TECHNICAL ANALYSIS

DOUBLE TOP REVERSAL

The Double Top Reversal is a bearish reversal pattern typically found on bar charts, line charts, and
candlestick charts. As its name implies, the pattern is made up of two consecutive peaks that are roughly
equal, with a moderate trough in-between.

Although there can be variations, the classic Double Top Reversal marks at least an intermediate-term, if
not long-term, change in trend from bullish to bearish. Many potential Double Top Reversals can form
along the way up, but until key support is broken, a reversal cannot be confirmed.

Fig. Double Top Reversal

First, the price reaches a high. Then when it reduces by more than 10%, a trough is formed, which could
reach the support line. With the price rise, the peak is formed again, after which the price gain falls up to
the support line. If the price now falls below the support for 2 or more candles, the reversal can be
confirmed.
Price Target – The distance form support break to peak can be subtracted from the support break for a
price target. This would infer that the bigger the formation is, the larger the potential decline.

DOUBLE BOTTOM REVERSAL

The Double Bottom Reversal is a bullish reversal pattern typically found on bar charts, line charts, and
candlestick charts. As its name implies, the pattern is made up of two consecutive troughs that are
roughly equal, with a moderate peak in-between.

It is important to remember that the Double Bottom Reversal is an intermediate to long-term reversal
pattern that will not form in a few days. Even though formation in a few weeks is possible, it is
preferable to have at least 4 weeks between lows.

Fig. Double Bottom Reversal

Price Target – The distance from the resistance breakout to trough lows can be added on top of the
resistance break to estimate a target. This would imply that the bigger the formation is, the larger the
potential advance.
HEAD AND SHOULDERS TOP
A Head and Shoulders Top pattern forms after an
uptrend, and its completion marks a trend reversal.
The pattern contains three successive peaks, with the
middle peak (head) being the highest and the two
outside peaks (shoulders) being low and roughly
equal. The reaction lows of e ach peak can be
connected to form support, or a neckline.

Price Target – After breaking neckline support, the projected price decline is found by measuring the
distance from the neckline to the top of the head. This distance is then subtracted from the neckline to
reach a price target.
HEAD AND SHOULDERS BOTTOM

The Head and Shoulders Bottom, sometimes referred to as an Inverse Head and Shoulders, is a reversal
pattern that shares many common characteristics with the Head and Shoulders Top, but relies more
heavily on volume patterns for confirmation.

As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, with its
completion marking a change in trend. The pattern contains three successive troughs with the middle
trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the
two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can
be connected to form resistance, or a neckline.

Fig. Head and Shoulders Bottom

Price Target – After breaking neckline resistance, the projected advance is found by measuring the
distance from the neckline to the bottom of the head. This distance is then added to the neckline to
reach a price target.
FALLING WEDGE
The Falling Wedge is a bullish pattern that begins wide at the top and contracts as prices move lower.
This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In
contrast to symmetrical triangles, which have no definitive slope and no bias, falling wedges definitely
slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance
breakout occurs. Bullish confirmation of the pattern
does not come until the resistance line is broken in
convincing fashion. It is sometimes prudent to wait for
a break above the previous reaction high for further
confirmation. Once resistance is broken, there can
sometimes be a correction to test the newfound

Fig. Falling Wedge

RISING WEDGE
The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move
higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive
slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

While the rising wedge is generally observed as a reversal pattern, the pattern can also fit into the
continuation category. As a continuation pattern, the rising wedge will still slope up, but the slope will be
against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the
prevailing trend.

Regardless of the type (reversal or continuation), rising wedges are bearish.

ROUNDING BOTTOM
The Rounding Bottom is a long-term reversal pattern that is best suited for weekly charts. It is also
referred to as a saucer bottom, and represents a long consolidation period that turns from a bearish bias
to a bullish bias.

