GS Technical Analysis Guide Book

SECURITIES DIVISION
SECURITIES DIVISION
GS Techs
Technical Analysis Guidebook
Sheba Jafari CMT
FICC Strats
Prepared by a Goldman Sachs sales and trading desk, which may have a position in the
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SECURITIES DIVISION
Defining Technical Analysis
The art of technical analysis for it is an art is to identify trend changes at an early
stage and to maintain an investment position until the weight of the evidence
indicates that the trend has reversed.
Martin Pring (2002) Technical Analysis Explained
A rising trend (uptrend) occurs when price makes higher peaks and higher lows. A
falling trend (downtrend) occurs when price makes lower peaks and lower lows. A flat
trend (range) occurs when price trades sideways without any significant direction.
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There are a few basic assumptions rooted in basic technical analysis which is also
very well linked to basic economic theory:
Prices are determined solely by the interaction of supply and demand
Prices tend to move in trends
Shifts in supply and demand cause reversals in trends
Shifts in supply and demand can be detected in charts
Chart patterns tend to repeat themselves
Robert D. Edwards and John Magee Technical Analysis of Stock Trends
SECURITIES DIVISION
What technical analysis will provide to the fundamentalist
Psychology. Technical Analysis is a way to quantify and visualize market sentiment and conviction.
Discipline. Assists in disciplining trading decisions.
Objectivity. In setting clear parameters, it is possible to create buy/sell signals that are unambiguous.
A Safety Check. It's quick to give you indications that you are wrong in your view.
Early Warning. Gives early warning that a market is becoming stretched or susceptible to a correction.
Markets are not necessarily efficient. Markets are not necessarily efficient, investors dont always act
rationally. Investors have biases, herding behavior, information inequality, noise and other similar limitations.
SECURITIES DIVISION
A few guidelines to keep in mind
None of the indicators or patterns can be used in isolation

When developing a market view envisage a pair of scales its
about evaluating whether there is an imbalance of patterns
and indicators pointing in one direction
Stick to a process, defaults and methodology

Always use multi-time frame analysis as a starting point
Weigh the importance of the indicator according to the

appropriate time frame. Its often easier to trade with the trend
rather than against it
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List of Contents
The following topics are covered in the following slides:
1. Basic introduction to CANDLESTICK PATTERNS

2. DEFINE YOUR TREND using pivots/confluence areas
3. Enhance your analysis with FIBONACCI RETRACEMENTS
4. Introduction to ELLIOTT WAVE THEORY (EWT)
5. How to use FIBONACCI EXTENSIONS with EWT
6. How to use STRUCTURES/PATTERNS to derive targets
7. The various uses of a (SIMPLE) MOVING AVERAGES
8. Uncovering signals of exhaustion with OSCILLATORS
9. How CORRELATIONS can strengthen/stress test views
10. Finally a GLOSSARY of TERMINOLOGY
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Candlestick Patterns: Understanding basics
Candlesticks can be used to determine potential reversals, exhaustions, the start of a trend and/or the
strength of the participation. It takes anywhere from one to seven candlesticks to make a pattern from which
to determine a particular signal.
The body of the candle represents the open and close of a session (daily/weekly/monthly) also considered
the area of market acceptance. The shadow represents the intraday high and low of the session, also
considered the area of rejection. A white candle is an up day, a filled candle is a down day.
High High High
Open
Close
Open Close
Close
Open
Low Low Low

White = up on the session Filled = down on the session Small/no body = unchanged
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Bullish/ Bearish period reversals
Patterns are made by the relative position of the body and the shadow, the location of the candlestick in
relation to the day prior day and whether or not the candlestick pattern is confirmed the next day.
Because candlestick patterns are used to signal a turning point, its important that there is a preceding trend
(either uptrend or downtrend).
BEARISH Key Reversal Posted where the market is in an uptrend and in BULLISH Key Reversal Posted where the market is in a downtrend and in
this particular period trades to a new high for the trend but subsequently this particular period trades to a new low for the trend but subsequently
reverses lower to close back below the previous periods low reverses higher to close back above the previous periods high
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Indecision and exhaustion signals
The shadow is a vertical line from the real body up to the high or down to the low. A long shadow represents
an inability for the market to maintain its highs or lows.
DOJI (Indecision) Posted where the market is in a trend, but at the HAMMER (Exhaustion) Posted when the market moves to a new
extreme of the move looses momentum. The open/close should be at a very extreme, but closes near the open, leaving a long tail or shadow against the
similar levels. Particularly powerful if immediately followed by a sharp close extreme of the trend. The pattern below is a hammer. If reversed then it is
basis move in the opposing direction called a Shooting Star
Using multiple time frames analysis SECURITIES DIVISION
SECURITIES DIVISION
Defining your trend: Blank canvas
Start with a clean canvas, whether

ghosting all annotations, beginning
brand new, or even just turning the
chart upside down. The primary
trend is lower
Stick to minimal number of
oscillator/momentum indicators The secondary
trends are higher
Start with four moving and short-lived
averages and eliminate those
that are less relevant to price
Start with multiple annotations
and do not be afraid of having a
messy canvas.
Then eliminate those that are
less relevant to price
SECURITIES DIVISION
Defining your trend: Starting lines
Start with a clean canvas, whether

