Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (John J. Murphy, 1997)

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Reversal patterns.
  • A prerequisite for any reversal pattern is the existence of a prior trend.
  • The first signal of an impending trend reversal is often the breaking of an important trendline.
  • The larger the pattern, the greater the subsequent move.
  • Topping patterns are usually shorter in duration and more volatile than bottoms.
  • Bottoms usually have smaller price ranges and take longer to build.
  • Volume is usually more important on the upside.
Volume and open interest rules
  1. Volume is used in all markets; open interest mainly in futures.
  2. Only the total volume and open interest are used for futures.
  3. Increasing volume (and open interest) indicate that the current price trend will probably continue.
  4. Declining volume (and open interest) suggest that the price trend may be changing.
  5. Volume precedes price. Changes in buying or selling pressure are often detected in volume before price.
  6. On balance volume (OBV), or some variation thereof, can be used to more accurately measure the direction of volume pressure.
  7. Within an uptrend, a sudden leveling off or decline in open interest often warns of a change in trend. (This applies only to futures).
  8. Very high open interest at market tops is dangerous and can intensify downside pressure. (This applies only to futures.)
  9. A buildup in open interest during consolidation periods intensifies the ensuing breakout. (This applies only to futures.)
  10. Increases in volume (and open interest) help confirm the resolution of price patterns or any other signficant chart developments that signal the beginning of a new trend.
Candlestick


Cycle


Technical checklist
  1. What is the direction of the overall market?
  2. What is the direction of the various market sectors?
  3. What are the weekly and monthly charts showing?
  4. Are the major, intermediate, and minor trends up, down, or sideways?
  5. Where are the important support and resistance levels?
  6. Where are the important trendlines or channels?
  7. Are volume and open interest confirming the price action?
  8. Where are the 33%, 50%, and 66% retracements?
  9. Are there any price gaps and what type are they?
  10. Are there any major reversal patterns visible?
  11. Are there any continuation patterns visible?
  12. What are the price objectives from those patterns?
  13. Which way are the moving averages pointing?
  14. Are the oscillators overbought or oversold?
  15. Are any divergences apparent on the oscillators?
  16. Are contrary opinion numbers showing any extremes?
  17. What is the Elliot Wave pattern showing?
  18. Are they any obvious 3 or 5 wave patterns?
  19. What about Fibonacci retracements or projections?
  20. Are there any cycle tops or bottoms due?
  21. Is the market showing right or left translation?
  22. Which way is the computer trend moving: up, down, or sideways?
  23. What are the point and figure charts or candlesticks showing?
After bullish or bearish conclusion
  • Which way will this market trend over the next several months?
  • Am I going to buy or sell this market?
  • How many units will I trade?
  • How much am I prepared to risk if I'm wrong?
  • What is my profit objective?
  • Where will I enter the market?
  • What type of order will I use?
  • Where will I place my protective stop?

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