Oil India Limited IPO

Background

Oil India initial public offering (IPO) opens on September 7, 2009 and close on Setpember 11, 2009. As per DRHP filed on December 14, 2007, the company was coming out with public issue of up to 26,449,982 equity shares of Rs 10 each. The issue comprised a net issue to the public of up to 24,045,438 equity shares and a reservation of up to 2,404,544 equity shares for subscription by eligible employees. The issue shall constitute 11% of the fully diluted post-issue capital of the company.

On February 18, 1959, Oil India Private Limited was incorporated to expand and develop the newly discovered oil fields of Naharkatiya and Moran in the Indian North East. In 1961, it became a joint venture company between the Indian Government and Burmah Oil Company Limited, UK.

In 1981, OIL became a wholly-owned Government of India enterprise. Today, OIL is a premier Indian National Oil Company engaged in the business of exploration, development and production of crude oil and natural gas, transportation of crude oil and production of LPG. OIL also provides various E&P related services and holds 26% equity in Numaligarh Refinery Limited.
The authorised and paid up capital of the company as on March 31, 2007 are Rs. 500 crore and Rs. 214 crore respectively, with 98.13 per cent holding by the Government of India and 1.87 per cent by others. The net worth of the company as on March 31, 2007 is Rs. 6849.07 crore.

OIL has over 1 lakh sq km of PEL/ML areas for its exploration and production activities, most of it in the Indian North East, which accounts for its entire crude oil production and majority of gas production. Rajasthan is the other producing area of OIL, contributing 10 per cent of its total gas production.

Additionally, OIL’s exploration activities are spread over onshore areas of Ganga Valley and Mahanadi. OIL also has participating interest in NELP exploration blocks in Mahanadi Offshore, Mumbai Deepwater, Krishna Godavari Deepwater, etc. as well as various overseas projects in Libya, Gabon, Iran, Nigeria and Sudan.

In a recent CRISIL-India Today survey, OIL was adjudged as one of the five best major PSUs and one of three best energy sector PSUs in the country.

Issue Details

Face Value INR              10
Price INR                         950-1,050


Minimum Lot                   6 Equity shares
Issue Opens                     7 September 2009
Issue Closes                     10 September 2009
Listing                               29 September 2009
Rating                               Crisil IPO Grade 4/5

Public issue:                        26,449,982 Equity Shares
Employee Reservation:     2,404,544 Equity Shares
Net Issue:                           24,045,438 Equity Shares
Issue size at Lower Band:  Rs. 2512 Crs
Issue size at Upper Band:  Rs. 2777 Crs

Catogoeries                      In Shares       % of Net Issue
QIB                                   14,427,263        60%
Non institutional Bidder   2,404,544         10%
Retail Individual               7,213,631         30%

Company Profile
Oil India is the second largest oil and gas company in India as measured by total proved plus probable oil and natural gas reserves and production (Source:DGH). It is primarily engaged in the exploration, development, production and transportation of crude oil and natural gas onshore in India. It also process produced natural gas to extract LPG. It also present internationally through the exploration of crude oil and natural gas in Gabon, Iran, Libya and Nigeria and were recently awarded exploration blocks in Yemen as part of a consortium. It primarily conduct our activities with respect to our domestic producing blocks and exploration activities in nominated blocks independently.

It also conduct exploration activity, both in India and overseas, through joint venture arrangements and PSCs with other oil companies. It was incorporated as a private limited company in 1959. It have been present in the Indian oil and gas exploration and production industry for nearly five decades and count among our achievements the creation, operation and maintenance of a fully automated crude oil pipeline

Objects of the issue

The company for its major expansions in the coming 5-years would use proceeds from this IPO. Oil India plans to expand its base outside India by acquiring oil producing and exploring companies of small and medium size. OIL along with its partner, Indian Oil Limited, is planning to acquire oil-producing plants in Asia, Africa and South America. Their investment planning also includes: -

• Investment in the field of exploration as well as production of oil and gas to the tune of Rs 15,000 crore
• Investment of Rs 2000 crore in the downstream projects like refining

Oil India Limited is also discussing with HPCL (Hindustan Petroleum Corporation Ltd.) for participating in their refineries in Vishakhapattanam and Bhatinda.

Competitive Strengths

• Large plus probable reserves of crude oil and natural gas in the Upper Assam basin.
• Sizeable domestic and international exploration acreage in basins with a track record of commercial discoveries and known accumulations of hydrocarbons.
• Track record of making and exploiting small to medium size discoveries.
• Beneficial cost structure resulting from our status as an integrated exploration and production
• Company with nearly five decades of operating experience.

Key Concerns and Risk Factors

• A substantial or extended decline in international prices for crude oil would have a material adverse effect on our business.
• Gas prices are controlled by the GoI, which limits the profitability of its gas production business, which also allocates most of the crude oil we produce, which reduces negotiating power.
• Its experience is primarily limited to exploration and production activities onshore in India, which makes it dependent on the expertise of third parties in connection with offshore exploration and development.
• Some of the countries in which OIL operate, such as Iran and Sudan, are subject to certain international sanctions.

