Reading the Charts: The Power of Price Patterns in Trading

welcome back everyone what a great session that we just had with our opening keynote with lazan saunders and jj kinahan to kickstart our 2021 investor education conference we're going to have a chance to hear from jj again a little later this afternoon as he joins nasdaq's greg ferrari this next session is near and dear to traders hearts we're going to talk about charting and technical analysis we're excited to have a couple of our most popular educators covering this topic leigh bull has over 30 years of trading and investing experience and has earned the chartered market technician certification lee can be seen each day on schwab live daily where he shares his expertise including technical analysis and training strategies welcome lee and for those of you who watch any of td mergers education you'd be very familiar with coach ben watson he's one of our education coaches here at td ameritrade he does webcast workshops focusing on all the topics he's going to talk about today and you can also find ben on our media affiliate the td ameritrade network where he can be found breaking down the markets in its daily segments as the chart master gentlemen thank you for joining me let's chart all right thank you lorraine and what i thought we would do today is talk a little bit about technical analysis and as lee and i begin our discussion uh ultimately talk about some of the price patterns that we see out there in the market as well as some technical indicators that we can put together with those price patterns and and really kind of get a sense about how we can make uh informed decisions about what's going on with price movement so lee as we talk about this one thing to remember is that any of these examples that we talk about today simply for illustrative and educational purposes only we're not telling anybody to trade any of this right but uh lee is you you and i have talked quite a bit about technical analysis i've been on uh your show and and you and i have had several interactions about these discussions i wonder maybe we ought to talk a little bit about where we're headed first of all and kind of that broad discussion of technical analysis then we'll look at some price patterns and then we'll after a short break get into some uh favorite technical indicators what do you say that sounds like a great plan ben looking forward to it all right well so lee as as you and i do talk quite often about technical analysis maybe we ought to start with uh the idea of what is technical analysis and why as traders or investors we might look to price movement as an indication of what's happened in the past and maybe what is potential uh or potentially likely to happen in the future what what's your take on technical analysis well i mean let's start with the definition really it's just the study of price action and corresponding volume so what i like to think about it is you have an idea but what's on a fundamental basis but when's the best time to buy when might you sell some i think looking at the charts can help you understand that and also if you learn some of these indicators it also helps you look for stocks in particular setups which can give you discipline in your trading so really just the study of price and volume it shows you what traders are doing institutions can't really hide their footprints you know when they buy billions of dollars worth of stocks you're going to see it on the chart so it's a good way to supplement your fundamental viewpoint so lee you mentioned fundamental analysis and uh i i think this is maybe a good place to throw in the idea that uh you know technical analysis and fundamental analysis and and really any other type of approach whether it's probability or uh some sort of quantitative analysis may come to different conclusions about what's likely to happen but i like your perspective on the idea that technical analysis complements fundamental analysis because it gives us a picture of what those institutional investors might be doing but you know some people look at the idea of technical analysis as uh voodoo or predicting the weather or finding pictures in the clouds what uh what's your take on that approach to technical analysis well i would say that there is a little bit of that in the academic community in in studying financial markets where the the fundamentals they have all those models and all of that where technical analysis is considered like you said throwing the bones on the floor and seeing what's happening but i've been doing this since 1973 and when a stock goes up to a place where a lot of selling has come in and it doesn't go any higher for a little while i mean maybe that's a signal that you might want to do something it's just kind of common sense yes it's not going to be able to predict which stock is going to go necessarily up five thousand percent but it will give you road maps to increase your efficacy of trading what i like to say is it doesn't necessarily predict so much of what's going to happen but it allows you to set up a plan to benefit from what you think is going to happen with risk to reward i think that is what technical analysis does most and as a matter of fact you know the cmt association is also called institutional risk management because that is what you're doing you're trying to limit your risk uh to the extent possible you can always worry about the profits later but it's the risk and technical analysis does help you set your risk right i i like that idea one thing i'll add to that is from my perspective one of the things that i talk about quite often is the idea of trading or acting upon what you actually see happening the the reality of what price movement is doing as opposed to what you think or hope or pray or wish the price might be doing and and that's something that i think that technical analysis can help us to define because we can actually make objective uh lines for instance on the chart and say if price moves above this line then do something so it becomes almost algorithmic in that way of of looking at the market in an if then else type of approach yeah exactly and uh as we had lisan on before us uh you know hope is not an investment strategy as she always likes to say you mentioned hope so technical analysis gives you more discipline