Technical Analysis: Support And Resistance

 By Cory Janssen, Chad Langager and Casey Murphy

Once you understand the concept of a trend, the next major concept is that of support and resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).

Figure 1

As you can see in Figure 1, support is the price level through which a stock or market seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the red arrows). 

Why Does it Happen?
These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trendlines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance will likely be established. 

Round Numbers and Support and Resistance
One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions. 

Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as $50, which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major psychological points as well. 

Role Reversal Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance. (For further reading, see Retracement Or Reversal: Know The Difference.)

Figure 2

For example, as you can see in Figure 2, the dotted line is shown as a level of resistance that has prevented the price from heading higher on two previous occasions (Points 1 and 2). However, once the resistance is broken, it becomes a level of support (shown by Points 3 and 4) by propping up the price and preventing it from heading lower again. 

Many traders who begin using technical analysis find this concept hard to believe and don't realize that this phenomenon occurs rather frequently, even with some of the most well-known companies. For example, as you can see in Figure 3, this phenomenon is evident on the Wal-Mart Stores Inc. (WMT) chart between 2003 and 2006. Notice how the role of the $51 level changes from a strong level of support to a level of resistance.

Figure 3

In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels. This is most often seen when a stock is trading in a generally sideways manner as the price moves through successive peaks and troughs, testing resistance and support.



The Importance of Support and Resistance Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level. 
Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance levels of an upward trending channel, the trend has accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel. 

Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support. 

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Technical Analysis: The Use Of Trend.

Technical Analysis: The Use Of Trend.

By Cory Janssen, Chad Langager and Casey Murphy

One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed. Take a look at the chart below:

Figure 1

It isn't hard to see that the trend in Figure 1 is up. However, it's not always this easy to see a trend: 

Figure 2

There are lots of ups and downs in this chart, but there isn't a clear indication of which direction this security is headed. 
A More Formal Definition
Unfortunately, trends are not always easy to see. In other words, defining a trend goes well beyond the obvious. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs. 

Figure 3

Figure 3 is an example of an uptrend. Point 2 in the chart is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend, each successive low must not fall below the previous lowest point or the trend is deemed a reversal.   

Types of Trend
There are three types of trend: 

• Uptrends
• Downtrends 
• Sideways/Horizontal Trends As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend. When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. If you want to get really technical, you might even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. In any case, the market can really only trend in these three ways: up, down or nowhere. (For more insight, see Peak-And-Trough Analysis.)
  
  Trend Lengths
  Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. Take a look a Figure 4 to get a sense of how these three trend lengths might look.
  
  

  Figure 4

  
  
  When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend. (To read more, see Short-, Intermediate- And Long-Term Trends.)
  
  Trendlines A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals. 
  As you can see in Figure 5, an upward trendline is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trendline helps traders to anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high. (To read more, see Support & Resistance Basics and Support And Resistance Zones - Part 1 and Part 2.)
  
  
  

  Figure 5

  
  Channels A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance. The upper trendline connects a series of highs, while the lower trendline connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.
  
  

  Figure 6

  
  Figure 6 illustrates a descending channel on a stock chart; the upper trendline has been placed on the highs and the lower trendline is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue. 
  
  The Importance of Trend
  It is important to be able to understand and identify trends so that you can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders. 

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Technical Analysis: Fundamental Vs. Technical Analysis

Technical Analysis: Fundamental Vs. Technical Analysis

By Cory Janssen, Chad Langager and Casey Murphy

Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities.



The Differences
Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. (For further reading, see Introduction To Fundamental Analysis and Advanced Financial Statement Analysis.)


By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements) for the purposes of this tutorial, this simple tenet holds true.

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

Time Horizon
Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.

The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases. (For more insight, read Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?)

Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.

Trading Versus Investing
Not only is technical analysis more short term in nature that fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.

The Critics
Some critics see technical analysis as a form of black magic. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. In fact, technical analysis has only recently begun to enjoy some mainstream credibility. While most analysts on Wall Street focus on the fundamental side, just about any major brokerage now employs technical analysts as well.

Much of the criticism of technical analysis has its roots in academic theory - specifically the efficient market hypothesis (EMH). This theory says that the market's price is always the correct one - any past trading information is already reflected in the price of the stock and, therefore, any analysis to find undervalued securities is useless.