Financial Highlights

Annual results in brief

	Mar ' 09	Mar ' 08
Sales	7,241.45	6,081.95
Operating profit	3,251.96	2,478.13
Interest	8.74	34.36
Gross profit	4,139.64	3,157.28
EPS (Rs)	101.01	83.61

Peer comparison

Company                  EPS      P/E              RONW(%)  Book Value
                                                                                  per Share(Rs.)
Oil India Limited     101       9.40-10.40   22.61                     370.75
ONGC                      78.09   15.10            23.87                     330.16
Cairn India Limited 0.29      896              0.16                       168.46
Hindustan Oil          1.85      191               2.39                       77.26
Exploration Company
Selan Exploration    32.57   9.30               548.16                  68.22
Technologies Limited

Crisil's report Oil India IPO

Crisil has assigned an IPO Grade 4/5 to the proposed IPO of Oil India. The grading reflects OIL’s strong position in the oil and gas exploration and production (E&P) space, especially in the onshore areas of India’s north-eastern region. OIL has been consistently adding to its reserve base with its average reserve replacement ratio being greater than 2 for most of the last 5 years. Additionally, a favorable resource mix (mainly onshore acreage, considering its long experience in operating in the difficult terrains of Assam) in its portfolio coupled with a strong track record lends comfort to the company’s capability to grow its recoverable reserves at a healthy rate.
As of March 2009, the company had cash and cash equivalent of Rs 61 billion or Rs 283.6 per share. This together with its cash generating ability and considerably low gearing would enable OIL to pursue growth opportunities in the global markets as well as comfortably fund its aggressive capital expenditure plans of Rs 104 billion drawn out for the Eleventh 5-Year period. The grading considers OIL’s advantage over its competitors in terms of low finding and lifting costs. Further, the company’s management has a strong understanding of E&P activities in onshore areas.

Valuation & Verdict

Sidhartha Pradhan, Joint Secy, Finance Ministry said “Oil India can be compared with very best companies in the world based on its production profile.” He further added that the book value of the company is Rs 470 per share and the cash per share is Rs 265 which makes Oil India among the best public sector undertakings (PSUs) in the country. The government is yet to form an expert panel to come out with a transparent subsidy sharing policy. But it is in the process of framing a transparent policy.

• The net worth of our Company before the Issue as of September 30, 2007 was Rs. 77,052.04 million.
• The net asset value per Equity Share as of September 30, 2007 was Rs. 360.05 per Equity Share.
• Oil India Limited deserves the P/E of 14 to 15 times. (Discounted 15% to 20% over ONGC)

OIL has good financial and PE ratio wrt its peer, one should subscribe and can expect reasonable listing gain.

Williams %R

Oscillator Williams %R, developed by Larry Williams, tracks the relative position of an instrument’s close price to its highest-lowest price range over a 14-bar period. %R values range from zero (higher – price is at the top of the 14-bar highest high range) to -100 (lower – price is at the bottom of the 14-bar lowest low range).

The goal of the %R oscillator is to detect overbought or oversold conditions, with values in the extreme end zones of the range signaling extenuated pricing.

• Bullish: After spending time in the oversold area below –80, the %R line rises back above -80 and continues up to cross the -50 line within 14 days. Recognia identifies an event at the -50 line crossover.
• Bearish: After spending time in the overbought area above –20, the %R falls back below -20 and continues down to cross the -50 line within 14 days. Recognia identifies an event at the -50 line crossover.

Trading Considerations

When the %R drops under the -80% line the instrument is considered oversold. Conversely, when the %R surpasses the -20% line the instrument is considered overbought. Some technical analysts prefer to use the -75% and -25% lines to define the oversold/overbought boundary conditions.

It should be pointed out that a %R outside the -80% or -20% lines does not necessitate a price reversal. In fact, the price can continue to rise, fall or just stabilize at its present level. To control whipsaw effects, Recognia identifies this event after the %R has left the oversold or overbought ranges and has re-crossed the -50% center line.

The Williams %R is best utilized when a price is oscillating within a non-trending trading range. If the price is trending, then another approach is to use indicators to classify the underlying price trend and then trade on %R events that support this trend. If the price is trending up, then Williams %R center line crossovers heading from -80 to -20 should be considered as long trade opportunities. If the price is trending down, then Williams %R center line crossovers heading from -20 to -80 should be considered as shorting opportunities.

Good trading practice dictates that this oscillator should not be used in isolation: fundamental data, sector and market indications and other technicals should be used to support your trading decisions.

Slow Stochastic

The slow stochastic oscillator compares two lines called the %K and %D lines to predict the possibility of an uptrend or a downtrend. In price charts, the %K line typically appears as a solid line, and the %D line appears as a dotted line. The slow stochastic oscillator can be used effectively to monitor daily, weekly or monthly periods.

According to Martin J. Pring, George Lane developed the stochastic oscillator with the premise that during an uptrend, the closing price tends to rise. However, when the uptrend matures, price tends to close towards the bottom of the price range for the period. Likewise, in a downtrend, the reverse holds true.

The difference between the slow and fast stochastic oscillators is the way that the %K and %D values are calculated. Slow stochastics are based on the moving averages values calculated for fast stochastics. As such, John J. Murphy writes that most traders favor slow stochastics because they tend to be more reliable.

Event for a slow stochastic oscillator when:

• Bullish: %K and %D lines fall below and then rise above the 20 threshold, indicating bullish potential, along with a %K line cross above the %D line, triggering a bullish signal event if these 3 crossovers occur within a 5-day period.
• Bearish: %K and %D lines rise above and then fall below the 80 threshold, indicating bearish potential, along with a %K line cross below the %D line, triggering a bearish signal event if these 3 crossovers occur within a 5-day period.

%K

For slow stochastics, the %K value is based on a 3-period moving average of the %K fast stochastics value. See fast stochastics for information about the %K calculation.

%D

For slow stochastics, the %D value is based on a 3-period moving average of the %K slow stochastics value (described above).

Pring identifies that a way to differentiate the %K line from the %D line is to remember that %K represents "Kwick" movements, while %D shows movements that "Dawdle". As such, Edwards and Magee note that "[ordinarily], the %K Line will change direction before the %D Line. However, when the %D line changes direction prior to the %K line, a slow and steady Reversal is often indicated."

Trading Considerations

This section identifies considerations that inform trading decisions using stochastics. It should be pointed out, that many technical analysts use stochastics in combination with other patterns or oscillators. John J. Murphy, for example, suggests that "[one] way to combine daily and weekly stochastics is to use weekly signals to determine the market direction and daily signals for timing. It's also a good idea to combine stochastics with RSI."