that's that's what i like to end up with the bottom line all right so one last question and then we'll jump into kind of a primer on technical analysis and that is simply this one of the uh questions that some investors have about technical analysis is this idea that it becomes a self-fulfilling prophecy that because traders are seeing lines on the chart or they're seeing levels of support and resistance which we'll talk about in a in a couple of minutes here that those levels become reality simply because traders see them on the chart and that doesn't necessarily reflect the fundamental nature of what should be happening well yes and no i mean you know you see something on a chart and people act on it well the more people that act on it the more self-fulfillment you get the more strong that signal is so yeah to a certain extent it is based on a lot of self-fulfillment but that doesn't mean that it doesn't work you know if everybody thinks it breaks to that level it's going to go higher and everybody buys because of that the stock will probably go up so i think that's what we're talking about it's yes it's self-fulfillment and we talk about some of our indicators uh like moving averages and there's certain ones that people look at specifically for that self-fulfillment idea and you're absolutely right yeah yeah and and you know i take heart in the fact that even before the advent of widespread uh charting packages like the charts that we have on uh the thinkorswim platform that levels of support and resistance that price patterns like the ones that we're going to look at here in just a minute those still existed even when people weren't looking at computerized charts that were easily accessed and easily manipulated and and uh and changed and and annotated so since those things happened when charts weren't readily available maybe there is something to the idea that because this market is driven by human beings that we have the same psychology as traitors of old what do you think yeah i mean i was trained as a scientist okay that was my education and when i first started trading it was like okay this is like physics you know you can do this you do that this has to happen but over the years i've come to the conclusion that doing the markets is more social science than physical science it is a lot of psychology we are people and that's how the market reacts so i think and when you look at these chart patterns coming up then we shall see you can explain a lot of them just by psychology so it's really important to look at these charts absolutely well let's do that right now let's uh let's start to talk a little bit about the some of the basic tenets of technical analysis perhaps for an investor or a trader that's listening to us today that hasn't really been exposed to this idea of using charts and and look at some of the basic elements of uh of technical analysis that you and i use on a on a regular basis and we see almost uh uh imperceptibly or almost uh subconsciously when we look at a price chart so i want to begin with the idea of trend and this concept that prices can tend to move in a particular direction whether it's up down or sideways and we'll look at those trend directions here in just a moment but that prices tend to move in a trend and it's not just necessarily random price movement out there what what are your thoughts on trendly right well i think people you know there's two ways to trade there's trend following and there's what's called mean reversion and to your point trends develop because something is going in one direction people think it's going to continue with the psychological thought we're talking about psychology that it's just easier to go with the flow than to say that you know when something is going to stop doing one thing turn around and do something else right so it's it's almost like inertia in the sense that it keeps going and the father of technical analysis you know charles dao all trends just different time frames you can have different effects but trends is what he started with and trends tend to work i mean some of the largest uh fortunes have been made by trend following for instance commodities traders so yes friends indeed all right so so let's do this lee let's we we've got a graphic that talks about uh trend direction and so let's start with the idea of an uptrend and just define that really quickly here so that we have an understanding of as we're talking about some of our live examples here in a few minutes what those up trends really consist of so as i look at an uptrend i begin by looking at the very big picture and simply the direction from the left-hand side of the chart to the to the right hand side of the chart now if i were going to define a trend maybe the most easily accessible definition might be an uptrend as we're displaying here in that graphic starts on the lower left hand side of the chart and works its way towards the upper right hand side of the chart anything else that you see about up translate right i mean if you're trying to decide uh whether an uptrend is continuing you know we you mentioned it it's just higher highs and higher lows so if the stock goes up and makes a high and it pulls back but it doesn't pull back as far as it did last time that means the buyers are a little bit more anxious they don't think it's going to get down there so they buy and the stock continues and that's what solidifies the trend right and and the other idea there and i like that the way that you put that is that buyers are anxious to perhaps see where price is moving that when you're making higher highs and higher lows those buyers are willing to buy at higher and higher price levels and thus continue to push the price higher and the expectation being that the the old adage of buy low sell high comes into play investors may want to buy when the price is relatively low and then turn around perhaps and sell it at some later date when that price is higher maybe the reason why or one of the reasons why investors buy individual stocks or or commodities contracts or index options or whatever else would be that idea of price appreciation and that's what we can see in this uptrend now lee one other trend direction that we might look at would be the opposite direction because we know that stocks and and financial instruments don't