Predicting Stock Prices using Technical Analysis Trends

Please note: Technical Analysis is used in many different forms of investing such as commodities, futures, and currency trading. This hub solely focuses on the application of technical analysis to the stock market. Technical analysis isn’t exact, but it often gives a good indication of future stock prices based on logic.

What is Technical Analysis?

Technical analysis involves identifying trends and patterns within an asset’s price movement to predict if it will go up, down, or sideways. The market technician studies an asset’s graph and uses logical reasoning to forecast the actions of buyers and sellers and determine the direction and magnitude of price changes. Charles Dow, the namesake of the Dow Jones Industrial Average, was a market technician himself. Averages, however are technical indicators, and will not be covered in this hub. This hub focuses on the different trends and patterns that can be identified within the stock market. These patterns can take shape over any time horizon, whether it is days, weeks, months or years.

Resistance Level
Resistance Level
Support Level
Support Level

Resistance and Support Levels

 The resistance and support levels act as “ceilings” and “floors” for stock prices respectively.  If the stock price breaks through a resistance or support the price will continue to go up or down continuously.  Normally, a stock will bounce up and down between levels.  This area of price fluctuation is known as the trading range, which can last for a few days or a few years.  If a stock rises above the resistance level or below the support level this is known as a breakout.

Uptrend
Uptrend
Downtrend
Downtrend

Uptrends and Downtrends

An uptrend is a series of rising bottoms, while a downtrend is a series of falling tops.  The steeper the slope of the uptrend, the quicker it will end.  Stocks will either move up, down, or sideways.  If the stock is trading sideways and the trend lines are parallel, buy close to the support level and sell as close to the resistance level as possible.  There will likely be a large upswing or downswing after the market is sideways.

Double Top
Double Top
Double Bottom
Double Bottom
Triple Top
Triple Top
Triple Bottom
Triple Bottom

Tops and Bottoms

A double top, or twin peak, is formed when a stock hits the resistance level twice and shoots downward. A double bottom, or double valley, is exactly the opposite with prices rising after the support level is touched for the second time. The two tops and bottoms do not have to be exactly the same, but they are usually very close. In a double top, investors see that a previous high was reached for a second time and decide it is a good time to sell, this causes the price to drop indefinitely. The opposite is true of the double bottom scenario. There are also triple tops and triple bottoms that act the same way as their double counterparts.

Head and Shoulders
Head and Shoulders
Inverse Head and Shoulders
Inverse Head and Shoulders

Head and Shoulders

A head and shoulders pattern consists of one high peak and two lower peaks on each side, thus resembling the outline of a person’s head and shoulders.  It is somewhat like a triple top in appearance and they both signal bad news for any investor holding the stock.  The stock makes the second shoulder because there isn’t enough momentum to reach the previous high.  The second shoulder breaks through the support line and continues downward.  The distance the stock moves downward is approximately equal to the height of the peak.  The inverse head and shoulders is the opposite.  It is a reflection of a regular head and shoulders, and is very good news for investors.

 

Rounding Top
Rounding Top
Rounding Bottom
Rounding Bottom

Rounding Tops and Bottoms

A rounding top is an uptrend that gradually turns into a downtrend.  The height of the rounding top is known as the distribution phase.  During the distribution phase, investors holding the stock sell high to optimistic buyers.  This dumping of shares is what causes the downtrend.  A rounding bottom begins with a downtrend which bottoms out in the acquisition phase and becomes an uptrend.  The acquisition phase is when savvy buyers recognize a recovery is around the corner and buy from unsuspecting sellers.  There was definitely an acquisition phase in early March of this year.  Be careful when buying on a downtrend to only buy when an uptrend is beginning, or else there may be eminent losses as the stock price continues to drop.  Also note that rounding tops and bottoms are usually not perfectly round, they are often jagged and bumpy.

Symmetrical Triangle
Symmetrical Triangle

Triangles

Symmetrical Triangle

A simultaneous uptrend and downtrend create a symmetrical triangle. This triangle can break out in either direction. The stock price must break out before it reaches the point of the triangle or there is no effect. The amount the price increases is equal to the initial height of the triangle. The volume traded must also be increasing for there to be a break out to the upside. If volume is steady, it is likely the stock will fall to the downside.