When you are using stochastics with price charts, keep the following factors in mind:

• Extremes

When the %K line nears the 100% or 0% line a powerful move is set to occur. Some technical analysts equate the extremes with overbought or oversold conditions, and that prices cannot get any higher or lower. However, Edwards and Magee identify that this is not true in all situations, and that the extremes instead represent the strength of a price move.

• Divergences

A divergence is said to have occurred when the price and oscillator trend lines move in different directions. A price reversal may follow.

• Hinges

Lane referred to a flattened %K or %D line as hinges. A hinge may indicate that the uptrend or downtrend has become exhausted, and that a price reversal may occur.

• Crossovers

When the stochastic has reached 80 or higher, and a divergence has occurred, a crossover is the sell signal. To summarize Lane, Robert W. Colby writes that "the sell signal is more reliable when %D has already turned down when %K crosses below %D"."
Similarly, when the stochastic has reached 20 or lower, and a divergence has occurred, a crossover becomes the buy signal. Robert W. Colby writes that "the buy signal is more reliable when %D has already up down when %K crosses above %D"."

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is an oscillator that measures a particular financial instrument's current relative strength compared to its own price history. The RSI should not be confused with relative strength which rates a financial instrument in relation to a market such as the S&P index.

The RSI is plotted on a vertical scale numbered from 0 to 100. The formula to calculate the RSI is:
                              100-[100/(1+A)] 

where A is the average of the "up" closes over the calculation period divided by the average of the "down" closes over the calculation period.
The "A" for a 14-day period is calculated by dividing the 14-day "up" close average by the 14-day "down" close average. An "up" close or a "down" close is defined as the absolute change in price from close to close.

When the RSI rises above the 30 threshold after establishing a 0 - 30 oversold condition, a bullish signal is generated. Conversely, when the RSI falls out of the 70 - 100 overbought zone, a bearish Event is signalled.

Trading Considerations

The RSI sometimes shows more clearly than the price chart itself the support and resistance lines for a financial instrument. Failure Swings which are also known as support or resistance penetrations or breakouts can be detected by using the RSI. Failure swings occur when the RSI passes a previous high or falls below a recent low.

Divergences (when market trends go in a different direction than market indicators predicted, usually signifying the onset of a trend change) occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI.

A financial instrument is considered to be oversold when its RSI falls below 30 and overbought when its RSI rises over 70.

Momentum

Momentum Oscillator measures the amount that a financial instrument's price has changed over a given timeframe. Momentum is significant because it signals the strength of price trends. A healthy price trend tends to exhibit strong momentum, while weakening trends often have decreasing momentum indicating a trend reversal or correction. Momentum can also indicate short-term market extremes referred to as overbought and oversold levels. A bullish signal is generated when the Momentum rises above 0 and a bearish signal is generated when the Momentum falls below 0.

When the Momentum rises above 0, a bullish signal is generated. When the Momentum falls below 0, the it gives a bearish signal.

Momentum is calculated as a ratio of today's price compared to the price 10 periods ago. The formula is

                         [Close/(Close 10 time-periods ago) times 100].

Trading Considerations

Momentum can be used as a trend-following oscillator similar to the MACD. A bullish signal is generated when the indicator bottoms and turns up. A bearish signal is generated when the indicator peaks and turns down.

If the Momentum indicator reaches extremely higher low values (relative to its historical values), a continuation of the current trend may be called for. For example, if the Momentum indicator reaches extremely high values and then turns down, one could assume prices will probably go still higher. In either case, only trade after prices confirm the signal generated by the indicator (e.g., if prices peak and turn down, wait for prices to begin to fall before selling).

The Momentum indicator can also be used as a leading indicator. This method assumes that market tops are typically identified by a rapid price increase (when everyone expects prices to go higher) and that market bottoms typically end with rapid price declines (when everyone wants to get out). As a market peaks, the Momentum indicator will climb sharply and then fall off--diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom, the Momentum indicator will drop sharply and then begin to climb well ahead of prices. Both of these situations result in divergences between the indicator and prices.

Moving Average Convergence / Divergence (MACD)

The MACD, "Moving Average Convergence/Divergence", shows the relationship between two moving averages of prices. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average called the "signal line" is plotted on top of the MACD to show bullish and bearish signal points. A bullish signal is generated when the MACD rises above the signal line, or above zero. A bearish signal occurs when the MACD falls below the signal line or below zero.

When the MACD crosses the signal line or the zero line (the event), a bullish or bearish signal is generated depending on the direction of the crossovers.

Trading Considerations

The MACD is best used in strongly trending markets.

The MACD indicates overbought and oversold conditions. An overbought situation occurs when prices have risen too far too fast and are ready for a downward correction. An oversold situation occurs when prices have fallen too far too fast and are ready for an upward correction. When the shorter moving average pulls away from the longer moving average (i.e., the MACD rises), it is likely that the financial instrument's price is too high and will soon return to more realistic levels.

An indication that an end to the current trend may be near occurs when the MACD diverges from the financial instrument's price. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

Know Sure Thing (KST)

A bullish signal is generated when the oscillator   KST, "Know Sure Thing", rises above its moving average. When the KST falls below its moving average, the Event is a bearish signal.

Supported "Short-term KST" events are suitable for investors interested in a time frame of 2-6 weeks. "Intermediate-term KST" events are suitable for those interested in 6-39 week trends. Supported "Long-term KST" events are suitable for a 9-month to 2-year time frame.

Price at any one time is determined by the interaction of many different time spans. Normally oscillators are constructed from a single time span so they ignore cycles not related to that specific period. The KST, on the other hand, consists of four different periods that are combined into one oscillator. Each time span used in the KST is smoothed with a moving average. Weightings are given to each moving average according to the length of the time span. Longer periods have greater weight in order to bring out a smoother curve. The KST changes direction sooner in response to price moves than similar oscillators using one time span because of the inclusion of shorter time spans.

The KST can be interpreted in the same way as other smoothed oscillators but most commonly indicates bullish and bearish momentum signals as it crosses above and below its moving average respectively. Because of the leading characteristics of this oscillator, it is important to make sure that some kind of trend confirmation is given by the price itself. This could be a price pattern breakout, trendline violation or moving average crossover.

