. С, В, and D frame the pennant-shaped consolidation. When the market breaks through the resistance line ВD, the price objective is E. The amplitude of the target price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts from the breakout point. Outgoing from prices in Figure 4.31, the height of the pennant pole is measured as the difference 1.5500 1.4500 = 1.1000. Once the resistance line is broken at 1.5200, the price target is 1.5200 +1.1000 = 1.6200.

Figure 4.31. Diagrams of a bullish pennant

If the original trend is going down, then the formation is a bearish pennant. In Figure 4.32, the pennant pole is AВ. С, В and D frame the pennant-shaped consolidation. When the market breaks through the support line ВD, the objective price is E. The amplitude of the target price is DE, and it is equal to the pennant pole AB. The price target measurement starts from the breakout point.

Outgoing from prices in Figure 4.32, the height of the flagpole is measured as the difference 139.00 119.00 = 20.00. Once the support line is broken at 120.00, the price target is 120.00 – 20.00 = 100.00.

A market example of a bearish pennant is presented on Figure 4.33.

Figure 4.32. Diagrams of a bearish pennant Figure 4.33. A real example of a bearish pennant in the Japanese yen chart

Triangles. Triangles can be considered as pennants with no poles. There are four types of triangles: symmetrical, ascending, descending, and expanding (broadening.)

A symmetrical triangle consists of two symmetrically converging support and resistance lines, defined by at least four significant points (See Figures 4.34 and 4.35). The two symmetrically converging lines suggest that there is a balance between supply and demand in the foreign exchange market. Consequently, a break may occur on either side. Hence, in the case of a bullish symmetrical triangle, the breakout will likely occur in the same direction, qualifying the formation as a continuation pattern.

As Figure 4.34 shows, the converging lines are symmetrical. Points B, D, and F define the declining line. Points A, C, E, and G define the rising support line. The price target is either equal to the width of the base of the triangle BB, measured from the breakout point H (HH); or at the intersection of line BI (which is a parallel line to the rising line AG) with the price line. Trading volume will visibly decrease toward the end of the triangle, suggesting the ambivalence of the market. The breakout is accompanied by a rise in volume.

Outgoing from prices in Figure 4.34, the price objective is either 1.5500, as the difference 1.5000 1.4000 = 0.1000 added to 1.4500; or 1.5300, as the difference between 1.5000 1.4000 = 0.1000, added to 1.4300. A currency market example is presented in Figure 4.35.

Figure 4.34 Diagrams of a bullish symmetrical triangle Figure 4.35 A real example of symmetrical triangles in the Euro chart

From triangles of other kind the descending triangle is considered below. It consists of a flat support line and a downward sloping resistance line (See Figure 4.36). This pattern suggests that supply is larger than demand. The currency is expected to break on the downside. The descending triangle also provides a price objective. Measuring the width of the triangle base and then transposing it to the breakpoint calculate this objective. As shown in Figure 4.36, the support line, defined by points A, C, E, and G, is flat. The converging top line, defined by points B, D, F, and H, is sloped downward. The price objective is the width of the base of the triangle (AA), measured above the support line from the breakout point I (IF).

Outgoing from prices on Figure 4.36, the price objective is 1.3000, as the difference 1.5000 1.4000 = 0.1000 subtracted from 1.4000.

Trading volume is decreasing steadily toward the tip of the triangle, but increases rapidly on the breakout.

The expanding (broadening) triangle. or the megaphone consists of a horizontal mirror image of a triangle, where the tip of the triangle is next to the original trend, rather than its base (See Figure 4.37). Volume also follows the horizontal mirror image switch and increases steadily as the chart formation develops. As shown in Figure 4.37, the bottom support line, defined by points B, D, and F, and the top line, defined by points A, C, and E, are divergent. The price objective should be the width, GG, of the base of the triangle, measured from the breakout point G. Outgoing from prices on Figure 4.37, the price objective is 102.00, as the difference between 101.00 100.00 = 1.00 subtracted from 101.00. A real example of the megaphone is shown in Figure 4.38.

Figure 4.36 Diagrams of a descending triangle Figure 4.37 Diagrams of an expanding triangle Figure 4.38 A real example of megaphone formation in the Pound Sterling chart

Wedges. The wedge formation is a close relative of the triangle and the pennant formations. It resembles both the shape and the development time of the triangles, but it really looks and behaves like a pennant without a pole. The wedge is markedly sloped, and the breakout occurs in the direction opposite to its slope (See Figures 4.39 and 4.40), but similar to the direction of the original trend. The signal we receive from the wedge formation is direction only. There is no reliable price objective. Depending on the trend direction, there are falling and rising types of wedges (as in Figure 4.39).

Figure 4.39 Diagrams of a falling (in a bullish trend) and a rising (in a bearish trend) wedges Figure 4.40 Example of a falling wedge in a bullish trend in the Japanese yen chart

Rectangles. The rectangle formation reflects a consolidation period. Upon breakout, it is likely to continue the original trend. Its failure will change it from a continuation to a reversal pattern. This pattern is easy to spot, as it can be considered a minor side-ways trend.

If it occurs within an up-trend and the breakout occurs on the upside, it is called a bullish rectangle (See Figure 4.41). The price objective is the height of the rectangle. As Figure 5.56 shows, the currency moves between well-defined, flat support and resistance levels. A valid breakout may occur on either side from this consolidation period. The price target (GH) is equal to the height of the rectangle (GH), measured from the breakout point H. Outgoing from prices in Figure 4.41, the price objective is 1.6200, as difference 1.6100 1.6000 = 0.0100, added to 1.6100.

If the consolidation occurs within a downtrend and the breakout continues the original trend, then it is called a bearish rectangle (See Figure 4.42). As shown in Figure 4.42, the currency moves between well-defined, flat support and resistance levels. A valid breakout may occur on either side of this consolidation on period. The price objective (HG) is equal in size to the height of the rectangle (GH), measured from the breakout point H. In the numerical example, the price objective is 100.00 (difference 102.00 101.00 = 1.00, subtracted from 101.00).

Figure 4.41 Diagrams of a typical bullish rectangle Figure 4.42 Diagram of a typical bearish rectangle Figure 4.43 Example of a bearish rectangle in the Euro chart