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Technical Analysis
Basics part 2: Bar patterns
Technical traders evaluate the shifting balance of supply and demand for stocks or ETFs. Learn about three bar patterns they use to identify these trends.
CIBC Investor’s Edge
3-minute read
Technical analysis is all about understanding the shifting balance of supply and demand for a given stock or exchange traded fund (ETF) in the market. Over many years, traders have come to rely on technical analysis as a tool to help identify trends, possible reversals of trends, support and resistance levels, as well as provide an indication of possible target prices. There are a variety of technical patterns and indicators in common use today. In this article, we'll highlight three types of price bar patterns that should be understood by technical traders.
Bar patterns are commonly used in technical analysis due to their easy identification directly from price charts. Their name derives from the fact that they are seen when using a particular style of charting, specifically price bars.
A key reversal bar indicates a possible reversal of the current trend to a new trend in the reverse direction. Both bullish and bearish key reversal bars exist. One- and two-bar patterns, such as the key reversal bar, reflect changes in investor sentiment that have a short-term influence on future prices — typically no more than 10 to 20 bars. For traders looking for clear entry and exit points, these patterns are useful. The key reversal bar is characterized by a bar with a wide trading range and opening strongly in the direction of the preceding trend. Changing investor sentiment causes a price reversal and the stock closes near or above the previous day’s close.
Figure 1: Bullish key reversal bar
Whether bullish or bearish, the two bar reversal pattern is a sign of trend exhaustion. This pattern occurs at the end of a well-defined trend: downward for the bullish two bar reversal and upward for its bearish counterpart. The two bars forming the pattern reflect a wide trading range and have their opening and closing prices near the extremes of the day. The key aspect of this pattern is to have a second bar, which completely reverses the gains or losses made in the preceding bar. Similar to the key reversal bar, this pattern reflects a change in investor sentiment, which leads to a reversal of the preceding trend.
Figure 2: Bullish two bar reversal
Gaps are very common bar patterns that occur when a stock’s daily price range forms a gap with the price range from the preceding day. When gaps form at the end of a defined trend, it can be seen as a sign of exhaustion and precedes a reversal in the price trend. For example, a gap up at the end of a long downtrend can be seen as a sign of a reversal to the upside.
Technical traders use bar patterns along with a variety of other types of patterns and events beyond those that are highlighted in this article. Identifying and using these types of events in your trading can be a time-consuming task — fortunately, there are online tools available to aid the investor in this process. CIBC Investor’s Edge account holders have access to Technical Insight, an automated technical analysis tool from Trading Central. Technical Insight automates the standard practices of technical analysis, thereby making it easy to identify new trade ideas or evaluate the technical perspective for a given stock or ETF. All the bar patterns described in this article are automatically detected by Technical Insight on an end-of-day basis.
Technical Insight users can look up a stock or ETF of interest and see all the active technical patterns and indicators that are currently active. The Featured Ideas module highlights 10 trade ideas per day based on what is poised to move from a technical perspective. Users can also search for trade ideas in a given sector or based on a specific technical pattern (like a gap or key reversal bar) using the Technical Event screener. Finally, users can stay on top of their positions and tune in to signs of weakness using the email alerts functionality.
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CIBC Investor’s Edge