always just go up in price sometimes they go down so again the direction of trading in this case the bigger picture might be upper left hand side of the chart down to the the lower right hand side of the chart so what do you look at when you look at a down trend lee yeah it's the same thing in reverse ben um you know you go up and you make a little bit of a high but it's not quite as high as before because people are more willing to sell they think you know the thing has been going down we got a little pop up probably continue to go down so they sell at a higher low i mean a lower high and the trend continues and just keep in mind that if you do trend trading which is a very popular way just keep in mind for some type of people with certain ways of looking at things they want to be right right they want to pick the exact top and they want to pick the exact bottom i'd rather make money than necessarily always be right in the sense that i would rather make sure the trend is started before getting involved as opposed to saying i know exactly when it's going to turn around and that goes back to the idea of trading what you see happening as opposed to what you hope or wish or think or or pray might be happening and in fact taking advantage of that uh information that technical analysis gives us now one more graphic that we have here in terms of trend would be the the third option if we've got an uptrend we've got a downtrend now we bring into the mix this idea that price is moving sideways across the chart so uh roughly uh equal highs and equal lows here but but one thing i noticed lee in in a sideways trend is even within the context of that sideways trend that we've got on the graphic here where there are roughly equal highs and equal lows if you shorten up the time frame we've got some uh some up trends and downtrends in here don't we yeah that's right so that that just shows you that trends occur in different time frames so if you want to be a trend trader that's why you have to define your time frame and when we talk about moving averages for instance we'll make this point later but you know if you're using a moving average which is an indicator to show you the trend you know to try to figure out what the trend is in your time frame maybe you look the moving average twice you're anticipated holding period so it does make a difference your time frame and you should you know stay in the same time frame don't let a trade turn into an investment the other thing i would say is with a sideways trend you know some people say there is no trend well no to you point there is a sideways gen but what does that mean when we say the trend remains intact until it breaks right the trend bends right well you go sideways you trade it as it's going to continue to go sideways until proven otherwise so it is a trend in that sense in that you're going to say if it's going to continue we're going to continue going sideways yeah absolutely the the the way that i learned that was the trend is your friend until the end of the trend yeah so i'll tell you what let's let's talk about this lee in in the concept of uh you know you mentioned uh tops and bottoms and those changes in the trend and that oftentimes technically informed investors are are looking to try to find uh that reversal when that trend changes either from an uptrend to a downtrend or from a downtrend to an uptrend and that it's very hard to pick the absolute top or the absolute bottom so the great thing about technical analysis is that it gives us some context around those reversal periods so around the idea of when does a trend change or how might we know that a trend is changing and so we've got some price pattern ideas that i want to talk about here uh in our graphics that would give us an idea of when those trends might be reversing so as we start to get to perhaps the idea of a bullish trend reversal meaning a trend that has been moving down but is finding a point where it's now starting to turn around and perhaps affording an investor or trader the opportunity to enter a position and take advantage of that upward price movement we've got a couple of typical types of price patterns now in a few minutes we're going to go out and we're going to look for these uh out in the wild on the the thinkorswim platform but let's talk about these price patterns for just a minute the double bottom the triple bottom and the head and shoulders or what we call an inverted head and shoulders sometimes bottom uh price pattern uh as you look at these patterns lee what what do these tell you about that change in the trend well the first point is you see uh usually on the right side of those graphics there ben you see how you begin to start trending after you break what had been an area where sellers had come in so the first point on these is if you take that as your signal as it does that you aren't getting in at the exact bottom which was our point from before that uh no you need some confirmation a trend is a very powerful thing so you do need some confirmation when it switches so you're not this is giving you confirmation so for instance on the double bottom you go down you make a low all right well uh at some point the people that are short are going to say i want to take some profit so they buy and the stock rallies but it has since it's been going down people use this rally to sell more and it goes down but it doesn't seem to go down further than where the buyers came in last time so that's giving you a little hope now some people might buy that but you really haven't changed the trend it's when you take out the high you can see that looks like a little bit like a w right ben so you take out that middle peak of the w there that means now people are willing to buy at a you know a higher price where they sold last time that does show you that the psychology is changing and i think a lot of these patterns is kind of the same thing i i like that now at the same time we also have very similar types of patterns on the bearish side and that bearish reversal idea when price has been moving higher and now starts to move down and in terms of the point that you made earlier about managing risk that might be a point where that trend changes from bullish to bearish where investors may exit a position or they might put on some type of hedge to protect