The following are the basic trading rules for a three-line break chart:

• Buy when a white line emerges after three adjacent black lines (a "white turnaround line").

• Sell when a black line appears after three adjacent white lines (a "black turnaround line").

• Avoid trading in "trendless" markets where the lines alternate between black and white.

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Bollinger Bands

With a 20-day SMA and 20-day Standard Deviation, the standard deviation multiplier is set at 2. Bollinger suggests increasing the standard deviation multiplier to 2.1 for a 50-period SMA and decreasing the standard deviation multiplier to 1.9 for a 10-period SMA.  Bollinger Bands (50,2.1) can be used for a longer timeframe or Bollinger Bands (10,1.9) can be used for a shorter timeframe. 

W-Bottoms where the second low is lower than the first, but holds above the lower band. 4 steps to confirm a W-Bottom with Bollinger Bands.
1, a reaction low forms. This low is usually, but not always, below the lower band. 2, bounce towards the middle band.
3, new low holds above the lower band. The ability to hold above the lower band shows less weakness on the last decline.
4, the pattern is confirmed with a strong move off the second low and a resistance break.

According to Bollinger, tops are usually more complicated and drawn out than bottoms. Double tops, head-and-shoulders patterns and diamonds represent evolving tops.

M-Top is similar to a double top, the opposite of the W-Bottom. 1, a reaction high above the upper band. 2, a pullback towards the middle band. 3, prices move above the prior high, but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal.

The 20-day SMA sometimes acts as support. In fact, dips below the 20-day SMA sometimes provide buying opportunities before the next tag of the upper band.

MACD

Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

The values of 12, 26 and 9 are the typical setting used with the MACD, however other values can be substituted depending on your trading style and goals.


Be careful with bad crossover signal.
1. 12 crossover 26
2. Centerline crossovers

(divergence)Slowing downside momentum can sometimes foreshadows a trend reversal or a sizable rally. ...Bearish divergences are commonplace in a strong uptrend, while bullish divergences occur often in a strong downtrend. Upside momentum may not be as strong, but upside momentum is still outpacing downside momentum as long as the MACD Line is above zero. The opposite occurs at the beginning of a strong downtrend.

The MACD indicator is special because it brings together momentum and trend in one indicator. This unique blend of trend and momentum can be applied to daily, weekly or monthly charts. The standard setting for MACD is the difference between the 12 and 26-period EMAs. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for weekly charts. Chartists looking for less sensitivity may consider lengthening the moving averages. A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent.

The MACD is not particularly good for identifying overbought and oversold levels.

Stochastic Oscillator

Bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.

Traditional settings use 80 as the overbought threshold and 20 as the oversold threshold. It is important to note that overbought readings are not necessarily bearish. Securities can become overbought and remain overbought during a strong uptrend.

The Full Stochastic Oscillator (20,5,5). A longer look-back period (20 days versus 14) and longer moving averages for smoothing (5 versus 3) produce a less sensitive oscillator with fewer signals.

Dips below 20 warn of oversold conditions that could foreshadow a bounce. Moves above 80 warn of overbought conditions that could foreshadow a decline.

The Full Stochastic Oscillator (10,3,3)

A bearish divergence can be confirmed with a support break on the price chart or a Stochastic Oscillator break below 50, which is the centerline. A bullish divergence can be confirmed with a resistance break on the price chart or a Stochastic Oscillator break above 50.

50 is an important level to watch. The Stochastic Oscillator moves between zero and one hundred, which makes 50 the centerline.

The first is a signal line cross and/or move back above 20. A signal line cross occurs when %K (black) crosses %D (red). This provides the earliest entry possible. The second is a move above 50, which puts prices in the upper half of the Stochastic range. The third is a resistance breakout on the price chart.

The stock formed a lower high as the Stochastic Oscillator forged a higher high. This higher high shows strength in upside momentum. Remember that this is a set-up, not a signal. The set-up foreshadows a tradable low in the near future. NTAP declined below its June low and the Stochastic Oscillator moved below 20 to become oversold. Traders could have acted when the Stochastic Oscillator moved above its signal line, above 20 or above 50. Alternatively, NTAP subsequently broke resistance with a strong move.

Motorola (MOT) with a bear set-up in November 2009. The stock formed a higher low in late-November and early December, but the Stochastic Oscillator formed a lower low with a move below 20. This showed strong downside momentum. The subsequent bounce did not last long as the stock quickly peaked. Notice that the Stochastic Oscillator did not make it back above 80 and turned down below its signal line in mid December.

A shorter look-back period will produce a choppy oscillator with many overbought and oversold readings. A longer look-back period will provide a smoother oscillator with fewer overbought and oversold readings.

Like all technical indicators, it is important to use the Stochastic Oscillator in conjunction with other technical analysis tools. Volume, support/resistance and breakouts can be used to confirm or refute signals produced by the Stochastic Oscillator.

Relative Strength Index (RSI)

Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers. RSI can also be used to identify the general trend.

The default look-back period for RSI is 14, but this can be lowered to increase sensitivity or raised to decrease sensitivity. 10-day RSI is more likely to reach overbought or oversold levels than 20-day RSI. The look-back parameters also depend on a security's volatility. 14-day RSI for internet retailer Amazon (AMZN) is more likely to become overbought or oversold than 14-day RSI for Duke Energy (DUK), a utility.

RSI is considered overbought when above 70 and oversold when below 30. These traditional levels can also be adjusted to better fit the security or analytical requirements. Raising overbought to 80 or lowering oversold to 20 will reduce the number of overbought/oversold readings. Short-term traders sometimes use 2-period RSI to look for overbought readings above 80 and oversold readings below 20.

Despite this overbought reading, the stock did not decline. Instead, the stock stalled for a couple weeks and then continued higher. Three more overbought readings occurred before the stock finally peaked in December (2). Momentum oscillators can become overbought (oversold) and remain so in a strong up (down) trend. 

A bullish failure swing forms when RSI moves below 30 (oversold), bounces above 30, pulls back, holds above 30 and then breaks its prior high. It is basically a move to oversold levels and then a higher low above oversold levels.

A bearish failure swing forms when RSI moves above 70, pulls back, bounces, fails to exceed 70 and then breaks its prior low. It is basically a move to overbought levels and then a lower high below overbought levels.

RSI tends to fluctuate between 40 and 90 in a bull market (uptrend) with the 40-50 zones acting as support.

On the flip side, RSI tends to fluctuate between 10 and 60 in a bear market (downtrend) with the 50-60 zone acting as resistance.

A positive reversal forms when RSI forges a lower low and the security forms a higher low. This lower low is not at oversold levels, but usually somewhere between 30 and 50.

A negative reversal is the opposite of a positive reversal. RSI forms a higher high, but the security forms a lower high. Again, the higher high is usually just below overbought levels in the 50-70 area.