PATTERN STUDY
Support & Resistance
Concept
• Support
– Price level below the current
market price at which buying
interest should be able to overcome
selling pressure and thus keep the
price from going any lower.
• Resistance
– Price level above the current market
price, at which selling pressure
should be strong enough to
overcome buying pressure and thus
keep the price from going any
higher.
Importance
• Support and resistance analysis is an important part of trends as it can be used to make trading
decisions and identify when a trend is reversing
– When price drops to a support level, it will go back up
– When price rises to a resistance level, it will go back down
• Support and resistance levels both test and confirm trends and need to be monitored by anyone using
technical analysis
• Reversal of support and resistance
– Market price falls below a support level, then the former support level becomes a resistance
level when the market later trades back up to that level.
– Market price rises above the resistance level, then the former resistance level becomes a
support level when the market trades back up to that level.
– Support and resistance areas only reverse roles when market moves far away to convince market
participants that they have made a mistake.
• As long as the price of a share remains between these levels of support and resistance, the trend is
likely to continue.
Importance of round numbers
There is a tendency for round numbers to stop advances or declines.
Traders tend to think in terms of important round numbers, such as 10, 20,
25, 50, 75, 100 (and multiples of 1000), as price objectives and act
accordingly.
These round numbers will often act as psychological support or resistance
levels.
A trader can use this information to begin taking profits as an important
round number is approached.
One trading application of this principle is to avoid placing trading orders right
at these obvious round numbers.
Importance of Volume
• Volume is the number of shares or contracts traded in a security(or an entire market) during a
given period of time
• Volume is an important indicator in technical analysis as it is used to measure the worth of a
market move.
• If the markets have made strong price move either up or down the perceived strength of that
move depends on the volume for that period.
• Volume should move with trend:
If prices are moving in an upward trend, volume should increase and vice versa.
If the previous relationship between volume and price movement starts to deteriorate
it is a signal of weakness in trend.
– Example: If the stock is in an uptrend but the up trading days are marked with lower volume,
it is a sign that the trend is starting to lose its legs and may end soon .
Reversal Pattern
• When price trends is in the process of Reversal, either from up to down or from down to up, a
characteristic area or pattern takes shape on the chart.
• Different reversal patterns are different in nature and some are built and completed very
quickly, whereas others require several weeks.
• Now the greater the reversal area –
the wider the price fluctuation,
the longer it takes to build,
the more shares transferred during its construction, and so
the more important its implications.
Head and Shoulder
Inverted/Reverse Head and Shoulder
Double Top and Bottom
Triple Top and Bottom
Continuation Patterns
• These pattern usually indicate that the sideways price action on the chart is nothing more than a
pause in the prevailing trend and the next move will be in the same direction as the trend that
preceded the formation
• Continuation patterns are usually shorter in duration and are more accurately classified as near
term or intermediate patterns
Gaps
Exhaustion
Runaway Gap
Breakaway Gap
Pattern Gap
Gap
Gaps
Thank You