There are three versions of EMH. In the first, called weak form efficiency, all past price information is already included in the current price. According to weak form efficiency, technical analysis can't predict future movements because all past information has already been accounted for and, therefore, analyzing the stock's past price movements will provide no insight into its future movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be of little use in finding investment opportunities. The third is strong form efficiency, which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental analysis can provide investors with an edge. The vast majority of academics believe in at least the weak version of EMH, therefore, from their point of view, if technical analysis works, market efficiency will be called into question. (For more insight, read What Is Market Efficiency? and Working Through The Efficient Market Hypothesis.)

There is no right answer as to who is correct. There are arguments to be made on both sides and, therefore, it's up to you to do the homework and determine your own philosophy.

Can They Co-Exist?
Although technical analysis and fundamental analysis are seen by many as polar opposites - the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved.

Alternatively, some technical traders might look at fundamentals to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Oftentimes, having both the fundamentals and technicals on your side can provide the best-case scenario for a trade.

While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school, there are certainly benefits to at least understanding both schools of thought.

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Technical Analysis: The Basic Assumptions

Technical Analysis: The Basic Assumptions

By Cory Janssen, Chad Langager and Casey Murphy

What Is Technical Analysis?
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns, others use technical indicators and oscillators, and most use some combination of the two.

In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future.

The field of technical analysis is based on three assumptions:

1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.

1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

Not Just for Stocks
Technical analysis can be used on any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex, etc. In this tutorial, we'll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is more frequently associated with commodities and forex, where the participants are predominantly traders.

Now that you understand the philosophy behind technical analysis, we'll get into explaining how it really works. One of the best ways to understand what technical analysis is (and is not) is to compare it to fundamental analysis. We'll do this in the next section.


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Technical Analysis: Introduction

Technical Analysis: Introduction

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future.

In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components.


If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.


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Can technical analysis be called a self-fulfilling prophecy?

This has been a topic of much controversy since the invention of technical analysis, and it remains a very heated debate. A self-fulfilling prophecy is an event that is caused only by the preceding prediction or expectation that it was going to occur. 

On the one hand, the tools used in technical analysis - such as support and resistance, trendlines, major daily moving averages and other types of indicators - do seem to have predictive qualities. Often the price of an asset does move in the direction foretold by these indicators.

However, those who see technical analysis as a self-fulfilling prophecy argue that these indicators are "right" only because extremely large numbers of people base trading decisions on these same indicators, thereby using the same information to take their positions, and, in turn, pushing the price in the predicted direction. Others argue that technical indicators can predict future price movements because the basic tenets of technical analysis, on which the design of these indicators is based, are valid and provide real insight into the market and the intrinsic forces that move it. 

However, both sides of the debate may be right to some extent. It is true that common signals generated by technical analysis can be self fulfilling and push the price of a security higher or lower, reinforcing the strength of the signal. That said, it's likely this may last only for a short time. Because the goals of participating investors and traders are different and there are hundreds of indicators informing these market players- not to mention fundamental forces that drive prices - it becomes nearly impossible for technical analysis to be self fulfilling in the long run. 

For example, many technical traders will place a stop-loss order below the 200-day moving average of a certain company. If a large number of traders have done so and the stock reaches this price, there will be a large number of sell orders, which will push the stock down, confirming the movement traders anticipated. Then, other traders will see the price decrease and also sell their positions, reinforcing the strength of the trend. This short-term selling pressure can be considered self-fulfilling, but it will have little bearing on where the asset's price will be weeks or months from now. In sum, if enough people use the same signals, they could cause the movement foretold by the signal, but over the long run this sole group of traders cannot drive price. 

To learn more about technical analysis see the tutorial The Basics Of Technical Analysis and Analyzing Chart Patterns.

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Technical Analysis: Introduction

Technical Analysis: Introduction
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Analyzing Chart Patterns: Introduction
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Technical Analysis: Five Chart Patterns You Need to Know

A guide for the practical investor

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A Simple Toolkit for Reliable Returns
In this simple-to-follow, eight-page guide, ChartAdvisor introduces you to five of the most powerful, profitable patterns in stocks.

These stock patterns pave the way 10%, 15%, even 20% gains for each winning trade. True, not the 2000% some people are touting. But it’s darn good money, made using an established strategy, and attainable at relatively low risk. It’s realistic money. And you don’t have to trust your hard-earned cash to some broker’s favorite fad.

In the next few pages, you’ll learn all the skills you need to recognize proven money-making stock patterns, and you’ll get to see these patterns in action.

