Charting Asia

Published: Friday, 2 Oct 2009 | 12:20 PM ET

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When it comes to analyzing charts, distinguishing between coincidences and correlation will always prove to be a challenge.

Japan's Sony chart poses this problem. Analysis starts with the up sloping triangle chart pattern on the weekly Sony chart. Price patterns give traders an insight into how other investors are playing the game.

The upper edge of the triangle is formed by the resistance level near 2750. The lower sloping edge of the triangle pattern is not very well defined. On the weekly chart, it has been tested several times and traders will look for further successful tests in the coming weeks.

The base of the triangle is also rather ambiguous. It consists of continuous price action moving in the same direction over a 9-week period. Generally, a 1 to 5 week time period may be able to provide a more reliable result for this type of chart pattern. So in this case, we need to handle the pattern development with caution.

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The broad, up sloping triangle pattern is acceptable because the relationship with the Guppy Multiple Moving Averages (GMMA) display also confirms this market bullishness. The short term GMMA shows a series of stronger penetrations of the long term GMMA group that are associated with sustainable trend reversals.

The long term GMMA shows that investors have relaxed their selling pressure.

A greater degree of convergence will indicate that investors have become buyers and this will confirm the change in trend direction.

The key feature of triangle patterns is the way they are used to calculate price targets. The projection of this triangle pattern sets an upside target for Sony near 3900.

These targets should not stand alone. They should be verified using other analysis methods.

We are back to our initial question: Is this co-incidence or correlation?

The 3900 level is near the upper edge of a longer term historical consolidation band. More importantly it is just above the downside projection targets for the head and shoulder pattern that preceded the Sony price fall from around 7000 to around 1500. The target for the head and shoulder reversal pattern as near 3750 which was equal to the lower edge of the long term historical consolidation band.

The clustering of these target and resistance levels suggests there is a high level of correlation.

This increases the probability of a successful breakout above 2750 -and the probability that it will also achieve targets between 3750 and 3900. Traders will aggressively buy the bullish breakout above 2750. Aggressive traders will buy as the price rebound from the value of the up sloping trend line.

The up sloping triangle pattern also has a downside. A move below the value of the up sloping trend line has a target near 1500. This has the potential to develop a double bottom pattern and any rebound from this level has an initial target near 1750.

The up sloping triangle pattern and the GMMA relationships suggest there is a higher probability Sony will reach for the 3900 target. 
  

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