against that downward movement but these look very similar just flipped on their heads don't they right it's it's again it's the same psychology just just in reverse you know when you break down through let's say that double top you know that looks like we call an m formation because it looks like an m and then you know so the stock had been going up uh at some point profit taking comes in it pulls back people buy into the pullback like you would think you would do it goes up but the first little sign of trouble is it can't really go much higher they sell where they did last time enough to keep it from going any higher and yet it goes down and then it takes out where they used to buy and now they don't buy anymore right because the stock is dropping that's a change in trend so it's exactly the same psychology we talked about on these patterns for bottoms it's the same just in reverse for tops so one other concept that i want to talk about and then we'll look at some examples of not only trend direction but also uh these reversal patterns both bullish and bearish is the idea of support and resistance which we might call the if trend is the first tenet of technical analysis maybe the second tentative technical analysis is the idea of support and resistance and and if if we think about support and resistance perhaps as support being the floor underneath us it's a point where price has gone down and it turns around and starts to come back up and resistance as the ceiling overhead and it's a point where prices increased and to the point where we're looking at those uh those uh reversal patterns where maybe it can't get through that level a couple of times and then turns around and starts to make that move to the downside these levels of support and resistance help to shape the price patterns and give us some decision points don't they right it just gives you a place to look for potential change in price action it doesn't have to occur but you know just think about the psychology every time it gets up to twenty dollars it hasn't gone any higher so it goes up to twenty dollars well what's a reasonable assumption it's not going to go any higher so they sell so that's resistance at some point though uh they don't sell and the buyers keep buying and then you turn around yeah exactly and it's important to remember that levels of support and resistance as solid as they may seem are never guarantees that that we don't know for sure what's going to happen the next time the price comes back down to that same level so i'll tell you what lee let's go out and uh go out into the wild and look for some examples of these a little bit like the old mutual omaha i'll stay here in the helicopter while you go down and find some price patterns so let's go over to the thinkorswim platform really quickly and let's just kind of walk through what we've discussed up to this point uh and and then we'll go to a little break and we'll come back and and have some additional examples here so what i'm looking at now on the thinkorswim platform is very simply a chart of the s p 500 the spx the the kind of broad definition of the market jj and lausanne talked about uh the uh s p 500 and and this particular chart and the strength of this trend and as i look at this trend over the course of the last year lee i'm noticing that just like we were talking about there is a series of higher highs and higher lows we can see where those lows are we can see where those highs are and and they just continue to move from that lower left-hand side of the chart to the upper right hand side of the chart kind of in that continuous movement even though we still have kind of that breathing in and breathing out nature of this trend right and how high can something go you never know so i mean psychology says well it's continuing to go up people aren't selling you know just ride the wave as long as possible at some point you know it's going to turn around you won't get out at the top but you would have made quite a bit of profit if you just went with the trend and trends exist that those uptrends exist even in individual stocks obviously that make up uh these indices uh here's another example of xilinx that is making that upward trend maybe not for the entire year but at least certainly part of that year it is making that higher high that series of higher highs and higher lows now let's look at the opposite direction here let's look at an example of a stock that has been perhaps in a downtrend over time and one that i've noticed uh recently is is this one right here and this is zillow and they've been in the news recently as well but again generally that idea of a downtrend existing as lower highs and and lower lows anything you notice about this chart well it just you know if you had bought every time it made a new you're thinking you're getting a bargain how would you have done right so that's why trend following can help because you're making lower lows people are not buying where you think maybe you wait till they start doing that in other words the reversals that you've been talking about yep absolutely so lee let's also take a look at that third trend option that we talked about and and this is one this is the russell 2000 index so going back to the indices but i think this is a pretty good example here of that idea of a sideways trend where price is really making those equal highs and equal lows over a period of time and just recently in fact we've had that price move out of that kind of sideways trend direction so we really have kind of all of that in this particular chart we've got some short term downtrends we've got some short-term uptrends but overall during this kind of middle portion of the year the russell 2000 has been moving in that sideways trend with equal highs and equal lows yeah that's right so uh you know you would have been within your rights to buy near the bottom of that sideways trend and sell near the top it would have worked until the last time which is the way trend following works you do a lot of good trades and then when the trend finally switches or continues uh fast then you change and i think one of the one of the key takeaways that i have from a chart like this is we look at the russell 2000 from a from a technical analysis perspective is that you know it's kind of like the weather that