Originally published by Guppytraders.com
Not every price chart adheres to the perfect exemplars of chart analysis, but sometimes they do. The daily Nikkei 225 chart is an almost perfect example of a Guppy Multiple Moving Average (GMMA) trend breakout pattern.
Technical indicators include those that are purely mathematical in construction. A moving average crossover is an example. The crossover is a mathematical function that can be used to identify a change in market sentiment.
Then there is chart pattern analysis. The very best of these patterns capture the psychological behaviour of participants and provides an effective means to set a price target that has a high probability of being achieved. An upsloping triangle pattern shows a sloping trend line – participants getting more eager – and a resistance level – existing stock holders with consistent selling at this level. The combination usually leads to a breakout.
The GMMA indicator combines these two approaches and uses the mathematical calculation to make inferences about the way traders and investors are thinking. When their thinking agrees then there is a high probability of a trend change developing.
With the Nikkei the long term group of averages have compressed and turned upwards. This shows investors have stopped being sellers and have started to become more aggressive buyers. The compression shows agreement about price and value. This turning upwards confirms the earlier identical pattern exhibited by the short term group of averages.
The short term GMMA challenged and retreated from the long term GMMA several times. The current breakout move the short term GMMA above the long term GMMA. The short term GMMA repeats the behaviour of traders and they are very bullish.
The GMMA shows the fractal repeated behaviour of the market participants across two major time frames. When there is agreement of behaviour it triggers a trend change. The strength of the change is measured by the degree of separation in the long term GMMA. The wider the separation the stronger and more stable the trend. Trend strength is confirmed with a steady separation between the long and short term groups of averages. Trend characteristics are shown by the degree of compression and expansion activity in the short term GMMA. In very strong trending the trading activity maintains a good separation in the short term GMMA.
The Nikkei breakout is a classic GMMA breakout pattern. The initial upside target is the historical resistance level near 23, 000. Pullback towards the lower edge of the short term GMMA are buying opportunities for a continuation of the uptrend.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.