Bullish confirmation comes when the pattern breaks above

the reaction high that marked the beginning of the decline
at the start of the pattern. As with most resistance
breakouts, this level can become support. However,
rounding bottoms represent long-term reversal and this
new support level may not be that significant.
Fig. Rounding Bottom

TRIPLE TOP REVERSAL

The Triple Top Reversal is a bearish reversal pattern typically found on bar charts, line charts and
candlestick charts. There are three equal highs followed by a break below support. As major reversal
patterns, these patterns usually form over a 3 to 6-month period.

All three highs should be reasonably equal, well-spaced and mark clear turning points to establish
resistance. The highs do not have to be exactly equal, but should be reasonably equivalent to each
other.

The distance from the support break to the highs can be measured and subtracted from the support
break for a price target. The longer the pattern develops, the more significant the ultimate break. Triple
Top Reversals that are 6 or more months old represent major tops and a price target is less likely to be
effective.
Fig. Triple Top Reversal

TRIPLE BOTTOM REVERSAL

The Triple Bottom Reversal is a bullish reversal pattern
typically found on bar charts, line charts and candlestick
charts. There are three equal lows followed by a break
above resistance. As major reversal patterns, these
patterns usually form over a 3 to 6 month period.
Fig. Triple Bottom Reversal

Price Target – The distance from the resistance breakout to lows can be measured and added to the
resistance break for a price target. The longer the pattern develops, the more significant is the ultimate
breakout. Triple Bottom Reversals that are 6 or more months in duration represent major bottoms and a
price target is less likely to be effective.

BUMP AND RUN REVERSAL

As the name implies, the Bump and Run Reversal (BARR) is a reversal pattern that forms after excessive
speculation drives prices up too far, too fast.

Lead-in Phase: The first part of the pattern is a lead-in phase that can last 1 month or longer and forms
the basis from which to draw the trend line. During this phase, prices advance in an orderly manner and
there is no excess speculation. The trend line should be moderately steep. If it is too steep, then the
ensuing bump is unlikely to be significant enough. If the trend line is not steep enough, then the
subsequent trend line break will occur too late. An angle of 30 to 45 degrees is preferable for the lead-in
phase trendline.

Bump Phase: The bump forms with a sharp advance, and prices move further away from the lead-in
trendline. Ideally, the angle of the trendline from the bump's advance should be about 50% greater than
the angle of the trend line extending up from the lead-in phase. Roughly speaking, this would call for an
angle between 45 and 60 degrees.

Fig. Bump and Run Reversal

IS IT BETTER TO GO FOR IMMEDIATE OTM STRIKE, IF YOU ARE BULLISH ?

Ace Traders used to say that it is better to go for immediate OTM strike, if one is bullish.
This is because they are cheaper, as the stock has no intrinsic value and one has to pay only the time
value.
Also more gain can be expected if the market becomes bullish.
This option already has no intrinsic value, it only has extrinsic time value. The market would have to
move above the strike price and exceed that by the amount that you paid for the option just to break
even. Only after the price exceeds that break-even point, one even begins to make money. Hence the
probability of success is well <50% – especially when assuming a normal distribution in returns of an
underlying.

The Delta measures how an options value changes with respect to the change in the underlying asset.
Therefore the Option Greek’s ‘Delta’ captures the effect of the directional movement of the market on
the Option’s premium.
The higher the delta, the higher is the chances to better profits.

OPTIONS GREEKS VALUES OF MY PORTFOLIO

The following table shows the Options Greeks values of the stocks in a portfolio created by me –