Three time frames are supported (short-term, intermediate-term and long-term), however the KST can be calculated for trends of any other term. Further information on the KST and its formula can be found in the book "Technical Analysis Explained" by Martin J. Pring.

Note that Intermediate-term KST events from this service are recognized at the end of the week in which the crossover was found. For example, the event date is always on a Friday even if the crossover occurred in the middle of the week. Similarly, Long-term KST events are recognized at the end of the month in which the crossover occurred, therefore the event date is always the end of the month even if the crossover occurred mid-month.

Trading Considerations

The KST usually moves in a deliberate path which means that changes in direction offer bullish and bearish momentum signals. When the KST turns upward this indicates a bullish situation. When it turns downward, a bearish situation is likely. This service recognizes events when the KST crosses its moving average, which indicates a more distinct change in direction. This is the more reliable approach to interpreting the KST. However the investor may look for earlier signals by watching for changes in the direction of the KST before a crossover might occur; in particular the investor may watch for the KST converging with its moving average to anticipate a crossover earlier.

Usually it is better to delay trading decisions until the price confirms the situation implied by the KST. This confirmation might be a trendline violation, price pattern breakout or moving average crossover.

Overbought and oversold reversals have a higher degree of reliability than reversals that take place near the equilibrium level. The magnitude of KST fluctuations will depend on the volatility of the price and the type of trend being measured. This means that overbought/oversold levels are determined on a trial and error basis with reference to the oscillator's past history.

Divergences (when market trends go in a different direction than market indicators predicted, usually signifying the onset of a trend change) occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the KST. Prices usually correct and move in the direction of the KST.

Fast Stochastic

The fast stochastic oscillator compares two lines called the %K and %D lines to predict the possibility of an uptrend or a downtrend. In price charts, the %K line typically appears as a solid line, and the %D line appears as a dotted line. The fast stochastic oscillator can be used effectively to monitor daily, weekly or monthly periods.

According to Martin J. Pring, George Lane developed the stochastic oscillator with the premise that during an uptrend, the closing price tends to rise. However, when the uptrend matures, price tends to close towards the bottom of the price range for the period. Likewise, in a downtrend, the reverse holds true.

The difference between the fast and slow stochastic oscillators is the way that the %K and %D values are calculated. Slow stochastics are based on the moving averages values calculated for fast stochastics. As such, John J. Murphy writes that most traders favor slow stochastics because they tend to be more reliable.

Event for a fast stochastic oscillator when:

• Bullish: %K and %D lines fall below and then rise above the 20 threshold, indicating bullish potential, along with a %K line cross above the %D line, triggering a bullish signal event if these 3 crossovers occur within a 5-day period.
• Bearish: %K and %D lines rise above and then fall below the 80 threshold, indicating bearish potential, along with a %K line cross below the %D line, triggering a bearish signal event if these 3 crossovers occur within a 5-day period.

%K

For fast stochastics, the %K value is calculated as follows:

%K = 100 [(C-L)/(H-L)]

Where
C is the latest closing price of the stock
L is the lowest price of the stock for the period that you are monitoring. Recognia uses a 14-day period as the period to monitor.
H is the highest price of the stock for the period that you are monitoring. Recognia uses a 14-day period as the period to monitor.

%D

For fast stochastics, the %D value is based on a 3-period moving average of the %K value.

Pring identifies that a way to differentiate the %K line from the %D line is to remember that %K represents "Kwick" movements, while %D shows movements that "Dawdle". As such, Edwards and Magee note that "[ordinarily], the %K Line will change direction before the %D Line. However, when the %D line changes direction prior to the %K line, a slow and steady Reversal is often indicated."

Trading Considerations

This section identifies considerations that inform trading decisions using stochastics. It should be pointed out, that many technical analysts use stochastics in combination with other patterns or oscillators. John J. Murphy, for example, suggests that "[one] way to combine daily and weekly stochastics is to use weekly signals to determine the market direction and daily signals for timing. It's also a good idea to combine stochastics with RSI."

When you are using stochastics with price charts, keep the following factors in mind:

• Extremes

When the %K line nears the 100% or 0% line a powerful move is set to occur. Some technical analysts equate the extremes with overbought or oversold conditions, and that prices cannot get any higher or lower. However, Edwards and Magee identify that this is not true in all situations, and that the extremes instead represent the strength of a price move.

• Divergences

A divergence is said to have occurred when the price and oscillator trend lines move in different directions. A price reversal may follow.

• Hinges

Lane referred to a flattened %K or %D line as hinges. A hinge may indicate that the uptrend or downtrend has become exhausted, and that a price reversal may occur.

• Crossovers

When the stochastic has reached 80 or higher, and a divergence has occurred, a crossover is the sell signal. To summarize Lane, Robert W. Colby writes that "the sell signal is more reliable when %D has already turned down when %K crosses below %D"."
Similarly, when the stochastic has reached 20 or lower, and a divergence has occurred, a crossover becomes the buy signal. Robert W. Colby writes that "the buy signal is more reliable when %D has already up down when %K crosses above %D"."

Commodity Channel Index (CCI)

The name CCI uses the term "commodity", but the oscillator is commonly used for analyzing equities. A CCI is based on a comparison of price and moving average. The CCI is expressed as percentage that oscillates between -100 and 100. However, these levels can be exceeded.

The Commodity Channel Index quantifies the relationship between the asset's price, a 20 bar moving average (MA) of the asset's price, and the mean of the absolute deviations (D) from that average. It is computed with the following formula:

Typically, if the price is greater than the moving average, then the CCI will rise towards or above the 100% line. If the price drops below the moving average, then the CCI will drop towards or past the -100% line. There are divergences and exceptions to this price/CCI behavior that technical analysts should be aware of when making trades.