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We’ll also introduce you to our ChartAdvisor system – Three Simple Steps to Stock Profits. Whether you decide to continue with ChartAdvisor or not, after reading this guide, you’ll …

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You’ll learn how to make big money on stocks using a technical analysis toolkit that has been wielded successfully for hundreds of years. That’s no exaggeration.

That makes these patterns some of the most time-tested strategies in finance. You can feel secure that you are trusting your investments to a highly refined system – not a new craze or an analyst’s hunch.

There are hundreds of patterns in stock charts that traders can look for, but atChartAdvisor, we focus only on the most trusted.

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Profitable Pattern Number One The Symmetrical Triangle: A Reliable Workhorse You’ll recognize the symmetrical triangle pattern when you see a stock’s price vacillating up and down and converging towards a single point. Its back and forth oscillations will become smaller and smaller until the stock reaches a critical price, breaks out of the pattern, and moves drastically up or down. The symmetrical triangle pattern is formed when investors are unsure of a stock’s value. Once the pattern is broken, investors jump on the bandwagon, shooting the stock price north or south. Symmetrical Triangle Pattern To form your symmetrical triangle pattern, draw two converging trendlines that bound the high and low prices. Your trendlines should form (you guessed it) a symmetrical triangle, lying on its side. How to Profit from Symmetrical Triangles Symmetrical triangles are very reliable. You can profit from upwards or downwards breakouts. You’ll learn more about how to earn from downtrends when we talk aboutmaximizing profits. If you see a symmetrical triangle forming, watch it closely. The sooner you catch the breakout, the more money you stand to make. Watch For: • Sideways movement, a period of rest, before the breakout. • Price of the asset traveling between two converging trendlines. • Breakout ¾ of the way to the apex. Set Your Target Price: As with all patterns, knowing when to get out is as important as knowing when to get in. Your target price is the safest time to sell, even if it looks like the trend may be continuing. For symmetrical triangles, sell your stock at a target price of: • Entry price plus the pattern’s height for an upward breakout. • Entry price minus the pattern’s height for a downward breakout. ChartAdvisor Symmetrical Triangles in Action ChartAdvisor has a long history of identifying symmetrical triangle patterns. Over the last two and one-half years, ChartAdvisor has brought to its readers over 20 symmetrical triangle patterns. That’s an average of one every month and a half. Our readers earned an amazing 40% profit on our Nortel Networks Inc (NT) pick. Those who followed our call on Rochester Medical Corp (ROCM) in September of 2004 earned 15% in 33 days. And in October of 2004, our members earn 11% in 19 days when ChartAdvisor noticed Pan American Silver Corp (PAAS). Our members earned 11% in 19 days on the PAAS symmetrical triangle pattern. If you’re not sure you can recognize a symmetrical triangle on your own, be sure to visitChartAdvisor.com daily for out Charts of the Day.  ---- Profitable Pattern Number Two Ascending and Descending Triangles: The Traditional Bull and Bear When you notice a stock has a series of increasing troughs and the price is unable to break through a price barrier, chances are you are witnessing the birth of an ascending triangle pattern. Ascending Triangle Pattern Confirm your ascending triangle pattern by drawing a horizontal line tracing the upper price barrier and a diagonal line tracing the series of ascending troughs. The descending triangle is the bearish counterpart to the ascending triangle. Descending Triangle Pattern Confirm your descending triangle by drawing a horizontal line tracing the lower price barrier and a diagonal line tracing the series of descending troughs. The ascending and descending patterns indicate a stock is increasing or decreasing in demand. The stock meets a level of support or resistance (the horizontal trendline) several times before breaking out and continuing in the direction of the developing up or down pattern. How to Profit from Ascending and Descending Triangles Ascending and descending triangles are short-term investor favorites, because the trends allow short-term traders to earn from the same sharp price increase that long-term investors have been waiting for. Rather than holding on to a stock for months or years before you finally see a big payday, you can buy and hold for only a period of days and reap in the same monster returns as the long-time stock owners. As with many of our favorite patterns, when you learn to identify ascending and descending triangles, you can profit from upwards or downwards breakouts. That way, you’ll earn a healthy profit regardless of where the market is going. Watch For: • An ascending or descending pattern forming over three to four weeks. Set Your Target Price: For ascending and descending