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Topic 4: Typical Parameters for intermediate trends  An intermediate cycle consists of a primary intermediate price movements
and a secondary reaction.
Some basic observations
 It extends from the low on one intermediate trend to the low of the other
 The price movement that corresponds to changes in economic activity
over the course of a typical 3 to 4 year business cycle. Causes of secondary reaction

 Through it is clearly important to have an idea of the direction and maturity  Since the primary trend of stock prices is determined by the attitudes of
of the primary trend, it is also helpful to have some understanding of the investors to the future flow of profits, which are, in turn, determined to a
typical character and duration of the intermediate trend for the purpose large degree by the course of the business cycle, it would seem illogical at
of improving success rates in trading, and also to help assess when the first to expect longer-term movements to be interrupted by what often
primary movement may have run its course prove to be very uncomfortable reactions (or in the case of a bear market,
very deceptive rallies)
Successful analysis of intermediate trends for any market or stock offers the
following advantages: Major technical principle

1. Changes in intermediate trends aid in identification of turning points in the  At any one time, there are 4 influences on prices.
primary trend  They are psychological, technical, economic and monetary in nature

2. Intermediate term trading involves fewer transactions than trading of Using intermediate cycles to identify primary reversals
minor price movements and, therefore results in lower commission and
execution costs Number of intermediate cycles

3. Intermediate trend reversal points occur several times a year and can, if  A primary movement may normally be expected to encompass 2 and a half
properly interpreted allow a relatively high and quick return on capital. intermediate cycles

Intermediate cycles defined  Unfortunately, not all primary movements correspond to the norm; an
occasional primary movement may consist of one,2,3 or even 4
 A primary trend typically consists of 5 intermediate trends, 3 of which form intermediate cycles
part of the prevailing trend, while the remaining 3 run counter to that
trend  Furthermore, these intermediate cycles may be of very unequal length or
magnitude, making their classification and identification possible only
 In a bull market, the intermediate countertrends are represented by price after the event.
declines; in a bear market, they form rallies that separate the 3
intermediate down waves.  Intermediate cycle analysis can still be used as a basis for identifying the
maturity of the primary trend in most cases
 Intermediate term trends that move in the same direction as the primary
trend are generally easier to profit from Characteristics of the final intermediate cycle in a Primary trend

 Those who do not have the patience to invest for the longer term will find  In addition to actually counting the no. of intermediate cycles, it is possible
that successful analysis of intermediate movements offers superior to compare the characteristics of a particular cycle with those of a typical
results, especially as the day-to-day or minnow swings are, to a large pivotal or reversal cycle of a primary trend.
degree, random in nature and therefore even more difficult to capitalize
on

 Intermediate movements can go either with or against the main trend,
which means that there is an intermediate cycles similar to a primary one

Reversal from bull to bear market

 Since volume lead price, the failure of volume to increase above the levels
of the previous intermediate cycle up phase is a bearish sign

 If over a period of 3 to 4 weeks, volume expands on the intermediate rally
close to the previous peak in volume but fails to move prices significantly,
it represents churning and should also be treated bearishly

Reversal from bear to bull market

 The first intermediate up phase of a bull market is usually accompanied by
a substantial expansion in volume that is significantly greater than those
of previous intermediate up phases

 The first leg up in a bull market attracts noticeably more volume than any
of the intermediate rallies in the previous bear market

 Another sign of a basic reversal occurs when prices retrace at least 80% of
the previous decline

 The greater the proportion of retracement, the greater the odds of a
reversal in the basic trend

 If the retracement Is greater than 100%, the odds clearly indicate that a
reversal in the downward trend has taken place because the series of
declining peaks will have broken down

Topic 5: Support & Resistance Rules for determining potential support/resistance points

Support resistance Previous highs and lows

 Support  “buying(actual or potential) sufficient in volume to halt a  We have already establishes that previous highs and lows are potential
downtrend in prices for an appreciable period” support or resistance levels.

 Resistance  “selling (actual or potential) sufficient in volume to satisfy all  High are important because many market participants may have brought
bids and hence stop prices from going higher for a time” close to or at the actual high for a move

 A support zone represent a concentration of demand, whereas resistance  When price decline, the normal human response is not to take a loss, but
represents a concentration of supply to hold on. That way, the pain of actually realizing a loss can be avoided

 The word concentration is emphasized because supply and demand are  As a result, when the price returns to the old high, those who bought at
always in balance. that level have great motivation to sell in order to break even

 However, it is the relative enthusiasm of buyers as compared to sellers, or  Note that how previous highs and lows offer good support/resistance
vice versa that is important because that is what determines trends points for future trading. unfortunately, there is no way of knowing
whether a particular level will turn out to be support or resistance, or even
 If buyers are more enthusiastic than sellers, that will continually increase whether it will be a pivotal point at all
their bids until their purchasing demands have been satisfied
At round numbers
 On the other hand, if sellers are the more anxious, then they will be willing
to liquidate at lower  Support and resistance zones have a habit of forming at round numbers
 This is probably because numbers such as 10, 50 or 100 represent easy
 Price and the general price level will fall. If in doubt, think of support as a
temporary floor for prices and resistance as a ceiling psychological points upon which traders and investors often base their
decisions
Support violation  The guide for potential turning points, is to look for round numbers