Pennant
Pennant

Pennant

The pennant is similar to the symmetrical triangle except it is somewhat easier to predict. There will be a certain dominant trend occurring before the pennant is formed; the price will be going either up or down noticeably. Whatever direction the price is going before the pennant is formed will be the same direction the price is going after it exits the pennant.

Ascending Triangles
Ascending Triangles
Descending Triangles
Descending Triangles

Ascending and Descending Triangles

The ascending triangle is a combination of an uptrend and a resistance level. This formation is almost always a bullish sign, but it can break out to the downside. Like the symmetrical triangle, the price increase is equal to the initial height of the triangle. The descending triangle is exactly the opposite; it is a bearish sign. The price decrease in price will be equal to the height of the triangle.

Flag
Flag

Flags

 A flag occurs when an uptrend or downtrend becomes trapped between parallel support and resistance lines and then breaks out in the same direction of its initial movement.  Flags usually appear to be moving in the opposite direction of the overall trend.  They occur as prices face adversity from buyers and sellers as prices rise and fall.  This “adversity” causes the actual trend to waiver momentarily before continuing on the same path.

Falling Wedge
Falling Wedge

Wedges

A wedge is similar to a flag except the resistance and support lines eventually converge. The price eventually moves toward the flatter of the two trend lines. A rising wedge is a sign of a bullish market, while a falling wedge is considered bearish.

Parabolic Curve
Parabolic Curve

Parabolic Curve

 Parabolic curves are steep inclines in stock prices caused by intense speculation.  This type of movement should be avoided as the stock price normally falls hard after these large upward gains.  These types of curves are normally seen in highly volatile stocks which fluctuate very erratically.  Low volatile stocks that have nearly a “flat line” formation should be avoided as well, since there is a low capital gain potential.

 

Cup and Handle
Cup and Handle

Cup and Handle

 The cup and handle is a pattern formed by a rounded bottom followed by a flag, which resembles a coffee mug.  The stock will reach an initial high point and decrease until it reaches a new high again where it faces sell off pressure.  This will create a flag formation until eventual break out.  If the bottom of the cup has a strong U-shape, then the pattern should be taken into consideration as a bullish indicator.  The trend does not apply if the cup bottom is a V-shape.

 

 

Gap
Gap
Break Away Gap
Break Away Gap
Exhaustion Gap
Exhaustion Gap

Gaps

Gaps occur when there is a dramatic change in stock price, and the chart shows an actual gap in the movement. Gaps can be upward or downward. The upward gap, or breakaway gap, needs high trading volume to occur. These positive gaps usually occur when there are significant events for the company, or if positive earnings reports are released. Breakaway gaps can mean big capital gains for investors. Downward gaps, sometimes called exhaustion gaps, signal a downward spike in stock prices. Downward gaps may be a result of undesirable company headlines. An exhaustion gap can be a good signal for investors to exit positions as losses are extensive and typically last for a while.

(Note: Gaps can only be seen if the chart is in some type of candlestick format, such as the charts shown in this hub.)

 All of the charts used here came from Investopedia.com.  http://www.investopedia.com

Quick Guide to Technical Analysis Trends and Price Direction

Trend or Pattern 
Price Direction 
Resistance (breakout) 
Up 
Resistance (reflection) 
Down 
Support (breakout) 
Down 
Support (reflection)
Up
Uptrend
Up
Downtrend
Down
Sideways
Up or Down (dramatically)
Double (or Triple) Top
Down
Double (or Triple) Bottom
Up
Head and Shoulders
Down
Inverse Head and Shoulders
Up
Rounding Top
Down
Rounding Bottom
Up
Symmetrical Triangle (with High Volume)
Up
Symmetrical Triangle (with Low or Steady)
Down
Pennant (after Uptrend)
Up
Pennant (after Downtrend)
Down
Ascending Triangle
Up
Descending Triangle
Down
Flag (after Uptrend)
Up
Flag (after Downtrend)
Down
Rising Wedge
Up
Falling Wedge
Down
Parabolic Curve
Up (dramatically)
Cup and Handle
Up
Breakaway Gap
Up (dramatically)
Exhaustion Gap
Down (dramatically)

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Comments 16 comments

Kapitall profile image

Kapitall 6 years ago from www.kapitall.com

What do you think about large price gap? Do you think they will always be filled? Do you believe there are any cases where the gap will not be filled?


