Terms used in Share Market
This query is : Resolved
22 September 2008
What is "Island Reversal", "Hammer formation", "Double Bottom formation".
22 September 2008
Hammering : Concerted selling of shares by operators to bring the price down, often short-selling heavily. Term associated with bears.
Double Bottom : Chart pattern in TECHNICAL ANALYSIS, which shows a drop in price, a subsequent recovery and another drop and recovery. The double bottom level is regarded as the SUPPORT LEVEL. If the price falls again and penetrates this level it is likely to fall further.
Island Reversal: An occurrence in technical analysis where a stock price will gap up/down, trade higher than this price, and then gap down/up below the initial price. When a stock indicates an uptrend, trades above the gap which occurs, then gaps back down and trades below the initial price, an island reversal has occurred.
Double Bottom : Chart pattern in TECHNICAL ANALYSIS, which shows a drop in price, a subsequent recovery and another drop and recovery. The double bottom level is regarded as the SUPPORT LEVEL. If the price falls again and penetrates this level it is likely to fall further.
Island Reversal: An occurrence in technical analysis where a stock price will gap up/down, trade higher than this price, and then gap down/up below the initial price. When a stock indicates an uptrend, trades above the gap which occurs, then gaps back down and trades below the initial price, an island reversal has occurred.
22 September 2008
Hi Ganesh,
Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement. This sudden move by a stock, the sudden change in demand, is often the beginning of a major move.
Today we are going to highlight a rare Gap situation, the 'Island Reversal'. This formation consists of;
� An exhaustion gap in the direction of the share price move.
� A tight trading range. This could be one or more candles.
� A breakaway gap in the reverse direction of the earlier prevailing trend.
� The result is a candle or candles that are left as an island
As the name implies, an "exhaustion" gap occurs at the end of a move. It is often referred to as the last fevered push of the bulls. Moreover, "Exhaustion gaps" are typically closed in one trading week or less. Technical analysts suggest that once the "exhaustion" gap has been closed, the short to medium-term trend has peaked.
Within an Island Reversal Formation, the more candles �in the island�, the stronger the reversal signal. This pattern is rare because the market is reversing its view on the stock.
While the Island Reversal sounds like a very important event, pragmatically, the second gap usually just produces a reversal of the previous movement. In other words, the stock, if it is a "bearish island reversal," is likely to retrace to approximately where it was when the upturn started. Note the chart below.
The Daily Chart from BHP Billiton Limited (BHP) shows all the technical criteria for a bearish Island Reversal formation. Interestingly, the share price has now retraced back to the current medium-term uptrend. As BHP reports tomorrow, short-term traders will need to see either a break of the current uptrend or a bounce off the current uptrend accompanied by indicators, such as heavy volume, stochastic crossover, and MACD turning up. If shorting a bullish stock, controlled stop losses need to be in place as going against the trend can be fraught with issues
Hammer
A hammer formation is a bullish formation that generally occurs at the end of a declining price trend. It is identified by its small real body at the higher side of the range. It can be either filled or open, a down day or an up day. The bottom tail should be at least twice the size of the real body and the upper tail should only be small, if it exists at all.
Fig 70
It's the length of the tail relative to the body that creates the signal. The tail could be viewed as a sign of rejection of lower prices and therefore a possible reversal of the trend. Taken alone it's not really a definitive signal and therefore it's a good idea to seek confirmation with some sort of an up day signal, the following day. The stronger the up day signal, the better. Volume can also be used to ascertain the probability of a turn around, in this case and increase in volume.
Double Bottom
A Double-bottom is a reversal pattern that tends to occur during severe market sell-offs, as in the example below of the chart for Qantas when it was at its most down trodden. The pattern acts as a major reversal signal that forms after just such an extended downtrend. Although the Qantas chart is a daily chart that shows a double bottom forming over 4 weeks, It should be noted that a double bottom is best in a weekly pattern that forms over a few weeks to many months, with the preferred period being 1-3 months.
As its name implies, the pattern is made up of two consecutive troughs that are fairly equal, with a defined peak between them. Although there can be variations, along with many potential double bottoms during an extended down trend, the 'text book' double bottom usually marks an intermediate or long-term change in trend. It is important to note that the reversal pattern is not confirmed until the key resistance or neckline is broken, as shown in the QAN chart. This confirmed a change in the trend. In the Double Bottom pattern, the initial trough can look like a continuation of the downtrend.
