Profiting from

Technical Analysis
and Candlestick
Indicators
This page intentionally left blank
 Profiting from
Technical Analysis
and Candlestick
Indicators
Powerful Methods for
Accurately Timing Trades
Michael C. Thomsett
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 Contents

Introduction: The Self-Fulfilling Prophecy . . . . . . . . . . . . . . . . . . . .1

Chapter 1 Charting Techniques—Predicting the Future . . . . . . . . . . . . . . . . . .5

The Desire for 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Articulating Risks in Trading Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
The Hypothesis—Relative Correlation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Identifying the Errors of Popular Charting Beliefs. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Requirements for Proof of What Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Chapter 2 Traditional Analysis—The Power of Pattern Recognition . . . . . .17

Charts and Directional Identification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Double Tops and Bottoms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Price Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Triangles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Wedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Trendlines and Channel Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Testing the Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Bringing Order to the Pattern: Measuring the Trading Range . . . . . . . . . . . . . . . . . . .35
Accuracy in Prediction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Validating the Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Measuring the Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Chapter 3 Candlestick Patterns—Recognizing Evolving

Strength or Weakness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Candlestick Comprehension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
A Review of the Candlestick and Its Attributes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
The Ten Candlesticks and Their Attributes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Six Basic Candlestick Formations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Examples of Ten Candlesticks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Three Black Crows Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Three Stars in the South Pattern. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Three-Line Strike Bull Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Three-Line Strike Bear Pattern. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Three White Soldiers Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
 Identical Three Crows Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Bearish Engulfing Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Morning Star Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Bearish Belt Hold Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Mat Hold Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
Pitfalls: Scaling and False Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

Chapter 4 Reversal Signals—Spotting the Turning Point . . . . . . . . . . . . . . . .79

Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
Proximity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83
Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
Failed Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

Chapter 5 Continuation Signals—The Mid-Trend Signs . . . . . . . . . . . . . . . . .91

Retracement Versus Reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Strength and Weakness—Candlestick Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96
Strength and Weakness—Western Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

Chapter 6 Combining West and East—Candlesticks and the

Technical Signs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
Combinations in Different Time Spans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
Continuation Combination Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Bullish and Bearish Combinations Together. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109

Chapter 7 Confirmation—An Essential Second Part of a Signal. . . . . . . . . .117

Relative Correlation and Inertia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117
Multiple Confirmation Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119
Examples of Strong Reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121
Examples of Weak Reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124
Examples of Strong Continuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126
Examples of Weak Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128
Maximum Versus Minimum Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130
Contradiction as a Different Kind of Relative Correlation . . . . . . . . . . . . . . . . . . . . .131

Chapter 8 Support and Resistance—Key Price Points in the Trend . . . . . . .135

How Much Time Is Needed to Establish Support or Resistance?. . . . . . . . . . . . . . . .136
Stationary and Dynamic Formations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139
Breadth of Trading—Growing or Shrinking
Formations and Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143

vi Profiting from Technical Analysis and Candlestick Indicators

 Proximity Is Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147
Flips. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150
Are Support and Resistance Valid Price Predictors? . . . . . . . . . . . . . . . . . . . . . . . . . .154

Chapter 9 Moving Averages—Finding Statistical Correlation . . . . . . . . . . .157

Types of Chart-Based Moving Averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157
Two-Line Averages and Double Crossover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158
Price Interaction with Averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161
Combining Moving Averages with Support and Resistance . . . . . . . . . . . . . . . . . . . .164
Moving Average Signals: Bollinger Bands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167

Chapter 10 Volume Indicators—Confirmation of Price . . . . . . . . . . . . . . . . .171

Volume Spikes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171
On Balance Volume (OBV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174
Accumulation/Distribution (A/D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177
Money Flow Index (MFI). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181
Chaikin Money Flow (CMF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184
Chaikin Oscillator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187

Chapter 11 Momentum Indicators—The Exhaustion Point . . . . . . . . . . . . . .191

