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A Bear Flag is a multi-period price/volume formation that shows a rising pullback channel following a recent downward thrust on heavy volume. The flag pole for this pattern is created during the downthrust phase when the daily range has to be twice the recent average true range and volume has to be twice the recent average volume. During the pullback channel phase the pattern is far more reliable if the volume remains modest. The pattern is violated if price moves above the breakout level (the base of the flag pole) or falls intraday below the "top" of the flag pole. Blended MFI values are created by performing multiple iterations of the money flow index calculation, each time using a different parameter reflecting a different lookback period. The MFI values are accumulated and then divided by the number of samplings made. The advantage of using a blended MFI value is that it smooths the results that can be obtained by this index which are very sensitive to the lookback parameter that is used. By smoothing the results from various time windows the blended result provides a more representative indication of the underlying money flow. A Bull Flag is a multi-period price/volume formation that shows a falling pullback channel following a recent upward thrust on heavy volume. The flag pole for this pattern is created during the upthrust phase when the daily range has to be twice the recent average true range and volume has to be twice the recent average volume. During the pullback channel phase the pattern is far more reliable if the volume remains modest. The pattern is violated if price moves below the breakout level (the bottom of the flag pole) or fails intraday above the top of the flag pole. The principal characteristic of the Doji formation is that the opening and closing price are either the same or almost the same.The formation can display an upper and /or lower shadow and if these become significant the Doji can then approximate the Spinning Top formation. In the limiting case where the open and close are identical and the shadows are very small the Doji formation is sometimes known as a "Star". Doji formations often presage a reversal and can also point to indecision. Evening Star Candlestick Formation The Evening Star Candlestick formation is a bearish reversal pattern that is especially significant if it occurs during a sustained uptrend. It is a three day chart pattern in which the first day shows a candle with a long green body. On the second day there is a gap up with a small body candle registered. On the third day, a candle with a relatively long red body is recorded. Ideally for the pattern the most recent day's close should be below the midpoint of the first day's candle range. The deeper the third candle moves into the real body of the first day's candle, the more reliable the reversal signal. This pattern is the converse of the Morning Star formation. Flag Duration Values show the time duration of the flag pattern from the completion of the flag pole formation stage to the current session. In other words, the count represents the number of sessions that have elapsed during the channel phase of the chart pattern. Our experience suggests that, genrally speaking, the longer the duration the less reliable the pattern becomes. However there are exceptions to that simple rule; when the overall market is in a congestion phase, longer duration values are to be expected, and they may not diminish the reliability of the signal. Typically the duration that we look for in our scanning algorithms is between five and twelve days. Hammer candlestick patterns are characterized by a relatively small body, that may be of either color, that sits on top of a long shadow or tail. The formation should ideally have no upper shadow or a very small one as it would then begin to more resemble a Spinning Top formation. When a Hammer candle occurs near a significant chart low it suggests that there is underlying buying interest right under the current closing price. Hanging Man Candlestick Formation Hanging Man candlesticks have the same appearance as a Hammer candle but what is required for this classification is that the pattern should occur at the top of a trading range or at chart locations that represent a significant high mark for the security. The long lower shadow or tail to this formation suggests, when it is associated with prices at upper extremes, that there will be many traders that could be left stranded should the price begin to falter in subsequent sessions. The Harami Candlestick formation is a two day pattern that has a small body day completely contained within the range of the previous candle's body. This pattern is also often referred to as an inside day and we attach added significance to this pattern when the preceding candlestick has a long body and occurred at a price extreme such as the top or bottom of a trading range. Harami-Inside Day After Peek At Multi-Period High This formation is a type of Harami candlestick. In this pattern the current session signifies an inside day following a peek at a 20 period high value. A peek can be defined as less than one percent from the 20 day high or within three sessions of the occurrence of that 20 day high. Harami-Inside Day After Peek At Multi-Period Low This formation is a type of Harami candlestick. In this pattern the current session signifies an inside day following a peek at a 20 period low value. A peek can be defined as less than one percent from the 20 day low or within three sessions of the occurrence of that 20 day low. Inverted Hammer Candlestick Formation The Inverted Hammer candlestick formation is often a reversal signal, especially if it occurs after a prolonged period of price weakness or near a significant low in the chart formation. It consists of a small candle body formed near the bottom of the day's price range. The upper shadow should be no more than twice as long as the candle body and the lower shadow should be small or non-existent. Sometimes this formation is found as the middle candle in a Morning star formation An Island Candlestick Formation is recorded when there is no overlap between the full candlestick ranges for the current session, the previous session and the session before that. If this formation occurs in conjunction with a Morning Star or Evening Star it indicates a major reversal pattern. Long Shadow Candlestick Formation Candlesticks with a long upper shadow (or tail) and a short or non-existent lower shadow indicate that the trading session was largely controlled by the buyers who kept moving prices higher. Conversely, candlesticks with a long lower shadow and a short (or non-existent) upper shadow indicate that sellers dominated the session pushing prices continually downwards. MACD Histogram values are a useful way of pictorializing the key components of the MACD indicator. The MACD value represent the differences between the two moving averages that are discussed in connection with the MACD indicator and in turn we can trace the difference between this value and the signal line that is a smoothed version of this difference amount. This seconday value can then be plotted on a histogram allowing a ueful monitoring of the evolution of the primary indicator with respect to the signal