Basics of Technical

Analysis

Prateek Dhuper
dhuper.prateek@gmail.com

Table of Content
INTRODUCTION TO TECHNICAL ANALYSIS
WHAT IS TECHNICAL ANALYSIS? .............................................................................................................................9
DOW THEORY..9
The Market Discounts Everything.9
The Three trend market.10
The three phases of Primary Trend..10
Market Indexes must confirm each other...11
Volume must confirm the trend..12
Trend remains in effect until there is a clear indication12
SUPPORT AND RESISTANCE12
MOVING AVERAGES..16
DOUBLE CROSSOVER19
TRIPLE CROSSOVER.19
BOLLINGER BANDS..
INTRODUCTION TO CANDLESTICK PATTERNS
CANDLESTICK CONSTRUCTION20
REVERSAL PATTERNS..23
CANDLESTICKS BULLISH REVERSAL PATTERNS24
BULLISH ENGULFFING..24
PIERCING PATTERN.25
BULLISH HARAMI26
HAMMER
.28
MORNING STAR PATTERN.29
BULLISH ABANDONED BABY30
THREE WHITE SOLDIERS31
CANDLESTICKS BEARISH REVERSAL PATTERNS.32
BEARISH ENGULFING..33
BEARISH HARAMI ..34
EVENING STAR .35
SHOOTING STAR 37
DARK CLOUD COVER .37
BEARISH ABANDONED BABY ..39
THREE BLACK CROWS ..40
CONTINUATION PATTERN
CANDLESTICK BEARISH CONTINUATION PATTERNS 42
THE FALLING THREE METHODS 42

DOWNSIDE TASUKI GAP 43

BEARISH THREE LINE STRIKE ..44.
CANDLESTICK BULLISH CONTINUATION PATTERNS 45
THE RISING THREE METHODS 45
TREND REVERSAL CHART PATTERNS
MAJOR REVERSAL CHART PATTERNS48
THE HEAD AND SHOULDER REVERSAL PATTERN 48
THE INVERTED HEAD AND SHOULDER REVERSAL PATTERN 50
THE TRIPLE TOP AND BOTTOM 52
THE DOUBLE TOP AND BOTTOM ..53
THE ROUND BOTTOM FORMATION 55
TREND CONTINUATION CHART PATTERNS
MAJOR CONTINUATION CHART PATTERNS .57
THE SYMMETRICAL TRIANGLE 57
THE ASCENDING TRIANGLE .59
THE DESCENDING TRIANGLE ..60
FLAGS AND PENNANTS 60
THE HEAD AND SHOULDER PATTERN .62
THE CUP AND HANDLE CHART PATTERN 63
OSCILLATORS
MOMENTUM OSCILLATOR66
MOVING AVERAGE CONVERGENCE DIVERGENCE OSCILLATOR66
RELATIVE STRENGTH INDEX (RSI)69

DISCLAMER
All the content that is published is this eBook is to be used for Education purpose only. The content
used in this book should not be taken as a Buy or Sell advice.
Trading of securities may not be suitable for all investors. Trading in stocks and investment in the
stock market has high degree of risks involved which may lead to loss of all your money. You, the
reader are solely responsible for any losses as a result of trading in stock market. The author
recommends that the reader should consult a qualified investment advisor.

Introduction
The purpose of this book is to make the readers of this book a completely independent trader and an
investor. No dependency on the capital investment companies and no unnecessary deprivation of
your hard earned money to seek some stock BUY/SELL tips, when you can gain that talent in yourself
after going through this book. This book is all about what you need to know to become a smart
trader and investor.
I started learning things about the stock market in the second half of year 2011 when I was making
losses but gradually as I was learning things I started recovering and finally a breakeven point came.
During this journey, obviously I have learnt a lot which one can only learn through their personal
experience. Then I thought of sharing this knowledge with other people and thus idea of writing a
book hit my mind.
In this book I would take you through the fundamentals of chart learning and then we will move to
advance learning concepts. I would take care to cover most of the topics that would help you in the
long run. Also, I will take care of explaining you the pattern with the live example snapshot which I
hope will make your understanding to the concepts much clear.
But before that there are some pre-requisites to it. We need charting Software, which you can find as
given below:
1). Online Charting software.
http://www.chartink.com/
2). A desktop based Charting Software, which you can download from
http://www.chartnexus.com/

I hope this book would be really helpful to you to make you understand the technicals of reading a
Chart and make you an independent Investor and a Trader.

Prateek Dhuper
Email: learnearnstockanalysis@gmail.com

INTRODUCTION TO TECHNICAL
ANALYSIS

WHAT IS TECHNICAL ANALYSIS?

Technical Analysis is the method of forecasting or predicting the future price movements of any
security based on its past movements. Technical analysis does not result in an absolute prediction. It
gives us an idea on what is likely to happen. This is something similar to how cricket lovers try to
predict whether India will lose or win the match based on the past matches India had played on that
stadium and against that team. (I am sure all the cricket lovers will get smiles on their faces while
reading this.)
Technical Analysis includes a vast variety of technical indicators and patterns that will help us to
predict the best and we will be taking about those as we go through the book.
DOW THEORY
The principles of Dow Theory were formulated by Charles Dow in the early
20th century. The theory is even used today when the markets are highly
volatile and technology enabled.
The theory was actually formulated from a series of editorial authored by
Charles H. Dow until his death in 1902. After his demise in the year 1902,
the theory was further refined by William P. Hamilton.
Dows theory is the base of the Technical analysis and all the traders/investors should understand the
6 tenets of Dow Theory.
So, Let us dive in...

The Market Discounts Everything

The very first tenet of the Dow Theory tells us that Price of the asset reflects all the information of the
past, present and the future. All that information is already discounted in the stock price and the
index. This doesnt mean that the market and the traders know what is going to happen in the future
but the price moves in the anticipation of what is likely to happen. All the hopes, fears and
expectation discounts the markets.
The information includes everything from interest-rate cut by RBI to the pending quarters earnings or
a GST announcement. That means, all the information which is expected to happen in future will
already priced in the market. Out of my personal experience, I have seen certain scrip giving a huge
movement on a single day when there is an announcement from the company and people start
buying the scrip and the price starts rising(price increases when the demand is higher and price
decrease when the supply is higher). This is happened because the company has announced
something which was unknown to the market. Out of my personal experience I have seen KEC
International rising 15%+ in a single day when the company announced that they have got huge
order. This was something which was unknown to the market. Likewise, Suven life sciences got USFDA
approval thus making a huge movement the very same point of time.
So, it means that the things that already happened and are expected to happen are already priced in
the market and any changes in them will also reflect over a period of time.

The Three trend market

The three trends of the market are as follows.

The Primary Trend

The Primary trend is the major trend of the market and is formed over a longer period of time and
lasts for years. This could be a bullish trend or bearish trend, usually bullish trend lasts for longer
duration. According to the Dow, a bullish trend exists when the prices are making higher highs and
higher lows whereas, the bearish trend exists when the prices are making lower low and lower high.
The primary trend is usually seen in long term charts with weekly or monthly candles. If in long term
bullish chart, the price closed below the previous low, it could be an alert that the market is heading
lower and should be taken as a warning and should closely watch it.

The Secondary Trend

The secondary trend moves in opposite direction to the primary trend. The bullish primary trend is
made of multiple corrective secondary trends and similarly, the bearish primary trend consists of
multiple rallies (pullback). The secondary trend usually lasts for only few weeks.

The Minor Trend

The minor trend is short term trend and can be seen during intraday moves or may be over a period
of few days. Since, the duration of the minor trend is so small it should not be a major concern as the
long term trend is still intact. If one is able to find these short term trends, can be taken as a trading
opportunity.