ghosting all annotations, beginning
brand new, or even just turning the
chart upside down. The primary
trend is lower
Stick to minimal number of
oscillator/momentum indicators The secondary
trends are higher
Start with four moving averages and short-lived
and eliminate those that are
Start with multiple annotations
and do not be afraid of having a
messy canvas.
Then eliminate those that are
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Defining your trend: Confluence areas
A confluence zone is a pivot area

where multiple levels are merged
together.
These zones are most

important as future target areas
and in adding confidence to
breaks
In this example, the monthly
close above 84.83-84.19 was
particularly important as it
broke a series of prior highs
and lows from Nov. 09 to Mar.
12.
Hence why it is important to
continually refresh the chart,
renew trendlines, erase prior
biases
SECURITIES DIVISION
Defining your trend: Finished product
The right side of the chart (near-term

price action) should always be the
most relevant.
This chart shows a selection of

pattern, moving averages and
trendlines for the current
environment.
This selection will likely change
over time
Hence why it is important to
continually refresh the chart,
renew trendlines, erase prior
biases
SECURITIES DIVISION
Defining your trend: Fibonacci levels
The Fibonacci Sequence is a series of

numbers (0, 1, 1, 2, 3, 5, 8, 13, 21, 34,
55) each number is the sum of the two
preceding numbers. Each number is 1.618
times the preceding number. The sequence
goes on to infinity.
The key (golden) ratio is 61.8%
38.2% is found by dividing one
number by the number that is two
places to the right (for example
13/34= 0.382)
23.6% is derived by diving one
number by the number that is 3
places to the right
And 76.4% is simply 100-23.6.
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Elliott wave: Quick introduction
Elliott wave theory is an attempt to define

a structure to the market. It is based on
the notion that the market behaves in an
irregular cyclic manner. Defining the
structure allows us to determine where
the market is and where it may be going.
The chart to the right shows an idealized
setup within an upward/bull market.
There are only two types of waves;

impulsive waves and corrective waves.
1. Impulsive moves happen in 5-
waves (either in a bull trend or bear
trend) in the direction of the trend.
2. Corrective waves happen in either
3- or 5-waves (ABCs or triangle)
against the trends direction.
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Although there are numerous guidelines,

there are only three specified rules. Each
wave is subdivided into minor waves and
therefore the rules apply on all variations
of time frames.
Rule 1. Wave 2 cannot retrace more
than 100% of Wave 1
Rule 2. Wave 3 can never be the
shortest of the three waves (its often
the longest)
Rule 3. Wave 4 can never overlap
with Wave 1
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The other thing to remember is that every

wave is related to the other by some
Fibonacci ratio (retracement or
extension). Well go into more detail on
this but a quick summary below:
Wave 2 can retrace 100% of wave 1
but generally stops between 50-76.4%
Wave 3 is typically 1.618 or 2.618
times the length of wave 1
Wave 4 can retrace between 23.6%
and 50% of the length of wave 3
Wave 5 can be 1.00, 1.618 or 2.618
times the length of wave 1
SECURITIES DIVISION
Impulsive moves happen in 5-waves

(either in a bull trend or bear trend)
Corrective waves happen in either 3- or
5-waves (ABC or triangle)
In this example, USDBRL rose in a (Corrective)
5-wave impulsive sequence from
the mid-11 lows up to the Aug. 13
high. Since then, an ABC type
sideways pullback has developed (Impulsive)
and nearly completed. It should be
attractive to start looking for signs
of the market basing again
SECURITIES DIVISION
The first rule to remember is that wave 2 cannot extend beyond the bottom of wave-1. If it does by a notable
margin (there is some discussion that very minimal overlap is possible in OTC markets) it invalidates the count,
implying the market is either still in corrective process or in an opposing trend.
As long as the low from the base of As a guideline, wave 2 tends to

wave-2 does not exceed wave-1 a 5 retrace near around 76.4% of the full
wave-5 rally can still take place distance of wave 1
1
4
1
2
76.4% retrace
2
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The second rule to remember is that wave 3 cannot be the shortest of the three impulse waves. It is often the
longest but it doesnt have to be. As long as wave 3 undergoes a greater percentage movement than either wave 1
or 5, this rule is satisfied. Moreover, wave 3 always goes beyond the end of wave 1.
In this example wave 3 is equal in In this example waves 1 and 5 are

length to wave 1 and shorter than 5 equal and wave 3 is the longest; this
wave 5. This is incorrect is common and satisfies the rule
5 5
4 3
1
3
1 4
1
4 2
2
2
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The third rule states that wave 4 cannot enter wave 1 territory. If it does by a notable margin (again) it invalidates
that count implying that an A-B-C correction is already in place and the market is beginning a sequence in the other
direction (reversing back in the direction of the previous trend).
In this example, wave 4 peaks below Here, wave-4 moves above the base
the base of wave-1 a wave-5 decline 5 of wave-1; a 5-wave sequence can
follows thereafter no longer be in the process
4
2 1 B
4
1 Base of A
2 wave-1
3 C
5
SECURITIES DIVISION
A few guidelines to follow...