line. Taken on its own the histogram value has little value but when one looks at the histogram itself over time or when the value reaches a threshold point there can be useful information provided. When the histogram value falls below the zero line this is indicating that the MACD has fallen below the signal line. Crossovers can be significant but only when there is other supporting evidence from the pattern analysis. One of our preferred ways to interpret the MACD indicator is to look for divergences between the shape of the MACD chart formation and the shape of the price formation. Again this type of divergence may not be a reliable indicator on its own but when it coincides with money flow divergences and RSI divergences it becomes increasingly useful as a technical analysis tool. The MFI Uplift values (these values can be negative of course) that we focus on in the Pattern Analysis tables provide a guide as to the degree to which a security could be experiencing accumulation or distribution. The parameter that is included within parenthesis in the column header represents the lookback period. For example, the way to interpret MFIUplift(5) is that this shows the change in the Blended MFI readings between the most current and the one from five sessions back. Changes that show an MFI index uplift of more than 20 or below -20 during short time frames can be considered significant. We like to monitor two time frames for this uplift value. Typically we consider changes in the Blended MFI Values index for five sessions and 15 sessions. Changes in the longer time frame can point to long term accumulation or distribution patterns. One of the cornerstones of our methodology is to look for market dissonance and this is revealed in the divergences between price activity and the performance of underlying momentum and volume indicators. Accordingly we would suggest that one way to use these tables is to look for high (or low) values in the MFI Uplift values which are not accompanied by the appropriate or commensurate price movements. In other words, by sorting on the columns for upward movement in price but weakening MFI Uplift values one may be able to identify potential divergences that could provide clues as to profitable trading opportunities. Even if price is relatively stable but there are noticeable rising MFI Uplift values, this provides evidence of quiet accumulation that can sometimes lead to explosive price breakouts. Money Flow Divergence is a proprietary indicator (that is still undergoing refinement) which creates a numerical value to reflect divergences between the money flow activity for a security and the price activity. What is important in this indicator is not so much to look for extreme values in either direction, but rather to look for situations that may be emerging. For example if the MFI value is above 60 but the Money Flow Divergence value is a negative amount, perhaps -30, this could represent the beginning of a pattern of divergence. In itself the Money Flow Divergence value should not be relied upon as it often contains money flow information that is already reflected in either higher or lower prices. When taken in conjunction with other values, and as pointed out when it is beginning to diverge from the underlying MFI scenario, it may provide early clues as to an emerging pattern. The Money Flow Index is a volume-weighted version of the Relative Strength Index. The indicator compares the total transaction values traded on days with upward price movement to the transactions value traded on days with downward price movement. The following is the method for calculating the Money Flow Index Morning Star Candlestick Formation The Morning Star candlestick formation is a three day bullish reversal pattern. The first day is in a downtrend with a long red real body. The following day gaps lower and has a small real body. The last day is a green candlestick that closes above the midpoint of the first session's red real body. Moving Average Convergence Divergence Moving Average Convergence/Divergence (MACD) was developed by Gerald Appel and is one of the most reliable technical indicators available. MACD uses moving averages to derive a momentum oscillator that subtracts the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. The most popular formula of the MACD is the difference between a 26-day and a 12-day exponential moving average. Appel and others have expeimented with different time periods to come up with an indicator that is more flexible and to analyse securities with different volatility characteristics and market conditions. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws. In the canonical version of the formula that make up MACD, the 12-day EMA is called the fast period and the 26-day EMA is called the slow period. The daily closes are used in the exponential moving average calculation. Traditionally, a 9-day EMA of the MACD value itself is plotted along side to act as a signal line. A bullish crossover occurs when MACD moves above the signal line and a bearish crossover occurs when MACD moves below the signal line. The histogram represents the difference between MACD and its signal line. The histogram is positive when MACD is above the signal line and negative when MACD is below the signal line If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish. If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating and this would be considered bearish. The Price Change field used in the Patterns Analysis tables represents the change between the current closing price and a previous closing price using as an offset the value contained within the parentheses. For example, Price Chg(1) will return the change between today's close and yesterday's close, and Price Chg(3) would reflect the change between the current close and the close from three periods ago. This very popular technical analysis tool was introduced by J. Welles Wilder in his 1978 book, New Concepts in Technical Trading Systems. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and quantifies those relative magnitudes by means of an index number that ranges from 0 to 100.The formula takes a single parameter, the number of time periods to use in the calculation, or the lookback window. In his book, Wilder recommended using a 14 period time window but we have found that 10 periods better serves our purposes. The steps in calculation of the Relative Strength Index are: Shooting Star Candlestick Formation The Shooting Star candlestick is a bearish pattern where the stock opens higher, trades still higher creating a long upper shadow and then the stock closes at or near the lows for the day. The candle body is relatively small and there should be either no lower shadow or a very small one. Spinning Top Candlestick Formation The Spinning Top candlestick formation has a relatively small candle body that can be of either color and this is accompanied by both upper and lower shadows or tails that are longer than the body width. Spinning Tops are often found at pivotal points and inflections and can indicate indecision or anticipation prior to significant market moves. The Volume Multiplier value that is used in the Patterns Analysis tables is the ratio of the volume during the current session to the average daily volume during the 15 preceding periods. |