CCI events:

• A bullish event when the CCI rises above the +100% line.
• Another event signaling the end of the previous bullish trend occurs when the CCI subsequently falls below the +100% line.
• A bearish event when the CCI falls below the -100% line.
• Another event signaling the end of the previous bearish trend occurs when the CCI subsequently rises above the -100% line.

Trading Considerations

Technical analysts use CCI in a couple of ways 1) to predict a price reversal, and 2) to determine overbought or oversold conditions.

To predict a price reversal, compare the direction trend lines for the price and CCI. If the direction of the price trend line is different than the direction of the CCI trend line a divergence is said to have occurred, and a price reversal may follow.

The most popular way to use the CCI is to watch for overbought or oversold conditions. A stock is considered overbought when it is reaches 100% or higher, and oversold when it is -100% or lower. Some technical analysts use CCI with the view that an overbought condition precedes a price drop, and that an oversold condition precedes a rise in price.

Colby, however, identifies the trading rules for using CCI as follows:

• Buy long when CCI rises above 100%

Buying long means that you are buying stock to own with the expectation that price will rise. You expect to earn a profit when you sell the stock at a higher price.

• Sell long when CCI falls below 100%

Selling long means selling stock that you own, ideally, at a higher price than when you bought it so that you will earn a profit.

• Sell short when CCI falls below -100%

Selling short means that you are selling stock that you have borrowed with the expectation that price will fall. If the price falls, you can profit by buying back the stock at a lower price and using it to replace the higher-priced stock that you borrowed. For example, if you sell stock for $100.00 per share, buy it back later at $70.00 per share, and then return the stock to the lender, your profit is $30.00 per share.

• Cover short when CCI rises above -100%

Covering short means that you are buying stock to replace stock that you have borrowed. To maximize your profit you will want to buy back the stock at a price that is lower than it was when you sold.

Bollinger Bands

Bollinger Bands is a Oscillator, which can be used as Bullish or Bearish Trading signal.



Bullish: When the price closes more than 3 standard deviations below the 20 period moving average of price, a bullish event is generated.

Bearish: When the price closes more than 3 standard deviations above the 20 period moving average of price, a bearish event is generated.

Recognia identifies a Bollinger band event based on a condition of price over-extension leading to an expectation of reversal. Some enhanced interpretations of Bollinger bands require secondary inputs such as RSI to validate a continuation or reversal position strategy. Refer to the Trading Considerations section below for further information regarding enhanced strategies for Bollinger bands.

Developed in the early 1980's by John Bollinger, Bollinger bands were one of the first adaptive volatility envelope tools. Rather than fixed percentage envelopes being drawn above and below the moving average, Bollinger bands are calculated based on the standard deviation of an instrument's closing price.

Bollinger bands use standard deviation and a simple moving average to help traders determine buy and sell events, or to help confirm other patterns. A price chart that uses Bollinger bands displays four lines; price, the upper and lower Bollinger bands, and the moving average.

The upper and lower Bollinger bands typically appear 2 standard deviations above and below the 20-day moving average. Recognia supports these typical settings.

For shorter-term trends, some technical analysts prefer 1 1/2 standard deviations with a 10-day moving average. For longer-term trends, a 2 1/2 standard 50-day moving average may better suit their purposes.

The purpose of Bollinger bands is to provide an indication of high and low price range. By definition prices will be high at the upper band and low at the lower band. Price tends to bounce between the upper and lower Bollinger bands, but touches or penetrations can be tradable. The expansion or contraction of the band's width around the moving average indicates periods of high or low volatility respectively.

Trading Considerations

There are several successful trading strategies that are used in conjunction with Bollinger bands. Typically they involve monitoring the price action after a Bollinger band penetration, or reference to a secondary indicator or oscillator to qualify the potential for a continuation or reversal of the present price trend. Some traders watch for a succession of Bollinger band touches to track upside or downside momentum.

Periods of rising price volatility lead to a widening of the Bollinger bands, and conversely, low price volatility causes tightening of the bands. Because there is a tendency for bands to alternate between expansion and contraction phases, some traders look for unusually wide bands and interpret that as a sign of trend reversal. Conversely, extremely narrow bands can be an indication that supply and demand are in a fine state of balance and can be easily upset, potentially leading to the initiation of a new and powerful trend move.

Both John Bollinger and the classic text "Technical Analysis of Stock Trends" by Edwards and Mcgee suggest using Bollinger bands penetrations as signals that are qualified by another indicator or oscillator. A common Bollinger bands and Relative Strength Index (RSI) based strategy is:

• "When price touches or penetrates the upper Bollinger Band, and the RSI is below 70, it is an indication that the trend will continue. Conversely, when price touches or penetrates the lower Bollinger Band, and the RSI is above 30, it indicates the trend should continue."

• "If a price touches or penetrates the upper Bollinger Band and the RSI is above 70 (possibly approaching 80) the trend may reverse and decline. On the other hand, if a price touches or penetrates the lower Bollinger Band and the RSI is below 30 (possibly approaching 20) it indicates the trend may reverse and move upward."

In "Technical Analysis Explained", Martin J. Pring suggests that you can determine whether a price reversal is imminent by observing how price behaves following the initial Bollinger band crossing. He states: "If the price makes several failed attempts to cross or touch a band, but in doing so traces out a classic reversal price formation, you can expect a price trend reversal."

In "The Master Swing Trader", Alan S. Farley suggests that a move that leads to a price bar extending over 50% beyond the Bollinger band is over-extended and encountering resistance and thus overdue for a reversal. This is the interpretation that Recognia implements.

Triple Moving Average Crossover

When a shorter moving average (of a security's price) crosses a medium moving average, and the medium crosses a longer moving average, a bullish or bearish signal is generated depending on the direction of the crossovers.

A moving average is an indicator that shows the average value of a security's price over a period of time. This type of event occurs when a shorter moving average crosses a medium moving average, and the medium moving average crosses a longer moving average. The moving average periods used for this event are 4, 9 and 18 day. When the 4-day crosses above/below the 9-day moving average, the event has "started". The event is "confirmed" when the 9-day moving average crosses above/below the 18-day moving average.