Price Momentum Versus Trend Momentum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191
Relative Strength Index (RSI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193
Stochastic Oscillator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .196
Moving Average Convergence Divergence (MACD) . . . . . . . . . . . . . . . . . . . . . . . . . .199

Chapter 12 Signal Failures and False Indicators—The Misguiding

Signal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207
Candlestick Indicator Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208
Continuation Versus False Reversal Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .210
Confusion Between Triangles and Wedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213
Failed Signals Between Price and Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .218
Failed Signals Between Candlesticks and Momentum. . . . . . . . . . . . . . . . . . . . . . . . .221

Chapter 13 Beyond the Signal—Candlestick Pattern Moves . . . . . . . . . . . . . .227

Mood of the Market for Directional Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .228
Candlestick—Trends of 3s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .230
Candlestick Top and Bottom Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .239
Candlestick Lines and Waves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .252

Contents vii
 Chapter 14 Risk Reduction Methods—Using Charting Techniques
to Manage Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .259
Assumptions That Add to Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .259
Technical Analysis Beyond Speculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .261
Applying Multiple Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .263

Appendix A Hypothesis Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .265

Appendix B Hypothesis Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .269

Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .279

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .281

viii Profiting from Technical Analysis and Candlestick Indicators

 Acknowledgments

I extend my gratitude to Executive Editor at Pearson/FT Press, Jeanne Glasser Levine,

for her guidance, enthusiasm, and long-time association and friendship. Also, thanks
to Betsy Gratner, Senior Project Editor, to Kristy Hart, Amy Neidlinger, Karen Annett,
and to the entire production staff at FT Press. A special thanks to Michael Stoppa, my
Web master and partner at ThomsettOptions.com, for his dedicated help in designing
the Web site and the virtual portfolio where the theories explained in this book were
first tested. Finally, thanks to all the readers of past books whose correspondence, sug-
gestions, and compliments are always welcome.

Acknowledgments ix
 About the Author

Michael C. Thomsett is the author of more than 80 books, including many FT Press
projects (Stock Profits: Getting to the Core, Put Option Strategies, The Options Trading
Body of Knowledge, Options Trading for the Conservative Investor, Options Trading for
the Institutional Investor, and Trading with Candlesticks). He also has written several
other books on the topics of technical analysis, candlesticks, and options trading. Thom-
sett is the cofounder of the education site ThomsettOptions.com, where he manages a
virtual portfolio emphasizing technical analysis and candlestick charting as required
trading skills; there, he has executed trades using the system explained in Profiting from
Technical Analysis and Candlestick Indicators. He is a frequent speaker at investment and
trading conventions and trade shows, and he teaches several classes for Moody’s and the
New York Institute of Finance. Thomsett lives in Nashville, Tennessee.

x Profiting from Technical Analysis and Candlestick Indicators

 Introduction
The Self-Fulfilling Prophecy

T
raders relying on candlestick charts have a problem. Whether experienced retail
investors or managers of institutional portfolios, one of their greatest chal-
lenges in chart analysis is creating and maintaining objectivity.
The tendency is to seek reversal and confirmation that agree with the initial belief. So
once you spot an initial signal (such as momentum moving into the overbought range),
the next step is to seek bearish confirmation. Upon finding a signal, or two or three
signals that confirm the bearish reversal, traders take action—closing long positions or
opening short positions based on the discovered bearish signals.
This is where the problem lies.
In seeking only bearish signals, do you ignore contradictory bullish signals at the same
time? A bullish pattern may be ignored, for example, with the latter session used as the
first of a new bearish signal. But which signal is correct?
Are traders at risk for seeking only those signals confirming what they initially see on
the price pattern? If so, chances for a poorly timed trade increase. With the purpose of
signal identification and confirmation to accurately identify reversal and time trades, it
is essential that an objective and open process is created for two contradictory purposes.
First, traders seek confirmation for the initial reversal signal spotted because the entire
exercise of chart analysis is designed to spot reversal before it occurs. By doing so, you are
able to enter your trade before the greater market sees the same thing. Second, however,
you will vastly improve your timing of trades if you also seek contradictory signals and
then attempt to interpret them accurately. What initially seems like a clear reversal sig-
nal could become a false signal to be followed by a different set of indicators forecasting
continuation of the current trend.

