Before entering into the details of technical buy and sell signals, it is necessary to understand what the basic technical patterns are telling us: waves of buyers, waves of sellers, neutral patterns between waves, and the impact of transaction volumes during technical patterns.
The bid and ask in real time are the highest price offered by the buyers and the lowest price asked by the sellers. Of course, there is always a buyer and a seller involved in a transaction, so why are we saying that the movements are triggered by the buyers or the sellers? It is simply because if the seller obtains his price, the upward movement has been caused by the buyer accepting the price of the best seller. When the buyer obtains his price, it is only because the seller has accepted to sell at the buyer’s price.
Neutral patterns (N rectangles) occur when the stock starts losing its bullish or bearish momentum which makes the stock price stop going up or down. When a bullish cycle starts to move sideways, it confirms the end of the cycle and is called a top or a resistance (R). When a bearish cycle starts to move sideways, it confirms the end of the cycle and is called a bottom or a support (S). When the price starts to move sideways, it means that the number of buyers and the number of sellers have become equal so no one wants to buy at a higher price or sell at less.
Normally, transaction volumes increase during bullish and bearish cycles, and decline sharply during sideways movements. Neutral patterns (N) take place between cycles.
To illustrate, I’ll use a drawing of my own in order to demonstrate most of the elements we find within uptrends and downtrends. Despite the fact that you will not find all elements, as there are other types of signals and some exceptions, the drawing includes all we need to know to easily understand the concept of technical signals. It would be a good idea to keep this drawing on file as a reminder.
A short-term signal is happening when the price passes above or under a neutral pattern (Rectangle N), indicating the beginning of a bullish or a bearish cycle. A buy signal occurs (Point B S) when the price passes above a neutral pattern (Resistance R), and a sell signal is triggered (point SS) when the price passes under a neutral pattern (Support S). The higher the volume on a price movement, the stronger the signal. The volume must increase at the crossing of the neutral pattern, but the highest volume of the cycle usually happens toward the end of the cycle.
On the illustration I have presented, you can detect bullish and bearish cycles, supports, resistances, short uptrends and downtrends, low and high volumes, as well as buy and sell signals.
All the signals are short-term signals except for the last one (BBS) which is very different. Why? BBS stands for Best Buy Signal. This signal is much stronger because the price has already reached this level three times, so it has reached a triple resistance (R). Each time investors refused to pay more. In breaking this point, the market is showing that the people are ready to pay more, and the very heavy volume makes the signal much stronger and increases the chances for a bigger movement.
Keep this theory in mind: The more often and the longer a support or a resistance is tested, the bigger will be the price movement of the next cycle, especially if the volume is heavier at the break out of the multiple supports or resistances.
I have added a chart to let you try to identify some good buy and sell signals as well as the best buy signals. Good short-term signals can happen very often on one stock, but the best buy signals do not happen very often on the same stock because they take a long time to develop.
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