A bullish signal is generated when the direction of the crossovers is above e.g. the shorter crosses above the medium and the medium crosses above the longer. A bearish signal is generated when the direction of the crossovers is below.

These events are based on simple moving averages. A simple moving average is one where equal weight is given to each price over the calculation period. For example, a 9-day simple moving average is calculated by taking the sum of the last 9 days of a stock's close price and then dividing by 9. Other types of moving averages, which are not supported here, are weighted averages and exponentially smoothed averages.

Trading Considerations

Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.

They work best in trending price patterns, where an uptrend or downtrend is firmly in place.

Criteria that Support

Indicators that are well suited to working with moving averages include the MACD and Momentum.

Criteria that Refute

Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.

Price Crosses Moving Average

When a security's price crosses its moving average (the event), a bullish or bearish signal is generated depending on the direction of the crossover.

A moving average is an indicator that shows the average value of a security's price over a period of time. This type of Technical Event® occurs when the price crosses a moving average. Three moving averages are supported: 21, 50 and 200 price bars. A price cross of a longer moving average indicates a longer term signal, in that the security may take a longer period of time to move in the anticipated direction.

A bullish signal is generated when the security's price rises above its moving average and a bearish signal is generated when the security's price falls below its moving average.

After a crossover is identified, it is considered "not yet confirmed". Then additional confirmation is sought by watching the slope of the moving average. A bullish event is "confirmed" if the moving average turns upward within 'X' price bars, where 'X' is the period of the moving average. For a bearish event, the moving average must turn downward as confirmation. In some cases, the moving average does not slope in the desired direction soon enough after the crossover, in which case the event is considered "never confirmed".

These events are based on simple moving averages. A simple moving average is one where equal weight is given to each price over the calculation period. For example, a 21-day simple moving average is calculated by taking the sum of the last 21 days of a stock's close price and then dividing by 21. Other types of moving averages, which are not supported here, are weighted averages and exponentially smoothed averages.

Trading Considerations

Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.

They work best in trending price patterns, where an uptrend or downtrend is firmly in place.

In trending markets, moving averages can provide a very simple and effective method of identifying trends.

Moving averages also act as support areas. You will often see a stock in an uptrend rise well above its 21 day moving average, return to it and then rise again.

Moving averages also act as resistance areas. When a stock trades under a moving average, that average will serve as a resistance price and it will be difficult for the stock to move above it. This is often very true when a stock has fallen below its 200 day moving average.

Criteria that Support

Indicators that are well suited to working with moving averages include the MACD and Momentum.

Criteria that Refute

Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.

Double Moving Average Crossover

When a shorter and longer moving average (of a security's price) cross each other (the event), a bullish or bearish signal is generated depending on the direction of the crossover.

A moving average is an indicator that shows the average value of a security's price over a period of time. This type of Technical Event® occurs when a shorter and longer moving average cross each other. The supported crossovers are 21 crossing 50 (a short term signal) and 50 crossing 200 (a long term signal).

A bullish signal is generated when the shorter moving average crosses above the longer moving average. A bearish signal is generated when the shorter moving average crosses below the longer moving average.

These events are based on simple moving averages. A simple moving average is one where equal weight is given to each price over the calculation period. For example, a 21-day simple moving average is calculated by taking the sum of the last 21 days of a stock's close price and then dividing by 21. Other types of moving averages, which are not supported here, are weighted averages and exponentially smoothed averages.

Trading Considerations

Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.

They work best in trending price patterns, where an uptrend or downtrend is firmly in place.

Using a crossover moving average as an indicator is considered to be superior to the simple moving average because there are two smoothed series of prices which reduces the number of false signals.

Criteria that Support

Indicators that are well suited to working with moving averages include the MACD and Momentum.

Criteria that Refute

Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.

Gap Up

Gaps usually represent important areas of support or resistance. A Gap Up is a Short-term Pattern and indicates different situations based on the context in which it was formed. A Gap Up in an uptrend may indicate a previous level of resistance has been broken and now forms a support level. A Gap Up in a downtrend may indicate an end to, or a reversal of, the prior downtrend. Gaps provide an indication of a financial instrument's SHORT-TERM outlook.

A Gap Up forms when the low for a period (usually day) is higher than the previous period's high.

Trading Considerations

Since Gaps represent important areas of support or resistance they can be used to measure the strength of moves. If a price breaks through a Gap it is usually a signal of a significant price move.

Criteria that Support

Three Gap Ups within a trend indicate a possible end to, or reversal of, that trend. The three Gaps do not have to occur on sequential days, but may form many days apart.

Gap Down

Gaps usually represent important areas of support or resistance. A Gap Down is a Short-term Pattern, which indicates different situations based on the context in which it was formed. A Gap Down in a downtrend may indicate a previous level of support has been broken and now forms a resistance level. A Gap Down in an uptrend may indicate an end to, or a reversal of, the prior uptrend. Gaps provide an indication of a financial instrument's SHORT-TERM outlook.

A Gap Down forms when the high for a period (usually a day) is lower than the previous period's low.

Trading Considerations

Since Gaps represent important areas of support or resistance they can be used to measure the strength of moves. If a price breaks through a Gap it is usually a signal of a significant price move.

Criteria that Support

Three Gap Downs within a trend indicate a possible end to, or reversal of, that trend. The three Gaps do not have to occur on sequential days, but may form many days apart.

Two Bar Reversal : Bearish Pattern

A Two Bar Reversal is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

A Two Bar Reversal is a classic signal of trend exhaustion. When these patterns occur after a pronounced advance or decline, the first bar should exhibit a dramatic continuation of the inbound trend, closing close to the bar's extreme end. The second bar completely negates the first bar, with the open price on the second bar being close to the close of the first bar and the close of the second bar being close to the open of the first bar. Wider trading ranges on both bars denote a more climactic reversal in psychology.

