Additional Praise for Technical

Analysis and Chart Interpretations

Ed’s thorough analysis will leave you with a deeper understanding and appreciation
of a vast array of technical tools and concepts. An essential guide for beginners and
seasoned traders alike.
—Jon Boorman, CMT, Broadsword Capital

Technical Analysis And Chart Interpretations is a worthy addition to any technical analysis
library. Ed Ponsi does a masterful job of taking a difficult, often confusing subject,
and making it incredibly easy to digest. Whether you are a beginner or veteran
student of technical analysis, this book is a must read.
—Bob Byrne, Private Investor and Trading Coach

Ed has written a great book not only on technical patterns and indicators, but on the
pitfalls that traders will face as they embark on a trading career. This information
can be applied to both longer and shorter time frames. It has value for both the
investor and trader alike. I even learned some new things myself!
—Carolyn Boroden, Founder, FibonacciQueen.com

Ed Ponsi has taught me the value of using some of the more useful indicators on
charts such as MACD. While our styles are quite different I have learned a lot from
his work and I believe you can as well.
—Helene Meisler, Contributor to Realmoney.com
 TECHNICAL ANALYSIS
AND CHART
INTERPRETATIONS

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TECHNICAL ANALYSIS
AND CHART
INTERPRETATIONS
A Comprehensive Guide to Understanding
Established Trading Tactics for Ultimate Profit

Ed Ponsi
Copyright C 2016 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Printed in the United States of America

10 9 8 7 6 5 4 3 2 1
 Ride with me to the edge of the land
Ever we play in waves and sand
Night full of stars, no clouds above
Ever be strong, and know you are loved
Ever be strong, and know you are loved
 CONTENTS

Introduction: The Journey xi

About the Author xv

PART I THE FOUNDATION OF TECHNICAL ANALYSIS 1 vii

CHAPTER 1 Why Technical Analysis? 3

CHAPTER 2 The Language of Trading 9

CHAPTER 3 The Cornerstone 15

CHAPTER 4 The Dow Theory 19

PART II KEY CONCEPTS OF TECHNICAL ANALYSIS 27

CHAPTER 5 Common Types of Charts 29

CHAPTER 6 Support and Resistance 39

CHAPTER 7 Trends and Trend Lines 51

CHAPTER 8 Volume 61

CHAPTER 9 Gaps 77
 PART III PRICE PATTERNS 93
CHAPTER 10 Reversal Chart Patterns 95

CHAPTER 11 Continuation Patterns 117

CHAPTER 12 Additional Chart Patterns 133

PART IV CANDLESTICK PATTERNS 141

CHAPTER 13 Candlestick Charting Patterns 143

CHAPTER 14 Continuation and Indecision Candlestick

Patterns 169

PART V FIBONACCI 181

CHAPTER 15 Fibonacci Trading Techniques 183

viii
PART VI TECHNICAL INDICATORS 199
CONTENTS

CHAPTER 16 Moving Averages 201

CHAPTER 17 Moving Average Envelopes and Bollinger Bands 215

CHAPTER 18 Oscillators 223

CHAPTER 19 Average True Range (ATR) 243

CHAPTER 20 Complex Indicators 253

PART VII OSCILLATORS 259

CHAPTER 21 Point and Figure Charting 261

PART VIII ATR, ADX, AND PSAR 285

CHAPTER 22 Cycles and Tendencies 287
PART IX CYCLES 305
CHAPTER 23 Sentiment Indicators 307