C. Whitaker profile image

C. Whitaker 6 years ago from Indianapolis, IN Author

That's a good question. I think whether or not the orders are filled within the price range of the gap basically depends on the current volume at hand. If a stock has low volume and erratic movement, then it is likely there are not buyers and sellers at certain prices. There just isn't the liquidity for steady buying and selling to occur. Also many gaps occur because of breaking news related to the stock. If a lawsuit comes to light for example this will create a downward gap, wherein the sellers cut their ask price to attract buyers. I think of it like retail, when a certain item doesn't seem to move off of the shelf and the price gets slashed to attract more customers. In investing that price slash is the downward gap. And yes I do believe there are several if not thousands of limit orders that do not get filled. If someone has a buy limit order at $5 and the stock is at $5.25 but gaps upward to $8 then the buyer may cancel or wait for the price to become deflated (depending on their type of limit order and its expiration). Thanks for the question, I appreciate any feedback


prevodi 6 years ago

There is an interesting book about trading based on chart patterns from Thomas Bulkowsky. I think he also has a website with more information than in the book.


C. Whitaker profile image

C. Whitaker 6 years ago from Indianapolis, IN Author

Do you remember the title of the book? I've only read a few books on technical analysis, but I think it's a very interesting subject. I always wished they would have had a class on technical analysis in the curriculum at my university. But, it's definitely one-sided towards fundamental analysis.


Jacques 6 years ago

Hi, I would like to know, do you any websites out there (used by most companies) that provide you with s list of stocks to watch on a regular basis, wedges, bottom top formation, trends, stocks that are bouncing on and off resistances and support and also about to break out, flags, triangles, cups and handless...etc


C. Whitaker profile image

C. Whitaker 6 years ago from Indianapolis, IN Author

Well there are a lot of technical analysis websites out there, but you really don't need a specific list of stocks because you can actually find trends and patterns as they form in about any stock. Once you memorize some of the patterns they actually become really easy to spot! Are there certain stocks you trade or are considering trading? See if you see any trends emerging and if not let me know the stock(s) symbol and I can take a look and see if there's anything prominent. Thanks for your question!


TINA V profile image

TINA V 6 years ago

This is a very informative hub. It is also helpful to your readers especially those who are engaged in trading.

Have a great week!


C. Whitaker profile image

C. Whitaker 6 years ago from Indianapolis, IN Author

Hey thanks Tina V, that's very nice of you to say. You have a nice week as well-


traderx profile image

traderx 6 years ago from Las Vegas

One thing to keep in mind is technicals are dynamic - over time what works shifts, meaning some patterns play out well, others do not or go very little then fail. This itself is a pattern too, but is only detected after enough time has passed to notice the pattern. One easy example would be breakouts - during strong trends they work well, during weak trends they are faded, but not all are. Its that level of uncertainty that keeps the market dynamics going, as one side faces off against the other side.


C. Whitaker profile image

C. Whitaker 6 years ago from Indianapolis, IN Author

Your comment is very insightful, it is true that when people begin to notice the patterns or if they perceive the price of the stock to be undervalued, this opportunity will be short lived indeed. I've debated before whether it is better to trade a lot of different stocks or stick to a few and learn their characteristics. The random walk theory proves stocks have no distinct pattern and therefore TA is useless, but I definitely think there is a certain "feel" to how specific stocks trade. Thanks for the post. CW


financialspreadbetting 6 years ago

I think you should stick to a few stocks or stick to a few patterns. Become an expert in them an you should be able to spot opportunities.


Richard Stephen 6 years ago

Very good summary on technical analysis. Concise and easy to read. I've bookmarked it for future reference. Thanks!


M.J.JEEVAN LAL 5 years ago

just excellent..well done..


Deron Wagner 4 years ago

Nice, succinct overview of technical analysis. I like it. It is similar to the technical swing trading strategy of http://morpheustrading.wordpress.com


daveM 3 years ago

This is a very thorough description of patterns and techniques, well worth reading a few times. Thanks you for this.

daveM

http://www.thesmallbusinessideassite.com


Sunil 7 months ago

Which pattern of graph one should consider while buying and selling of share? Day 1 , 5 , week , month, year, 5 years or all .

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