The three phases of Primary Trend

The three phases of the primary trend are the accumulation phase (distribution phase), the public
participation phase and the excess phase.
The three phase of the primary trend will apply to both, the bullish trend and the bearish trend. Lets
talk about both.
Bull market

The Accumulation Phase

The first phase of the bull market is known as the accumulation phase. This is the first step of the bull
market and is found at the bottom of the downtrend where the informed investor takes long
positions.
Since the accumulation phase is found at the bottom of the downtrend, most of the negatives are
already priced into in the market and the worst has already happened and the most of the assets are
available at attractive valuations. All around we see negative sentiments, people think that market will
only get worse and the public is out of stock market. However, this is the point where smart people
start pouring smart money into the market and start accumulating stocks as they are available to you
at cheap valuations and the time is right to become rich.

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Public participation Phase

The second phase of the bull market is the public participation phase which is the longest phase of
the bull market as the worst seems to get over. Improving economic conditions and good earning
posted by the corporate sectors changing the sentiments of the market and large public participation
come in to the market taking the prices much higher.
This is phase where most of the trend lovers come into picture and start taking long positions.

The Excess Phase

The third phase of the primary is known as the excess phase. This is the phase when smart money
leaves of the market taking out the maximum gains and selling their assets to the late entrants who
are expecting that everything looks awesome to get good returns. When everyone starts talking
about stock market and everyone is ready to bet on it, thats the right time to exit the market.
Bear market

The Distribution Phase

The first phase of the bear market is known as the distribution phase, in which the informed buyers of
the accumulation phase of Bull market square off their long positions. This is the excess phase of the
bull market and there is optimism all around with expectations of higher market levels. The
distribution phase is difficult to spot in the early stages as this could be secondary trend in the primary
trend. During the distribution phase there is a little belief that bullish market is over and most of the
investors are still bullish. Technically, after every correction there is always a pull back and if during
this pull back if market is not able to penetrate the previous high then we are entering into bear
market.

The Public participation Phase

Public participation phase is the second phase of the bear market. During this phase, the selling
continues as the corporate earnings are deteriorating, economic conditions are worsening, spreading
negative sentiments in the market. This is the phase where the trend lover starts dumping their
positions.

Panic Phase
This is last phase of the bear market and is known as the panic phase when all hopes are lost and
there is bad news all around like we have experienced during the year 2015-2016 when crude price
was falling and china economy worsen. During this phase everyone is a seller.

Market Indexes must confirm each other

The major indices should confirm each other. According to this theory, all the major reversal happens
when all the major indexes confirm each other. If the major indexes are conflicting each other that
means there is no clear trend in the market.

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Volume must confirm the trend

The fifth tenet of Dow Theory, Volume must confirm the trend. According to Dow, when the price is
moving in the direction of the primary trend the volume should increase and when the price is
moving against the primary trend volume should fall down.
In case of primary bull trend, the volume on advances should go higher which indicates that more
traders/investors are willing to buy an asset even at higher price since they believe that the trend will
continue, where as the volume should decrease when the price is coming down which indicates that
the traders are still not willing to close off their positions in anticipation that primary bull trend is yet to
complete. If the market is in uptrend and the volumes are decreasing, it indicates the traders are not
willing to buy the asset at higher price and there is a possibility of trend reversal and sellers might dive
in.
The same is true for the bear market, the volume should go high when the price of an asset is coming
down which indicates the weakness of the market and the volume should come down when the price
is going up indicating the weakness that there are no buyers to enter the scrip . If the trend is bearish
and the volumes are decreasing, that is an indication that the asset is bottoming out and there could
be potential reversal coming.

Trend remains in effect until there is a clear indication.

The final sixth tenet of Dow Theory, trend remains in effect until there is a clear indication of the
reversal.
Traders should have strong indication of the trend reversal before taking any positions. Do not
confuse the secondary trend with the primary trend as the secondary trend will not continue over a
longer period of time whereas the primary trend is still intact.
SUPPORT AND RESISTANCE
Support and Resistance are undoubtedly two basic and most important concepts of Technical analysis
to be used in trading and analyzing the stock future movements. These are the areas where the price
has changed direction repeatedly which results into the formation of support and resistance levels.
What is Support?
Support is a psychological and technical price levels where the demand meets the supply to prevent
the price from declining further below the price level known as the support price level. Support is
actually not an exact value but an area where the experienced traders think that the prices will bounce
back. As the securities prices falls down and get closer to the support level more buyers are willing to
enter the stock and the demand overcome the supply thus bouncing the stock back to higher levels.
The technical support level is formed over a period of time based on the historical data.
The support line once broken becomes the resistance level and it is not unusual if the price touches
the support level (now resistance) after the breakdown and should be taken as a good shorting
opportunity. Once the support level is broken, another support level is established at lower level.

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Support Line

The above diagram shows us how the support level is established when the prices bounce back from
the same area multiple times.
Below is the perfect example of support & resistance in Pricol on daily and weekly charts, will make
you understand the concept in depth. The blue marked circle on the left represent the area of
consolidation where multiple support levels were formed. The price bounced back from the support
level to a new high but retraced back after a long time taking support at the long term support levels.
Yes, support and resistance do have long term memories.

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What is Resistance?
The resistance is psychological and technical levels where the supply meets the demand and prevent
price from rising further above the level know as resistance price level. This is the level where the
bullish trends reverse back to the bearish trend as most of the traders/investors think that the price is
too high now and they tend to square off their long positions. As the price comes closer to the
resistance level more and more sellers dive in and the supply overcomes the demand taking the
prices down. Alike support, resistance is also an area, not an exact value from where the experienced
traders think that prices will fall down. Technical resistance levels are created over a period of time
based on the historical data and they do have long memories.
The resistance level once broken becomes the support level.

Resistance level

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Above is the diagram to give a better idea on how the resistance level is established over a period of
time when the bull trend reversed back to the bearish trend.
When the market moves between the resistance and the support levels, it is known as the range
bound market and it can give a breakout on either side. If the market gives breakout above the
resistance level, it would become a support level. If the market gives breakdown below the support
level, it would become the resistance level. The breakout above the resistance level is a huge bullish
signal.

Resistance Level

Support Level

15

Above is one of the best and perfect examples of Granules India ltd on daily chart. Starting from left
to right, the resistance level was formed as indicated by blue circles, which was broken later and was
tested later not once, twice but thrice after the breakout, giving all professional traders to make entry
at lower levels. The broken resistance becomes a support level and the stock rally to new highs,
creating new resistance levels which it was unable to break and tested the old support levels.

MOVING AVERAGES
The moving average is one of the most widely used technical indicators. The moving averages are the
lagging indicators as it is computed on the past prices. The two basic commonly used moving
averages are simple moving averages (SMA) and exponential moving averages (EMA). We will be
talking about both of them into depth in coming chapters. Most importantly, the moving averages are
used to determine the existing trend and these moving averages are also used to determine the
support and resistance.

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The bluish smoothed line is a 20 day SMA.