PART X POINT AND FIGURE CHARTING 321

CHAPTER 24 Psychological Aspects of Technical Analysis 323

CHAPTER 25 Understanding Bubbles 333

CHAPTER 26 Trading versus Reality 339

PART XI ODDS AND ENDS 347

CHAPTER 27 Unconventional Patterns 349

CHAPTER 28 Combining Technical and Fundamental

Analysis 353

ix
PART XII BEHAVIORAL ASPECTS OF TECHNICAL ANALYSIS 359

CONTENTS
CHAPTER 29 Final Thoughts on Technical Analysis 361

Index 363
 INTRODUCTION: THE JOURNEY

E very trader must follow their own path. Maybe technical analysis will be part
of your path, but even if your journey takes you in another direction, it’s still
important to understand the concepts in this book. As you read on, the reasons why
will become clear.
How did technical analysis become a part of my journey? It started with my first xi
job interview in the financial services field, which was for a position as a stockbroker.
I was led by two senior brokers into a tiny, glass-encased room. Two more
brokers were already waiting there. They began asking questions—slowly at first,
then more rapidly. They bombarded me with questions to see if I could handle the
pressure. My heart raced: Was I up to the challenge?
‘‘Name your five favorite stocks,’’ they asked.
‘‘Ascend Communications, 3Com, Cascade, Cisco Systems,’’ I replied.
At the time, all four companies were in the rapidly expanding computer
networking sector. That sector was on fire, making headlines on a daily basis with
its huge gains and wild swings.
‘‘That’s four … keep going … ’’
‘‘Four … Fore … ’’
‘‘Ford? Ford Motor Company?’’
‘‘No, Fore Systems.’’
I’d named another computer networking stock. I was five minutes into my first
interview, and I’d already broken every rule of diversification. Had I blown my
opportunity to break into finance?
Surprisingly, my interview caught the attention of a senior broker who specialized
in technical analysis. He knew that all the stocks I’d named were in the strongly
trending computer networking sector. I was hired at his recommendation and
 became a member of his team, which placed a heavy emphasis on technology and
momentum stocks.
Our reading assignments included books such as The Gorilla Game: Picking Winners
in High Technology by Geoffrey Moore. We were also instructed to read a number
of books on technical analysis, including Secrets for Profiting in Bull and Bear Markets
by Stan Weinstein as well as titles by John Murphy and the team of Edwards and
Magee.
On our team, technical analysis was the key to every decision. While others
paid close attention to fundamental research reports, our team cared only about
price action. Every company’s chart was to be thoroughly analyzed. I dove into the
reading materials with gusto.

Total Immersion
What happened next could only be described as total immersion. We were like cult
members. Our team of four would work from 8 a.m. until the closing bell. After
the close, we’d look at every single chart in the S&P 500.
Then we’d go to dinner, or to the bar, or just hang around the office while the
cleaning crew worked around us, and the technical analysis conversation would
continue. Any remaining time was spent reading additional books on technical
xii analysis and growth stocks as assigned by our mentor.
While I loved learning about technical analysis, I wasn’t fond of being a broker.
INTRODUCTION: THE JOURNEY

At one time I’d believed that brokers traded and managed money for their clients.
This is only somewhat true; eventually, I learned that being a broker has more to do
with selling than with trading.
The final straw occurred when my employer asked me to obtain a license to sell
life insurance. There is nothing wrong with selling insurance to people who need
it; I just didn’t want to be the person who sold it to them. Instead, I wanted to use
everything I’d learned about technical analysis to become a full-time professional
trader. So, I quit.

The Next Step

For a long time, I’d been sending my trading track record to anyone I could find
who hired traders. I’d scour the Sunday New York Times and collect e-mail addresses,
and then bombard them with my trading record. I had a solid record, mainly thanks
to the very forgiving bull market environment of the 1990s.
After months of this, with no indication that anyone noticed or cared, the phone
finally rang—would I like to interview for a trading job on Wall Street?
This time, I was interviewed by just one person—and he seemed like a maniac. He
stomped around his spacious Wall Street office, alternately mumbling and shouting.
His expensive suit was wrinkled and uneven, and he needed a shave. He looked as if
he’d been out all night.
Suddenly, I wanted my old job back, a good paying job from which I’d walked
away. What had I gotten myself into?
I didn’t know it at the time, but this man was a well-known character on Wall
Street. He ran several investment firms, one of which employed over 400 traders.
When I told him I was willing to travel 100 miles by train to get to work every
morning and another 100 miles to get home every night, he hired me on the spot.
Once again, it was a case of total immersion. I’d catch a train before dawn, always
clutching a book and a copy of Investor’s Business Daily. Eventually, one of those books
would be Confessions of a Street Addict by legendary hedge fund manager Jim Cramer.
Years later, I’d work with Jim and even merit a brief mention in one of his books.
I saw the same faces every morning on the train. Every day, a young man and
an older man would board the train together, and I’d overhear them discussing
technical analysis. The older gent was an experienced arbitrage trader, and the kid
was a college athlete who was just getting started in the business. Every day, we’d
discuss indicators and other technical concepts. Years later, we would all work
together at a midtown Manhattan trading firm.

Hiding from the Boss

xiii
My first trading job could only be described as Darwinian—it was the survival of

INTRODUCTION: THE JOURNEY

the fittest. The firm’s philosophy of cutting losses quickly apparently translated to
the company’s attitude toward its traders. Nearly every day, another desk would be
vacant, its former occupant never to return.
The company had a lengthy set of rules, particularly regarding risk management.
I had trouble making money at first, as I struggled to adjust my somewhat wild
trading style to fit within the company’s parameters. Every day brought with it a
new defeat followed by the long train ride home.
Meanwhile, the new hires I’d started with were disappearing one by one. Why
had I left my secure job and gotten involved in this mess? I lost money, lost sleep,
and lost my appetite. I thought I’d lose my mind.
I really thought I’d be fired, but I kept showing up. In the hallways at work,
I avoided at all costs the man who hired me. I figured he’d simply forgotten to fire
me, and I didn’t want to jog his memory.
A few months later, after I’d gotten my act together and become profitable,
I finally gathered enough nerve to march into the wild man’s office. I needed to ask
why he hadn’t fired me while he was letting the other new hires go.
What he said startled me: ‘‘We didn’t fire you because we like the way you lose.’’
He explained that while losing, I’d demonstrated ‘‘good defense.’’ I wasn’t
profitable, but I hadn’t lost much money, preferring to take a quick loss rather than a