Wave-2 tends to Wave-4 tends to be a
be an ABC triangle
5
b
d
B 3
A 1 e
4 c
C a
2
A wedge at the lows is a A wedge at the highs

leading diagonal is an ending diagonal
5
3
1 4
SECURITIES DIVISION
Elliott wave: Developing targets
Each wave (from 2 to 5) has a guideline target based on the length/magnitude of the prior move. In other
words, using Fibonacci retracement/extension levels can help determine the next step in the sequence.
Wave 2 can often retrace between Investors are convinced that the bear
50% and 76.4% of Wave 1; it cannot 5 market is back to stay; this wave is
exceed the beginning of Wave 1 marked by anxiety/lack of confidence
1 1
4
1
2 2
2
50% retrace 76.4% retrace
SECURITIES DIVISION
Wave 3 is often 1.618 or 2.618 times Wave 3 is the most powerful and
wave 1 (sometimes more). If more 5 impulsive. Confidence and volume
than 1.618, its termed extended returns; participation period
1.618 times W1 4 2.618 times W1

1
1
1
2
2 2
SECURITIES DIVISION
Elliott Wave: Use of Extensions
If youre not sure what the wave count is, start with a 1.00 extension target. When that target has been met and
exceeded, you know the market is more likely impulsive. The next target is derived is a 1.618 and 2.618 target.
SECURITIES DIVISION
Wave 4 is between 23.6% and 50% Surprising and disappointing; doubt

the length of wave 3. It also cannot 5 starts to prevail. People want to hold
overlap with Wave 1 territory on, but start to give back
3 4 3
1
1
23.6- 50% of W3 Cannot go
2
2 below W1
SECURITIES DIVISION
Wave 5 is dependant on if Wave 3 is

extended or not; if extended then
1.00, 1.618 or 2.618 times Wave 1. If Renewed momentum and often
Wave 3 is not extended Wave 5 is 5 saturation, the last big move before
0.618, 1.00 or 1.618 time Wave 1-3 distribution starts to take over
Extended 3 4 Not Extended 3

1
1 1
Wave 5 is a Wave 5 is a
measure of 2
2 2 measure of
Wave 1 Wave 1-3
As a reminder, Wave 3 is extended if it is greater than 1.618 times Wave 1
SECURITIES DIVISION
Elliott wave: Corrective patterns
There are three categories of corrections; a zigzag, flat or triangle pattern.
A zigzag is the most common. Its There are more complex double and
classified as a sharp correction (as it triple zigzags which are two or three
is deeper than a flat sideways basic ABC structures separated by
correction); subdivides into ABC; A an X wave (which is broken into 3
and C are near equal in length minor waves)
B
A C
A
B C
C
A
B
A X
C
B
SECURITIES DIVISION
A flat correction is a sideways consolidation which is An irregular flat occurs when wave B overshoots the top of
typically broken up into 3-3-5 waves; wave A has a minor wave A. Wave and B are still 3 wave structures (abcs);
abc, wave B has a minor abc and C has a minor 1-2-3-4-5 wave C has a minor 1-2-3-4-5
B c
B c
b ii b ii
a a
i i
a iv a iv
b b
A A
c iii c iii
C v C v
SECURITIES DIVISION
A triangle pattern is composed of five contracting swings An expanding triangle are very infrequent. Composed of
each with three minor waves to make a complete ABCDE. five expanding swings each with three minor waves to
Wave E tends to end midway through the pattern make a complete ABCDE
D
B
B
D
C A
C
A E
SECURITIES DIVISION
Structures and Targets: Triangles
Triangles tend to be continuation

patterns but dont always have to To calculate the target of the Target
pattern you project the height of
be. The shorter the time-frame the
the pattern as it begins forming
more likely to have a break in the from the break point
direction of the preceding trend
(these are often called pennants).
As the market narrows into the apex
of the pattern, volatility also Height Break
narrows. Therefore the break tends of the point
to be associated with a pop in pattern
volatility.
The break generally occurs within
10% of the apex.
Same target calculation and structure applies in inverse
SECURITIES DIVISION
Double Top and Bottom
Double tops/bottoms are reversal Top Top

patterns.
Increased volatility related to market
exhaustion is often seen as trends
move to extremes. One of the ways
this manifests itself is in markets not
being able to build the necessary
momentum to break a certain price
point at the extreme of a trend on Neckline
repeated attempts
This is likely to be caused either by
the market becoming over
positioned and therefore unable to
break through extremes or the news
flow changing and a segment of the Target
market seeing the prior price To calculate the target you take the distance from the trend
extreme as a good risk/reward entry across the two Tops to the Neckline and extrapolate
this distance from the Neckline itself
point for counter-trend trades
SECURITIES DIVISION
Head and Shoulders
A head and shoulders pattern is Head

also a reversal pattern and
therefore must have a preceding
trend.
Shoulder Shoulder
This is essentially another reflection
of the market entering a period of
increased volatility at the extreme of
a trend and another indicator of
exhaustion Neckline
The right shoulder forms where the To calculate the target you take the
market attempts to resume the distance from the top of the Head
trend and regain the highs but fails to the Neckline which sits at the
to do so. Therefore oftentimes the base of the Shoulders and project
this distance from the Neckline
neckline will have a right-tilt.
Target
SECURITIES DIVISION
Structures and Targets: Wedges
Wedge formations are often

longer-term reversal patterns. Breakdown
Trend extremes are often
Point
associated with a loss of underlying
momentum. This can manifest itself
in one of two ways; (1) extreme
volatility with the market making
little real progress with the trend or Market is initially in a strong uptrend, but at the extreme
(2) the trend continuing but in an of the trend the move begins to lose momentum and
increasingly slow and over-lapping becomes increasingly overlapping
manner. Once the market breaks the trend across the interim
lows it is often the beginning of a large downside
With regards to wave theory, correction as the market will have little in the way of
wedges tend to be 5th waves. They support to buy the currency pair against and will likely
be over positioned
are also called ending waves or
diverging waves. The market will often form negative momentum or
oscillator divergence against the gradual new highs
In fundamental terms, this pattern is often seen as