Simple Moving Average
The moving averages are known as smoothed device as by calculating the simple moving average a
smoothed line is produced. The simple moving average is a lagging indicator as it is based on the
past price actions. For example, if we have a 20-day moving average and 200-day moving average.
The time lag will be reduced with a shorter moving average because it contains the most recent data
whereas the longer time frame moving average will be slow and take time to change as it contains a
lot of past data.
How do we calculate simple moving average?
The simple moving average is calculated by summing up the past n closing prices and dividing the
sum by n and it will be n-Day simple moving average. Most of the technical analyst use the closing
prices to calculate the simple moving average and is one of the widely used ways to calculate the
average.
Day1 10
Day2 20
Day3 30
Day4 40
Day5 50
Day6 60

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Day7 70
Day8 80
Day9 90
Day10 100
The 10 day moving would be like.
10+20+30+40+50+60+70+80+90+100 = 550
550/10 = 55
The 10 day moving average is 55.
If we continue to calculate the moving average for the 11 th, 12th, 13th day a smoothed line will be
produced as depicted in the chart above.
Exponential Moving Average
The problem with the simple moving average is that is assigns equal weight to all of the data.
Whereas, in exponential moving average we can assign a higher weight/importance to the most
recent data that reduces the time lag. The traders can suppose assign 10% weight to the last day
price and 90% to the remaining days in 20-day moving average.
Since simple moving average is the most commonly used indicator, we will be concentrating on this.
Below is the diagram to show the comparison of the simple and exponential moving average.

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DOUBLE CROSSOVER
Two moving averages can be used together to generate buying signals and known as double
crossover. The double crossover involves one relatively short moving average and other relatively
long moving average.
A bullish crossover occurs when a shorter moving average crosses above the longer moving average
and is known as the golden cross and bearish crossover occurs when a shorter moving average
crosses below the longer moving average and is known as the death cross.
The moving crossover will produce late signals as it involves two lagging indicators. The longer the
time frames of the moving average, the greater the lag in the signals. I love to use 20-SMA, 50-SMA
to generate bullish signals. If the 20-sma crosses above the 50-sma, we consider that as a bullish
signals and of course we will have a look on the other indicators like MACD, momentum, etc to get
the confirmation.(we will talk about oscillators later)
Some traders tends to use the moving average combinations of shorter time frame like a combination
of 10-SMA and 20-SMA or 5-SMA over 20-SMA.
TRIPLE CROSSOVER
There is a triple crossover technique also which produces signals and involves three moving averages.
Signal is generated when the moving average of the shorter time frame crosses above the moving
average of longer timeframe.
This might involve a combination of 10-sma, 20-sma and 50-sma.
The other indicators can also be used along with crossover to identify the true nature of the bullish
signals. MACD turning positive during the golden cross will strengthen the bullish trend of the stock
whereas MACD turning negative during the death cross will strengthen the bearish trend of the stock.

Below is the example of the PC Jewelers, when a 20 EMA represented as a smoothed bluish line
crosses above the greenish 50 EMA line to produce a bullish signal. The bullish crossover was also
accompanied with the MACD crossing the ZERO Line. During the course of action we have seen that
the price of the stock has taken support at the 20EMA multiple times which shows a strong uptrend.

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BOLLINGER BANDS
The technique was developed by John Bollinger. Bollinger Band measures the volatility of the security
based on the standard deviation which changes as the volatility increase or decreases. The Bollinger
band comprises of a 20-day moving average with two standard deviated outer bands that are placed
below and above the moving average. The outer bands automatically widen as the volatility increases
and narrows down as the volatility decreases. Security is considered to be overbought when the
prices touch the upper Bollinger band and likewise, the security is considered to be oversold when the
prices touch the lower Bollinger band. When the outer bands are far apart, that is sign that the
current trend might be ending. When the distance between two bands has narrowed too far that
means that the market is about to initiate a new trend. Bollinger bands works best when used with the
oscillators.
The candle should trade between the two outer Bollinger bands. The candle formed outside the
upper Bollinger band is an overbought signal and there is huge chance that the price will decline. The
candle formation outside the lower Bollinger band is an oversold signal and the chances are good for
a pull-back. The upper and the lower Bollinger bands can be used as a target. If the price bounces off
from the lower Bollinger band and crosses the middle Bollinger band, the upper Bollinger band
becomes the target likewise, when the prices falls below the middle Bollinger band, the lower
Bollinger band becomes the target. If the candles are ridding the upper Bollinger band, this is a

20

strong bullish signal and the candles ridding the lower BB is a bearish signal. Bollinger Band is used
with other technical indicators and oscillators to identify the oversold and overbought levels.

Above is the best of example candles formed outside the Bollinger band in Plastibends ltd, forming
the candles outside the upper Bollinger band. Candles circled are outside the upper Bollinger and
resulted into correction in coming days.

21

INTRODUCTION TO CANDLESTICK
PATTERNS

22

CANDLESTICK CONSTRUCTION
In order to create a candlestick, we must have a data that contains the information like the open
price, close price, low price, and high price for the time frame we want to display in a candle. A candle
could be a daily candle, weekly candle or a monthly candle. Other than this we can also construct a 2
min, 5 mins or a 30 mins candlestick. Over a longer term chart some people tend to use quarterly,
half yearly and even yearly candle also. The GREEN or the RED filled portion of the candle is called the
body. The lines above or below the candle are known the shadows of a candle that represent the
Highs/Lows. If the stock close price is higher than the open price, a GREEN candle is formed (top of
the body representing the close price).Similarly, when the price closes below the open price, a RED
candle is formed (Top of the body representing the open price).
Please refer the diagram below for better understanding.

High

High

Close

Open

Open

Close

Low

Low

The combination of multiple candlesticks helps us to predict the future possible trend of scrip.
The combination of these candlesticks signifies whether the trend will continue or will it reverse. So
these patterns are further divided under two categories.
Reversal Patterns
Continuation Patterns
REVERSAL PATTERNS
The reversal pattern depends upon the existing pattern, will it be a Bullish reversal pattern or Bearish
Reversal Pattern. If the previous trend is bearish, we could possible see a BULLISH REVERSAL or if the
previous trend is bullish, we could possibly see a BEARISH REVERSAL.
There are dozens of the bullish/bearish pattern and we will cover all the important patterns. So, lets
jump in...

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CANDLESTICKS BULLISH REVERSAL PATTERNS

Before we start to study the different bullish reversal patterns, there are certain points that we need to
understand
1. Most of the patterns require confirmation before you expect a true reversal. (So dont hurry to
enter the scrip).
These scrips require confirmation in the form of Gap-up or a big green candle or a good rise
in volumes. This confirms that the new buyers are interested to enter.
2. All the bullish reversal pattern candlesticks are seen at the bottom of the downtrend. (The
prior trend should be bearish).
3. The other aspects of the technical analysis could also be incorporated to add confirmation of
the reversal. These could be the support levels be it either a Moving averages, or the
Fibonacci retracements levels. One can even have a look on the improving Indicators like
Momentum, CCI or the CMF which could give an indication about if selling pressure is
reducing or if there is an increase in buying pressure.
So, lets start with the different bullish reversal candlesticks one by one.
BULLISH ENGULFFING
Since this is a Bullish reversal pattern, it should be formed at the bottom of the downtrend. This
pattern is a combination of two candlesticks, a Red and Green candle. During the formation of bullish
engulfing candle the Green candle (2nd candle) should totally engulf the red candle (1st candle). This
pattern requires a confirmation before you enter this scrip. (A gap-up or a long white candle or a
good increase in volumes which ensures the interest of buyers to take the price higher)

Prior downtrend

The green candle completely engulfed the previous red candle.

Let us take an example of Igarashi Motors to understand how it works.

24

Above is the chart of Igarashi motors. Please have a look on the candles circled blue, also pointed
with a RED arrow.
Igarashi Motors during the mid of March-2015 has slipped from a high of around 440 levels to the
levels of 360, where exits a support level of 50DMA, it has formed a bullish-engulfing candle. An
immediate gap-up opening with a huge rise in volumes confirmed the true bullish reversal and the
stock price moved ahead to make new highs.
Igarashi motors had satisfied the conditions to form a potential reversal pattern and we had already
seen it continued its upward journey for quite a few days from around 370 till 510 level, before any
major correction.
PIERCING PATTERN
The Piercing pattern is made up of two candles and is formed at the bottom of the downtrend. The
first candle is the red candle which is followed by a green candle. The Green candle should open
lower than the previous red candle close and should close above the mid of the previous red candle
body.
The selling pressure forces the price to open below the previous close but then later on the buyers
increase and push the prices to close near/above the mid of the first red candle. This pattern like the
bullish Engulfing also requires the confirmation. (Dont rush to enter the scrip as it a could be false
indication)

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Prior downtrend

The green candle just closed above the mid of the previous red candle.
Lets take an example of IFB Motors.

