Alan Hulls tutorials in technical analysis module 03

These tutorials will introduce you to the basics of technical analysis. Whilst investors may or may not
use charting as part of their decision making process, a basic understanding of it is an advantage.

Pattern Recognition
What makes a Market

A market can only exist when there is agreement on the sale price (in order for a transaction to take
place) and disagreement on the current or future value of the asset being traded. When there is
agreement on value there is no market. Disagreement on value is usually created because of the
difference in peoples perspective or opinions. This point is illustrated clearly in example 2, below

Example 1

There is general agreement that a $50 note has a value of $50. Because of this agreement in value it
would be impossible to sell a $50 note for $60. Likewise, the owner of the $50 note would not be a
seller at $40.

Example 2

An individual places lesser value on a tomato if they own a vegetable garden than the neighbour who
has a dinner party in 3 hours time and wants to make homemade tomato soup. Supply & demand
create disagreement in value. The person who owns the vegetable patch has had a win situation if he
or she sells the tomatoes to a neighbour for 30 cents each. The neighbour has had a win situation if
the only alternative is to buy the tomatoes from the local convenience store for 50 cents each. Win-
Win situations can happen in markets!!!

In any working market, such as the Stockmarket, agreement on value is short term or the market
ceases to exist. When there is agreement in the Stockmarket it usually indicates that a change is
about to occur.

A Point of Agreement indicates that all of the forces present, both buyers and sellers, are in
agreement on price for a particular moment in time. At this moment in time it will take less external
force to shift the market.

Example

Two men in a boat sitting side by side are hard to tip over.
Two men in a boat sitting inline down the spine of the boat require less force to tip over.

If trading or investing in the Stockmarket was an exact science and all participants agreed on value,
the Stockmarket would cease to exist.

Important Points

The Stockmarket operates principally on opinion, where said opinion may be based on fact.
Identifying Points of Agreement is a major aspect of Technical Analysis.

Points of agreement indicate that a market is about to breakout and the nature of price behaviour
leading up to that moment can even suggest in which direction. The following patterns are some of
the simpler price patterns that chartists use, including ones that indicate points of agreement.
1
The range, the distance from the high to the low, indicates the volatility or difference between the
bulls and the bears. Bulls have a positive outlook and are buyers while bears have a negative outlook
and are sellers. An inside day suggests that the bulls and the bears are moving towards agreement
on value. This pattern suggests a price rally is coming but does not indicate in which direction.

The position of the close near the top suggests the smart money agrees with the bulls (Bullish
signal). The position of the close near the bottom suggests the smart money agrees with the bears
(Bearish signal).

2
The close near the open and low volatility suggests general agreement and usually indicates a shift in
price is about to occur. Candlestick chartists refer to this pattern as a Doji Star.

A bear shakeout is a bar that has its open, close and high nearly or completely equal with a long tail
attached. A bear shakeout indicates that a bullish movement is about to occur because the market
has exhausted its supply of bears or sellers. Candlestick Chartists call this bar a dragon tail or
hammer.

3
A bull shakeout is an upside down version of a bear shakeout. A bull shakeout indicates that a
bearish movement is about to occur. Candlestick Chartists refer to this pattern as a hanging man.

A bull or bear shakeout can occur over more than just one trading period.

4
When bull and bear shakeouts occur next to one another it indicates a Point of Agreement. This
pattern can occur during trends and is a warning sign of a possible change in direction or weakening
of the underlying trend.

When the market moves into a Point of Agreement, market participants signal their acceptance of
the current price by refraining from buying or selling the share. This causes a drop in volume during
the period leading up to and during the POA.

5
The classic reversal bar indicates the weakening of a rally. When a market is rising it is typical for the
close to be higher than the open. When a close is lower than the open it indicates a weakening of the
underlying trend or rally.

The exact opposite can occur in a falling market where the classic reversal bar will have the close of
the trading period higher than the open.

Coming up, we will look at trend lines and a special class of pattern; triangles. Triangles indicate
points of agreement and, given the shape of a triangle, can indicate probable future price direction.
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 Alan Hull is one of Australias leading Technical Analysts
Alan has been trading and investing in Australian
Blue Chip shares for decades and is one of
Australias most respected Technical Analysts,
Stockmarket expert and best selling author.

He has appeared on Sky Business channel and is a

keynote speaker on the seminar circuit, appearing
regularly for the AIA, ASX, ATAA, the Trading &
Investing Expo and other major investment forums.

Alan is often interviewed by financial journalists and writes articles about the
Stockmarket and investing & trading in shares. These articles appear regularly in major
publications such the ASX online newsletter and Money Magazine.

In addition to this, Alan is the best-selling author of Charting in a Nutshell, Active

Investing, Trade My Way and Invest My Way, all published by Wrightbooks.

For more on Alans services please visit his website at www.alanhull.com

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