markets move an extreme distance from fair value
SECURITIES DIVISION
Simple Moving Averages: Introduction
A moving average shows the average closing price for a market over the past x-periods
There are multiple types of moving averages (simple, exponential, weighted, triangular etc.)
Again to avoid subjectivity its advisable to keep periods CONSTANT across various TIME FRAMES of chart
The periods of moving average which have a good track record in FX:
21-period part of the Fibonacci Sequence (see below)
55-period part of the Fibonacci Sequence (see below)
100-period market accepted standard
200-period market accepted standard
SECURITIES DIVISION
Simple Moving Averages: Multiple Uses
There are multiple uses of simple

moving averages:
As support and resistance
Bullish and bearish
crossovers
Defining whether a trend is
stretched or extreme
Defining whether a market
is trend ready
SECURITIES DIVISION
Stretched or extreme
In Oct. 87 the index reached 167

weekly closes above the 55-wma.
When it finally broke, the S&P
dropped ~24% from the pivot (a
total of 35% from the high).
On Friday 21st August the S&P

reached another 167
consecutive before dropping
~10% from the break (a total
of 13% from the high). It
proved to be a very useful
signal.
SECURITIES DIVISION
Simple Moving Averages: Trend-ready?
A cluster of moving averages

the calm before a storm?
A confluence of moving
averages can give a similar
message to when a markets
volatility is reaching extreme
lows
This will often precede a
significant directional move
The signal can then be
heightened when seen near
the apex of a triangle
SECURITIES DIVISION
Momentum Indicators/ Oscillators: Introduction
Oscillators are a derivative form of technical analysis. Their primary purpose is to improve the
risk/reward associated with trading decisions and to act as an early warning signal when a
market is susceptible to a turn/correction.
An oscillator is calculated from two moving averages. It represents mathematically the

relationship between the two moving averages, usually in the form of a ratio.
Two primary forms of implementation:

As an overbought or oversold indicator
As an exhaustion signal where they develop what in technical terminology is described as
positive or negative divergence
SECURITIES DIVISION
Momentum Indicators/ Oscillators: Slow Stochastics
Slow Stochastics is no different than any Slow Stochastics simply measures the average close of a given period
other RSI or MACD; whats important is to relative to its period high and low. In a bull market we would expect higher
pick one and get to know its closes. In bear market, lower closes.
signals/range/scope
Oscillators failed to confirm the peak in Oscillators not confirm the new high
Aug. 98 with negative oscillator in Mar. 09 with a equal new high on
divergence. Negative divergence is where the indicator. This is an example of
price makes a series of 2-or more higher negative divergence and eventually
preceded the downtrend into 11 lows
highs with 2-or more lower highs on the
indicator
The double top in 01/02 can also be
interpreted as negative divergence
A depressed range lasted from mid-07 to
late-12, while price declined in a wedge-
like manner
The price break above 84.83-84.19 was
complemented nicely by a comparable
(bullish) break in momentum
SECURITIES DIVISION
Momentum Indicators/ Oscillators: Slow Stochastics
Slow Stochastics simply measures the average close of a given period

relative to its period high and low. In a bull market we would expect higher
On USDCAD, oscillators failed to closes. In bear market, lower closes.
confirm the new high in Mar. 09
which resulted in negative
divergence. Oscillators did not confirm the new high
in Mar. 09 with a equal new high on
Oscillators warned of trend the indicator. This is an example of
exhaustion when a rally was met with negative divergence and eventually
preceded the downtrend into 11 lows
peaks in the indicator (see arrows
in 11, 12 and early-14)
A bull trend is often accompanied by
an elevated range (as seen during
09/10/early-11) while a bear trend is
often accompanied by a depressed
range (as seen since late-12)
SECURITIES DIVISION
Momentum Indicators/ Oscillators: RSI
The formula for Relative Strength Index: BUY/SELL SIGNAL (I.E. RISK/REWARD INDICATOR)
Its generally accepted that above 80 is over-bought and below 20 is over-sold. Once the
indicator gets to these type of levels its time to watch for signals that the market is preparing to
100 turn from the classic indicators. As with other indicators the importance of the signals increase
RSI
1 + RS with the time period of chart on which they are based; intraday < daily < weekly < monthly.
modified moving average of x days up closes

RS
modified moving average of x days down closes Although not 100% reliable
readings of near 80 or 20
have been reasonable
Moving AveragePrev + 1 signals that USDJPY is at
Modified Moving Average risk of reversal/correction
N * (P - MAPrev)
Again, as with Slow Stochastics, its

knowing how to interpret the indicator
which is most important
The indicator oscillates between 0 and 100
The original recommendation from the
creator was to use a 14-period system (i.e.
x in the formulas above is 14)
Chart Source: Aspen Graphics Data: Reuters
SECURITIES DIVISION
Momentum Indicators/ Oscillators: MACD
The formula for MACD (Moving Average The MACD can be used as an overbought / oversold indicator, similar
Convergence Divergence): to Slow Stochastics or RSI, but its more common use is in looking for
instances of divergence
Although the formula looks complicated, its underlying theory is
actually quite simple in that it effectively shows as a histogram the
MACD EMA1t EMA2t
difference between two moving averages
Signal Line MACDt-1 + SLSF (MACDt MACDt- Put simply this enables you to visually appraise the health of a trend
1)
Exponential Moving Average 1 EMA1t-1 + SF1 (Pt EMA1t-1) Although this is open to discussion/interpretation, in simple form this
means there are two market states (the same applying in bullish and
Exponential Moving Average 2 EMA2t-1 + SF2 (Pt EMA2t-1) bearish trends)
- HEALTHY TREND - Moving averages maintain a