sometimes if you wait around a little while you're going to find the trend that you're looking for kind of like if you don't like the weather wait five minutes and it's probably going to change because we have that uptrend over here on the left-hand side we've got those shorter term downtrends and uh and then we've got that sideways trend that we can uh that we can look at as well so uh as we as we kind of get to this point of understanding a little bit about trend direction let's talk briefly before we go to break about the idea of time frame league because i want to bring this into the mix here you know i mentioned a couple of different time frames as we were looking at those charts we looked at long term time frames kind of an intermediate perspective and then those short term i think you mentioned uh short-term traders uh let's let's define those a little bit what do you look at when you look at a long-term intermediate term or short-term trend yeah i think it's a a way to frame this is different terms that are used for the different time frame so generally you've got investors right that generally buy on fundamentals and hold and they get their diversification from having many stocks and not too much in each in each stock however when you have the sideways trend that you've been talking about it can really change quickly so you got to be aware of that and the time frames then are position trading is about you hold for a few months investors you hold for a long time and swing trading tends to hold for a couple weeks maybe a week to a couple weeks and then you have intraday trading so when you put on your indicators you look for patterns you can look for them all in these same situations because technical analysis is what we consider fractal that means you can have these same patterns in different time frames because you have people looking at different charts in different time frames and the psychology is exactly the same so if we look at a one-day one-minute chart here instead of a one-year one-day chart we're going to see similar types of price patterns as well as similar trends they just happen over a shorter period of time and i'll tell you what that's one of the great things about technical analysis is that it is fractal across different time frames well i'll tell you what lee i we we've spent quite a bit of time here getting ready and kind of preparing everyone for this idea of our favorite price patterns let's do this let's take a real quick break let's let everybody grab a drink of water and you and i will be back in about two minutes to talk more about our favorite price patterns and technical indicators we'll be right back [Music] [Music] whether you're an experienced investor or just getting started td ameritrade offers a webcast that's right for you the platform demo webcast series is designed to help you broaden your knowledge of tools and resources available from td ameritrade you'll learn tips and tricks to help navigate td ameritrade.com think or swim and mobile-based platforms best of all you can ask questions by chatting directly with an education coach it's interactive learning at its finest tune in live or watch on demand head over to td ameritrade.com webcasts and start learning today this is my headquarters this is where i trade and manage my portfolio since i added futures i have access to the oil markets and gold markets okay i'm plugged into equities trade confirmed 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and start learning today [Music] welcome back and uh we're talking about technical analysis and some of our favorite price patterns my name is ben watson i'm an education coach at td ameritrade i'm joined with by leigh bull senior manager at charles schwab and we're having a great chat i think today lee about the idea of technical analysis and how we can use it as well as some price patterns we've been talking about trend and trend direction and time frame let's get into some of those reversal patterns that you and i spoke about before the break and and look at some examples out in the wild and i first wanted to look uh at that idea of a double top or a triple top that might indicate a change between an upward movement and then a downward movement in price and one of the stocks that's been in the news especially in the last few days lee has been peloton and as we look at this one of the things that i notice is that on the the right hand side of the chart it's been moving in a downward direction there's a lot of different price patterns going on here but the one that i see probably most clearly is the one that occurs right back here in the december to january time frame up here at the top of the chart more towards the left hand side and uh and we might see that as potentially that triple top the idea being that the trend had been moving up and then runs into a level of resistance in this case right around that 167 level as a resistance and it touches it once comes back down touches it twice comes back down touches it three times can't break up through that resistance and then in fact moves back down to the downside so on a triple top pattern like this uh does the question become when is that triple top actually a triple top yes i mean i think you see it's a triple top when they don't buy it when it goes down to the place that have been stopping before so in other words you've got your horizontal line there under the lows when it traded through there that might be the sign that the buyers are done they tried as you said three times to push it higher couldn't do it the buying that did come in around those lows has not come in this time i think you can see that's a change in psychology and a change in the way that people are looking at this stock and that was indeed um the highs for a while and it continues to trade a little bit lower now even yep exactly and interestingly it was right around the time of an earnings announcement when the company reports their quarterly results that perhaps changed investors psychology about this particular stock and uh and perhaps led to that price movement to the downside so even if we didn't know that there was an earnings announcement there we could see objectively on the chart that uh it was breaking down below perhaps that level of support in that reversal type of uh of pattern uh you know