triangles, sell your stock at a target price of: • Entry price plus the pattern’s height for an upward breakout. • Entry price minus the pattern’s height for a downward breakout. ChartAdvisor Ascending and Descending Triangles in Action Ascending and descending triangles are some of our most popular patterns, because their features are so clear and the breakouts are almost always fast and furious. Flanders Corp (FLDR) earned our readers 28% in 18 days. Dominos Pizza (DPZ) jumped 12% in 20 days after we pinpointed the breakout point on June 13, 2005. Another of our winning picks in 2005, Dril-Quip Inc (DRQ) jumped 12% in just 6 days. On Boyd Gaming (BYD), investors following our pick earned a whopping 29% in 35 days. Our readers earned 29% in 35 days on the BYD ascending triangle pattern. As a ChartAdvisor regular you would have reaped incredible profits on the 60 ascending and descending triangle picks we’ve made since our program’s beginning. We features an average of two of these cash cows per month, making them one of the most prevalent and predictable patterns in your toolbox. ---- Profitable Pattern Number Three Head and Shoulders: A ChartAdvisor Staple The head and shoulders pattern is a prevailing pattern among short sellers, investors who profit from downtrends. After three peaks, the stock plummets, offering a textbook, high-return opportunity to traders who catch the trend early. Head and Shoulders Pattern Head and shoulder patterns are characterized by a large peak bordered on either side by two smaller peaks. Draw one trendline, called the neckline, connecting the bottom of the two troughs. The first trough is a signal that buying demand is starting to weaken. Investors who believe the stock is undervalued respond with a buying frenzy, followed by a flood of selling when traders fear the stock has run too high. This decline is followed by another buying streak which fizzles out early. Finally, the stock declines to its true worth below the original price. How to Profit from the Head and Shoulders Pattern • Short sell as soon as the price moves below the neckline after the descent from the right shoulder. Set Your Target Price: For the head and shoulders pattern, buy shares at a target price of: • Entry price minus the pattern’s height (distance from the top of the head to the neckline). ChartAdvisor Head and Shoulders Pattern in Action Profiting from a downtrend can seem counterintuitive at first, but ChartAdvisor.comreaders soon learn the benefits of being able to profit in up OR down markets. This head and shoulders pattern on PAWC shot up an astonishing 27% in just 33 days. ---- Profitable Patterns Number Four and Five Triple and Double Bottoms and Tops: Reversals upon reversals When you see a W or M pattern forming, you may have just discovered a money-makingdouble bottom or double top pattern. These patterns are common reversal patterns used to suggest the current stock trend may be likely to shift. But don’t panic if your double bottom or double top patterns do not develop as you had originally thought. You haven’t lost your chance for cash. If your W or M pattern reverses for a fourth time, you could now be working with the profitable triple bottom or triple top. Double Bottom Pattern Double Bottom Pattern A small peak is surrounded by two equal troughs. Purchase When: • The price exceeds the middle-peak price. Watch For: • A price increase of 10% to 20% from the first trough to the middle peak. • Two equal lows, not to differ by more than 3% or 4%. Set Your Target Price: For the double bottom pattern, sell your stock at a target price of: • Entry price plus the pattern’s height (distance from the peak to the bottom of the lowest trough). Double Top Pattern Double Top Pattern A small trough is surrounded by two equal peaks. Short Sell When: • The price drops below the middle-trough price. Watch For: • A price decrease of 10% to 20% from the first peak to the middle trough. • Two equal highs, not to differ by more than 3% or 4%. Set Your Target Price: For the double top pattern, buy shares at a target price of: • Entry price minus the pattern’s height (distance from the trough to the top of the highest peak). Triple Bottom Pattern Triple Bottom Pattern Three equal troughs amid a series of peaks. Purchase When: • The price exceeds the resistance established by the prior peaks. Watch For: • A series of three identical troughs at the end of a prolonged downtrend. Set Your Target Price: For triple bottom patterns, sell your stock at a target price of: • Entry price plus the pattern’s height (distance from the resistance to the bottom of the lowest trough). Triple Top Pattern Triple Top Pattern Three equal peaks amid a series of troughs. Purchase When: • The price falls below the support that formed from the prior troughs. Watch For: • A series of three peaks at relatively the same level. Set Your Target Price: For triple top patterns, buy shares at a target price of: • Entry price minus the pattern’s height (distance from the support to the top of the highest peak). Now You Know… The five most profitable stock patterns: • symmetrical triangle • ascending and descending triangles • head and shoulders • double top and