 At the beginning, the price is declining. It finds at bottom at A and then Trend lines and Moving Averages Represent dynamic levels of support and resistance
moves up. The next time it falls to A, it again rallies, so A may now be said
to be support area  Chart 5.2

 The third time the price slips to A, it goes through or, as we say, it violated Emotional points on a chart represent potential support/resistance levels
support. One of the first principles of identifying a potential support level,
then is to look for previous lows.  Unexpected bad news, the sugar price experience three downside gaps

 In the case of potential resistance, this would be in the area of a previous Rules for determining the probable significance of a potential support or resistance
high zone

Support and resistance reverse their roles  There is no hard and fast answer, but there are some general rules that
can act as guidelines;
 The price found temporary support at B. C also proves to be support point,  The greater the speed and extent of the previous move, the
but note that the rallies are reversed at support level B; move significant a support or resistance zone is likely to be

 Support reverses its role to resistance on the way up
 We see the price rally through resistance at B and A (the former support

level). The ensuing decline then finds support at A again
 Resistance reverses its role to support on the way down

Topic 6: Trend lines 2. A resumption of the previous trend, when it is called a consolidation or
continuation pattern
 Perhaps the simplest of the tools we use in technical arsenal and are
arguably one of the most effective Similarly, the penetration of a trend line will result in either a reversal of that trend
or its continuation
 This concept of fundamental building block of pattern identification and
interpretation Major technical principle;

 It is straight line connecting either a series of ascending bottoms in a rising  The violation of trend lines with a sharp angle of ascent or descent is more
market or the tops of a descending series of rally peaks likely to result in a consolidation than a reversal

 Those joining the lows are called up trendlines Extended trend lines
 Those connecting the tops are referred to as down trend lines
 Possible to construct horizontal trend lines joining a series of identical lows  Trend line reversing its previous role as support while the throwback move
turns it into an area of resistance
or identical highs
 Down trend line is constructed by joining the final peak with the top of the Logarithmic (ratio) vs Arithmetic scales

first rally  Scaling is an issue that is often overlooked in the technical community, but
since it can have an important influence on how trend line can be
Major principle; interpreted, this is as good a place as any to introduce this concept

 A true trend line is a graphic way of representing the underlying trend  There are 2 axes on any market chart
 The x axis along the bottom, register the date, the y axis, the price
Ideally:  There are 2 methods of plotting the y-axis: arithmetic and logarithmic
 Which one is chosen can have very important implications
 Up trend line is constructed by connecting the final low with the first  Arithmetic charts allocate a specific point or dollar amt to a given vertical
bottom in the rally, as line AD
distance
 This is called the primary trend line  Each arrows has the same vertical distance and reflects approximately 250
 This would be the bear market low and the first intermediate bottom
 Example shown; offers a fairly shallow angle of ascent. points, that will be true at an price level
 The price rallies sharply, which means that the violation develops well after  Logarithmic scale, on the other hand, allocates a given percentage price

the final peak. move to a specific vertical distance
 It is better to redraw the line as the price moves up  Each arrow represents a move of approximately 100%, whether it is a

Major technical principle; lower prices or higher prices

 Drawing trend line is more a matter of common sense rather than Significant of trend lines
following a set of hard and fast rules
 It has been established that a break in trend caused by the penetration of
Trend line breaks can be followed by a reversal or consolidation a trendline result in either an actual trend reversal or a slowing in the pace
of the trend
The completion of a price pattern can signify either;
Length of the line
1. A reversal in the previous trend – in this instance, it is known as a reversal
pattern,  The size of length of a trend is an important factor as with price patterns.

 Is a series of ascending bottoms occurs over a 3-4 weeks span, the resulting
trendline is only of minor importance

 If the trend extends over a period of 1-3 years, however its violation marks
a significant juncture point.

 Big trends result in big signals, small trends in small signals

Number of times the trendline has been touched or approached

 A trendline derives its authority from the number of times its has
been touched or approached; ie the larger the number the greater
the significance

 Trend line represents a dynamic area of support or resistance
 Each successive “test” of the line contributes to the importance of this

support or resistance, and thus the authority of line is true reflection
of the underlying trend
 Close encounter to the line  important as an actual touching
because it still reflects the lines importance as support or resistance
area

Angle of ascent or descent

 A very sharp trend, is difficult to maintain and is liable to be broken rather
easily, even by short sideways movements

 All trends are eventually violated, but the steeper ones are likely to be
ruptured more quickly.

 The violation of a particularly steep trend is not as significant as that of a
more gradual one

Trend channels

 Only the possibilities of drawing trend line join bottoms in rising market
and tops in declining ones have been examined

 It also useful to draw lines that are parallel those basic trend line
 In rising mkt, the parallel line  return trendline joins the tops of rallies

and during declines the return line joins the series of bottom
 The area between these trend extremities  trend channel