Futures Markets Patterns on Price Charts

Major purpose – measure relative strength of buying and selling pressures in the market. Bar charts the most common. Plot high low range and close and look for patterns. Point & Figure charts also used extensively. Plots movements in high (lows) from previous day’s high (low) when in bull (bear) market.

Bar Charts Day Formations Inside Day – High and low of current trading day are within the trading range of the previous trading day. Close not perceived as significant. Following breakout could have some significance.

Bar Charts Day Formations Outside Day – High and low of the current trading day are outside the trading range of the previous trading day. Direction of close may be significant, depending on previous patterns

Bar Charts Day Formations Thrust Day – Close is outside the trading range of the previous day’s trading range. Single day may not be significant, but a series could signal strength (upthrusts) or weakness (downthrusts) in market.

Bar Charts Day Formations Closing Price Reversal – High and low continue an existing trend but close is in opposite direction. Weak indicator that a trend may come to end.

Bar Charts Day Formations Reversal Day – Combined Thrust Day with close in opposite direction. Also known as Hook Reversal (Key Reversal without Outside Day) Significance depends trend preceding, the magnitude of thrust and volume traded on Reversal Day

Bar Charts Day Formations Key Reversal Day – Combined Thrust Day and Outside Day with close in opposite direction of preceding trend. Strong indicator of trend reversal. Adds strength if volume is large and is preceded by long prior trend.

Bar Charts Day Formations Island Reversal– Trading day outside the trading day range of previous day and following day with a close the following day in the opposite direction for the 2 trading days before the island. Significance depends on preceding trend and volume traded on following day. Island Following Day

Bar Charts Longer run formations Congestion areas – temporary periods of market stability. Buying and selling pressures are relatively stable. Longer you are in congestion area, the greater the expected breakout. Triangle- Consolidation phase where breakout can signal significant move. Direction of breakout important, but it gives no indication of that direction.

Bar Charts Longer run formations Congestion areas – temporary periods of market stability. Buying and selling pressures are relatively stable. Longer you are in congestion area, the greater the expected breakout. Pennant-Congestion where direction of breakout signaled by flat portion of pennant. The flat portion indicates greater resolve sellers than buyers.

Bar Charts Longer run formations Support and Resistance Support – Area where buying of futures is sufficient to halt a price decline. Resistance - Area where selling of futures is sufficient to halt a price advance. Breakout – can result in significant move, especially the longer and more times the support or resistance has been tested. Support Resistance

Bar Charts Longer run formations Trendlines –Lines tangent to highest highs or lowest lows. Violation of trendline signals warning of ending trend. Uptrend line – Trendline showing higher lows. Downtrend line– Trendline showing lower highs. Channel – Nearly parallel trendlines lines. A breakout from a channel may result in significant move. Uptrend Channel Uptrend line

TD Trend Lines Relative high (RH)– a high that is higher than N preceding and N following days. Relative low (RL) - a low that is lower than N preceding and N following days. N is selected by chartist. N=5 would be more appropriate on longer charts. Draw TD Trend Lines connecting the most recent RH to the preceding RH and the most recent RL to the preceding RL Trade signals selected by chartist, e.g., trade when TD Trend Line violated on X successive days, X selected by chartist. Schwager uses X=3 TD Trend Line, N=2 TD Uptrend line RL

TD Trendlines and N Low values of N give earlier trade signals but will also give more false signals. Schwager suggests using higher values of N (N=3 to N=12) If using N=1, then fine tune using ‘True High’ (higher of current day’s high or previous close) and ‘True Low’ (lower of current day’s low or previous close). Leads to more sensible representations of relative highs and lows.

Internal Trend Lines Line drawn to best approximate the majority of relative highs or relative lows (a best fit). Internal Trend Lines reduces the influence of extreme highs and extreme lows due to emotional excesses in the market. Weakness – They are unavoidably arbitrary. Schwager – “Internal trend lines are a concept that should be explored by the serious chart analyst.”

Signals of Major Tops or Bottoms Head & Shoulders – Fairly reliable indicator. Has 4 stages: 1. Left shoulder 2. Head 3. Neckline 4. Right shoulder Complete only after right shoulder penetrates neckline. Top of head to neckline is expected distance of move from neckline. Complete Left shoulder Head Neckline Right shoulder

Signals of Major Tops or Bottoms Double Tops (Bottoms) – Indicates major move may be imminent when you break the barrier between them. Distance of expected move equal to the distance from double tops (bottoms) and the barrier between.

Signals of Major Tops or Bottoms Saucers (Rounded Tops and Bottoms) -Platform suggests gradual turn in market. Usually associated with longer run trend changes caused by gradual learning of new information, like weather.

Gap – day formation that occurs when the trading range is completely outside the trading range of the previous day. Common – usually filled within 8 days when nothing is evidenced to support the gap. Breakaway – Price move out of a consolidation phase. Can signal major move. Often accompanied by new info. Runaway – Accelerated trend when traders jumping on a major move. Exhaustion – End of trend. Difficult to distinguish from runaway until following days, other than it gets covered by some type of trend reversal. Reversal – Gap plus close reverses last TWO closes. Measuring – Following Breakout Gap (about 15 days). Distance from beginning measures potential move left in the market.