double bottom • triple top and triple bottom You’re halfway through your ChartAdvisor toolbox. But you still need a couple more nuts and bolts to ensure high-dollar profits in the market. Before you’re ready to invest, you’ll want to learn how best to cut your losses and maximize your returns. ---- How to Minimize Your Risk No investment advisor likes to admit it, but no stock picking system is perfect. Sometimes, the stocks we think will explode, don’t. Sometimes, the stocks we feature lose money. There may not be a foolproof system to predicting the stock market, but we do have afoolproof system for managing risk. ChartAdvisor follows one of the safest risk reduction systems available. Using these three simple steps, you can reduce the risk in your stock picking plan: Three Ways to Take Risk Out of the Stock Market 1. Screen Your Picks. This might seem obvious, but patterns that look like they are developing into predictable trends do not always follow through. After combing over thousands of stock charts a day, ChartAdvisorwill often not fetures a single stock. 2. Get In. Get Out. ChartAdvisor preaches setting realistic target exit prices for all stocks. We lock in high returns while the stock is high, and we get out before the market has a chance to change its mind. 3. Set Tight Stop Losses. This step is absolutely critical to minimizing your risk in the stock market. If a sure-fire winner turns out to be a fizzled-out dud, your system needs to have a built-in, abandon-ship trigger. That is, you need to know when to cut your losses and move on to brighter prospects. ChartAdvisor sets its stop-loss trigger around 3%. So if a trade starts to go sour, you will almost never lose more than 3% of your investment. “I am glad I took a second look at ChartAdvisor. I keyed in your data from the 2nd of Feb 04 into a spread sheet with 20% of capital allocated to each symbol and came up with the 38% annualized return which is better than a poke-in-the-eye-with-a-sharp-stick, considering "the market" has been a sideways affair since the starting date. What I must mention is how inspired and relaxed I am after an in-depth study of your real trading account making that amount of return... I can more fully appreciate the much-lectured "cut your losses short now", seeing just how early it pays to get out when the trade goes against you, rather than the "give-it-room" systems I have tried." -P. Cameron, New Zealand ---- How to Maximize Your Return In Up or Down Markets Remember at the beginning of this report when we said we’d show you the Three Simple Steps to Stock Profits? We already learned about step one: picking profitable stock patterns. We’ve also covered step two: minimizing your risk. Now we’ve come to the final step that makes theChartAdvior system so unique: how to profit from stocks, even when the stock goes down. It’s a common misconception that traders can only make money when the price of a stock rises. Investors can make money anytime they can predict a stock’s future movement – up or down. It’s time to learn about short selling. Short selling is the secret to making cash in a down market. Here’s how it works: 1. Identify a stock pattern that suggests a stock is headed down. Example: The Cleveland Cliffs descending triangle pattern in April of 2005 was perfect for short selling. 2. Borrow shares of the soon-to-decline stock from your brokerage. Example: Let’s say, right before the Cleveland Cliffs pattern (above) breaks out and moves downwards, you borrow 100 shares of the stock. 3. Immediately sell these borrowed shares. Example: You immediately sell these borrowed shares of Cleveland Cliffs at the price just below the support line: $70 per share, 100 shares = $7,000. You are now sitting on $7,000. But, of course, you still owe the brokerage 100 shares, which you don’t currently have anymore. 4. Wait for the stock to drop to your target price. Example: You wait for the stock to reach the target price, which in this example, is $63 per share. 5. Buy the shares at the target price. Example: You use the $7,000 you made earlier to purchase 100 shares at $63 per share. That costs you $6,300 dollars and leaves you with an extra $700 in your account. 6. You return the shares to your brokerage. Example: Return the 100 shares of Cleveland Cliffs to your brokerage. 7. Enjoy your profits. Example: You earned $700, a 10% profit on $7,000. And even better, you made $700 when the price of CLF declined and all other investors were losing money! ---- Time to Get Started! You’re ready. You know everything you need to make big money on stocks, and you can put all of these tools to work now. Start flipping through stock charts, and see if you can identify the right patterns. Then use our easy-to-follow principles of risk management and short selling to ensure you are squeezing the most out of every one of your investment dollars.

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Look at the big picture when Investing

Look at the Shadow

It is not a sin when you buy LOW

Use fundamental analysis to pick the good quality stocks.
Use technical analysis to buy into the stocks.

Technical analysis versus Fundamental Analysis
Malaysian Personal Finance