Technical Analysis

Channeling Concepts
and
Use of Technical
Indicators & Oscillators

Technical Analysis
Concepts and Applications

Technical Analysis
Assumptions:

1.
2.

3.
4.
5.

Serial correlations exist and are probabilistic.

Examines buying and selling pressure within a particular
market for a security and not in the intrinsic value of the
security.
Attempts to form an opinion of market directionality based
on behavioral characteristics (i.e. Prices moves in trends).
Behavioral characteristics of large masses tend to herd
(i.e. History tends to repeat itself).
The market discounts all known and unknown variables.

Technical Analysis
Concepts and Applications

Technical Analysis
Applications and Tools:

1.

Trend lines
Idealized
representation of stock
price movement

Technical Analysis
Concepts and Applications

Trend Lines

Idealized
representation of stock
price movement

Technical Analysis
Concepts and Applications

How

to Identify
Market Structure
Highs/Lows (MSH
and MSL)
Self-Price
Confirmation
Trend Behavior
Channeling???

Confirmed

MSH?
MSH

Confirmed

MSH?
MSH

Projected Price
Path?
Confirmed
MSL?
MSL

Confirmed
MSL?
MSL

Technical Analysis
Concepts and Applications

Trend Lines

Idealized
representation of stock
price movement

Material Trend Change?

Technical Analysis
Concepts and Applications

Wave Theory

A form of Technical Analysis.

Analyzes markets in cycles.
Created by RN Elliott in the 1930s.
Assumes that the market behaves in waves of optimism
and pessimism that are of a repeating fractal nature
(i.e. this time its different).
Defines trends into two categories: Impulsions and
Corrections.

Technical Analysis
Concepts and Applications

Impulsions (Impulsive Waves or Motive Waves)

Five adjacent segments must be present (monowave or larger), which must

meet form requirements of a trending impulsion or terminal patterns.
Three of the five segments must thrust in the same direction (upward or
downward).
Immediately after the first segment (wave-1), a minor move in the opposite
direction (wave-2).
The third segment (wave-3) must retrace the entirety of the second segment
(wave-2) and be longer than wave-2.
Immediately after the third segment, a minor move in the opposite direction of
the third (same direction as wave-2), but never retraces the entirety of the third
segment.
The fifth segment (wave-5) will almost always be longer than the fourth, but
only has to be 38.2% of the fourth segment (price wise). When the fifth
segment is shorter than the fourth, the fifth segment is termed, a failure or
truncation.
The second segment (wave-2) cannot enter the price territory of the fourth
segment (Wave-4), unless a terminal triangle or terminal impulsion is forming.
When the entire vertical price distances covered by the first, third, and fifth
segments are measured and compared amongst each other, the third does not
have to be the longest, but it can never be the shortest of the three segments.
If any of these rules are violated, the trending behavior thus far in the
market is considered Corrective and NOT Impulsive.
If Corrective, then the directionality is in the opposite direction of the main trend
one degree larger.

Technical Analysis
Concepts and Applications

Corrections (Corrective Waves)

Three adjacent segments must be present (monowave or larger), which must meet
form requirements of a correction.
Two of the three segments must thrust in the same direction (upward or
downward).
Immediately after the first segment (wave-A), a minor move in the opposite
direction (wave-B).
Wave-A could be, but does not have to a five-wave-impulsion (in the case of
sharps).
The third segment (wave-C) must retrace at least 23.6% of Wave-B and must be a
five-wave-impulsive structure itself, regardless of the entirety of the Corrective
Structure (3-3-5 flat).
Immediately after the third segment (Wave-C), the trend of one larger degree
reasserts itself in the main impulsion of one larger degree.
Occurring within in a five-wave-impulsion (trending impulse), Corrections can only
occur in the Wave-2 and Wave-4 position, unless a triangle or terminal formation is
unfolding.
Rules of Alternation between Waves-2 and 4 and their ABC Corrective structures
must alternate in terms of Price, Time, Severity, Intricacy, and Construction (aka
Design).
Corrective Design may include, flats, sharps, triangles and complex corrections
which encompass multiple polywave-flats, polywave-sharps, polywave-triangles
(sometimes referred to as diametrics).

Technical Analysis
Concepts and Applications

Technical Analysis
Concepts and Applications

Technical Analysis
Concepts and Applications

Technical Analysis
Concepts and Applications

Is this structure impulsive or

corrective?

Lets review the Guidelines

Technical Analysis
Concepts and Applications

Impulsions (Impulsive Waves or Motive Waves)

Five adjacent segments must be present (monowave or larger), which must

meet form requirements of a trending impulsion or terminal patterns.
Three of the five segments must thrust in the same direction (upward or
downward).
Immediately after the first segment (wave-1), a minor move in the opposite
direction (wave-2).
The third segment (wave-3) must retrace the entirety of the second segment
(wave-2) and be longer than wave-2.
Immediately after the third segment, a minor move in the opposite direction of
the third (same direction as wave-2), but never retraces the entirety of the third
segment.
The fifth segment (wave-5) will almost always be longer than the fourth, but
only has to be 38.2% of the fourth segment (price wise). When the fifth
segment is shorter than the fourth, the fifth segment is termed, a failure or
truncation.
The second segment (wave-2) cannot enter the price territory of the fourth
segment (Wave-4), unless a terminal triangle or terminal impulsion is forming.
When the entire vertical price distances covered by the first, third, and fifth
segments are measured and compared amongst each other, the third does not
have to be the longest, but it can never be the shortest of the three segments.
If any of these rules are violated, the trending behavior thus far in the
market is considered Corrective and NOT Impulsive.
If Corrective, then the directionality is in the opposite direction of the main trend
one degree larger.

