One of the main goals of technical analysis is to ascertain the trend. We can categorise a trend into one of the following:
Uptrend – Bullish
Where share prices are generally increasing in value and the making higher highs and higher lows.
Downtrend – Bearish
Where share prices are generally decreasing in value and making lower lows and lower highs.
Range bound – Neutral
Where the market is giving no confirmation or consistency in terms of making either consecutively higher high’s and higher low’s to fit into the category of an uptrend or alternatively lower low’s and lower high’s to fit into the category of a down trend.
Range bound markets can be just as profitable markets to trade as their bullish and bearish counterparts. Strategy selection does however play a key role in ones success.
Reversal Signals
Technical analysts look for reversal signals in order to pick entry or exit points on a stock. There are a multitude of signals on price action alone without considering indicators and oscillators. One of the more common is the open/close reversal.
The Open Close Reversal Signal
This signal can be easily identified using a candlestick chart where a candle will simply continue in the current trend forming a higher high and higher low, however in the wrong order.
For example, below in a down trend, a reversal signal is identified by a change in the colour of the candle, despite forming a lower low and lower high. The stock has formed the lower low earlier in the day, and ended up closing on its high. This indicates weakness in the current trend and therefore a reversal is likely.
Similarly on the bullish reversal, the candle stick chart shows the reversal, by changing from an open candle to a black candle.
Below is an example on the XJO.ASX where a reversal signal can be seen using candle stick charts.
Sourced from IRESS Technology 2010