EMA1t
CONSTANT or GROWING differential, i.e. the momentum of
current value of 1st exponential moving average
the trend is STEADY or BUILDING
EMA2t current value of 2nd exponential moving average
- UN-HEALTHY TREND The differential between the moving
EMA1t-1 previous value of 1st exponential moving average averages is NARROWING, i.e. the momentum of the trend is
EMA2t-1 previous value of 2nd exponential moving average DECREASING
SF1 smoothing factor for EMA1
SF2 smoothing factor for EMA2
MACDt current MACD value
MACDt- previous MACD value

1
SLSF SLSF = signal line smoothing factor
SECURITIES DIVISION
Momentum Indicators/ Oscillators: MACD

EXHAUSTION SIGNAL (I.E. +VE AND VE DIVERGENCE)
This develops where the market is in a trend, but the move is losing momentum and becoming increasingly gradual and overlapping. It is often associated with the
formation of wedges. The two forms of divergence are described and shown below with recent examples from EURUSD
NEGATIVE POSITIVE
DIVERGENCE DIVERGENCE
This forms where the This forms where the

market makes a series market makes a series
of 2-or more higher of 2-or more lower lows
highs on the price on the price action with
action with 2-or more 2-or more coincident
coincident lower highs higher lows on the
on the MACD MACD HISTOGRAM
HISTOGRAM
Negative Positive Negative Positive

Divergence Divergence Divergence Divergence

SECURITIES DIVISION
Momentum Indicators/ Oscillators: Williams Percent R
The formula for Williams Percent R: BUY/SELL SIGNAL (I.E. RISK/REWARD INDICATOR)
A reading above -20, i.e. nearer to 0, theoretically indicates the market is over bought and a
reading below -80 i.e. nearer to -100, theoretically indicates the market is over sold. Once the
highn Current Close indicator moves into these extreme levels its time to watch for signals that the market is
%R preparing to turn from the classic indicators. As with other oscillators the importance of the
lown - highn
signals increase with the time period of chart on which they are based; intraday < daily <
weekly < monthly.
n number of periods
highn highest high in n periods Trending market so
indicator doesnt
lown lowest low in n periods
work well
xx
The indicator ranges from 0 to -100
The authors suggested value for n is 14
As with other indicators, its about learning Range bound
how to interpret them, not using a golden market so
number as the input indicator
works well
The indicator tends to only be useful in
range bound markets, it must therefore be
combined with indicators which help
determine market state (range or trend)
SECURITIES DIVISION
Bollinger Bands: A volatility indicator
How Bollinger Bands are calculated

The first thing to say about
Bollinger Bands is that they The method for calculating Bollinger Bands is effectively divided into six
tend to add little value if stages and there are two variable inputs; x the day count for the moving
used in isolation, they must average around which the bands are based and y the number of standard
be taken as one input deviations the bands stand above/below the moving average:
amongst other signals 1. Calculate the simple mean of the x periods used for the moving average
2. Subtract the simple mean from each data point used to calculate it to arrive at the raw deviations
3. Square each of the raw deviations to calculate the square deviations
4. Sum the square deviations to calculate the total squared deviation
Used in isolation they will 5. Divide the total square deviation by the number of data points to calculate the mean squared deviation
tend to give far too many 6. Calculate the square root of the mean square deviation to get the standard deviation
signals to exit a winning
position and/or attempt to To apply Bollinger Bands to a market you then need to overlay three things on
enter counter trend the price action:
positions too early
1. The simple x period moving average
2. The simple moving average plus y times the standard deviation
3. The simple moving average less y times the standard deviation
Better to use them as a
confirmation signal, not a Determining x and y
signal in their own right
x Bollinger originally recommended setting x as 20 (i.e. a simple 20-day moving average)
y Bollinger originally recommended setting y as 2 (i.e. a 2 standard deviation range around the moving average)
SECURITIES DIVISION
Bollinger Bands: A volatility indicator
As highlighted on the prior slide, with

