Investment Analysis can be divided into two basic types: Fundamental Analysis and Technical Analysis. This section will discuss the important issues in understanding Technical Analysis. With the aim of predicting future trends, Technical Analysis incorporates price charts and/or technical indicators for analysing previous trends to predict future market prices.
Before delving into Technical Analysis applications and techniques, investors should understand the following assumptions.
1. Price reflects all market behaviour.
2. Prices will occur in patterns.
3. History will continue to repeat itself.
Three Major Analysis Techniques:
1. Candlestick Charts
2. Chart Patterns
3. Trading Indicators
Our experts are constantly analyzing the market trends since the ups and the downs of the gold market is highly influenced by the directions of the market, and trend analysis; therefore, is absolutely necessary. In other words, the market trends point the direction of price changes.
1. When prices move successively higher than earlier prices, this upward price movement is called an uptrend.
2. When prices move successively lower than earlier prices, this downward price movement is called a downtrend.
3. When further upward price movements face resistance, or when downward movements face support, and also when a price hovers around a consistent price range, then that price movement is called a side trend.
Resistance and Support
Whenever prices rise, the market sentiment is optimistic in the sense that investors expect the price to grow continually. However, each investor will have different price where they expect to sell and close their buy positions. Whenever the positions are sold, there is an increase of sell positions. This increase of sell positions may exceed the number of buy positions. The increase in supply of sell positions will move the market price downward. The resistance level is the price where market prices fall after the price moves in an upward movement.
Whenever prices fall, the market sentiment is pessimistic in the sense that investors expect the price to fall continually. In this situation, investors will have different expectation of prices where they expect sell and close their sell positions. Whenever positions are bought, there is an increase of buy positions. This increase of buy positions may exceed the number of “sell” positions. The increase in supply of buy positions will move the market price upwards. The support level is the price where market prices rise after the price moves in a downward movement.
An important note to remember is that support and resistance levels are interchangeable. Whenever the price breaks through a resistance (or support) level, that respective level will then act as a support (or resistance) level. The rationale is that the most recent breakdown of a resistance (or support) level will be remembered by the market as a point of reference until those respective levels are tested at a later date.
Chart patterns can be divided into two major categories: Reversal Patterns and Continuation Patterns. A reversal pattern signals that the present trend might have changed direction, whereas a continuation pattern will signal that the trend may continue onwards whenever there is some market uncertainty. Below is a detailed explanation of some common patterns for your reference.
Head and Shoulders Patterns appear with a left shoulder, a head, and a right shoulder. The horizontal line drawn connecting the base of the shoulder is known as the neckline. With Head and Shoulder Patterns, there are two common variations. The first variation is simply known as the Head and Shoulders pattern, whilst the other variation is known as the “Inverted” Head and Shoulders or the Head and Shoulders Bottom.
Whenever the price breaks through the neckline, the breakout will continue until there is a breakdown of the continuation pattern. The price will continue to reverse until the price goes beyond the start of the head and shoulders pattern.
Double Top / Double Bottom Patterns occur whenever two consecutive tops (or bottoms) appear, with an eventual trend reversal.
Double Tops occur whenever the price rises to a new high. Afterwards, the retracement will go towards a support level for an uptrend market direction. After the retracement, the market will continue upwards from the support level to test the previous high. Once the market realizes that the resistance level cannot be broken, the prevailing short sellers will overwhelm the number of long positions, resulting in a breakdown of the previous uptrend.
The resulting trend will break through the previous support levels and act as resistance for the buyers.
Double Bottoms occur whenever the price rises to a new low. Afterwards, the retracement will go towards a resistance level for a downward market direction. After the upward retracement, the market will continue downwards from the resistance level to test the previous low. Once the market realizes that the support level cannot be broken, the prevailing long traders will overwhelm the short sellers, resulting in a breakdown of the previous downtrend.
The resulting trend will break through the previous resistance levels and continue the new market uptrend.
Triple Top / Triple Bottom Patterns are formed whenever the market forms three similar priced tops or bottoms. Much like the Head and Shoulders pattern, the Triple Top (or Bottom) shows that the market is unable to continue upwards (downwards) as the sellers (buyers) are overwhelming the market. This creates a strong resistance (support) level, which will eventually influence the market and result in the downward (upward) trend.
Rectangle Patterns occur whenever the market is uncertain of the overall market trend, with the market direction trading in a sideways channel pattern, which is known as the Rectangle Pattern. As with the previous patterns, the sellers will choose their target price to enter the market to short the trade, whilst the buyers will choose their target price to go long. If the either side, outnumber the other by volume, the respective support and resistance levels will be shown to the rest of the market. Whenever these levels are shown, other buyers and sellers will use these price targets as a reference to enter the market.
Eventually, when enough time has passed between the buyers and sellers for exchanging trades amongst each other, only one side will have enough influence to overwhelm the other, thus creating a clear definitive market trend. In most cases, whenever a market trend moves in a favorable direction before going into a Rectangle Pattern, the market will usually break out to continue the previous prevailing pattern.
For example, if the market is in an uptrend, the rectangle formation may be formed with buyers’ profit-taking on their positions. If some potential traders notice this formation occurs, they may enter the market to catch the uptrend at the lowest of the channel where near the support levels. Afterwards, if enough buyers have entered the market, the long trades will eventually overwhelm the short trades and create a breakout pattern to continue the previous uptrend.
For a downtrend, the logic is the same, but with the sellers influencing the market direction.
Triangle Patterns occur whenever the market is uncertain in showing a clear market direction. Whenever traders buy and sell against one another, the market may show a triangle pattern to denote the overall market uncertainty. As the price fluctuates between the support and resistance levels, the eventual reality is that only one side, either buyers or sellers, will end up being the prevailing market force.
The reasoning behind this is as follows:
Whenever there is an even number of buyers and sellers, the market will fluctuate in a price range, where the buyers will enter the market near the lower support range, with the sellers entering the market at the higher resistance levels. As the exchange ensues, the market may see new market participants enter the market, or in some cases, some traders on one side will reverse their trades in favor of the other side. When this happens, the critical moment of a breakout will occur and the losing side will be forced to liquidate to match the market trend in order to cover their losing positions.
Flags Patterns (or Flag Formations) are chart patterns which appear after a sharp movement with a gradual reversal, which then result in a continuation of the previous sharp movement. Whenever sharp market movements occur, the gradual reversal is not a change in overall market sentiment, but rather an opportunity for traders to partake in profit-taking.
The Flag Formation depicts an upward Flag Pattern (also known as an Ascending Flag Pattern), whereby the initial upward movement is followed by a gradual price decline. After a period of time, the market views that the retracement is an opportunity to continue with the initial trend, which breaks through the resistance levels.