let's take a look here really quickly at a potential double top as well that's a triple top let's look at uh microsoft here as perhaps an example and i'll just kind of zoom in on this time frame that same idea existing as maybe a double top here where price runs up to that resistance pulls back runs up to a resistance pulls back and then again falls from that level can't get up through that resistance level now in in the case of microsoft that didn't really change the trend significantly it brought the price back down didn't change the trend significantly because overall the longer term trend is still up here but those double tops can be an indication of those types of reversals right it was a kind of a pausing formation in here and when it took out the low there in uh in september you know you can see you did get a little more on the downside but uh because the trend is so strong they started buying again but that did give you you know if you wanted to take a little bit of a profit uh you've been in it a long time and it did break those lows that would be a place you know at least to take some off because you'd never know if that is the beginning of a change in trend sure so one other pattern here that you and i talked about was that idea of a head and shoulders and this is where we get into the perhaps the artwork side of uh of technical analysis and uh you know i i looked at this one and this is charter uh communications and and this presents kind of that idea of the head and shoulders now i'm gonna i'm gonna use my magic marker here on the chart just so that we can kind of get a sense of of what this looks like because sometimes this takes a little bit of uh art appreciation interpretation so a head and shoulders pattern consists of a left hand shoulder and then a move back up off of a support level which we'll sometimes call the neckline to a head and then a pullback to that neckline a rally back up to a lower high on the right hand side and then a move back down so here's kind of the essential elements of our head and shoulders pattern i'm just going to draw some happy little eyes on here we'll just play bob ross for a minute left hand shoulder head right hand shoulder that's our head and shoulders and the idea is that the price may very well move to the downside from this pattern and it may move in a an amount that is consistent with how far it went from the bottom of that neckline up to the top of the head and that might be our what we might call our measurement objective it doesn't guarantee that price is going to move that far but it might give us an indication of how far that price might move one other example that i've got on here that was a kind of a clear reversal from that head and shoulders pattern is a stock that some are probably fairly familiar with and this is actually one that uh moved all the way to that that objective this is uh southwest airlines and you can see that left-hand shoulder the head right here at the top and then that right hand shoulder and then it moved when it broke that neckline all the way down to another support level so it's nice to see head and shoulders patterns like this kind of come to fruition for a technical analyst like me and i'm sure for you lee it's kind of gratifying to see those patterns work the way that they're supposed to isn't it it is and uh i just want to spend a minute on this pattern because it's considered to be the essential reversal pattern and why is that because when you were going up to the head what had been happening higher highs and higher lows when you break the neckline now it has happened well you made a lower high on the right shoulder and when you break the neckline you make a lower low so it is the classic going from higher highs and higher lows to lower highs and lower lows if you want to try to be a little bit more analytical with these patterns one thing that you can look for is is the volume generally declining across the pattern that is one thing that can help determine if it is a really good one or not what you'd like to see is less volume on the run up to the head maybe or at least the same that you saw going up to the shoulder and then you can see there's a lot less volume on this one when it ran up to the right shoulder you can see the those red bars are a lot lower that confirmed that pattern so that's another thing that traders look at to evaluate this classic reversal pattern excellent and i like that idea of bringing volume into the mix because if you think about it those are really our only two data points that we have aren't they lee i mean in terms of pure data we have price and we have trading volume that happens and everything else is pretty much a mathematical or uh some sort of derivative calculation of those two factors yeah that's right it's just people over the years have put them together in different combinations to see what works but really to your point there's only as i said in what's the definition of technical analysis the study of price and volume yep exactly now what's cool to me is that sometimes these patterns these head and shoulders patterns or reversal patterns happen on the the downside and give us an indication that trend might be moving in the opposite direction one of those uh examples might be something like halliburton in the energy space as we notice again that uh that inverted or upside down type of head and shoulders pattern indicating that reversal from a downtrend back into that low and then that move back towards the high and in fact this one kind of completed itself all the way to that measuring objective if you will the distance from the neckline to the head and then when it broke the neckline went all the way back up towards that distance and a little bit beyond and in fact right now is sitting back on that level as a level of support so a nice example here of that head and shoulders type of reversal or inverted head and shoulders or type of reversal back to uh the up side yeah so that's right i'll tell you what the end uh yeah great no i was just saying that um we talked about volume on these uh patterns you know one thing on an inverse head and shoulders is when it takes out the neckline uh you'd like to see an increase in volume you don't need it quite as much it seems when you break down from a regular head and shoulders and and that's