IFB motors formed a Piercing pattern during the month of August-2015 after a downtrend. The first
day it was a big red candle followed by the second day candle that opened below the previous day
close and closed above the mid of the first day candle body. (Still no need to jump into the scrip, as it
needs the confirmation). The piercing pattern was confirmed on the very next day when we saw a
gap-up opening, a long body candle and good rise in volumes and the scrip went higher to touch
600 levels before it started its consolidation for the next leg of a big move.
BULLISH HARAMI
Bullish Harami candlestick pattern is made up of two candles and exists as a combination of redgreen, green-green, red-red or a green-red. Like others bullish reversal patterns this pattern should
be formed at the bottom of a downtrend.

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The smaller the size of the second candle, more likely is the reversal. If the candle is doji, the chances
of reversal are high.

Above are the four different forms of a bullish harami candlestick pattern.
Lets take a case study to understand the bullish harami pattern.

Above is the example of Marksans pharma, which has formed a bullish harami candle at the 20DMA
support level, as pointed by a circle. The red candle followed by a small green candle. Since the
reversal was true, it was supported by the gap-up opening and the increase in volumes is observed
the very next day. (One thing to keep in mind, you should only enter the scrip once the confirmation
is done)
After the reversal the scrip zoomed to 115 levels within few sessions, giving huge returns.

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HAMMER
Hammer candlestick pattern is made of a single candle and it is named so, because the candle looks
like a Hammer. It could either be a red or a green candle with relatively small body when compared
to the lower shadow. The upper shadow should be non-existent or should be relatively very small.
In theoretical terms, the price of the scrip was taken to a new low where the buyers became active
and the price were taken close to the open price during the end of the day, resulting into a hammer
formation. This pattern also requires a bullish confirmation.

Hammer

Inverted Hammer

Doesnt the candle on the left looks like a hammer?

On the right, we have one more bullish reversal pattern i.e. INVERTED HAMMER. This is also a bullish
reversal pattern and can be found at the bottom of a downtrend.
Lets take a case study to understand the Hammer pattern.
Below is the case study of Lloyd Electric.

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Lloyd Electric has formed a Hammer candle, denoted by a circle. The candle is formed at the
supporting levels of 100DMA. The hammer was then followed by an inverted hammer the very next
day. This candle was further supported by a large body candle and the increase in volumes and the
scrip zoomed from 190 to 258 odd levels within few trading sessions.
MORNING STAR PATTERN
The morning star bullish reversal pattern consists of three candles.
1. The very first red candle indicating the selling pressure.
2. The red/green that gaps below the first candle and is ideally a doji, indicating an indecision/
tug-of-war between the bulls and bears which indicates a possible reversal.
3. A last tall green candle that opens above the middle candle and closes near the mid of the
first candle. This candle provides bullish confirmation of the reversal.

Like other candlestick patterns, this pattern should also be used with the other technical parameters
like the support levels or different technical oscillator parameters to confirm the reversal. Lets take a
case study to understand how the Morning-star pattern actually looks like.
Below is the chart of Indocount Industries Ltd. on NSE. The 3 candles highlighted on the charts forms
a Morning star pattern. A red candle followed by a little doji green candle and then a tall candle
supported by huge volumes. These three things make a perfect morning star and in fact it was
formed a small downtrend and was seen at the 100 DMA supporting point, and since then it is in
continuous uptrend and was trading at 600 plus levels in just few days.
The middle candle is Inverted hammer which is also another reversal signal is.

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BULLISH ABANDONED BABY

This Bullish reversal pattern resembles to Morning star pattern and is a combination of 3 candlesticks.
1. A very first candle is tall RED candlestick indicating huge selling pressure.
2. The second candle opens gap down and the prices goes down during the day but later
buyers enter to move the price up resulting into a doji.
3. A tall GREEN candle that opens above the middle candle and close above the open of the
first candle.
Like other bullish reversal patterns when this pattern is used in conjunction with the other technical
parameters gives a good reversal indication.
This pattern does not require any further confirmation.

30

Let us take an example of a Bullish abandoned baby pattern.

Above is the chart of Alicon Castalloy Limited. The candlesticks highlighted in the chart are bullish
abandoned candlestick pattern. The pattern formed is seen at 50% retracement levels which took the
price from 240 levels to 350 levels in just few days.
THREE WHITE SOLDIERS
The three while soldier is a bullish reversal pattern and is formed at bottom of downtrend. As the
name indicates this pattern is a combination of 3 long bodied green candles. In this pattern each
candle should open below the previous close price and should close above the previous close price.
Each day the price opens lower but the bulls take the price up representing the bulls are
strengthening and the bears are losing control. The candles should not have long upper and lower
shadows but long bodies. The series of long bodied candles indicates the potential shift in investor
sentiments. Like the other reversal pattern, the pattern should be used along with other indicators.
Below is the pictorial diagram of the pattern.
Bullish reversal

Prior downtrend

31

Above is the perfect example of White soldier pattern formation at the bottom of the downtrend and
50% retracement support level. The same example is used above for the bullish abandoned baby
pattern formation.
Even though three white soldiers is bullish reversal pattern, it is not unusual to find this pattern during
the uptrend also and should be considered as a good bullish signal.
CANDLESTICKS BEARISH REVERSAL PATTERNS
There are multiple numbers of bearish reversal patterns available and we will keep it simple to the
most popular bearish reversal patterns.
Before we start with the different number of bearish reversal pattern, there are certain points that you
need to keep in mind.
1. Most of the bearish reversal patterns require confirmation before you make positions.
This confirmation could be in the form of huge volume or a big tall candle or a gap-down
opening. If the volume is increasing during the downtrend, it confirms more number of
traders/investors is closing off their positions.
2. All bearish reversal patterns are seen at the top of an uptrend. (The pre-existing trend should
be an uptrend)
3. The other aspects of the technical analysis should also be incorporated to add confirmation
the reversal. These could be the resistance levels either a Moving averages, or the Fibonacci

32

retracements levels. One can even look on the improving Indicators like Momentum, CCI or
the CMF which could give an indication as if the selling pressure is increasing or if there is a
decrease in buying pressure.

BEARISH ENGULFING
This is a bearish reversal pattern and it should be formed at the top of an uptrend, just opposite to
the bullish engulfing pattern already discussed. The bearish engulfing pattern consists of two candles,
the green candle followed by the red candle. The second candle (red) should completely engulf the
body of the first candle. The bigger is the red candle; more bearish will be the reversal. Ideally, the
second red candle should also engulf the shadows of the first candle.
The bearish engulfing pattern requires the confirmation before a major trend reversal is expected.
This could be a gap-down opening, huge volume or a big red candle. Below is the diagram to show
how bearish engulfing candle pattern looks like.

Though Bearish engulfing is a trend reversal pattern, it can also behave like a bearish continuation
pattern during a downtrend. Occasionally, when bearish engulfing candle formed at the bottom of
the downtrend acts as bearish continuation pattern and gives strength to the bearish pattern.