Gaps Exhaustion Measuring Runaway Breakaway Common

Constructing Point and Figure Charts Plot movement in prices from previous days high or low. Follow trends by identifying ticks (boxes) that are covered. X would cover upticks in bull market when the high price of period covers the next price open box in the column. O would cover downticks in bear markets when the low price of the period covers the next open box in the price column. Once in a trend(bull/bear), continue covering price boxes with X in bull market (O in bear market) until a reversal is identified. Reversal occurs when no new box can be covered in existing trend and price range in opposite direction is enough to cover 3 boxes, one away from the high/low of the previous column. Then start new column with first tick covered being one away from range of previous column. The key decisions an analyst must make in using point and figure charts are to establish the size of the box value in the columns and to determine the number of boxes that must be covered in a reversal. These are selected to give best estimates of trading success given the trader’s level of risk tolerance.

Point and Figure Charts xxxxxxxxxxxxxx oooooooooooooo xxxxxxxxxxxxxxxx oooooooooooo xxxxxxxxxxxxxx Cell Value (tick size)= 2 Required Reversal = 3 If today’s high price was 252 we would add another x to the last column. If today’s high price was 251 ¾ (or lower) and the low was 244 we would do nothing. If today’s high price was 251 ¾ (or lower) and the low was 242, we would start a new column with 3 O’s covering cells 242 through 248. price *Note: No label is given to the horizontal axis. It is simply columns

Point and Figure Chart Signals Simple signals Buy when x in last column is one higher than highest x in previous column Sell when o in last column is lower than the lowest o in the previous column

Point and Figure Charts Signals Trendlines --Uptrend lines drawn from the lower right hand corners Downtrend lines drawn from the upper right hand corners. Violation of trendline may mark shift in market

Point and Figure Charts xxxxxxxxxxxxxx oooooooooooooo xxxxxxxxxxxxxxxx oooooooooooo xxxxxxxxxxxxxx price Uptrend line Simple Buy signals Downtrend line

Price Projections With P&F Charts PPRO=CV x RR x NC PPRO is the price projection after a topping or bottom action CV is the value of each tick box. RR reversal required to begin a new column, i.e., number of boxes that must be covered. NC is the number of columns in the topping or bottom formation.

Point and Figure Charts xxxxxxxxxxxxxx oooooooo xxxxxxxxxxxxxx oooooooooo xxxxxxxxxx price Price Projection Move from top PPRO=CVxRRxNC PPRO=2x3x4=24 Projected price = 246 – 24 = 222 oooooooooooooooo Sell Signal Uptrend line

Point and Figure Chart for EC

Japanese Candlestick Charts Technical tool used in Japanese markets for many years. Constructed like a bar chart except that a black box (real body) is added between the open and close if the close is below the open. A white real body is drawn between the open and close when the open is below the close. high low open close shadows real body

Japanese Candlestick Indicators A long white real body indicates bulls are in charge. A long black real body indicates that bears are in charge. Can be drawn from any time frame, intraday, daily, weekly or monthly. high low open close

Japanese Candlestick Indicators Doji – When open and close are the same (or nearly the same) Indicates neutral market A doji following a strong trend often viewed as “a market separating from its trend.” high low open close

Japanese Candlestick Charts Hammer – candle with long lower shadow and small real body. 1. Real body is at upper end of trading range (color unimportant). 2. Lower shadow at least twice height of body. 3. Short or nonexistent upper shadow. Appears after sell-off. Indicates potential rally.

Japanese Candlestick Charts The Hanging Man – candle with long lower shadow and small real body. The Hanging Man looks like a Hammer, except that it occurs after a rally. Indicates market advance may be ending.

Japanese Candlestick Charts The Shooting Star – opposite of a hammer. Candle with long upper shadow and small real body. Combined with any confirming signal (like resistance) can be strong indicator of near term bear market. This is a signal not viewable on most other charts.

Japanese Candlestick Charts Engulfing Patterns - When real body of opposite shade engulfs the previous real body. Bullish Engulfing Pattern – white real body engulfs preceding black real body. Bearish Engulfing Pattern- Black real body engulfs preceding white real body. Bearish Engulfing Pattern Bullish Engulfing Pattern

Japanese Candlestick Charts Dark Cloud Cover – Two candlestick pattern with the first being a white real body followed by a candlestick with a black body beginning above the upper shadow of the first candlestick and the bottom near the low for the day (small lower shadow) and well within the prior day’s white body. Seen as bearish signal, being more bearish the more the black body penetrates through the white body. Dark Cloud Cover

Japanese Candlestick Charts The Morning Star – Bottom Reversal Pattern following market downtrend. Three day pattern with a first tall black real body followed by a small white body that gaps lower, followed by a white real body that moves well within the preceding black body. Signals bulls have taken control of the market. The Morning Star

Japanese Candlestick Charts The Evening Star – Counterpart to the Morning Star. Top Reversal Pattern following market uptrend. Three day pattern with a first tall white real body followed by a small black body that gaps higher, followed by a black real body that moves well within the preceding white body. Signals bears have taken control of the market. The Evening Star

Japanese Candlestick Charts Windows – Counterpart to Gaps in bar charts. It is an area where the low of one day is above the high of the previous day (rising window) or the high is below the low of the previous day (falling window). Candlestick charts view rising windows as support levels for any correction that may occur after an uptrend. Falling windows are viewed as resistance for any correction after a downtrend. Rising window

Feeder Cattle and Japanese Candlesticks

A Point To Hold When Using Patterns on Price Charts Charting is often described as MORE ART THAN SCIENCE. Selection of technique can be significant in identifying formations. A creative eye may be needed to identify some signals.