Handbook of Technical Analysis For Phil’s Stock World By Pharmboy 1 Table of Contents Table of Contents _____________________________________________________________ 2 Table of Figures ______________________________________________________________ 4 Introduction __________________________________________________________________ 6 Understanding Market Cycles: The Art of Market Timing _____________________________ 7 Stages of a Market Cycle ___________________________________________________ 8 Phase Strategies __________________________________________________________ 9 Sentiment Cycle _________________________________________________________ 10 Dow’s Theory of Markets ______________________________________________________ 12 Fundamental vs. Technical Analysis _____________________________________________ 17 Types of Technical Trading: Scalping, Day, Momentum, Swing, & Position Trading _______ 19 Scalping________________________________________________________________ 19 Day Trading ____________________________________________________________ 19 Momentum Trading ______________________________________________________ 19 Swing Trading ___________________________________________________________ 21 Position Trading _________________________________________________________ 23 Stock Charting Basics: How to Read & Understand Stock Charts _______________________ 25 Line Charts _____________________________________________________________ 26 Bar Charts ______________________________________________________________ 28 Candlestick Charts _______________________________________________________ 29 Trading Time Frames _____________________________________________________ 29 Using Moving Averages for Long and Short Trades _________________________________ 32 Basic Technical Patterns: The Foundation of Common Pattern Identification _____________ 35 Trends & Trend lines _____________________________________________________ 36 Support & Resistance _____________________________________________________ 39 Neutral Ranges __________________________________________________________ 40 Triangles: Symmetrical, Ascending, Descending ________________________________ 42 Flags, Pennants and Wedges ________________________________________________ 44 Double Tops & Bottoms ___________________________________________________ 44 Head & Shoulders ________________________________________________________ 46 Cup with a Handle _______________________________________________________ 47 Entry & Exit Points _______________________________________________________ 49 Low-Risk Trading ________________________________________________________ 50 Selling Short ____________________________________________________________ 50 Candlestick Charts _______________________________________________________ 51 Summary: Combine Indicators to Support Trading Decisions ______________________ 51 Candlestick Charting I: Basic Patterns ____________________________________________ 54 Doji ___________________________________________________________________ 55 Engulfing_______________________________________________________________ 55 Harami_________________________________________________________________ 57 Kicker _________________________________________________________________ 57 Dark Cloud Cover ________________________________________________________ 58 Piercing ________________________________________________________________ 59 2 Shooting Star ____________________________________________________________ 59 Hammer & Hanging Man __________________________________________________ 60 Morning Star ____________________________________________________________ 60 Evening Star ____________________________________________________________ 62 Playing the Gap: Identifying and Trading Gaps _____________________________________ 63 Types of Gaps: __________________________________________________________ 63 Area Gaps ______________________________________________________________ 63 Continuation Gaps _______________________________________________________ 64 Breakaway Gaps _________________________________________________________ 65 Exhaustion Gaps _________________________________________________________ 65 Strategy ________________________________________________________________ 66 When to Buy (Short) and Sell (Cover) ________________________________________ 66 How to Find Trading Gaps _________________________________________________ 66 Conclusion _____________________________________________________________ 67 High-Reliability Reversal Signals________________________________________________ 68 Breakouts & Breakdowns ______________________________________________________ 74 Breakouts ______________________________________________________________ 74 Breakdowns_____________________________________________________________ 76 How to Trade Power Spikes ____________________________________________________ 80 References & Games __________________________________________________________ 82 3 Table of Figures Figure 1. Four stages of the market cycle. __________________________________________________________ 7 Figure 2a and b. Market stages of two companies. ___________________________________________________ 7 Figure 3. Market cycles of Potash (3a), Mosaic (3b) and CF Industries (3c). ________________________________ 9 Figure 4. Range of a trader’s emotions. ___________________________________________________________ 10 Figure 5. Candlestick chart with 50 and 200d MA. Below are the MACD and RSI. __________________________ 12 Figure 6. Primary and secondary movements of S&P 500 Spiders Index (SPY). _____________________________ 13 Figure 7. Three phases of the market. ____________________________________________________________ 14 Figure 8. STEC earnings announcement gaps. ______________________________________________________ 14 Figure 9. Divergence of XLF and XHB. _____________________________________________________________ 15 Figure 10. SPY volume declines as price increases and vice versa. _______________________________________ 16 Figure 11. Market Trend (2003 – 2007). ___________________________________________________________ 16 Figure 12. Technical analysis noted on the graph, Fundamental analysis income statement. _________________ 17 Figure 13. TA and FA effectiveness in long and short term trading. _____________________________________ 18 Figure 14. Momentum trading of ENI. ____________________________________________________________ 21 Figure 15. Swing trading Verizon. ________________________________________________________________ 23 Figure 16. Position trader buying and selling in Petrohawk. ___________________________________________ 24 Figure 17. SPWRA bar chart. ____________________________________________________________________ 25 Figure 18. SPWRA line chart. ___________________________________________________________________ 28 Figure 19. Bar chart. __________________________________________________________________________ 28 Figure 20. Candlestick chart. ____________________________________________________________________ 29 Figure 21. Cerner time frame chart. ______________________________________________________________ 30 Figure 22. STEC volume analysis chart. ____________________________________________________________ 31 Figure 23. 50 and 200d MA of Merck. ____________________________________________________________ 32 Figure 24. Moving averages for Verizon. __________________________________________________________ 33 Figure 25. Four year DJIA bar chart. ______________________________________________________________ 34 Figure 26. Typical up and down trends. ___________________________________________________________ 35 Figure 27. Trend line drawn correctly. ____________________________________________________________ 36 Figure 28. Trend line drawn incorrectly. ___________________________________________________________ 36 Figure 29. Downtrend line of Caterpillar. __________________________________________________________ 37 Figure 30. Dryships chart showing trend lines and identifing breakdowns. ________________________________ 38 Figure 31. Dryships chart continued. _____________________________________________________________ 39 Figure 32. Support and resistance lines. ___________________________________________________________ 39 Figure 33. Neutral trading ranges in Merck.________________________________________________________ 42 Figure 34. Symmetrical triangle. _________________________________________________________________ 42 Figure 35. Ascending triangle. __________________________________________________________________ 43 Figure 36. Descending Triangle. _________________________________________________________________ 43 Figure 37. Flags, pennents and wedges. ___________________________________________________________ 44 Figure 38. Double top in GTE. ___________________________________________________________________ 46 Figure 39. Double bottom seen in chart of MEMC. __________________________________________________ 46 Figure 40. Head and shoulders pattern in S&P 500. __________________________________________________ 47 Figure 41. Cup with handle pattern. ______________________________________________________________ 49 Figure 42. Chart showing the entry and exit points for STEC. __________________________________________ 49 Figure 43. Chart of the DIAs and its breakouts and consolidation pattern. ________________________________ 50 Figure 44. Short selling CVX. ____________________________________________________________________ 50 Figure 45. Candlestick chart