How I display fluctuations in significant technical market sentiment signals.

Six month daily candlestick chart of the All Ordinaries Chart (XAO) – from Incredible Charts.

Many lose faith in technical analysis when signals they may have correctly identified are not immediately followed by the price-action they anticipate.

Individual signals can be misleading. Markets don’t just back-flip like Kevin McCarthy (current US Republican House Minority Leader). Price action is constantly evolving, forming into trends, or moving sideways in trading ranges. Signals accurately reflect how market participants appraise stocks at any one time, but they give no clue as to how long that view-point will last. Every session is a new start, taking into account the most recent events..

For this reason I have come to plot on my candlestick charts a system of green and red arrows according to whether each signal is considered to be bullish or bearish. My focus is on chart inflexion points, where price direction reverses, either forming a series of highs and lows, or a change in longer-term trend.

Significant signals

Doji candles are formed when the open and closing prices are in near proximity to each other, so that there is that there is little price change on the day, despite the high and low trading prices varying more widely. The market seems unsure whether to buy or sell and they usually follow a period of trending. Some participants may wish to take profit after gains, or stop-loss after falls, thus pausing the trend. Doji candles warn the investor of possible imminent change in the direction of price movement, but are not otherwise predictive.

The signals I highlight are those showing either bullish (green) or bearish (red) market activity on the day, likely to influence subsequent trading. My list, not in any order of importance, is:

  • Bullish or bearish engulfing patterns.
  • Overnight (when market is closed) market gaps.
  • Successive large range price movements.
  • Respect for, or penetration of, support and resistance levels.
  • Respect for, or penetration of, trend lines.
  • Head and shoulder patterns.
  • Double or triple tops and bottoms.
  • Break-out from trading ranges.
  • Relation to the 120 period moving average.

Observations on the current XAO chart

The XAO has fallen in the past month from a high of 7900 to a low of 7160 respecting support at 7120. It appears to have formed a double bottom from which it is likely to rebound. If this does eventuate, the next target could be 7500.

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