Trading Considerations

Two Bar Reversals can be either Bullish or Bearish depending on the direction of the inbound price trend. If the inbound trend is up, then upon identification of a Two Bar Reversal, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of a Two Bar Reversal, taking a long position or closing a short position is recommended.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

A persistent upward inbound trend is required; the longer and sharper, the better.

Both bars should have exceptionally wide trading ranges relative to the previous bars formed during the inbound trend.

For both bars, the opening and closing prices should be as close to the extreme points of the bars as possible.

Volume, if available, should be higher on both bars to accentuate the sentiment reversal. The greater the expansion of volume, the better the signal.

Underlying Behavior

Two Bar Reversals signal the dashing of hopes for those traders and investors that had been riding the trend or had jumped on board the especially wide trading of the pattern's first bar. The second bar, by completely reversing the ground made on the first bar, turns the tide of inbound sentiment and replaces it with an equal and opposite sentiment view. Look for an outbound trend period that reverses any gains made in the lead up to the Two Bar Reversal.

Shooting Star

A Shooting Star is a Short-term Bearish Pattern which indicates that the prior uptrend is about to end and may reverse to a downtrend or move sideways. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

A Shooting Star forms when the Upper Shadow is longer than the Real Body and the Lower Shadow is small or non-existent. The Shooting Star is the same as an Inverted Hammer, only the Shooting Star appears at the end of an uptrend, whereas the Inverted Hammer appears at the end of a downtrend.

Criteria that Support

The Real Body of the Shooting Star should "gap" away from the Real Body of the previous period. The greater the size of that gap the more important the Shooting Star. Measure the gap between the Real Bodies by taking the lower of the open or the close for the Shooting Star and comparing it to the higher of the open or close for the previous period. If the Shooting Star's lower value is greater than the previous period's higher value then a gap is present.
The Lower Shadow of the Shooting Star should be close to zero.
The Upper Shadow of the Shooting Star should be as large as possible. The larger the Upper Shadow, the more important the Shooting Star.

Outside Bar : Bearish Pattern

An Outside Bar is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. Two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion, then reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Outside Bars exhibit a trading range that fully encompasses that of the previous bar. They can appear after both downtrends and uptrends, and are a strong signal of trend exhaustion leading to reversal.

Trading Considerations

Outside Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is down, then upon identification of an Outside Bar, taking a long position or closing a short position is recommended. Conversely, if the inbound price trend is up, then upon identification of an Outside Bar, taking a short position or closing a long position is recommended.

The degree that the price bars and volume characteristics match the description above will likely have a bearing on the strength of the post pattern price movement. Look for price influence over the next 5 to 10 bars. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

The wider the second bar relative to the narrower trading range of the preceding bar, the stronger the signal.
The sharper the rally preceding the Outside Bar, the more significant the bar.
The more bars encompassed, the better the signal.
The greater the volume accompanying the Outside Bar relative to previous bars, the stronger the signal.
The nearer the price closes to the extreme point of the bar that is away from the direction of the previous trend, the better. For example, if the previous trend is up and the price closes very near to the low of the Outside Bar, this is more favorable than if it closes near the high and vice versa.

Underlying Behavior

Outside Bars are classic indicators of trend exhaustion and likely reversal of sentiment. The presence of a pair of high volume bars following a sharp rally - with the second bar exhibiting a wide trading range that encompasses all or more of the first bar - is a powerful warning of a change of investor/trader psychology.

Key Reversal Bar

A Key Reversal Bar (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion, followed by a reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

A Key Reversal Bar is one that develops after a prolonged rally or reaction. Often the trend will be accelerating by the time the price experiences the Key Reversal Bar.

Trading Considerations

Key Reversal Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of a Key Reversal Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of a Key Reversal Bar, taking a long position or closing a short position is recommended.

Failure of this pattern is denoted by a price move in the wrong direction beyond the extreme point of the Key Reversal Bar.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

The price opens strongly in the direction of the prevailing trend.
The trading range is very wide relative to the preceding bars.
The price closes near or below the previous close (or near or above the previous close in a downtrend reversal).
Volume if available, should be climactic on the Key Reversal Bar, and should expand during the inbound trend.

Underlying Behavior

The presence of a Key Reversal Bar usually signals a reversal of psychology and a subsequent retracement of recent gains. With a large opening gap on continued volume expansion, we are seeing the results of climactic sentiment growth, but as the bar's wide trading range eats up a large part, or the entire opening gap, we have a very strong indication of sentiment reversal.

Island Top

An Island Top is a bearish signal (Short-term Bearish Pattern) indicating a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

The Island Top occurs when the price "gaps" above a specific price range for a number of days and then is confirmed when the price "gaps" down below to the original range.

Inside Bar : Bearish Pattern

An Inside Bar (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. Two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion and potentially, a reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

An Inside Bar is a reversal formation characterized by a bar that forms totally within the trading range of the preceding bar. Inside bars reflect a balance between buyers and sellers following a sharp up or down move, which is sometimes later resolved by a change in trend.

Trading Considerations

Inside Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of an Inside Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of an Inside Bar, taking a long position or closing a short position is recommended. Look for confirmation in a trend-line break.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

The sharper the trend preceding the pattern, the better.

The wider the first bar and its immediate predecessors in relation to previous bars, the better. This is evidence that the strong underlying momentum of the prevailing trend has climaxed and will dissipate.

The smaller the second bar relative to the broader range of the first bar, the more dramatic the change in the buyer/seller balance and therefore the stronger the signal.

Volume on the inside bar should be noticeably smaller than that of the preceding bar since it indicates a more balanced situation.

Underlying Behavior

An Inside Bar indicates a balancing of sentiment between buyers and sellers after a sustained up or down move. On the Inside Bar's second day, especially with a drop in volume, we are seeing a drop off of interest in this instrument. This balancing usually leads to a period of sideways price movement, but a reversal is possible.