Bollinger Bands its essential to stick with
the build a view theory
Where they tend to be most powerful is if
a market posts a trend reversal or
exhaustion pattern while testing the upper
or lower band
Historically EURUSD finds it very

difficult to move materially beyond
the two standard deviations on
either side of the moving average.
When it does move to those kinds
of theoretical extremes it has a
tendency to snap back towards the
center (30-month moving average)
SECURITIES DIVISION
Historical Comparisons Using the past to predict the future
Technical Analysis is based on a basic

premise that the price action that has
followed certain patterns or developments
in the past will do so again in the future
With the above in mind, beyond the

textbook patterns that can be followed its
important to look back at how markets
have reacted to certain developments in
the past
From the July 08 highs
EURUSD corrected 37.11 big
The basing process which the DXY figures lower and has
From the September 92 subsequently recovered. A
is currently forming looks very much highs EURUSD corrected similar size %age recovery
like the structure that developed into 37.65 big figures lower, to the 92-95 episode would
then recovered 80.75% of
the late-90s before the market that sell-off
target 1.5325
accelerated into the last major USD-

uptrend. Could this indicate that the
market is setting up for another
multi-year rise?
SECURITIES DIVISION
Correlations: Stress test views
Besides conducting detailed technical This overlay shows EURUSD is green, the
German/U.S. 10-year yield spread in blue
analysis on individual FX markets its also and the EUR/Linked Asset basket in yellow
very useful (and powerful) to conduct the
same type of analysis on other asset
markets with which a certain FX market is
correlated
The most important use of this type of
analysis is to help strengthen and explain
views. But is also acts as a stress test.
If a highly correlated market
appears to give a differing EURUSD
overlaid with Oil
directional message it can often be
a warning that a move is relatively
unlikely to take place or that an
established correlation needs to be
broken for it to be achieved
As a reminder, this index tracks a basket of Germany/U.S. 10-/5-/2-

year spreads and Germany/-France/-Italy/-Spain 10-year spreads
SECURITIES DIVISION
Statistical: Trending or turning

Performance vs Anchor Currency In this case the
performance of all currencies is displayed vs the USD
with the exception of PLN, CZK, HUF, SEK and NOK
which are tracked vs the EUR
First Across and then Up or Down The %age

change last week is displayed on the x-axis and the
%age change so far this week is displayed on the y-
axis
Displayed as if the Base Currency If a currency

shows a +ve %age change it means it strengthened vs
its anchor currency (USD/XZY or EUR/XZY fell) if a
currency shows a negative %age change it means it
weakened vs its anchor currency (USD/XZY or
EUR/EYZ rallied)
Four Quadrants Top right is Strong and Stronger

where a currency has strengthened for both of the
past two weeks, bottom right is Strong then Weak
where a currency strengthened last week but
weakened this week, bottom left is Weak and
Weaker where a currency weakened for both of the
past two weeks and top left is Weak then Strong
where a currency weakened last week but
strengthened this week
Trending or Turning If a currency appears in the

top right quadrant it indicates its trending higher and if
a currency appears in the bottom left it indicates its
trending lower. If it appears in the bottom right it is
turning lower and if it appears in the top left it is turning
higher.
SECURITIES DIVISION
Statistical: Trending or turning

This scatter chart helps us to identify where the market is pricing various
currencies based on the 1-month risk/reversals and implied volatility
First Across and then Up or Down The 1 month

25Delta Risk Reversal (RR) is displayed on the x-axis
and the 5-day %Change in 1 month Implied Volatility
(IV) is displayed on the y-axis
Four Quadrants Top right is Positive Skew/Higher