33

Above is the example of tanla solutions which was trading around 50+ levels during the 2 nd week of
December in 2016. During the uptrend, the bearish engulfing candle engulfed the previous complete
candle including its shadows. The bearish engulfing candle was followed by a big red candle with
decent volumes giving us the confirmation of the downtrend.
BEARISH HARAMI
This is a two candlestick bearish reversal pattern formed after an uptrend. The first candle should have
a large body and the second one should have a relatively small body that should totally encompassed
by the first. There are four possible combination of the bullish harami pattern. It could be Red-Green,
a Red-Red, a Green- Red or a Green-Green. Bullish Harami is one of the potential bearish reversal
patterns and should be accompanied with the reversal confirmation.
Bearish Harami pattern is similar to the bullish harami pattern just that bearish harami is formed at the
top of an uptrend and bullish harami formed at the bottom of the downtrend.

34

Below is the perfect case study of bearish harami pattern to get a better idea on the pattern. Pricol
limited, trading around 70 levels in the mid of September-2014 when we saw a bearish harami
candlestick pattern formed at the top of an uptrend. The next we encountered a gap-down opening
but somehow the stock managed to close around the opening price, but was followed by a big red
candle as pointed by green arrow. The bearish harami gave us the signal of trend reversal and the
stock touched a low of 27 in march-2015.

EVENING STAR
The evening star pattern looks similar to the morning star bullish reversal pattern and is a
combination of three candlesticks.
1. The green candle.
2. A small red/green candle that gaps up above the previous closed price. Bulls take the prices
up and they lose control and the stock price is dragged down to lower levels but somehow
managed to close around the open price forming a doji.
3. The red candlestick that gaps down and closes near the middle of the first candle. This is
actually a confirmation of the bearish reversal.
Below is the diagram how Evening star candle pattern looks.

35

The Evening star pattern is formed at the top of the uptrend and should be accompanied with other
technical factors as already discussed above.

Above is the example of First source solution ltd. forming a evening star pattern. Since, then the price
is falling continuously, rebounded once and touched the previous peak but unable breakout.

36

SHOOTING STAR
Shooting star is a single candlestick pattern and could be either white or black and should be formed
after a gap-up opening. Ideally, the body of the candle should be small/ doji. This pattern also
requires bearish confirmation before we can see further weakness in the stock prices.
If the shooting star candle is formed outside the upper Bollinger Band which we have experienced a
lot many times, there is a good chance that the trend will change.
Below is the case study of the Butterfly Appliances. If we take a look at the chart we would find a
shooting star as pointed by a bluish round circle. Later, the second day we have seen a gap-down
opening which gave us the trend reversal confirmation.
The shooting star was also formed outside the upper Bollinger band, so the candle has to come
inside the Bollinger bands. We will discuss on Bollinger band later in the book.

DARK CLOUD COVER

The Dark cloud cover is a two candlestick pattern. The green candle followed by a red candle. In ideal
scenarios, the body of the both the candle should be fairly large enough. In this reversal pattern the

37

red candle should open above the previous days close and should close below the midpoint of the
first green candlestick body.
This pattern requires confirmation before we can see major weakness in the stock price.

Below is a classic case study of PC Jewelers, Dark cloud candlestick pattern formation encircled blue
on top of the trend. On the second day, the price opened above the previous close and closed below
the middle of the green candle. The reversal was confirmed the very next day with a good volume
and a big red candle and the bulls lost the control and bears took the charge.

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BEARISH ABANDONED BABY

The bearish abandoned baby candlestick pattern resembles the Evening star pattern and is a
combination of 3 candles.
1. A long green candle.
2. A small non-existent doji that gaps up above the previous close.
3. A long red candle that gap below the doji and closes below the first candle open.
This pattern doesnt require any bearish confirmation as the 3rd candle of the pattern act itself as a
confirmation.
Below is the diagram to show the bearish abandoned baby.

39

TVS Electronics showing bearish abandoned baby pattern at top of an uptrend. The first candle is a
big green candle followed by a small bodied candle that gap-up above the previous candle. The third
gives us the confirmation as the candle is long bearish candle that closes below the first candle open
price. The stock continued falling
THREE BLACK CROWS
The three black crows is a bearish reversal pattern just opposite to the three white soldiers and should
be formed at the top of an uptrend. As the name suggests this pattern is a combination of three long
bodied red candles that opens above the previous close and closes at a new low. The pattern is a sign
that bulls have lost the conviction to take price up in the current uptrend.
Like other reversal patterns, this should also be used with other technical Indicators to confirm the
validity of the pattern.

40

Prior Uptrend
Reversed Downtrend

Above is the example of Unichem labs representing a three black crow pattern marked in circle. The
price open higher above the previous close but closed at a new low. A new low formed daily shows
that the bulls are losing control and the bears are strengthening.

41

Although this is a good bearish reversal pattern but it is not unusual to see this pattern during an
existing downtrend also.
CONTINUATION PATTERN
The continuation pattern is the second category of the candlestick pattern. We already discussed
about the reversal pattern (bullish reversal and then bearish reversal) and now lets take a look on
continuation candlestick pattern.
Continuation pattern suggest that the market will prevail its prior trend and this is just a consolidation
phase before the original trend resumes back. During the consolidation phase the trend appears to
be reversing as the consolidation happens opposite to the original trend but the chances of
continuation of the original trend are more probable. For the formation of continuation pattern there
should exist a prior trend, is one of the pre-requisite of the continuation pattern. The continuation
pattern is further divided into two categories and we will be talking about both over the next few
pages.
CANDLESTICK BEARISH CONTINUATION PATTERNS
THE FALLING THREE METHODS
The falling three methods is a bearish continuation pattern and characterized by a series of candle
formation.
The first candle in this pattern is a long bearish candle which is followed by a series of few small
bullish candles. These bullish candles should not exceed the low and high of the first candle but these
candlesticks basically represents the consolidation/pullback phase of the trend before the previous
downtrend resumes. The series of small bodied candles shows that the buyers still dont have strength
to take the prices up and should be taken as a good opportunity to short the positions. The last
candlestick that completes this pattern is again a long bearish candle which should close below the
close of the first candle.
Below diagrams shows us how the falling three methods pattern looks like. The last candle makes a
new low, which predicts that the bears are back in control.

Prior Downtrend

Below is one of the perfect examples of TVS Electronics forming a Falling Three Methods bearish
continuation pattern. The large bodied red bearish candle is followed by few small bodied candles

42

that trade within the range of the first candle. The last candle is a tall bearish candle (pointed out by
the arrow) hitting a new low indicating the weakness in the market and bearish continuation.

DOWNSIDE TASUKI GAP

Downside Tasuki Gap is commonly used to represent the continuation of the current downtrend.
This pattern is characterized by a combination of three candles.
1. The first candle is long bearish candle of the downtrend.
2. The long bearish candle is followed by again a long bearish candle that gaps low and closes
at a new low indicating negative sentiments in the market and market is suppose to go lower.
3. The third and the last candle is a bullish candle that gaps up above the previous close and
closes within the gap of previous two candles. This is a period of consolidation before the
bears again push the price to a new low.
Traders should wait for the confirmation in the form of another red candle formed on day 4
before taking any positions.

43

Below is the pictorial diagram of downside Tasuki gap pattern.