The Daily Trader report of the 27th July gave Qantas as a buy on stop at $3.14 based upon the assumption that this was a double bottom and that $3.14 was a break of the neckline. This trade was triggered on the 16th August and has so far shown a clear change in trend, and using the basic trailing stop exit strategy outlined in the Daily traders companion is returning a very nice profit (11% at the close of trade today). Although the Qantas rise has been assisted by fundamental news a double bottom price target is said to be; The distance from the resistance breakout to trough lows can be added on top of the resistance break. This would imply that the bigger the formation is, the larger the potential advance.
Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement. This sudden move by a stock, the sudden change in demand, is often the beginning of a major move.
Today we are going to highlight a rare Gap situation, the 'Island Reversal'. This formation consists of;
� An exhaustion gap in the direction of the share price move.
� A tight trading range. This could be one or more candles.
� A breakaway gap in the reverse direction of the earlier prevailing trend.
� The result is a candle or candles that are left as an island
As the name implies, an "exhaustion" gap occurs at the end of a move. It is often referred to as the last fevered push of the bulls. Moreover, "Exhaustion gaps" are typically closed in one trading week or less. Technical analysts suggest that once the "exhaustion" gap has been closed, the short to medium-term trend has peaked.
Within an Island Reversal Formation, the more candles �in the island�, the stronger the reversal signal. This pattern is rare because the market is reversing its view on the stock.
While the Island Reversal sounds like a very important event, pragmatically, the second gap usually just produces a reversal of the previous movement. In other words, the stock, if it is a "bearish island reversal," is likely to retrace to approximately where it was when the upturn started. Note the chart below.
The Daily Chart from BHP Billiton Limited (BHP) shows all the technical criteria for a bearish Island Reversal formation. Interestingly, the share price has now retraced back to the current medium-term uptrend. As BHP reports tomorrow, short-term traders will need to see either a break of the current uptrend or a bounce off the current uptrend accompanied by indicators, such as heavy volume, stochastic crossover, and MACD turning up. If shorting a bullish stock, controlled stop losses need to be in place as going against the trend can be fraught with issues
Hammer
A hammer formation is a bullish formation that generally occurs at the end of a declining price trend. It is identified by its small real body at the higher side of the range. It can be either filled or open, a down day or an up day. The bottom tail should be at least twice the size of the real body and the upper tail should only be small, if it exists at all.
Fig 70
It's the length of the tail relative to the body that creates the signal. The tail could be viewed as a sign of rejection of lower prices and therefore a possible reversal of the trend. Taken alone it's not really a definitive signal and therefore it's a good idea to seek confirmation with some sort of an up day signal, the following day. The stronger the up day signal, the better. Volume can also be used to ascertain the probability of a turn around, in this case and increase in volume.
Double Bottom
A Double-bottom is a reversal pattern that tends to occur during severe market sell-offs, as in the example below of the chart for Qantas when it was at its most down trodden. The pattern acts as a major reversal signal that forms after just such an extended downtrend. Although the Qantas chart is a daily chart that shows a double bottom forming over 4 weeks, It should be noted that a double bottom is best in a weekly pattern that forms over a few weeks to many months, with the preferred period being 1-3 months.
As its name implies, the pattern is made up of two consecutive troughs that are fairly equal, with a defined peak between them. Although there can be variations, along with many potential double bottoms during an extended down trend, the 'text book' double bottom usually marks an intermediate or long-term change in trend. It is important to note that the reversal pattern is not confirmed until the key resistance or neckline is broken, as shown in the QAN chart. This confirmed a change in the trend. In the Double Bottom pattern, the initial trough can look like a continuation of the downtrend.
The Daily Trader report of the 27th July gave Qantas as a buy on stop at $3.14 based upon the assumption that this was a double bottom and that $3.14 was a break of the neckline. This trade was triggered on the 16th August and has so far shown a clear change in trend, and using the basic trailing stop exit strategy outlined in the Daily traders companion is returning a very nice profit (11% at the close of trade today). Although the Qantas rise has been assisted by fundamental news a double bottom price target is said to be; The distance from the resistance breakout to trough lows can be added on top of the resistance break. This would imply that the bigger the formation is, the larger the potential advance.
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