Technical Analysis
Concepts and Applications

Is this structure impulsive or

corrective?

Possibly Impulsive

So as long as this MSL

holds

Technical Analysis
Concepts and Applications

What can be inferred about

this market and its possible
progression?

Since the structure appears

to be impulsive, then the
main trend must be up

What wave is this? Does it

matter?
Not Really(yet)

Technical Analysis
Concepts and Applications

What can be expected is a

retracement of some degree;
hence a minor move in the
opposite direction

Technical Analysis
Concepts and Applications

Impulsions (Impulsive Waves or Motive Waves)

Five adjacent segments must be present (monowave or larger), which must

meet form requirements of a trending impulsion or terminal patterns.
Three of the five segments must thrust in the same direction (upward or
downward).
Immediately after the first segment (wave-1), a minor move in the opposite
direction (wave-2).
The third segment (wave-3) must retrace the entirety of the second segment
(wave-2) and be longer than wave-2.
Immediately after the third segment, a minor move in the opposite direction of
the third (same direction as wave-2), but never retraces the entirety of the third
segment.
The fifth segment (wave-5) will almost always be longer than the fourth, but
only has to be 38.2% of the fourth segment (price wise). When the fifth
segment is shorter than the fourth, the fifth segment is termed, a failure or
truncation.
The second segment (wave-2) cannot enter the price territory of the fourth
segment (Wave-4), unless a terminal triangle or terminal impulsion is forming.
When the entire vertical price distances covered by the first, third, and fifth
segments are measured and compared amongst each other, the third does not
have to be the longest, but it can never be the shortest of the three segments.
If any of these rules are violated, the trending behavior thus far in the
market is considered Corrective and NOT Impulsive.
If Corrective, then the directionality is in the opposite direction of the main trend
one degree larger.

Technical Analysis
Concepts and Applications

What can be expected is a

retracement of some degree;
hence a minor move in the
opposite direction

What cannot be determined

is the type of correction.

Technical Analysis
Concepts and Applications

What can be expected is a

retracement of some degree;
hence a minor move in the
opposite direction

What cannot be determined

is the type of correction.

Technical Analysis
Concepts and Applications

What can be expected is a

retracement of some degree;
hence a minor move in the
opposite direction

What cannot be determined

is the type of correction.

Technical Analysis
Concepts and Applications

Sharp Correction?

Technical Analysis
Concepts and Applications

Flat Correction?

Technical Analysis
Concepts and Applications

Triangle Correction?

Technical Analysis
Concepts and Applications

Technical Analysis
Concepts and Applications

Is this structure impulsive or

corrective?

Lets review the Guidelines

Technical Analysis
Concepts and Applications

Impulsions (Impulsive Waves or Motive Waves)

Five adjacent segments must be present (monowave or larger), which must

meet form requirements of a trending impulsion or terminal patterns.
Three of the five segments must thrust in the same direction (upward or
downward).
Immediately after the first segment (wave-1), a minor move in the opposite
direction (wave-2).
The third segment (wave-3) must retrace the entirety of the second segment
(wave-2) and be longer than wave-2.
Immediately after the third segment, a minor move in the opposite direction of
the third (same direction as wave-2), but never retraces the entirety of the third
segment.
The fifth segment (wave-5) will almost always be longer than the fourth, but
only has to be 38.2% of the fourth segment (price wise). When the fifth
segment is shorter than the fourth, the fifth segment is termed, a failure or
truncation.
The second segment (wave-2) cannot enter the price territory of the fourth
segment (Wave-4), unless a terminal triangle or terminal impulsion is forming.
When the entire vertical price distances covered by the first, third, and fifth
segments are measured and compared amongst each other, the third does not
have to be the longest, but it can never be the shortest of the three segments.
If any of these rules are violated, the trending behavior thus far in the
market is considered Corrective and NOT Impulsive.
If Corrective, then the directionality is in the opposite direction of the main trend
one degree larger.

Technical Analysis
Concepts and Applications

Is this structure impulsive or

corrective?

Lets review the Guidelines

Technical Analysis
Concepts and Applications

Technical Analysis
Concepts and Applications

Directional Move

Directional Move 3-waves?

Directional Move 5-waves?