Prior Downtrend

BEARISH THREE LINE STRIKE

Bearish Three Line Strike is a bullish continuation pattern, is a combination of 4 candles.
1. The first candle is a bearish candle in the existing downtrend.
2. The second candle opens above the previous close but close at new low.
3. The third candle is similar to the second candle which opens above the previous close and
closes at a new low.
4. The fourth candle is a bullish candle that opens at a new low but closes above the first days
open price. This candle is a result of short covering that took the prices higher.
Although, this is a bearish continuation pattern, the fourth candle engulfs all the previous three
candles which is a bullish reversal signal also. Traders should look for confirmation before taking any
positions. Below is the diagram of the pattern. This pattern is very rarely found.
Prior Downtrend

44

Above is the example of TVS motors forming a bearish three line strike pattern. In the example, the
fourth candle is a combination of two candles which closed above the first candle open price. Though
the fourth candle completely engulfed the previous three candles but it continued its previous trend.
CANDLESTICK BULLISH CONTINUATION PATTERNS
THE RISING THREE METHODS
The rising three methods is a continuation pattern that appears during an uptrend.
The first candlestick in the rising three methods is a bullish candle with a real large body representing
the strength of the bulls. The bullish candle is then followed by a series of few small bodied bearish
candles and should not exceed the high and low of the previous bullish candle. These bearish candles
represents a period of consolidation/pullback after which the previous trend is resumed. If one is able
to recognize this pattern, it could be taken as a good buying opportunity. The last candlestick which

45

completes this pattern is large bullish candle that open above the previous close and close above the
first candle close and suggests that the bulls are back in action.
Below diagrams shows us how the rising three methods pattern looks like. The last candle makes a
new high and closes above the first candle close, which confirms that the bulls are back in action.

Prior uptrend

46

TREND REVERSAL CHART PATTERNS

47

MAJOR REVERSAL CHART PATTERNS

THE HEAD AND SHOULDER REVERSAL PATTERN
This is one of the top known and potential reversal patterns. The head and shoulder pattern is formed
after an uptrend and its completion establishes trend reversal. The pattern can be seen in any time
frames. The head and shoulder pattern consists of three peaks, with middle peak being the highest
known as HEAD and the two other peaks being low and roughly equal known as SHOULDERS. The
reaction lows of each of the peak forms a support line and is known as Neckline.
There are many aspects related to the Head and shoulder pattern such as the volume, the breakout,
etc. Ideally, we would never find a perfect head and shoulder pattern formation and there will always
be some noise. Have a look on the image below to check out how a head and shoulder pattern looks
like.

HEAD
C
LEFT SHOULDER

RIGHT SHOULDER
A

F
NECKLINE
B

H
Lets now talk more about it.
Existing Trend
To form a Head and shoulder pattern there should be an existing uptrend to reverse. Without an
uptrend there could not be a Head and Shoulder pattern to reverse.
The left Shoulder
Till Point A, there are no signs of top being formed and then the corrective wave to B is formed on a
lighter volume which is what is expected in an ideal scenario(correction should happen on a lighter

48

volume during an uptrend and price should move high on low volumes during a downtrend) and the
left shoulder is formed.
The Head
The price rebounded from point B till Point C which has breakout through Point A on a lighter volume
as compared to the previous rally till Point A. This decrease in volume gives a kind of warning signal
to the analyst as the new high was formed with low volume. Prices then begin to decline from point C
to point D where something unusual happens, the prices decline below the point A (during an
uptrend the penetrated peak should act as an support level during corrective waves) and the head is
formed.
The Right Shoulder
The price then rally from point D till point E (this time with even less volume) but unable to cross the
previous high at point C. To continue the uptrend each rally should penetrate through the peak of the
previous rally. The failure of the rally to cross point C (the peak of the previous rally) marks a possible
change in trend. The price then fall from Point E till point F and the right shoulder is formed.
The Neckline
The point B and the point D when connected form a support line known as the neckline.
The price then fall below the Neckline (acting as a support line over period of time) with huge
increase in volume. Now the important support line will act as a resistance.
How to measure the target?
Measure the height of the head from the neckline (CG) and project it from the point of breakdown.

49

Above is the example of head and shoulder pattern in Eros International Ltd. Look at the continuous
fall in the volume during the formation of left shoulder, the head and the right shoulder. A big red
candle formed near the left shoulder can be considered as a noise and could have been possibly
constructed because of some false news as the price recovered the very next day.
THE INVERTED HEAD AND SHOULDER REVERSAL PATTERN
The Inverted Head and Shoulder pattern is very similar to the head and shoulder pattern, is the mirror
image of Head and the shoulder pattern. The Inverted Head and shoulder pattern is formed after the
downtrend and its completion results in trend reversal. The target is calculated as similar to the head
and shoulder pattern.
H

Neckline
G

D
F

E
Right Shoulder

Left Shoulder A

Head

C
50

Above is the very basic diagram of how the inverted head and shoulder look like. The neckline which
was acting as a resistance line would be the support level now after the breakout. The price has a very
high tendency to touch the neckline after the breakout. Lets dive in to study more about it.
The Prior Trend
To form an inverted head and shoulder pattern there should be an existing downtrend to reverse.
The Left Shoulder Formation
Till the point A, there were no signs of bottom being formed and then the price bounced back till
point B on lighter volume(pull back should happen on lighter volume as the trend is bearish) which is
very much expected. Point B is the resistance due to the bearish trend line.
The Head Formation
The price then starts correcting again and a new low is made at C but this time the volume is lighter
as compared to when the previous low was formed at A. The lesser volume during the downtrend
gives a kind of alert/warning that the downtrend might diminish very soon. The lower volume shows
that no new sellers are available to take the prices down. The price then gives a pullback rally till point
D, breaking out the trend line (second signal to show that the downtrend will diminish) and the Head
is formed.
The Neckline
The point B and D together forms the resistance line known as the Neckline. Breaking this line
would give higher target to the stock price.
The Right Shoulder
The price then falls back from point D till point E but unable to cross the previous low of C (to
continue the downtrend each drop in price should penetrate through the previous lows). The failure
to penetrate through the previous lows marks a possible trend reversal. The price then gives a rally
and breaks out of the Neckline completing the right shoulder.
How do we measure the target of head and shoulder breakout?
The height of the head from the neckline is projected from the point of breakout to evaluate the
target. This is very similar to how we measure the target of head and shoulder.
Below is the example of LIC housing Finance Ltd. forming an Inverted head and shoulder pattern and
the continuous fall in volume when forming the troughs which is a warning/alert for the traders to
cover the shorts. The second indication came when the price penetrates above the trend line (marked
in red).

51

THE TRIPLE TOP AND BOTTOM

The triple top and Bottom is very similar to the head and shoulder pattern. The main difference
between them is that the three peaks/ troughs in triple top and bottom are at the same level. Volume
plays a very important role in the formation of triple bottom and tops formation.
The volume should decline with each successive peak at the top and should increase at the
breakdown in case of triple top formation (the decrease in volume with each peak indicates that there
are no new buyers to take the price up). Triple top is a bearish reversal pattern and is formed after
the uptrend.
A

C
B
The triple TOP

52

Conversely, In case of Triple bottom formation, the volume should decrease with each successive low
at the bottom and should increase at the time of breakout. The decrement in volume with each
successive low will indicate that there are no sellers available at the price and bulls then take the price
up. Below is the diagram of how triple bottom looks like. This is bullish trend reversal pattern and is
formed after the downtrend.

The triple BOTTOM

C

B
How do we project the target?
The way to project the target of the triple bottom/top is no different from the head and shoulder
pattern. The height of the pattern AB is projected from the point of breakout C. Once, the breakout
happens there is nothing unusual that price touches the breakout line again and it should be taken as
buying opportunity.
THE DOUBLE TOP AND BOTTOM
The general characteristics of the Double Bottom/top pattern are similar to the head and shoulder
and Triple Top/Bottom pattern, just that in case of double top/bottom we have two peaks/bottoms
unlike three in the above 2 patterns. The role of the volume is also same as the other reversal pattern.
A

D
E

53

The double top is a bearish reversal pattern and is formed at the top of an uptrend. In the above
diagram of double top formation there was no clue of the reversal till the price rises to Point A on
heavier volume compared to the volume of its previous peak and the price then corrected to Point B
which was very much expected in an uptrend. From B , the scrip rallied till point C and is unable to
cross the previous high (A) and we observe that the volume is also lighter which indicates that the
bulls are losing strength and no new buyers are available to take the price higher. From C, the scrip
then corrected and breaks a major trend line which gives warning to the traders to have lighter
positions now as this could be a potential double top formation. Once the stock breaks the support
line of B double top formation is completed and we can expect this to fall further. The stock can give
a pullback rally and touch the breakout levels and this could be taken as a shorting opportunity.