1
Traders as a group tend to seek what they expect to find on the chart; this creates a large
blind spot and vulnerability. Even those who consider themselves entirely objective are
at risk for this type of error, seeking a set of signals that become a self-fulfilling prophecy.
This book proposes that a candlestick indicator by itself is not reliable for timing of
trades. You need confirmation through distinct and separate signals forecasting the same
reversal (or continuation), but you also need more. In the process of seeking confirma-
tion, the candlestick only becomes a valuable forecaster of future price direction under
one premise: The chances of confirmation or contradiction are given equal weight. In
other words, a series of very specific methods need to be brought to bear to ensure that
all possible signals are recognized and analyzed. In the desire to spot reversal and confir-
mation, the tendency to ignore any signals contradicting that idea reduces the reliability
of chart analysis.
Several supporting principles are brought into this revised analysis. It is based on sta-
tistical principles as well as the scientific method, under which an indicator is subjected
to objective analysis, which may have either a positive or a negative outcome. In this
application of the principle, a positive outcome is confirmation of likely reversal or
trend continuation. A negative outcome is a contradictory indicator, which draws into
question whether the initial signal is correct or a false lead. Either of these outcomes is
valuable, leading either to trade execution or caution and a delay in action.
Augmenting the concept that candlesticks are useful only when applied within an objec-
tive search for confirmation or contradiction are a few additional principles. Every char-
tist will benefit from being aware of these.
First, reversal signals vary in their strength based on proximity to resistance or support.
When a reversal occurs close to these borders of the current trading range, it is much
stronger than the identical signal found at midrange.
Second, when reversal occurs at the point that price trends above resistance or below
support, it is the strongest possible proximity, meaning reversal is more likely than any-
where else—assuming the first signal can be strongly confirmed by other price, volume,
or momentum signals. The move above resistance or below support lends to even greater
likely reversal when price gaps accompany that breakout. At this point, a candlestick
reversal signal is quite strong, as long as it is confirmed.
By the same series of arguments, breakouts may be accompanied by candlestick continu-
ation signals. These are particularly strong following a resistance/support or support/
resistance flip (in which the prior border becomes a new, opposite one). This tends to
add great strength. For example, if price moves above resistance and is accompanied by
a candlestick continuation signal, and the new assumed level of support is at the same

2 Profiting from Technical Analysis and Candlestick Indicators

price location as prior resistance, this is one form of strong confirmation, making it likely
that the new range will not reverse.
These concepts contain many variables, but can be demonstrated with a detailed analysis
of chart patterns; with the study of candlesticks in the context of their interaction with
traditional Western technical analysis of prices; and with a range of moving average,
volume, and momentum signals acting as confirmation.
One aspect of this analysis used throughout this book is recognition that among the doz-
ens of candlestick indicators, many are reliable only about half of the time. Even those
candlesticks leading to expected price movement between 50% and 70% of the time serve
little use in predicting price movement. These weaker signals may be useful if and when
confirmed independently, or when they confirm other signals. However, it makes sense
to limit an analysis of candlestick patterns in a logical manner. For this reason, the argu-
ments for strong and objective analysis of trends and prediction of reversal are limited to
only ten of the strongest candlestick indicators. These are explained in detail in Chapter
3, “Candlestick Patterns—Recognizing Evolving Strength or Weakness.”
Why use only the strongest candlestick signals? The belief that objective analysis has to
begin with solid and reliable information leads to a conclusion that exceptionally strong
candlestick indicators form a solid basis and a starting point in the analysis. This is based
on a statistical rule for sampling. In a population sample, the statistician needs to ensure
that the sample is representative of the larger group. Thus, a survey of “likely voters”
should include only those who have voted in recent elections, and not those who might
vote or might not. A survey of shoppers in a product survey should include the family
member likely to do the majority of shopping, and not the occasional shopper seeking
a fast in-and-out of the store, regardless of price, product nutrition, or brand loyalty.
The same idea should apply to candlestick analysis. Some studies of candlesticks focus
on the attributes of the indicator itself and its location within the price chart. However,
even those examples that include explanations of false signals often do not focus on the
narrowing down of likely outcomes. By limiting the discussion to ten of the strongest
candlestick signals, this book presents the best case for utilizing candlesticks in a context
of accuracy and reliability.

