Technical Analysis

 Trading volume > General

            We will start our presentation with a general explanation about the importance of an understanding of trading volume in evaluating market trend.

Trading volume is an important factor, since apart from the price (of currencies, shares, commodities etc.), this is the only independent factor. Trading volume should rise in a pushing wave and fall in a correcting wave. A pushing wave – one which goes in the direction of the trend, a correcting wave being one which goes against the trend. A rising wave is observed as long as the new record is a record in trading volume, and vice versa for a falling wave.

            All of the technical patterns work better on the increase and on the decrease, falls being wilder, sharper and faster, and in terms of trading volume not much money is needed for falls to occur, and lack of interest can also be a factor. For example, the last day of the month is generally a thin day, and thus falls can occur merely as a result of lack of interest. January is regarded as a good month for the markets.

            Trading volume as an indicator is not of itself unequivocal, since for every buyer there is a seller, but we examine the strength of each side, which is most determined. The assumption is that in a rising market, buyers are dominant, since in order for the market to rise, more and more buyers are needed, and the opposite being the case in a falling market.

            Thus, an increase in trading volume in a rising market is a positive indicator, with buyers dominating. A fall in volume in a rising market means that fuel firing the increase – the buyers, is running out. If, for example the dollar rises and trading volume is falling, and the currency is approaching a resistance level – the chance that the resistance will work and brake the rise, is high.

            There are two indicators that support each other, if the price is rising and trading volume is rising, and the price in approaching the resistance level, then there is a chance of breaking through the resistance point, and thus for each resistance level, we look at how the price is approaching it in terms of trading volume. The chance of breaking through the resistance level needs to be examined in relation to trading volume at that time.

Trading Patterns > Double ceiling pattern
This pattern is a pattern running against the trend, a pattern which is created when the price reaches a certain level at which it has a lot of sellers and from which realizations start occurring. The realization stops at a certain support level, where the buyers feel that they have obtained a good price and the price starts going back up. At this point, we once again meet the same resistance point and the same sellers. Once again, the sellers have the upper hand and the price starts falling again. Before checking, it needs to be ascertained whether this is a pronounces rising trend. The first summit is the highest summit of the current trend, with no indication of a pattern or a reversal.

No few people mistakenly come to a conclusion which is too early and do not, at this stage, the price a chance to rebound and break through the resistance. It is important to realize that the pattern only starts acting only after breaking a support level and no earlier. What is actually happening here is that – the price resisted twice at a particular point as supported once at a particular point. At this stage, we need to look at what is happening –

Is there support once again at the same support, producing a triple ceiling, or a range with little movement. If the support is indeed broken, this means that the buyers have broken down, and the security can be expected to fall with the target being a number of points between the support level and the resistance level.

Trading Patterns > Double floor pattern

In this pattern, the price sets a floor at a certain support point, and then tries to rise up to the resistance point where it is arrested and falls back to a second support. From the moment it breaks through the resistance point, the pattern starts to work.

Head and shoulders pattern > reversal of rising trend

The patter occurs at a trend reversal. It includes a single pinnacle with two lower pinnacles on each side.

Left pinnacle = left shoulder, Right pinnacle = right shoulder, Middle pinnacle = head

The line connecting between the two shoulders is called the neck line.

The head and shoulders pattern is a form of a Trend shuffle.

Head and shoulders pattern > reversal of rising trend

As already mentioned, the head and shoulders pattern takes place at the end of a rising trend and shows a trend reversal. Trading volumes are very important in characterizing this pattern. A small trading volume at any peak point (head and shoulders) is a vital condition for creation of the pattern, since a low trade volume shows that the rising trend before the peak is not supported by high volume and is thus weaker. Where this condition does not exist, caution needs to be exercised in case this is a false pattern and does not match our analysis. The neck line connects between the two lowest points of the head and shoulders, the line is not necessarily straight, a falling line strengthens estimates of a stronger fall, and a rising line suggest a weaker fall.

Fibonacci number series > General

The purpose of the Fibonacci series is to identify technical corrections.

What is a technical correction?

Market trading of all types of instruments (Forex, commodities, indexes, shares etc.) does not occur in a straight line, and after a certain rising trend, we need to ensure that we are discerning a clear pattern, whether rising or falling, with the market falling in the opposite direction until a certain point, and then returning to the trend that characterized it prior to the "correction".

A Fibonacci series, points to technical correction targets, moving between 38.2% and 61% of the length of the trend. We would expect the technical correction to end within this range of targets and the and we then return to the trend which characterized the market prior to the correction, and if the correction continues beyond the 61.8% market this points to the possibility of a trend reversal. Fibonacci levels are 32.8%, 50% and 61.8%. with the correction occurring at one of these levels and changes direction, enabling us to assume that this is a technical correction and not a trend reversal.

Example :

The euro/dollar pair is trading in a downward trend, falling form a level of 1.4 to a level of 1.3. When the pair reaches 1.3, it starts correcting upwards. According to Fibonacci, we would expect the correction to be fall between 1.3382 and 1.3618.

If the pair reaches 1.3382 and form that point on starts falling again, this is then the minimal correction, and from there on the trend will continue downwards. If the pair reaches 1.3618 this is the maximal correction. The assumption is that from this point the pair will continue falling and if the pair passes this point then there is a good chance that this is trend reversal.

Having identified that this is indeed a technical correction, we would expect the downwards trend to return, with the target below the previous low point (the Fibonacci series is correct both for a rising trend and for a falling trend).

Currently, almost all trading platforms has Fibonacci bar. Fibonacci bar has to stretch from the low point from which the currency began to rise to the peak from which supposedly started the downward correction or the trend reversal.

According to theory, if a decline (after trend of increases) was stopped in one of the Fibonacci numbers, then the decline was only a correction and the upward trend expected to continue, if the decline is not stopped at any of the Fibonacci numbers, then we are in a trend reversal.

Upward trend is stopped at 38.2% and then returned to a downward trend, ie it was a technical correction rather than a change in trend.