Vol. where the RR favors calls and the Implied Vol.
has risen in the past 5 days, bottom right is Positive
Skew/Lower Vol. where the RR favors calls but IV is
has dropped over the past 5 days, bottom left is
Negative Skew/Lower Vol. where RR favors puts and
IV is lower and top left is Negative Skew/Higher Vol.
where the RR favors puts and IV is higher.
SECURITIES DIVISION
Keeping up with the ideas
SECURITIES DIVISION
Keeping up with the ideas
SECURITIES DIVISION
Glossary of Terminology
ABC target (abbreviated; ABC, also known as equality target) An Elliott wave term. A three wave sequence whereby wave C is
measured by the length of wave A and projected from the furthest point in wave B. According to Elliott wave theory, ABCs are typically
counter-trend corrective movements; can either follow a 5-wave sequence or characterize the shape of waves 2 and/or 4.
Bear market A market characterized by falling prices and negative sentiment. Quantitative measures vary; some believe a 20%
decline over a two month period classifies as a bear market.
Bull market A market characterized by rising prices and positive sentiment. Typically need several months/years of asset price
appreciation. The opposite of a Bear Market.
Candlestick A chart that displays the high, low, open and close for a particular session (daily, weekly, monthly). The wide part of the
candlestick represents the real body and displays where the market opened and closed. The wick/shadow of the candlestick
represents the sessions high and low (on a daily chart, this will be the intraday high and low).
Continuation pattern A pattern (flag, triangle, pennant) which takes place after an existing trend and, once broken/completed, results
in a continuation of the preceding trend. Opposite of a reversal pattern.
Convergence/confluence When multiple pivots (trendlines, moving averages, retracements and/or extensions) cluster within a very
tight range. This confluence area can act as support, resistance or a future target level.
Corrective An Elliott wave term. Price action that occurs counter to (against) the trend. Also called a motive wave. From an Elliott
wave perspective, corrections have a three wave structure or a combination of three waves. There are several variations; zigzag (5, 3,
5; ABC), flat (3, 3, 5) or triangle (3, 3, 3, 3, 3; ABCDE). Often measured in terms of Fibonacci retracements; 23.6%, 38.2%, 50%,
61.8% and 76.4%.
SECURITIES DIVISION
Divergence When price action moves in the opposite direction to a specific indicator or another market. A divergence can occur
when equities rally while volume declines. When related to an indicator, divergence can be positive or negative. Positive divergence is
when price action is posting lower highs while the indicator (RSI, Slow Stochastics, MACD) is posting higher lows; this can be
considered a bullish signal. Negative divergence is when price action is posting higher highs while the indicator is posting lower highs;
this can be considered a bearish signal.
Doji A candlestick pattern. When the open and close of a session is near to or exactly the same. After an up or downtrend, this
generally indicates that there is indecision, loss of momentum.
Double top (bottom) A reversal pattern. The pattern is made up of two consecutive peaks (troughs) that are roughly equal leveled
with a moderate trough (peak) in between. The double top completes when the market trades through the lowest point between the
two peaks. The target is derived from the distance between peak and breakout, extrapolated from the breakout point.
Elliott wave theory/count A theory which asserts that crowd behavior follows trend patterns that are either impulsive or corrective.
Impulsive waves (also called motive waves) move with the bigger trend while corrective waves move against the bigger trend. The
basic sequence is 5 waves in the direction of the trend, 3 waves against the trend; a full cycle is 8 waves in total. Elliott wave theory is
fractal meaning no matter how big or small the wave degree, there are subdivisions of the impulsive/corrective waves; in other words
any impulsive wave can be subdivided into 5 smaller waves. Any corrective wave can be subdivided into three smaller waves. There
are only three rules of the wave principle; i) wave 2 cannot retrace more than 100% of wave 1, ii) wave 3 cannot be the shortest wave
(it is often the longest but doesnt have to be) and iii) wave 4 cannot enter/overlap with wave 1.
Equality target (abbreviated; ABC) A three wave sequence (ABC) whereby wave C is measured by the length of wave A and
projected from the furthest point in wave B. According to Elliott wave theory, ABCs are typically counter-trend corrective movements;
can either follow a 5-wave sequence or characterize the shape of waves 2 and/or 4.
SECURITIES DIVISION
Evening star Three candle pattern with bearish implications. Begins with a preceding uptrend, a long white candlestick pattern. The
market gaps higher forming a small black or white body candlestick (indicating a loss of momentum). The following day declines and
closes is below the midpoint of the first day.
Expanding triangle Also known as an expanding pattern. Price swings are expanding as opposed to narrowing as in symmetrical
triangles. Continually larger swings within a range. More often a reversal than a continuation pattern.
Extension target Any time a market goes significantly beyond an ABC/equality target, the wave becomes extended and therefore
potentially impulsive. The target for an extended wave is derived from 1.618 and 2.618 multiples of the first A/1 wave. Both of these
multiples are part of the Fibonacci sequence; 1.618 in particular is considered the Golden Ratio.
Flag A short term continuation pattern which is characterized by a narrow range channel. The breakout takes place in the same
direction as the preceding trend. The target is derived either from the flag pole (the length of the preceding trend) or the height of the
pattern extrapolated from the break point.
Flat A type of sideways correction against the larger trend, characterized by an ABC pattern. Wave A is characterized by 3 minor
sub-waves. Wave B is also often characterized by 3 sub-waves. Wave C is characterized by 5 minor sub-waves. In an irregular flat
wave B terminates above the starting point of wave A. Wave C should meet or exceed the bottom of wave A.
Gap An area on a price chart in which there was no trade. Can be subdivided into four categories; common, breakaway, runaway
and exhaustive. A common gap is uneventful and usually gets filled quickly. A breakaway gap occurs when price is simultaneously
breaking out of a chart pattern/range. A runaway or measured gap happens near the midpoint of a trend and signals continuation,
increased participation. An exhaustive gap occurs at the end of a trend and signals that the market is running out of steam; usually
confirmed when the gap is filled (in the opposite direction of the trend).
SECURITIES DIVISION
Hammer A single candlestick pattern formed after a downtrend. Characterized by a long lower shadow and a small body
(open/close) which is near the session highs (basically looks like a hammer). A reversal signal, which warns of trend exhaustion.
Head and shoulders (abbreviated; H&S) A reversal pattern that is characterized by three consecutive peaks. The second peak is a
little higher than the first and third; the first and third are therefore the shoulders while the second is the head. The pattern
completes when price breaks through the neckline of the pattern; the neckline is a trendline formed across the lowest points on the
two shoulders. The target is derived from the length of the neckline to the head extrapolated from the breakpoint/neckline.
Horizontal range A flat range/channel which can be either continuation or reversal. The target is derived from the height of the
pattern and projected off the breakpoint in the direction of the breakout.
Impulsive An Elliott wave term. Waves that go in the direction of the bigger trend. In a 5-wave sequence, waves 1, 3 and 5 are
impulsive waves. Because of the fractal nature of the trend, impulsive waves tend to be subdivided into 5- minor waves. Often
measured by multiples of 1.00, 1.618 and 2.618.
Key day reversal (bullish or bearish) A reversal pattern also called engulfing pattern. In a bullish key day reversal, there is a
preceding downtrend; the session makes a new low then closes back above the previous session high. In a bearish key day reversal
there is a preceding uptrend; the session makes a new high then closes back below the previous session low.
MACD A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is
calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA.
Moving Average (abbreviated; -dma/-wma/-mma) A simple, or arithmetic, moving average that is calculated by adding the closing
price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages
respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
SECURITIES DIVISION
Negative divergence When price makes a series of higher highs and the momentum indicator makes a series of lower highs. This
can often be a warning signal that the market is running out of steam.
Pennant A short triangle that usually slopes in the opposite direction from the trend. It is a continuation pattern, meaning that it
generally breaks out in the direction of the preceding trend.
Positive divergence When price makes a series of lower lows and the momentum indicator makes a series of higher lows. This can
often be a signal that the market is forming a potential base (the downtrend is running out of steam).
Pullback When price retraces within an upward trend, signaling a slight pause in upward momentum. This is often viewed as a brief
reversal rather than material turnaround.
Resistance The level at which sellers may be as powerful and aggressive as buyers and stop the advance. A resistance level
becomes a resistance zone when more than one pivot converges at roughly the same place. Once broken it becomes support.
Retracement Any correction to the principal trend. In an uptrend, it is a downward correction. In a downtrend it is an upward
correction.
RSI A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine
overbought and oversold conditions. Calculation is RSI = 100 - 100/(1 + RS*) where RS = Average of x days' up closes / Average of
x days' down closes.
Oscillators Any momentum study which is banded between two extreme values. It is used to determine overbought and oversold
conditions. Example; Slow stochastics is an oscillator but RSI is not because it is not banded by two extremes.
Shooting star A candlestick pattern. Opposite of an inverted hammer. The real body occurs in the lower end of the range, a long
shadow exists above the body of the candle, the candle appears at the top of a trend and signifies exhaustion.
SECURITIES DIVISION
Stochastics A study which looks at the most recent close price as a percentage of the price range (high to low) over a specified
window of time. In an uptrend, should expect the stochastics indicator to rise. In a downtrend should expect the stochastics indicator
to fall. Slow or fast stochastics refers to whether the indicator is smoothed or raw. In other words, slow/smoothed stochastics takes a
moving average of the moving average.
Sub-waves An Elliott wave term. Refers to the fact that the wave principal is fractal. Each wave is sub-divided into smaller waves.
Regardless of what time frame used, should in theory be able to identify similar patterns.
Support The level where buyers become as powerful or aggressive as sellers and stop a price decline. Should be viewed as a
psychological barrier. Once broken, support turns into resistance.
Throw-over/throwback When price breaks out of a pattern or structure either from above (throw-over) or below (throwback) and
then quickly reverses back where in the direction that it came from. Also known as a false break or trap.
Trap See throw-over/throwback. Can be either a bull trap (when it breaks higher) or bear trap (when it breaks lower).
Triangle A pattern which has converging trendlines. It can be rising, falling or symmetrical. In Elliott wave theory, triangles are
common in 4th and B waves. The direction of the breakout typically determines the direction of the target.
Wave An Elliott wave term. A sustained price move in one direction as determined by the reversal points that initiated and
terminated the move. A wave cycle is composed of two waves; impulsive and corrective.
Wedge (ascending/rising or descending/declining)