Introduction The Self-Fulfilling Prophecy 3

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 Index

Boeing
A Ascending triangle, 23-25
Accumulation/Distribution (A/D), 177-181
Flip (support to resistance), 152-153
Accuracy in prediction, 40-41
2.5-point scaling, 75-76
Alleghany, three-line strike or bear
Bollinger Bands, 167-169
engulfing, 208-210
Buffalo Wild Wings
Amazon.com, Chaikin oscillator—bearish
MA tracking resistance, 164-165
divergence, 189-190
Strong reversal confirmation, 34-35
American Express
Tweezer top, 255-256
Identical three crows, 66-67
Bulkowski, Thomas, 48, 53-54
Symmetrical triangle, 25-27
Bullish three gaps, 234-236
Appel, Gerald, 199
Apple, tower bottom, 241-242
Ascending triangle, 23-25, 144-145 C
Asset allocation, 6
Candlestick
AT&T, proximity of signals, 149-150
Comprehension, 47-51
Attributes, 51-52
Formations, 54-56
B Long, 54-55
Bearish belt hold, 53, 71-72
Short, 54-55
Bearish engulfing, 34, 41, 53, 67-69, 83
Doji, 53-55
Bearish three gaps, 233-234
Long upper and lower shadow, 54-56
Beta, 229
Ten sample candlesticks, 56
Blackberry
Pitfalls, 74-78
Falling wedge or descending triangle,
Scaling, 74-75
216-217
Strength and weakness, 96-98
Price interaction (bearish), 162-163
Combined with Western signals, 105
Three gaps, bearish, 234-235
Bullish and bearish combinations, 109-115
Blending, 77-78
Indicator conflicts, 208-210

281
 Failed momentum and, 221-225 Coca-Cola
Pattern moves, 227-228 Continuation, 98-99
Trends of 3s, 230-239 Proximity of signals, 147-148
Five Methods, 230-231 Coil, 25-26
Three mountain top and three river Combinations in different time
bottom, 230-233 spans, 105-107
Bearish three gaps, 233-234 Confirmation, 10, 13, 33, 50, 86-89,
Bullish three gaps, 234-236 117, 119-121
Three soldiers, 236-239 ConocoPhillips, price interaction
Top and bottom patterns, 239-243 (bullish), 161-162
Tower top and bottom, 239-243 Construct validity, 42-43
Frying pan bottom, 242-244 Continuation:
Dumpling top, 244-245 Combination patterns, 107-109
Gapping price rising or falling, 245-248 Maximum and minimum, 130-131
Hammer, 53, 250-251 Mid-trend signals, 91-92
Hanging man, 53, 248-249 Retracement and, 92-96
Lines and waves, 252-258 Strong, 126-128
Eight higher or lower price lines, 252-254 Versus false reversal, 210-213
Tweezer tops and bottoms, 254-258 Weak, 128-130
Predictions, 5-6 Critical thinking, 15-16
Hypothesis, 10-11 Crowd mentality, 5
Eastern signals, 17, 34, 49 Cummins, three white soldiers, 64-65
Caterpillar Cumulative conclusions, 14
Long duration, 137-138
Weak signals, 86-88
Chaikin Money Flow (CMF) and D
oscillator, 184-190 Dependent variable, 11
Channel lines, 30-33 Descending triangle, 25-26, 144-145
Chevron Desire for 100% profits, 7-8
Continuation, 95-96 Directional identification, 18-19
Declining trendline, 31-32 Doji, 53
Cisco Systems Double tops and bottoms, 19-22
Morning star, 69-70 Dow Jones Industrial Average (DJIA), 229
Stationary range, 140-141 Dumpling top, 244-245
DuPont, short duration, 136-137

