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Mark Etzkorn - Basic Chart Analysis Trends, Trading Ranges, and Support and
Mark Etzkorn - Basic Chart Analysis Trends, Trading Ranges, and Support and
Mark Etzkorn - Basic Chart Analysis Trends, Trading Ranges, and Support and
resistance
By Mark Etzkorn
If you've read The Technician's Basic Tool: The Price Chart, you're probably
familiar with the more popular chart types and how they display price information.
But knowing the difference between a bar chart and a candlestick chart is only
the beginning. Obviously, what's important is making sense of the price patterns
that develop over time.
Actually, despite the sometimes colorful names given to chart patterns, chart
analysis has a very common-sense goal: to locate price trends, congestion
areas, and points where trends are likely to reverse. "Patterns" can consist of a
single price bar or dozens, and can trigger trades that last a few hours or a few
months. To start, we'll focus on a few major price patterns that illustrate the most
important principles of chart analysis.
Keep in mind that many, if not most of the concepts we will discuss here are
equally applicable to intra-day, daily, weekly, or monthly charts. However, certain
patterns, especially those that revolve around the open or closing prices, will be
relevant only on the daily time frame.
Trends
Of course, catching the precise beginnings and ends of all trends is unrealistic;
fortunately, you don't need to. But as a technical trader interested in finding
profitable price moves, you are always concerned with price trends on a certain
level, whether they last a few hours or several months.
Figure 1. Sun Microsystems (SUNW), daily. Uptrend preceded by trading range and
punctuated by corrections, or pullbacks. Source: Omega Research.
It is obvious from this example that even though the market is clearly in a strong
overall uptrend, the rally is punctuated by occasional counter-trend downswings
(corrections, pullbacks--pick your term), the most notable occurring between
January and February 1999. (This correction happened to take the form of a
triangle, a pattern we will discuss in a future article.) A trading range, or
congestion period (see next section) preceded the uptrend.
Points A, B, C and D correspond to some of the more notable highs and lows
throughout this uptrend, the largest of which (C and D) are referred to as relative
(or "reaction," or "swing") highs and lows. Figure 2 shows a downtrend on a 15-
minute chart. A, B, C and D mark some of the relative highs and lows on this
chart.
Figure 2. America Online (AOL), 15-minute. Downtrend and relative highs and
lows. Source: Quote.com.
Of course, trends are relative, depending on the time frame you consider. Figure
3 shows a somewhat random market that drops dramatically toward the end of a
roughly three-month period on a daily chart. While this might not qualify as a
downtrending market (until the steep sell-off at the end), it is definitely not an
uptrend.
Figure 3. Cisco (CSCO), daily. Sideways price action ending with sharp break. Source:
Omega Research.