CHARTS, TRENDS, AND PATTERNS - Section 2 - Chapter 13 Part I - Confirmation Basics

1. Lecture - 21
Confirmation Basics
CMT LEVEL - I

2. CMT LEVEL - I
Learning Objectives
 Price Confirmation
 Indexes and Oscillators
Analysis Methods
- Overbought & Over Sold
- Failure Swings
- Divergences
- Reversals
- Trend ID
- Crossovers
- Classic Patterns

3. Confirmation Basics
Overbought
& Over Sold
Failure
Swings
Divergences
Reversals Crossovers Trend ID
Classic
Patterns

4. Overbought & Over Sold
• Bound momentum indicators are best suited for overbought/oversold
analysis.
• Bound oscillators, such as RSI and the Stochastic Oscillator, fluctuate within a
specific range, zero to one hundred in this case.
• Overbought means an extended price move to the upside; oversold to
the downside
• When price reaches these extreme levels, a reversal is possible.
• Overbought describes a period of time where there has been a significant and
consistent upward move in price over a period of time without much pullback.
• Oversold describes a period of time where there has been a significant and
consistent downward move in price over a period of time without much
pullback.

5. Failure Swings
• A Failure Swing is a specific type of breakout from an
overbought or Oversold zone first described by wilder in
1978
• A Negative failure swing occurs when the oscillators
breaks down out of an overbought zone creates a reversal
point , pullbacks but fails to re enter the zone , and then
breaks back down below the earlier reversal point .
• A positive Failure swing is the opposite at an oversold
zone.

6. Divergences
• Divergence is when the price of an asset is moving in the
opposite direction of a technical indicator, such as an
oscillator, or is moving contrary to other data.
•Divergence warns that the current price trend may be
weakening, and in some cases may lead to the price
changing direction.
•There is positive and negative divergence. Positive
divergence indicates a move higher in the price of the
asset is possible. Negative divergence signals that a move
lower in the asset is possible.

7. Reversals
• A reversal shows that the price direction of an asset
has changed, from going up to going down, or from
going down to going up.
•Traders try to get out of positions that are aligned with
the trend prior to a reversal, or they will get out once
they see the reversal underway.

8. Reversals
•Reversals typically refer to large price changes, where
the trend changes direction. Small counter-moves
against the trend are called pullbacks or
consolidations.
•When it starts to occur, a reversal isn't distinguishable
from a pullback. A reversal keeps going and forms a
new trend, while a pullback ends and then the price
starts moving back in the trending direction.

9. Trend ID
•In a trending Markets oscillators will remain in one half of
their range for long period and breakout signal from
standard overbought and oversold zone are often false .
• According to strong Trending markets we can adjust
overbought or oversold zones to reduce false breakout
like 70 level increase to 90 for overbought in RSI for Up
trending Markets or vice versa.
• This adjustment of zones not have any impact on
divergence or reversals

10. Crossovers
•The crossover is a point on the trading chart in which a
security and an indicator intersect. It is used to estimate
the performance of a financial instrument and to predict
coming changes.
•Crossovers indicating a moving average are generally the
cause of breakouts and breakdowns. Moving averages
can determine a change in the price trend based on the
crossover.
•A crossover is used by a technical analyst to forecast how
a stock will perform in the near future.

11. Classic Patterns
•Oscillators & Indicators are also make simple patterns
such as triangle , rectangle and produce support &
resistance levels just price does.
• They even have trends that can be defined by a classic
trend line .
• These patterns have same validity as price patterns ,
even when the oscillators are bounded.