282 Index
E H
Efficient market hypothesis (EMH), 6-7, 51, Halliburton, frying pan bottom, 242-244
261-262 Hammer, 53, 250-251
Eight higher or lower price lines, 252-254 Hanging man, 53, 248-249
Empirical belief, 13-14 Herbalite
Encyclopedia of Candlestick Charts, 48, 53 Double crossover (bearish), 160-161
Errors in charting, 12-13 Dumpling top, 244-245
Exponential moving average (EMA), 158 Home Depot, three black crows, 57-58
Exxon Mobil Homna, Munehisa, 14, 230
Continuation, 98-97
Double bottoms, 20-22
I
IBM
F Double tops, 19-20
Face validity, 42 Mat hold, 73-74
Falling wedge, 28-29, 144-145 Identical three crows, 53, 65-67
False indicators, 207-208 Independent variable, 11
Fibonacci retracement, 93 Intel
Five Methods, 230-231 Combinations, 112-114
Frying pan bottom, 242-244 Dynamic range, 145-146
Money Flow Index (MFI), 181-183
Three stars in the south, 59-60
G Interim association, 43
Gapping price rising or falling, 245-248
General Electric
Mat hold or three black crows, 211-212 J
Multiple confirmations, 120-121 Japanese Candlestick Charting
General Mills, double crossover Techniques, 14
(bullish), 158-159 Johnson & Johnson
Generalizations, 14-15 Descending triangle, 25-26
Goldman Sachs, continuation, 99-100 Weak reversal, 124-126
God of the markets, 14 J.P. Morgan, bearish engulfing, 68-69
Granville, Joseph, 174

Index 283
 Microsoft
K Continuation, 93-94
Kellogg, ascending triangle or rising
Flip (resistance to support), 151-152
wedge, 212-214
Momentum indicators:
Kraft Foods
Exhaustion point, 191
MACD continuation, 203-204
Failed candlesticks and, 221-225
Tweezer bottom, 256-257
Moving Average Convergence Divergence
Kroger, eight lower price lines, 253-254
(MACD), 199-205
Price versus trend, 191-192
Relative Strength Index (RSI), 193-196
L Reversal power, 205
Las Vegas Sands
Stochastic oscillator, 196-199
Accumulation/Distribution, 178-179
Money Flow Index (MFI), 181-184
Hanging man, 248-249
Mood of the market, 228-230
Lines and waves, 252-258
Morning star, 53, 69-70
Lockheed Martin, conflicting signals—
Moving Average Convergence Divergence
candlesticks and momentum, 221-223
(MACD), 199-205
Lowes
Moving averages
Gapping price falling, 247-248
Bollinger Bands, 167-169
Moving Average Convergence Divergence
Double crossover, 158-161
(MACD), 201-202
Price interaction, 161-164
Statistical correlation, 157
Support and resistance combined with,
M 164-167
Macy’s
Two-line, 158-161
Failed signals—price reversals and
Types, 157-158
volume, 218-221
Munehisa Homna, 14, 230
Three soldiers (bullish), 236-237
Mastercard
Stochastic oscillator, 197-199 N
Three soldiers (bearish), 238-239
Narrow-range day (NRD), 173
Mat hold, 53, 72-73
NASDAQ, 229
McDonald’s
Netflix
Strong reversal, 122-123
Hammer, 250-251
True range, 76
Relative Strength Index (RSI), 194-195
Merck, dynamic range, 141-142
10-point scaling, 74-75

