Bar Chart Analysis
In pattern 1, the second bar breaches the high of the previous bar on high volume.
In pattern 2, price retraces to the 50 percent level of the previous bar and subse-
quently rebounds on high volume, breaching the previous bar’s high. The reverse
applies for bearish continuation bar patterns.sixteen Main price and volume action reversal
Characteristics
Besides studying the individual price behavior associated with each bar pattern,
the practitioner should also be aware of the 16 basic price and volume action
characteristics that are indicative of a potential reversal, namely:- Decrease in price cycle amplitude
- Decrease in price cycle period
- Change in bar retracement symmetry
- Decrease in average bar range
- Lack of the quality of price persistence
- Decrease in average bar stochastic ratio
- Decrease in average candlestick real body to range ratio
- Changes in angular symmetry and momentum
- Proximity to a price barrier
- Reduction in frequency and decrease in depth of trend-based oscillations
- Appearance of relatively larger and longer lasting consolidations
- Appearance of an exhaustion gap
- Completion of the average range for the period under observation
- Overextended price action with respect to a price barrier
- Price accompanied by extremely high or low volume
- Standard divergences between price, volume, and oscillators
These reversal indications above apply equally to Japanese candlestick
analysis. The trader and analyst should always be wary of any a price bar forma-
tion that is accompanied or preceded by any of the 16 price action characteristics
listed above. These characteristics are strong indications of a potential change in
trend or price retracement. Please refer to Chapter 5 for a detailed discussion of
these reversal characteristics.
One of the most important price reversal characteristics is that of barrier
proximity (listed as item (9) on the list). Reversal patterns are most reliable at
significant price barriers. For example, a bearish key reversal day is more reliable
when it occurs at a significant resistance level. Similarly a bullish exhaustion bar
is more reliable at a significant support level.
Figure 7.13 will help illustrate some of these price reversal characteristics. The
daily chart of the National Bank of Greece is an example of price action charac-
teristic (14) depicting an overextended or overbought price bar with respect to a
volatility barrier, namely the Bollinger upper band. This will be potentially even
more bearish if the overbought price bar was associated with an extreme reading
in volume. The overextended price bar is further preceded by an exponential rise in
price, which is an indication of a rapid change in angular momentum, as described