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Combining Long- and Short-Term TechnicalsUse candle charts to find support levels with GPC and CNDL. By David Keller

securities often trade between two key price levels: A support level is the price at which buyers tend to pur-chase a security because they think its a good value. A resistance level is the point at which investors tend to sell the secu-rity because they consider it overpriced. Indicators such as long-term moving av-eragesthe average price of a security over a fixed period of time, generally at least 200 dayscan help you determine when other participants may be expect-ing a turn in the market for the security. A security experiencing heavy price movement, or momentum, can proceed through a moving average without a pause. A short-term technical approach, such as candlestick analysis, can help you determine how a security should be-have as it approaches and breaches a key price level.

On candle charts, such as those on

the Price Candle Graph (GPC) function, a solid or open candle represents each trading day. The vertical line in the mid-dle, called the shadow, represents the high and low trades for each day. The body of the candle represents the open and closing prices. On the Bloomberg Professional service, the candle is blue if the close was below the open and clear if the close was above the open. By using candle charts instead of bar charts, youll find that certain price movements are easier to discern. During a period of rising prices, for example, youll see a sequence of clear candles.

In a bull market, a security tends to trade above the moving average. The longer the moving average period, the more time it takes for the price to break above this line at the beginning of an up-trend. Some market participants use two moving averages and look for the short-er-term average to cross the longer-term one. Others just analyze the moving av-erage itself and determine which way its headed. Finally, some look for the price to break up or down through a moving average. By adding candlestick analysis to this final technique, you can

minimize your risk in identifying po-tential price movements.

for example, burlington Northern Santa Fe Corp. broke above its 200-day moving average in March 2003. Type BNI US GPC . Add the 200-day moving average by entering 200 in one of the Moving Average Average Afields and pressing . To make 200 days your moving-average-period de-fault, type PDF to access the Per-sonal Settings & Defaults screen, and then type 5 for Graph, Technical Analysis Defaults. Under the Historical heading, enter 200 in either the second or third Historical Moving Average Periods field, and type 1 to save your settings. For more informa-tion on customizing your personal de-fault settings, press twice.

After trading as high as $30 a share, Burlington Northerns stock price dropped again to its 200-day moving av-erage in August 2003. The stock finally closed below this long-term indicator on Aug. 22. On the next trading day, the opening and closing prices were at about the same price level. This occurrence creates whats called a doji candle, which looks like a cross on the candle chart.

When the market is moving in one direction, this day of indecision sug-gests the end of the trend. The presence of this particular candle provided fur-ther indication that Burlington North-ern would find support at its 200-day moving average.

In March, Burlington Northern again approached its 200-day moving average. After three straight weeks of trading lower, the stock showed a pattern of a short solid candle followed by a long open candle. In this so-called bullish engulfing pattern, the second days ac-tion engulfs the first days action.

Cand le Char tsType BNI US GPC . Adjust the date range, and enter 200 in one of the MOVING AVERAGE fields.

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Thinking through the dynamics of this pattern makes it easier to un-derstand why it often represents sup-port in a bearish market. After trading within a penny of the 200-day moving average on March 10, Burlington Northern opened below that average on March 11. By the end of that trading day, the stock had moved above the 200-day average, as well as above the close and open of the previous day. This move repre-sents solid buying pressure through-out the trading day. The upward momentum seen with this candle often continues in the days to follow.

The Candlestick Patterns (CNDL) function helps you recognize various candle patterns. Type CNDL for a candle chart with a series of one- or two-letter abbreviations on certain days. These symbols indicate various candle patterns on the chart. Type 1 to list the abbrevia-tions, and click on one for a descrip-tion of the pattern. For illustrations of many candlestick patterns, type CNDL 9 6 .

Besides the bullish engulfing pat-tern, other candle patterns that often represent a turning point include the hammer, the inverted hammer and the bearish engulfing pattern. A hammer is a solid or clear small body with a long shadow below it and lit-tle or no shadow above it. The ham-mer represents a buy signal when seen in a downward trend. The in-verted hammer is just the opposite: a small solid or clear body with little or no shadow below it and a long shadow above it. The inverted ham-mer represents a sell signal when seen in an upward trend.

The bearish engulfing pattern is a small clear candle followed the next day by a long solid candle. The second days body completely en-gulfs the first days action. This pat-tern also indicates a sell signal when seen in an upward trend.

