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Analysis
Basic Charting
Section 2 of 8
Basic Charting
KEY CONCEPTS
You can adjust the time frame on your chart by using the toolbar at the top of
the Interactive Chart. To adjust the time span of the chart, click on the second
drop-down menu from the left (see Figure 2.1).
To adjust the time span of each bar on the chart, click on the third drop-down
menu from the left (see Figure 2.2).
Try adjusting your chart from a 1-year daily chart to a 5-year weekly chart.
This same principle of looking to the next time frame for trend confirmation
can be used with the hourly and daily charts, the daily and weekly charts and
even the weekly and monthly charts for a longer-term trader. The principles of
technical analysis apply equally to each of these time frames.
Basic Charts
AT A GLANCE
Basic Charts
Bar charts
Line charts
Japanese candlestick charts
You can adjust the chart type by using the toolbar at the top of
the Interactive Chart. To adjust the chart type, click on the first
drop-down menu from the left (see Figure 2.3).
Bar Charts
A bar chart is a commonly used Western
method of charting price movement. The long
vertical linethe barrepresents each periods
trading range, including the high price for the
day and the low price for the day. The horizontal
line on the left side of the bar represents the
opening price for the day. The horizontal line on
the right side of the bar represents the closing
price for the day (see Figure 2.4).
Line Charts
A line chart does not plot the price movement for a given period.
It only plots the closing price for each period. The chart then
connects the closing prices with a single linehence the name
line chart. At first glance, this chart type seems inferior to the
bar chart because it displays less information. However, some
technicians like this view because it usually shows support and
resistance more clearly than a bar chart does (see Figure 2.6).
INVESTOR TIP
Candlestick Charts
Candlestick Construction
INVESTOR TIP
Figure 2.7Candlesticks
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Black Candlesticks
The black candlestick has a long
body that may or may not have
an upper or a lower shadow (see
Figure 2.10). The long black body
of this candlestick type indicates
strong selling interest. Yet a black
candlestick is not a stand-alone signal
to buy or sell.
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INVESTOR TIP
Spinning Tops
A spinning top is a candlestick with
both an upper and a lower shadow
and a relatively small body (see
Figure 2.11). The color of the body
is not important. While a candlestick
with a long body indicates strong
Figure 2.11Spinning Tops
buying or selling interest, the small
body of a spinning top indicates a slow market with a relative
balance between buyers and sellers. Yet a spinning top is not a
stand-alone signal to buy or sell.
Dojis
A doji is a candlestick with an upper shadow, a lower shadow
or both, and a flat body (see Figure 2.12). Dojis occur when
the stock closes at a price
equal to or almost equal to its
opening price. Dojis do not
have an elongated body, just a
horizontal line indicating the
opening and closing prices.
Like the spinning top, a doji is
not a stand-alone signal to buy Figure 2.12Dojis
or sell.
A doji is essentially a neutral indicator because
it represents a balance between buyers and
sellers. There are, however, two types of dojis
that are not neutral.
The first non-neutral doji is called the
tombstone doji (see Figure 2.13). As its name
might suggest, it usually kills an uptrend
Figure 2.13
and is generally bearish. A tombstone doji
Tombstone Doji
represents a trading period in which the price
opened near the low for the period, experienced an unsuccessful
rally and then closed near the low for the period.
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Figure 2.14Dragonfly
Doji
Candlestick Formations
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As you can see in the IBM (IBM) chart shown in Figure 2.16,
the stock price forms a hammer on 5/12 that is followed by a
confirmation on 5/19 when the stock price closes above the
hammer.
As with most technical signals, the hammer is not a stand-alone
signalanother signal must confirm the bullish action. A buy
confirmation for a hammer occurs when a subsequent candlestick
closes above the body of the hammer candlestick.
The Hanging Man
A hanging man is similar in form to the hammer, but the
implications of this candlestick are quite different. A hanging
man occurs only during an uptrendit is bearish and signals a
reversal of the current trend. A hanging man has little or no upper
shadow, a small body and a lower shadow that is at least twice the
length of the body (see Figure 2.17). The color of the body of the
hanging man is not important.
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INVESTOR TIP
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INVESTOR TIP
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Inverted Hammers
The inverted hammer is a
common formation that occurs
only in a downtrendit is
bullish and signals a reversal of
the current trend. The inverted
hammer, like the hammer, is
similar to the tombstone doji.
Inverted hammers have little or
no lower shadow, a small body
and an upper shadow that is at
least twice the length of the body
(see Figure 2.19). The color
of the inverted hammer is not
important.
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Shooting Stars
The shooting star formation is similar
to that of the hanging man. You
can see how the name shooting star
came about because it looks like a
meteor with a tail falling to earth.
The shooting star occurs only during
an uptrendit is bearish and signals
a reversal of the current trend. A
shooting star has little or no lower
shadow, a small body and an upper
shadow that is at least twice the length
of the body (see Figure 2.21). The
color of the body of the shooting star is
not important.
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Engulfing Formations
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As you can see in the eBAY (EBAY) chart shown in Figure 2.24,
the stock price formed a bullish engulfing formation on 6/21 and
6/22. This signaled a change in the trend of the stock and was the
beginning of a 9 percent increase in the stock price.
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INVESTOR TIP
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Harami Formations
INVESTOR TIP
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Piercing Lines
The piercing line formation is the
exact opposite of the dark cloud
cover formation. A piercing line is a
bullish reversal signal that occurs at
the bottom of a downtrend or the
valley of a congestion zone.
Piercing line formations consist of
a long black candlestick followed
by a white candlestick that opens
below the closing price of the black
candlestick and closes deep within
the body of the previous black
candlestick (see Figure 2.32).
Figure 2.32Piercing Line
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As you can see on the Home Depot (HD) chart shown in Figure
2.33, the stock price formed a piercing line formation on 5/07
and 5/10. This formation was followed by a very profitable
uptrend.
Dark cloud cover and piercing line formations are important
technical signals, as they represent major shifts in market
sentiment. Here are three important things to remember to
ensure you are recognizing the right formation at the right time:
Trend. The dark cloud cover formation occurs during an
uptrend, while a piercing line formation occurs during a
downtrend. Both indicate a potential change in trend.
Body size. The second candlesticks body must
penetrate through more than half of the body of the first
candlestick in both formations.
Color. The first candlestick in the dark cloud cover
formation must be white and the second candlestick
must be black. The first candlestick in the piercing line
formation must be black and the second candlestick must
be white. The two candlesticks are always opposite colors.
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