Theta as
CE
Company / ATM Delta Theta % of Gamma Vega
Expiry Premiu
Stock Strike (δ) (θ) premiu (γ) (ν)
m
m
Near Month -
2650 112.35 0.55 -3.93 -3.50 0.0015 2.00
28MAY2020
Mid-Month -
BAJAJ-AUTO 2650 210.25 0.56 -2.40 -1.14 0.0008 3.54
25JUN2020
Far Month -
2700 353.3 0.56 -2.36 -0.67 0.0004 4.83
30JUL2020
Near Month -
880 38.7 0.54 -1.42 -3.67 0.0043 0.66
28MAY2020
Mid-Month -
HDFCBANK 880 66 0.54 -0.80 -1.21 0.0024 1.17
25JUN2020
Far Month -
880 90 0.55 -0.59 -0.66 0.0017 1.59
30JUL2020
Near Month -
165 6.4 0.52 -0.25 -3.91 0.0247 0.12
28MAY2020
Mid-Month -
ITC 165 10.9 0.51 -0.15 -1.38 0.0133 0.22
25JUN2020
Far Month -
160 36.25 0.62 -0.22 -0.61 0.0043 0.28
30JUL2020
Near Month -
390 16.15 0.48 -0.70 -4.33 0.0087 0.29
28MAY2020
Mid-Month -
ICICIPRULI 390 93 0.62 -1.12 -1.20 0.0016 0.49
25JUN2020
Far Month -
380 111.65 0.65 -0.69 -0.62 0.0013 0.65
30JUL2020
 Near Month -
380 20.7 0.54 -0.77 -3.72 0.0079 0.29
28MAY2020
Mid-Month -
M&M 380 33.1 0.55 -0.39 -1.18 0.0049 0.51
25JUN2020
Far Month -
380 66.35 0.59 -0.42 -0.63 0.0023 0.68
30JUL2020
Near Month -
1460 57 0.53 -2.11 -3.70 0.0029 1.10
28MAY2020
Mid-Month -
RELIANCE 1460 91 0.54 -1.09 -1.20 0.0018 1.95
25JUN2020
Far Month -
1460 249.75 0.59 -1.69 -0.68 0.0006 2.62
30JUL2020
Near Month -
1900 55.55 0.50 -2.23 -4.01 0.0027 1.43
28MAY2020
Mid-Month -
TCS 1900 235.95 0.56 -2.87 -1.22 0.0007 2.51
25JUN2020
Far Month -
1900 345.75 0.59 -2.26 -0.65 0.0004 3.36
30JUL2020
Near Month -
450 18.8 0.50 -0.77 -4.10 0.0079 0.34
28MAY2020
Mid-Month -
SUNPHARMA 450 21.75 0.52 -0.27 -1.24 0.0072 0.60
25JUN2020
Far Month -
450 72.1 0.59 -0.45 -0.62 0.0022 0.81
30JUL2020

In the above table, it can be seen that far-month premium is higher than the close and mid-month. This
is because there is often a time value associated with the stock price and there are contracts purchased
or sold in the market depending on that.

DELTA (δ):
The call options have a delta of +ve. A Call option with a 0.8 delta means that the call option premium
gains / losses 0.8 points for every 1 point gain / loss in the underlying one. The OTM options have a delta
value of 0 to 0.4, the ATM option has a delta of 0.6, and the ITM option has a delta of 0.5 to 1.
The call option has a delta from 0 to 0.9 (positive). The put option has a delta from -0.1 to -0.9
(Negative).

THETA (θ):
The Theta value basically says that as every day passes, one will close the (theta) value out of the
premium. This is money's time value, which depreciates as the expiry option is coming close. So it is
evident that for the close month, the theta value is higher compared to the mid- and far-months.
GAMMA (γ):
The Gamma '(2nd order premium derivative) also referred to as the option's curvature gives the rate at
which the delta of the option changes as the underlying modifications. The gamma is typically expressed
in deltas gained or lost by one point of the underlying shift – with the delta increasing by the amount of
the gamma when the underlying increase and decreasing by the amount of the gamma when the
gamma.

VEGA (ν):
The effect of Increase in volatility is maximum when there are more days to expiry – this means if you
are at the start of series, and the volatility is high then you know premiums are plum. Maybe a good idea
to write these options and collect the premiums – invariably when volatility cools off, the premiums also
cool off and you could pocket the differential in premium. When there are few days to expiry and the
volatility shoots up the premiums also goes up, but not as much as it would when there are more days
left for expiry. So if you are a wondering why your long options are not working favourably in a highly
volatile environment, make sure you look at the time to expiry