DAVID KELLER is an application specialist in the Bloomberg Sales department in New York. dkeller2@bloomberg.net

Each letter that appears on an MKTP market profile represents trades within a half hour period. Letter A represents trades from 99:30 a.m. New York time, B represents 9:3010 a.m. and so forth. U.S. equity markets open at 9:30 a.m., so their initial trades are designated with the letter B. Market profiles for 24-hour futures markets use lowercase let-ters from midnight to 9 a.m., when they switch to uppercase, starting with A. At midnight, they change back to lower-case letters. For example, type TYA MKTP to see the mar-ket profile for the current futures con-tract on the 10-year U.S. Treasury note. By analyzing the letters that appear on the vertical axis, for price, you can

market profiles can help traders profit by tracking a securitys price range early in the trading day. You can use market profiles, which chart the distri-bution of prices over different time in-tervals of a trading day, to determine whether the majority of traders in a par-ticular security are initiating or respond-ing to general price rallies or declines.

You can view the market profile for any security that has intraday pricing by using the Market Picture function. For example, type IBM US MKTP to display market profiles for recent trading in International Business Machines Corp. shares. You can also specify the number of daily chartsfrom one to threeto display on MKTP, and you can end the charts at a specific point within the last 20 trading days. To see two daily market profiles for IBM stock from five busi-ness days ago, type MKTP 2 5 . For more-detailed instructions on using and interpreting MKTP, press twice or type MKTP 9 .

Profile Your Way to ProfitsType MKTP to examine the price distributionof trades. By Matthew Ritter

The Market P ictu re Fu nct ionType IBM US MKTP to analyze daily price distributions for IBM shares over the three most-recent trading days.

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determine the full range of trading pric-es for any half hour.

The two red lines on each market profile represent the boundaries of the so-called value area, in which 68 per-cent of all trades on the profile take place. Technical analysts examine any

trades outside the value area because theyre considered to reflect a traders opinion on the future direction of price. The right side of the MKTP screen graphs the volume traded at each price level on the most recent day. Long hori-zontal bars on the volume histogram signal key price levels that technical an-alysts believe are likely to act as resis-tance points for rising prices or support levels for falling prices.

market profiles assume that a secu-ritys price is balanced or imbalanced. Balanced trading days exhibit strong horizontal price activity, with letters ex-tending from left to right on the market profile. During a balanced day there is a strong consensus between buyers and sellers; balanced days are not good times for intraday trading. Theyre often good days to buy a security in an-ticipation of strong price moves in the next couple of days.

Very balanced price movements often result from a lack of new infor-mation. As information appears, the market often will shift from balanced to imbalanced, producing trade oppor-tunities. Vertical price activity with let-ters dispersed from top to bottom of the market profile represents an imbal-anced trading day and a volatile mar-ketplace. This volatility can make imbalanced days more profitable for in-traday trading.

Traders often look to the first hour or two in the market profile (Bs and Cs or Ds and Es in the U.S. equity market) to determine a probable trading range

which are those outside the red value lines on the market profile. For example, a trader may sell when prices exceed the higher border of the value area.

In a normal variation pattern, the market profile for the first hour of trad-ing represents about half of the secu-ritys price range for the day. Technical analysts who identify this type of day from the market profile look for the first hours trading range to double and then buy or sell based on that limit. For example, a trader would buy when pric-es fall below double the lower limit of the securitys price range from the first hour of trading.

MATTHEW RITTER is on the staff of the Bloomberg Analytics department in New York.mritter@bloomberg.net

for the rest of the day. Robin Mesch, a technical analyst and president of Robin Mesch Associates in Portland, Oregon, classifies four different types of market profile in New Thinking in Technical Analysis (Bloomberg Press, 2000): nontrending, trending, normal and normal variation of a normal day. By examining the market profile early in the day, a trader can try to determine the profile type and forecast a trading range for the security.

The characteristics of a nontrending profile include a small first-hour trad-ing range, with the majority of trades that take place later in the day being ex-ecuted within that same range. This re-sults in a horizontal market profile. These days dont offer enough volatility to be profitable for the intraday trader. They often precede days with large price movements.

Trending days have much vertical and little horizontal price movement in their market profiles, with no more than six letters extended horizontally. This type of market profile offers insight into the direction of the securitys price trend. In a trending day, prices continue to move in one direction and close toward the extreme of the price movement.

In a normal day, the market profile typically defines 85 percent of the secu-ritys price range in the first hour of trad-ing. The wide price movement in early trading outlines a top and bottom for prices during the rest of the day. To try to profit during a normal day, traders can buy or sell against extreme price levels,

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Analyzing Histor ical Market Prof i lesType TYA MKTP 2 3 to ana-lyze two days of market profilesstarting three trading days agofor the 10-year U.S. Treasury note futures contract. To adjust the prices at the top and bottom of the charts, tab in to the LOW and HIGH fields, enter new prices and press . To add another days market pro-file to the MKTP screen, tab in to the small field in the upper left corner of the screen, enter 3 and press .

Type IBM US BTST to evaluate the results of applying various technical analysis trading methods to IBM shares.

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