an indication that buyers are present they're willing to start pushing they're active and and we're going to talk about indicators here in just a minute as well that'll give us some ideas about that so let's look at a couple of other price patterns here really quickly uh and then we're going to get into some of our favorite technical indicators i'm going to drop volume off of this chart once again just so that we can uh clean up that display a little bit and let's take a look at some of those price patterns that might also exist as kind of subsets of these reversal type patterns and we might look at these as what we call continuation type patterns so one of the patterns that we might see oftentimes is what we call a an ascending triangle type of pattern where price has been moving in a sideways fashion or at least an upward trend it's run into a resistance level and the resistance is horizontal but the support level is diagonal support is rising resistance is staying the same let's talk a little bit about what's going on in a pattern like this on on this example prim is the symbol and again not a recommendation just simply an example to illustrate this type of price pattern but that ascending triangle has an expectation that price is going to move uh in the direction of the trend and continue to move higher from here rightly yes that's right so that's why they are called continuation patterns because i mean nothing works all the time but if you go into a pattern in one direction and you get one of these continuation patterns there's several of them this is what's called an ascending triangle as ben said typically you leave the pattern in the direction that you entered now there's no guarantees of that of course the other thing i noticed on this then is that it showed you the buyers are getting a little bit more interested right every time it goes down it makes a little bit higher low they can't get through the high but they are buying at higher levels and finally that buying just breaks through and sometimes those trends those those patterns fail and uh move back down to the upside and then it might become a double top or a triple top that we talked about before and sometimes we'll see those patterns these ascending triangle type of patterns that exist on a shorter term time frame as a matter of fact just as we were talking about this i happen to notice one over here on the right hand side of the chart uh that is occurring just before this earnings announcement in fact starting to see that breakout of the ascending triangle pattern that we can see this shorter term pattern which is really just a matter of a couple of weeks so when we when we look at these patterns like ascending triangles descending triangles which we're going to look at here in a second those can happen over shorter periods of time as well right right and i think one other key factor in analyzing chart patterns is that you know how long does it take to make the target suggested by the pattern and in shorter term patterns i would have to say that a technical analysis tenant is it can make the target based on the pattern in about the time it took to make the pattern so you can see on the triangle over to the left i mean it made it even quicker but certainly if it doesn't make the target after the time frame that the pattern developed over some traders will take a little out of that trade and move into something that is moving a little bit better so that is one thing to consider all right well tell you what lee let's do this since uh our time as it always does when you and i start talking about technical analysis has moved so quickly let's jump into a couple of ideas about technical indicators so we've talked about trend we've talked about support and resistance let's talk a little bit about technical indicators and we'll just go to some live examples here of the using some technical indicators and i know you mentioned this one uh a little while ago uh when we were talking about moving averages and and using that as a means to help determine the trends so what i'm gonna do on the thinkorswim platform we're back on our friend the russell 2000 which had that sideways trend i'm going to go ahead and i'm going to put on here a couple of moving averages that are relatively common moving averages that investors may use and one is a 50 period moving average the other one is a 200 period moving average now when we say period i'm talking about days because this is a daily chart if this were a minute chart this would be 50 minutes and 200 minutes so this is the 50-day moving average which some investors have heard of and the 200 period or the 200-day moving average the green line is our 200 the blue line is our 50. so what do you notice that's happening with these moving averages on the russell 2000 and what does that tell us about trend and trend change here lee right i think uh it's an excellent example you pulled up here ben because you can see that it is showing you the trend the slope of the moving average shows you what the current trend is in the time frame that you are measuring so we can see that in the intermediate term right the 50-day there was just going sideways you can see there was no trend it was just flat um where the longer term trend you can see was still rising at that time vis-a-vis the 200. so again when you are looking at these moving averages it depends on your time frame and as i said earlier you know if you want to know which ones to look at we talked about the different time frame swing traders tend to look at that 20-day moving average because that's a month you know because that's half your anticipated holding period of a couple weeks right uh intermediate term traders position traders tend to watch that 50-day moving average like you have on that chart and investors uh tend to look at the 200 some traders will not buy stocks under the 200-day moving average since it is such a widely followed indicator so what i'm going to do is i'm going to put on here the spx that that broad market definition and take a look at uh the 50 and the 200 again same colors same moving averages and and i like the way that this plays out over the course of this last year that 50 period moving average has really acted almost like a level of support for the s p 500 and those two indicators those two