Technical Analysis
Concepts and Applications

Even though there is a

possible impulsive structure, it
is within an overall Corrective
Structure. Therefore, the entire
directional move is corrective.
And, if corrective, it is against
its main trend

Technical Analysis
Concepts and Applications

Even though there is a

possible impulsive structure, it
is within an overall Corrective
Structure. Therefore, the entire
directional move is corrective.
And, if corrective, it is against
its main trend

The segments that comprise

this directional move are as
follows

Technical Analysis
Concepts and Applications

Even though there is a

possible impulsive structure, it
is within an overall Corrective
Structure. Therefore, the entire
directional move is corrective.
And, if corrective, it is against
its main trend

The segments that comprise

this directional move are as
follows

Technical Analysis
Concepts and Applications

Even though there is a

possible impulsive structure, it
is within an overall Corrective
Structure. Therefore, the entire
directional move is corrective.
And, if corrective, it is against
its main trend

The segments that comprise

this directional move are as
follows

Technical Analysis
Concepts and Applications

Even though there is a

possible impulsive structure, it
is within an overall Corrective
Structure. Therefore, the entire
directional move is corrective.
And, if corrective, it is against
its main trend

The segments that comprise

this directional move are as
follows

Technical Analysis
Concepts and Applications

Even though there is a

possible impulsive structure, it
is within an overall Corrective
Structure. Therefore, the entire
directional move is corrective.
And, if corrective, it is against
its main trend

The segments that comprise

this directional move are as
follows

Technical Analysis
Concepts and Applications

Technical Analysis
Concepts and Applications

Sharp Correction?

Technical Analysis
Concepts and Applications

Flat Correction?

Technical Analysis
Concepts and Applications

Triangle Correction?

Technical Analysis
Concepts and Applications

Flat Correction!!!

Technical Analysis
Concepts and Applications

Flat Correction!!!

Technical Analysis
Concepts and Applications

What seems to be unfolding

is an impulsive series of
waves followed by a
corrective series of waves

In better context, the rally

seems to be impulsive, and
is therefore the dominant
trend. The decline seems to
be corrective, and therefore
is countertrend to the
primary trend.

Technical Analysis
Concepts and Applications

What seems to be unfolding

is an impulsive series of
waves followed by a
corrective series of waves

In better context, the rally

seems to be impulsive, and
is therefore the dominant
trend. The decline seems to
be corrective, and therefore
is countertrend to the
primary trend.

Technical Analysis
Concepts and Applications

Resumption of the Impulsive

Structure (i.e. new uptrend)

Technical Analysis
Concepts and Applications

Resumption of the Impulsive

Structure (i.e. new uptrend)

Technical Analysis
Concepts and Applications

5-waves
3-waves

5-waves

Is this entire structure

Impulsive or Corrective?

Technical Analysis

5-waves

Concepts and Applications

3-waves
5-waves

3-waves

5-waves

Primary Trend is UP!!!

Technical Analysis

5?

Concepts and Applications

This is an impulse wave, and

since it is rallying, the primary
dominant trend is UP!!!

Technical Analysis
Concepts and Applications

5-waves
3-waves

5-waves

Is this entire structure

Impulsive or Corrective?

Technical Analysis
Concepts and Applications

5-waves
5-waves

3-waves

5-waves

Primary Trend is DOWN!!!

Technical Analysis
Concepts and Applications

Technical Analysis
Concepts and Applications

It is important to understand
where you are in the structure of
an on-going primary bull market
(or bear market).

You Are Here

Technical Analysis
Concepts and Applications

It is important to understand
where you are in the structure of
an on-going primary bull market
(or bear market).

You Are Here

Technical Analysis
Concepts and Applications

It is important to understand
where you are in the structure of
an on-going primary bull market
(or bear market).

You Are Here

Technical Analysis
Concepts and Applications

Identifying Behavioral Signatures

1.
2.

3.
4.
5.

Technical Indicators are used to define strength of trend

and validity of potential buy/sell signals.
Technical Indicators when used in the context of Wave
Theory can support or refute structural behavior of
trends.
There are two types of Technical Indicators: Oscillators
and Overlays.
Of the two types of Technical Indicators there are two
categories: Leading and Lagging.
The rest of the semester will focus primarily on
Oscillators, both leading and lagging.

Technical Analysis
Concepts and Applications

Technical Indicators: Oscillators

1.
2.
3.

4.
5.
6.

Oscillators are range bound Technical Indicators that

typical measures price/volume characteristics.
Range bound calculations are unique to the Oscillator
itself (i.e. ranges from 1-100 or -50 to +50).
Oscillators are what technicians use to gauge the
amount of over-boughtness and over-soldness within a
security.
Are used to confirm overall strength of trend.
Confirm price movements through divergence
characteristics.
Technicians use Oscillators to show possible price
entries and exits. These are done with buy/sell signals
that are either called crossovers OR divergences.

Technical Analysis
Concepts and Applications

Technical Indicators: Oscillators Leading

1.
2.

3.

4.

Leading Indicators are used to preemptively

recognize price changes.
Leading Indicators are volatile measures as
they are not based on MAs, rather price
volatility themselves.
Leading Indicators are best used during
periods of consolidation (non trending
markets).
Popular Leading Indicators include the RSI,
Stochastics, and Momentum.

Technical Analysis
Concepts and Applications