Hanging Man

The Hanging Man is a Short-term Bearish Pattern indicating that the prior uptrend is about to end and may reverse to a downtrend or move sideways. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

The name "Hanging Man" is used because it has a gloomy connotation, and also because the candlestick that defines this pattern looks like a hanging man with dangling legs. The Hanging Man pattern is characterized by a small Real Body near the top of the price range. The Real Body can be black or white, although a black candlestick is preferable. A black candlestick is slightly more bearish since it shows that the close could not get back up to the opening price level. The Hanging Man has a long lower shadow that should be at least twice the length of the Real Body. The upper shadow should be very small or non-existent.

Trading Considerations

In cases where a major uptrend exists followed by a Hanging Man, the investor should consider vacating long positions.

Criteria that Support

A Hanging Man can be confirmed by a bearish gap between the Real Body of the Hanging Man and the open on the next session. In other words, the investor should look for the next session opening lower than the Real Body of the Hanging Man. The greater the gap, the stronger the signal.
A Hanging Man may be a stronger signal if the subsequent session shows a black Real Body with a close lower than the close of the Hanging Man.
A Hanging Man may be a stronger signal if it is followed by another, well-formed Hanging Man in the next session.
The longer the Lower Shadow of the Hanging Man the greater the significance of the pattern.
The smaller the Real Body and the Upper Shadow the more significant the pattern.

Criteria that Refute

It is important to view signals in the context of prior price action. If the uptrend is strong and there are major bullish indicators before the Hanging Man, then perhaps the bullish momentum is overwhelming and the Hanging Man won't work. In such cases it is wise to wait for bearish confirmation before acting.
The uptrend may still be in force if the next session opens higher than the Real Body of the Hanging Man.
A Hanging Man with a white Real Body (where the close is higher than the open) may indicate weakness in the pattern.

Gravestone :Bearish Pattern

The Gravestone (Bearish) candlestick is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

The Gravestone (Bearish) consists of a long Upper Shadow and no Real Body (i.e. the open is equal to the close for the session). There should be no Lower Shadow for a Gravestone.

Trading Considerations

A small Lower Shadow is acceptable.
A small Real Body is acceptable.

Criteria that Support

The longer the Upper Shadow the more significant the pattern.

Criteria that Refute

If a Lower Shadow exists and is too long then it will reduce the significance of this pattern.
If a Real Body exists and is too large then it will reduce the significance of this pattern.

Exhaustion Bar : Bearish Pattern

An Exhaustion Bar (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion followed by reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Exhaustion Bars can develop after a rapid up or down move. They are a form of key reversal, but differ sufficiently enough to warrant their own category.

Trading Considerations

Exhaustion Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up as in this case, then upon identification of an Exhaustion Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of an Exhaustion Bar, taking a long position or closing a short position is recommended.

Failure of this pattern is denoted by a price move in the wrong direction beyond the extreme point of the Exhaustion Bar.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

The price opens with a large gap in the direction of the then-prevailing trend.
The bar is extremely wide relative to the previous bars.
The opening price develops in the lower half of the bar in a downtrend and in the upper half in an uptrend.
The closing price should be both above the opening price and in the top half of the bar in a downtrend and in the lower half and below the opening in an uptrend.
The bar is completed with a gap to the left still in place.
Look for heavy volume to indicate temporary inbound trend climax.

Underlying Behavior

The presence of an Exhaustion Bar usually warns of a reversal of psychology. With a large opening gap, we are seeing the results of extreme sentiment, but as the wide trading range eats up a large part of the opening gap, and the bar ends with the gap almost closed, we have a strong indication of a sentiment reversal from bullish to bearish.

Engulfing Line : Bearish Pattern

An Engulfing Line (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

The Engulfing Line (Bearish) occurs when the Real Body for a price bar is larger than the Real Body for the previous price bar. In addition, for an Engulfing Line (Bearish), the Real Body of the previous session must be White (close higher than open) and the Real Body of the second session must be Black (close lower than open).

Criteria that Support

The difference in the sizes of the two Real Bodies can be an important indicator of the significance of the Engulfing Line. If the Real Body of the previous session is substantially smaller than the Real Body of the following session then this pattern should be considered more significant. The greater the size difference the more significant the formation.

The longer and higher the inbound trend that leads into the Engulfing Line, the more significant the pattern.

Look for heavy volume on the following session. A noticeable increase in volume from the previous few sessions is a strong indication that this pattern is more significant.

If the following session "engulfs" more than one session's Real Body this pattern is very significant.

Two Bar Reversal : Bullish Pattern

A Two Bar Reversal (Bullish) is a Short-term Bullish Pattern which indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

A Two Bar Reversal is a classic signal of trend exhaustion. When these patterns occur after a pronounced advance or decline, the first bar should exhibit a dramatic continuation of the inbound trend, closing close to the bar's extreme end. The second bar completely negates the first bar, with the open price on the second bar being close to the close of the first bar and the close of the second bar being close to the open of the first bar. Wider trading ranges on both bars denote a more climactic reversal in psychology.

Trading Considerations

Two Bar Reversals can be either Bullish or Bearish depending on the direction of the inbound price trend. If the inbound trend is up, then upon identification of a Two Bar Reversal, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of a Two Bar Reversal, taking a long position or closing a short position is recommended.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

A persistent downward inbound trend is required; the longer and sharper, the better.

Both bars should have exceptionally wide trading ranges relative to the previous bars formed during the inbound trend.

For both bars, the opening and closing prices should be as close to the extreme points of the bars as possible.

Volume, if available, should be higher on both bars to accentuate the sentiment reversal. The greater the expansion of volume, the better the signal.

Underlying Behavior

Two Bar Reversals signal the dashing of hopes for those traders and investors that had been riding the trend or had jumped on board the especially wide trading of the pattern's first bar. The second bar, by completely reversing the ground made on the first bar, turns the tide of inbound sentiment and replaces it with an equal and opposite sentiment view. Look for an outbound trend period that reverses any gains made in the lead up to the Two Bar Reversal.