moving averages are moving in the same direction roughly over the same time period aren't they right uh to your point that you made earlier ben about voodoo well it does seem that traders are using that 50-day moving average is it self-fulfillment is it a factor of nature i don't know but you look at that as we both do and say well that's something that i might want to pay attention to right absolutely and it might very well be in those changes when trend direction or when those moving averages cross over one another that some investors may make decisions i'm going to look at a chart here of tesla and we will bring that up here and we can see those periods of time where those trend or those trend indicators the moving averages crossed over i'm actually going to extend this chart out a little bit to a two year chart because when we see a couple of crossovers here way back here in 2019 we saw that 50 period moving average cross up above the 200. we saw it cross back below here in july of 2021 and very quickly turned back up and moved higher and in fact is now moving up and away from that uh from that 200 period moving average so some investors may use those crossover points in moving averages as an indicator for when to perhaps take profits or when to protect their positions right yeah you just look for those crossovers like you said that is an indication that the faster time frame is getting stronger than the weaker one that's all okay so when you're there there's also another technical indicator that we can use and and this is one of the indicators that i use on a fairly regular basis uh if you uh if you see me on the td ameritrade network brought by to us by our media production uh affiliate td ameritrade media productions uh we can uh look at a comparison of two different moving averages so i'm gonna bring up a stock jbht and this is in the transportation space and i'm going to put on here an indicator i'm going to leave the the 50 and 200 day moving averages on here but i'm going to bring up an indicator that you and i have talked about a couple of times and that is the moving average convergence divergence indicator and sometimes that's abbreviated as the macd m-a-c-d and i'm just going to put this on a histogram view which simply illustrates kind of that comparative range between uh those two moving averages so we'll click on apply and okay and you can see that macd or that moving average convergence divergence indicator down here in the bottom of the chart as we look at jbht overall in an uptrend but tell me a little bit about the macd and how you might use this indicator as a confirmation to what's going on with the trend of the stock right so um an interesting way to look at it it's called the triple threat macd um so i'll give you three ways to use it based on that little um name so the first one is what is the macd it's simply the difference between the two moving averages so when the faster moving average goes above the slower one mac b gets positive and when the faster moving average is below the slower one macd is negative and then there's another line which is the um so the macd is the difference between them and then you have that second line which is a signal line which is simply a moving average of the macd line so the signals that are based on this is if the macd line itself goes from below zero to above zero then the faster moving average just moved above the slower one some people consider that a buy uh another maybe faster signal is when the macd line crosses its signal line um and that's what you see in the histogram is the difference between the um the faster moving average and it's i mean the macb line and its signal line so people look at that as well and the third one which is a little bit more um i'd say a little bit more secretive it maybe is when you can look at four momentum divergences which we talk about sometimes where you get a lot of momentum that macd makes a high when something's really moving and it pulls back and it runs up and it makes a higher high but the macd doesn't quite go as high and maybe that shows momentum is coming out a little bit so some people use that as a way to be a heads up that the trend might be changing too all right well i'll tell you what we again as any time that you and i start talking about technical analysis we get kind of lost in uh in in the discussion and uh our time is almost up but uh i wanted to to just kind of get a couple of quick words the the your perspective on your favorite price patterns and and technical indicators and how you use them and where we can find out more information about technical analysis right so i use basically the same indicators that you have shown i mean it's price and volume so moving averages for price uh volume bars for volume and uh those technical indicators that you talked about the macd works very well and so do moving averages so i think you covered the major ones and i think people should look at those because everybody else is looking at them and you talked about self-fulfillment so um right i think that's where we can go with that all right thanks lee and again remember that technical analysis and these price patterns not guarantees but they can help us to make technically informed decisions about what might be happening to price movement so lee thank you very much we're going to throw back to uh lorraine gavin kerr in the studio and again my thanks to lee lorraine thank you so much ben and lee what a fantastic session about tech analysis and i know the audience will be able to take what they learn from both of you and apply it in their own analysis of the markets if you guys enjoyed this session and the topics that they covered you can catch more of what lee and ben talk about on a regular basis lee can be found on schwab live daily and ben can be seen on our media affiliate tdm merchant network in addition to teaching webcasts and workshops and a wide range of topics so thank you very much both of you we're going to take a short break but coming up next we're going to hear from henry schwartz from the sibo global markets as he joins james boyd to discuss many index options and how they might fit into one's portfolio thanks for sticking with us we'll be back shortly [Music] [Music] you

2021-11-09 13:56

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