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Zig Zag Interpretations

Zig Zag

  1. Zig Zag Defined
  2. Interpreting the Zig Zag Indicator

The Zig-Zag indicator can be effective in filtering short-term noise and identifying significant trends and significant changes in market prices.

Below is a chart of the E-mini S&P 500 Futures contract that illustrates how effective the Zig-Zag indicator was in visually finding areas of support and resistance and price breakouts:

Zig Zag indicator showing major tops and bottoms of price moves

The chart above of the e-mini uses a 5% Zig-Zag retracement value; therefore, only price changes of 5% or greater are shown, helping a long-term trader or investor identify important areas of support, resistance, and areas of price breakouts.

On the left of the chart, the S&P 500 was forming a triangle consolidation pattern. When prices broke resistance, a potential long-term buy was generated. During the middle of the chart, the Zig-Zag indicator was effective in illustrating that the S&P 500 was in an upward price channel. Typically traders might wish to buy in areas where price touched the lower support trendline and sell when prices touched the upper resistance line.

The chart below of Intel (INTC) shows a classic chart head and shoulder pattern easily seen by the Zig-Zag indicator ($1 retracement):

Zig Zag and a head and shoulder pattern

The easily identified head and shoulders pattern gave a potential sell signal when price on the right shoulder broke the upward slanting trendline.

The Zig-Zag indicator is a technical analysis tool that might be used to identify classic charting patterns. The Zig-Zag indicator is also effective in visually reducing noise and helping the technical trader see larger picture patterns and general market direction.

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