B
D

The double bottom is no different from the double top pattern but yes, it is a bullish reversal pattern
and is formed at the bottom of the downtrend. In the above diagram, there was no clue until the
stock price hits the point A and rebounded to break the trend line and rallied till point B. The scrip
then corrects again to reach point C but unable to make a newer low and takes support near the low
of point A. This now rebounded back and breakout above the support line of point B and therefore,
completes the double bottom formation. Any pullback to the breakout line should be taken as a
buying opportunity.
How do we measure the target?
I guess this is an invalid question now.
Just remember, the breakout should happen on heavier volume and one can also look at the other
indicators to confirm if the breakout is true. One can avoid entering few of the stocks which give false
breakout by just confirming the volume breakout.

54

THE ROUND BOTTOM FORMATION

The rounding bottom is bullish trend reversal pattern and also referred as saucer pattern, is a long
term reversal pattern. It takes several weeks to months to form a rounding bottom, and represents a
long term consolidation.
The round bottom formation usually seen in weekly charts and is preceded by a downtrend. The
volume should be heaviest at the left peak and should decline gradually to form the bottom and the
when the pattern starts forming the 2nd half the volume should also increase gradually.

Above is the case study of Cox and kings ltd. forming a rounding bottom chart pattern after a
downtrend. The rounding bottom is a consolidation phase of the stock and the breakout above the
neckline will take this to another levels. Above the self-explanatory example of how Cox and kings hits
its target after the breakout.

55

TREND CONTINUATION CHART

PATTERNS

56

For the next few pages, we will be going to discuss major continuation chart patterns. These patterns
are nothing but just a pause during the prevailing pattern. Once this consolidation is completed the
previous trend is expected to continue.
Very occasionally, these patterns also act as a reversal pattern. So, one can look for a breakout before
entering the stock.
MAJOR CONTINUATION CHART PATTERNS

THE SYMMETRICAL TRIANGLE

The symmetrical triangle is a continuation chart pattern. It represents halt /pause
(technically called as consolidation) in the existing trend after which the original trend is resumed.
The minimum requirement for a symmetrical triangle is 4 reversal points or a maximum of 6 reversal
points. The symmetrical triangle is the consolidation phase during the trend after which the existing
trend would continue.
During the consolidation phase, the volume in the stock should decline when the two converging
lines are coming close to each other. This is the characteristic of the volume during the consolidation
phase. But the volume should pick up considerably at the time of penetration of the trend line or at
the time of breakout.

Above is the 4 point reversal triangle pattern. The point where the two converging line intersect each
other is the APEX Point.
During the consolidation phase, the volume in the stock should decline when the price of the stock
swings between two converging lines coming close to each other to form the triangle. But the volume
should pick up considerably at the time of penetration of the trend line or at the time of breakout.
Lets us review an example of Granules India to see how the symmetrical triangle would actually look
like.

57

The 4 reversal points symmetrical triangle formation in Granules India with two lines converging after
an uptrend to undergo the consolidation before it continues the original trend. The volume also
diminishes as the price swings between the two converging trend lines. The chart shows us the
breakout with huge increase in volumes and price gap-up above the previous day close.
Can we predict the timing?
The Apex Point could provide us the approximate timing of the target. The charts of the granules
India would give us a good Idea on how can we look for the approximate timing.
How to measure the target?
There are two ways to project the target and both are discussed below.
Have a look on the chart of Granules India discussed above.
Here, if we draw a line parallel to the trend line and a line parallel to the candles at Apex Point, the
intersection of the two lines is our target.

58

The other way to determine the target could be to draw a base line AB and measure the height of
AB and project the height of AB from the breakout point C.

THE ASCENDING TRIANGLE

The ascending triangle is very much similar to the symmetrical triangle and is considered as a bullish
pattern. Since its a continuation pattern, it is noticed during an uptrend. The upper trend line is flat
where as the lower trend line is rising which indicates that the bulls are more aggressive than the
bears.

Is it possible that Ascending triangle act as a reversal pattern?

Though the Ascending triangle is a bullish continuation pattern, it is something not very strange to
find the ascending triangle at the bottom of the downtrend. However, in this situation we would also
consider this as a bullish signal and if volume supports this volume go much higher.
How can we measure the target?
The target of the Ascending triangle could be measured as we projected for the symmetrical triangle.

59

THE DESCENDING TRIANGLE

The descending triangle is very much similar to the symmetrical triangle and is considered a bearish
pattern. The flat horizontal line acts as a support and finally the price breakdown below the support
line to continue the prior trend.
A

Is it possible that Descending triangle act as a reversal pattern?

It is not very unusual if we infrequently find this pattern formed at the top of the uptrend. But, yes it
would need a confirmation if the price closes below the flat lower line and the volume would act as an
indicator to understand if this breakdown is true.

FLAGS AND PENNANTS

The Flags and Pennants are more or less the same pattern in terms of how they appear with a very
slight difference in between them.
One of the very important points about the Flags and Pennants is that they both are preceded by a
very sharp move. The Flag and the Pennants is a kind of break/consolidation of the stock price after a
very sharp move and after the consolidation will resume its trend again with a sharp move. Below are
the diagrams that explain how you would find a flag and pennants in real life scenarios.

A
C

60

The above diagram is a Flag formation which is preceded by a strong sharp move in the price. The
flag formation is consolidation or a brief pause and occurs at the end of the sharp move and
resembles like a rectangle formed by two parallel lines acting as support and resistance lines. During
the formation of the flag the volume is dried up and should pick up again after the breakout.

Above is the example of bull-flag formation in waterbase ltd. Clearly, the volume was dried up during
the formation of flag and increased gradually after the breakout. The height of the pole should be
projected from the point of the breakout to get the target which was achieved in this case soon as
shown above. Have a look on the candles circled, they together formed a dark cloud cover pattern at
the top of the trend and acted as a reversal candlestick pattern. (Dark cloud pattern already
discussed)
The Pennant formation is also very similar to the flag. The Pennant is also preceded by a sharp move
but the Pennant resembles a symmetrical triangle. The duration of the pennant is no longer than 3
weeks. During the formation of the Pennant the volume is dried up and should pick up once again
after the breakout.
Below is the diagram to show how a pennant resembles.

61

A
How do we plot the target in Flag and Pennants?
The target of the Flag and Pennant continuation pattern is calculated by projecting the height of the
POLE from the point of breakout.

THE HEAD AND SHOULDER PATTERN

The head and shoulder pattern which is a major trend reversal pattern can also sometimes behave
like a continuation pattern.
Below is the bullish continuation of the Head and Shoulder pattern.
Head
Shoulder

Shoulder

Neck Line

Below is the bearish continuation of the Head and Shoulder pattern.