284 Index
Newton, Isaac, 9 Reversal
Nike Failed and false signals, 89-90, 210-213,
Contradictory signals, 132-133 218-221
Weak signals, 85-86 Proximity, 12-13, 83-85
Nison, Steve, 14 Recognition, 80-82
Normative belief, 13-14 Strong, 121-124
Turning points, 79-80
Weak, 124-126
O Rising wedge, 27-28, 144-145
OHLC chart, 48 Risk, 8-9, 259-261
On Balance Volume (OBV), 174-177
Opko Health, Chaikin oscillator—bullish
divergence, 187-188 S
S&P 500, 54, 229
Sakata, 14, 50-51, 230
P-Q Scientific method, 6
Pattern recognition, 17-18, 45 Sears Holding, Chaikin Money Flow
Pattern testing, 33-35 (CMF), 185-186
Pfizer Signal failures, 207-208
Continuation, 102-103 Simple moving average (SMA), 157-158
Dynamic range, 143-144 South Sea Bubble, 9
Three gaps, bullish, 235-236 Speculation, 261-263
Philip Morris, Bollinger Bands, 168-169 Spinning top, 53
Price gaps, 22-23 Stochastic oscillator, 196-199
Procter & Gamble Support and resistance
Combinations, 111-112 Breadth of trading, 143-147
Weak signals, 83-84 Flips, 150-153
Key points in trends, 135
Moving averages combined with, 164-167
R Proximity, 147-150
Random Walk Hypothesis (RWH), 51, Stationary and dynamic, 139-142
261-262 Time needed to establish, 136-139
Relative correlation, 10-12, 17, 117-119 Validity as price predictors, 154-155
Relative Strength Index (RSI), 34-35, Symmetrical triangle, 25-27
193-196
Requirement for proof, 13-16
Retracement, 92-96

Index 285
 U.S. Steel
T Tower top, 239-241
Technical analysis, 261-263
Volatile trading range, 37-39
Tesla Motors
Accumulation/Distribution, 180-181
Gapping price rising, 245-246 V
3D Systems, eight higher price lines, 252-253 Validating the pattern, 41-43
3M Verizon, three river bottom, 232-233
Price gaps, 22-23 Visa
Three-line strike bear, 62-63 Combinations, 105-106
Three black crows, 53, 56-58, 90 Rising wedge, 27-28
Three mountain top and three river bottom, VIX, 230
230-233 Volume
Three soldiers, 236-239 Accumulation/Distribution (A/D),
Three stars in the south, 53, 59-60 177-181
Three white soldiers, 53, 64-65, 90 Chaikin Money Flow (CMF), 184-187
Three-line strike, 53, 60-64 Chaikin oscillator, 187-190
Top and bottom patterns, 239-243 Confirming price, 171
Tower top and bottom, 239-243 Money Flow Index (MFI), 181-184
Trading range measurements, 35-40 On Balance Volume (OBV), 174-177
Travelers Spikes, 171-174
Blending, 77-78
Combinations, 107-109
Trend measuring, 44-45 W
Trendlines, 30-33 Wal-Mart
Trends of 3s, 230-239 Strong continuation, 126-128
Triangles, 23-27, 144-145, 213-218 Three-line strike bull, 61-62
True range, 76-77 Walt Disney
Tweezer tops and bottoms, 254-258 Continuation, 100-102
Weak continuation, 128-129
Weak signals, 81-82
U Wedges, 27-30, 144-145, 213-218
Umbrella patterns, 248 Wells Fargo, MA tracking support, 166-167
United Technologies, falling wedge, 28-29 Western signals, 17, 34, 45, 49, 98-104
Unitedhealth Group
Bearish belt hold, 71-72
Combinations, 109-110
X-Y-Z
UPS, On Balance Volume, 175-176 Yahoo!, three mountain top, 230-232
Yum Brands, volume spike, 172-173

286 Index
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