Zigzag - An Elliott wave term. A single ABC correction where wave A is impulsive, B is corrective and C is impulsive. A zigzag can be
a complex double or triple. A complex double is defined as an ABCXABC.
SECURITIES DIVISION
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GS Technical Analysis Guide Book

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SECURITIES DIVISION

Defining Technical Analysis

Martin Pring (2002) Technical Analysis Explained

Defining Technical Analysis

Prices are determined solely by the interaction of supply and demand

Prices tend to move in trends

Shifts in supply and demand cause reversals in trends

Shifts in supply and demand can be detected in charts

Chart patterns tend to repeat themselves

Robert D. Edwards and John Magee Technical Analysis of Stock Trends

Defining Technical Analysis

What technical analysis will provide to the fundamentalist

A few guidelines to keep in mind

None of the indicators or patterns can be used in isolation

Stick to a process, defaults and methodology

Weigh the importance of the indicator according to the

The following topics are covered in the following slides:

1. Basic introduction to CANDLESTICK PATTERNS

Candlestick Patterns: Understanding basics

High High High

Low Low Low

Bullish/ Bearish period reversals

Indecision and exhaustion signals

Defining your trend: Blank canvas

Start with a clean canvas, whether

Defining your trend: Starting lines

Start with a clean canvas, whether

Defining your trend: Confluence areas

A confluence zone is a pivot area

These zones are most

Defining your trend: Finished product

The right side of the chart (near-term

This chart shows a selection of

Defining your trend: Fibonacci levels

The Fibonacci Sequence is a series of

Elliott wave: Quick introduction

Elliott wave theory is an attempt to define

There are only two types of waves;

Elliott wave: Quick introduction

Although there are numerous guidelines,

Elliott wave: Quick introduction

The other thing to remember is that every

Elliott wave: Quick introduction

Impulsive moves happen in 5-waves

Elliott wave: Quick introduction

As long as the low from the base of As a guideline, wave 2 tends to

Elliott wave: Quick introduction

In this example wave 3 is equal in In this example waves 1 and 5 are

Elliott wave: Quick introduction

Elliott wave: Quick introduction

A few guidelines to follow...

A wedge at the lows is a A wedge at the highs

Elliott wave: Developing targets

Elliott wave: Developing targets

1.618 times W1 4 2.618 times W1

Elliott Wave: Use of Extensions

Elliott wave: Developing targets

Wave 4 is between 23.6% and 50% Surprising and disappointing; doubt

Elliott wave: Developing targets

Wave 5 is dependant on if Wave 3 is

Extended 3 4 Not Extended 3

As a reminder, Wave 3 is extended if it is greater than 1.618 times Wave 1

Elliott wave: Corrective patterns

There are three categories of corrections; a zigzag, flat or triangle pattern.