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Head
Shoulder

Shoulder

Neck Line

THE CUP AND HANDLE CHART PATTERN

The cup and handle chart pattern is bullish continuation pattern. The cup and the handle formation
during an uptrend is just a consolidation phase after which the original trend is resumed. As the name
suggests, Cup and the Handle, these are the two different phases of consolidation. The cup is the
rounding bottom consolidation and once the cup is completed a sideways trading range is formed
known as the handle.
The breakout above the cup and the handle resumes the previous bullish trend. Prior uptrend is one
of the major pre-requisites of the pattern.
The cup is a U shaped pattern. The stock undergoes consolidation over a long period of time and
comes up to test the previous high forming a Cup pattern. Huge selling pressure is encountered as
the price touches the previous high, as large number of traders would have taken position at these
levels. The selling pressure will take the prices down for another few days. Once the selling pressure is
absorbed, the stock will take off for new highs. This pattern can be seen in daily and weekly
timeframe.
Below is the case study of the cup and Handle chart pattern in RPG Life Sciences. The perfect cup and
handle pattern formed in RPG life sciences. The breakout above the neckline (formed by joining the
left and the right peak) gives a big movement and it hits the target in few days.

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How to measure the target?

The target of cup and handle pattern is calculated by projecting the height of the cup from the point
of breakout. The height of the cup is measured from the right peak till the bottom of the cup.

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OSCILLATORS

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In this chapter, we are going to talk about Oscillators. Oscillators are the technical indicators which are
extremely useful during the non-trending markets i.e. when the price fluctuates between the two price
bands or trading range. The traders interpret the signals from these oscillators and convert these
signals into a profitable trade during the trendless market conditions.
These oscillators are not only very limited to the trendless market situations but are also very
efficiently used by alarming the trader about the short term peaks or the short term lows, technically
known to be as overbought and oversold conditions. The oscillators can also warn about when that
the trend is losing momentum. Also, it generates technical signals known as divergence to showcase
that the trend is completing.
MOMENTUM OSCILLATOR
The momentum is one of the very basic technical oscillators and it measures the velocity of price
change by continuously measuring the price difference for a fixed time interval. The 10-day
momentum is measured by subtracting the price 10 days ago from the last closing price. The positive
or negative is plotted around a Zero line. The most commonly used is the 10-day momentum.

Momentum = Price today - Pricex

If the closing price is above the 10 days ago price then the positive value will be plotted above the
zero line and if the closing price is below the 10 days ago price then the negative value is plotted
below the zero line. The 10-day moving oscillator is the commonly used across the traders.
Significance of ZERO line in Momentum Oscillator
The momentum chart has a zero line and most of the technicians and chartist trades on the signal
generated by the momentum chart. The momentum line crossing above the Zero line is a BUY signal
and the momentum line crossing below the Zero line is a SELL signal (short signal).

MOVING AVERAGE CONVERGENCE DIVERGENCE OSCILLATOR

Moving Average Convergence Divergence (MACD) oscillator is one of the most effective and widely
used indicators by professional traders. MACD oscillator contains two lines, one is the MACD line and
other one is the signal line although there are 3 lines that are used in its calculations.
MACD is calculated by subtracting the 26-Day EMA from 12-Day EMA that oscillates above and
below the Zero line. Closing prices are taken while calculating the MACD. As the name implies, the
MACD is the convergence or divergence between the two moving averages. The Positive MACD
indicates that the short term moving average is above the long term moving average (bullish). The
positive value increases as the short term moving average diverges above from the long term moving
average and this indicates the upside momentum is increasing. The negative MACD indicates that the
short term moving average is below the long term moving average. The negative value increase as
the short term moving average fall further away from long term moving average and indicates that

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the downside momentum is increasing. MACD crossing above/below the zero line is used by most of
the traders to generate buy or sell signal.
A 9-Day EMA line, called the signal line is also plotted on top of MACD. The MACD and the signal
line are used together to generate buy and sell signals. Lets learn about how to use them.

How to use MACD, signal and the Zero line to generate BUY/SELL signals?

In the above example, the negative and the positive territory of MACD is well pointed out. As the 12DAY EMA moved below the 26-DAY EMA, the MACD(blue line) entered into the negative region and
likewise when the 12-DAY EMA moved above the 26-DAY EMA the MACD entered into positive
region.
Professional traders use the zero line to generate the buy and sell signals. A cross above zero line is a
buy signal as the shorter moving average crossed above the long term moving average (double
crossover) and the cross below the zero line is the sell signal.
Below is the example of Lloyd electric generating Buy/sell signals based on signal line crossovers.

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The MACD line (blue line) and the signal line (red line) together are used to generate buy or sell
signals by most of the professional traders. Bullish crossover occurs when the MACD line crosses
above the signal line representing a strong buy signal whereas the bearish crossover occurs when the
MACD line crosses below the signal and representing a strong sell signal.
The divergence appears between the MACD line and the price action. A Bearish divergence occurs
when the prices are making highs whereas the MACD is weakening and makes lower highs. This is the
signal of market reaching top. A bullish divergence occurs when the prices are making lower lows
whereas the MACD is making higher lows. This is the sign of market forming bottom.

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Above is very nice case study of Allcargo Logistics Ltd. The price was making higher high while the
MACD made a lower high indicating a possible bearish divergence. The divergence was accompanied
with bearish engulfing candle at the top of an uptrend and the price continued to move lower and
MACD also finally went below zero indicating negative trends.
RELATIVE STRENGTH INDEX (RSI)
The relative strength index, developed by J. Welles Wilder, is a momentum oscillator that measures
the speed and change of price movements. Wilder points out that there are two major issues with the
momentum indicator, one is the inconsistent movement caused due to the huge price drop or rise 10
days ago and the other one is that there is no constant range of the movement and the RSI does
resolve the second problem. The RSI oscillates between 0 and 100 and used to generate overbought
and oversold signals. The RSI is also used along with the price action candles to indentify the
divergence (reversal) in the trend.

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How do you calculate RSI?

The RSI is a two-step process. The average gains and losses are identified for a specified time period.
For instance, if you want to calculate the 14-day RSI (the 14-day RSI is the most commonly used and
is preconfigured that way in most of the tools but you can configure that according to your trading
strategy) suppose the stock went up on 6 days and fell on the remaining 8 days. The absolute gains
on each of these 6 days are added up and divided by 14 to get the average gains. Similarly, the
absolute losses on each of the 8 days are added up and divided by 14 to get the average losses. The
ratio between these values (average gains / average losses) is known as relative strength (RS). To
make sure that the RSI always moves between 0 and 100, the indicator is normalized later by using
the formula given below:
RSI = 100 100/ (1+RS)
NOTE: RS is the relative strength.

Oversold / Overbought
The RSI always oscillates between 0 and 100 and is used to generate the oversold/overbought signals.
The RSI value above 70 is considered as an overbought region indicating the stock might be getting
overvalued and is a good candidate for a pull back. The value below 30 is considered as an oversold
region and indicates that the security is getting undervalued and is a good candidate for reversal.
However, this value can be adjusted according to the traders specific strategy. A stock trading in
overbought region can continue to be in the region until there is a clear indication of weakness or
trend reversal. Similarly, the stock in oversold region can continue to trade in the region over a long
period of time.
Divergence
RSI is one the greatest indicator to identify the potential reversals. A bullish divergence occurs when
prices makes a lower low whereas the RSI forms a higher low. RSI does not confirm the new low and
shows that the momentum is strengthening. The negative or bearish divergence occurs when the
prices are making a higher high and the RSI makes a lower high indicating the weakness in the trend.
Below is the example of PC Jewellers, from left to right the prices have been continuously moving up
with RSI losing its strength and making lower high when prices continued to make new highs. The
formation of new high was accompanied with the losing strength in volumes and bearish engulfing,
dark cloud cover candlestick formation. The additional signals should also be taken into account to
identify true reversals.

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The divergence can sometimes be misleading in case of strong trends. In case of strong bullish trend,
the RSI can actually show numerous bearish divergences before actually topping and similarly, in case
of strong bearish trend, the RSI can show numerous bullish divergences before bottoming out.

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