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Tech analysis part 1

Technical analysis uses statistical data from market activity, past prices and trading volumes to identify patterns and indicators that can predict a security's future performance. Hundreds of techniques exist, including chart patterns like bar charts, candlestick charts and point and figure charts that consolidate supply and demand forces into a visual representation. Technicians believe prices move in predictable trends and patterns until a change causes the trend to reverse, and chart analysis helps identify support and resistance price levels as well as common patterns like double tops/bottoms and head and shoulders formations that can signal trend reversals.

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Technical Analysis • There are hundreds of thousands of market participants buying and selling securities for a wide variety of reasons: • hope of gain, fear of loss, tax consequences, short-covering, hedging, stop-loss triggers, price target triggers, fundamental analysis, technical analysis, broker recommendations and a few hundred more. • Trying to figure out why participants are buying and selling can be a daunting process. • Chart patterns put all buying and selling into perspective by consolidating the forces of supply and demand into a concise picture.
Technical Analysis • Method of evaluating securities by analyzing statistics generated by – Market activity – Past Prices – Volume • Do not attempt to measure intrinsic value • Instead look for patterns and indicators on charts to determine future performance
Technical Analysis • The world of technical analysis is huge • Hundreds of different patterns and indicators investors claim to be successful
Technical Analysis • Technicians believe that securities move in very predictable trends and patterns • Trends continue until something happens to change the trend • Until that change takes place, price levels are predictable
Charts • Line Charts • Bar Charts • Candle Stick Charting • Point and Figure Chart
The Bar Chart
Daily chart is typical but could be weekly or monthly Bar shows H and L Tick on R shows close Tick on L shows open
The Bar Chart (Continued)
Candle Stick Charting
Candle Stick Charting (Continued) • Green is an example of a bullish pattern, the stock opened at (or near) its low and closed near its high • Red is an example of a bearish pattern. The stock opened at (or near) its high and dropped substantially to close near its low
Candle Stick Charting (Continued)
Point and Figure Chart • Somewhat rare • Plots day-to-day increases and declines in price. • A rising stack of XXXX’s represents increases • A rising stack of OOOO’s represents decreases. • Typically used for intraday charting • If used for multi-day study, only closing prices will be used
Point and Figure Chart
Point and Figure Chart (continued) • Helps to filter out less-significant price movements allowing analyst to focus on most important trends • Used to keep track of emerging price patterns – No time dimension • Two attributes affecting the appearance of a point & figure chart – Box size – Reversal amount
Resistance and Support • Price levels at which movement should stop and reverse direction. – Act as floor and ceiling – Different strengths (major and minor) • Support – Price level below the current market price at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower • Resistance – Price level above the current market price, at which selling pressure should be strong enough to overcome buying Interest and thus keep the price from going any higher
Resistance and Support One of two things can happen when stock approaches resistance/support • Can act as a reversal point – When price drops to a support level, it will go back up – When price rises to a resistance level, it will go back down • Support/Resistance reverse roles once penetrated. – Market price falls below a support level, then the former support level becomes a resistance level when the market later trades back up to that level
Resistance and Support Resistance Support Resistance/Support
Trend Line Mechanics UPTREND LINE DRAWN ACROSS TWO LOWS DOWNTREND LINE DRAWN ACROSS TWO HIGHS The uptrend line is drawn across two lows that are several trading days (preferably 10 or more) apart. The line should not be significantly steeper than the trends that appear via inspection of the price patterns on the chart. The downtrend line is drawn across two highs. The chart below demonstrates both.
Technical Analysis: Double Tops, Bottoms DOUBLE TOP ALONG MAJOR RESISTANCE PLANE DOUBLE BOTTOM ALONG MAJOR SUPPORT PLANE RELIABLE FORMATIONS The top or bottom will occur along resistance and support planes respectively. When the market fails on a rally to a previous high a "double top" is developed. Volume is found to be distinctly low at second Top. A double bottom occurs along the plane at the old low.
Double Tops and Bottoms • Double top is a bearish indicator • Double bottom is a bullish indicator • If the price line falls from the neckline by a distance equals to the distance between the peak and trough, the indication is to sell for top and buy for bottom.
810 was also resistance on the monthly Nov Double Top
Technical Analysis: Head and Shoulder Formations WIDELY OBSERVED PROVIDES A PROJECTION OF HOW FAR THE MARKET WILL MOVE VERY RELIABLE FORMATION A widely observed formation, we often see head and shoulder tops and bottoms in the market. Once completed, the formations give relatively accurate measures of how far the market will move. Volume is Heavy at the left shoulder and noticeably low volume at the right shoulder.
Head and Shoulders • Volume is heavy at the left shoulder • Low volume at the right shoulder • The prices are expected to decline after the penetration at least as much as the distance between the head and the neckline.
Notice how the breakout is tested, a good place to sell
DOW JONES INDUSTRIAL INDEX (Basket of large company stocks) Neckline Shoulder Shoulder Head Formation not relevant until neckline is broken. Projects distance between head and neckline. Projection depends on where price breaks neckline. 10800
Triangles Descending Triangle. Break out tends to be to downside. Ascending triangle. Break out tends to be to the upside. Symetrical triangle. When prices break out of a symmetrical triangle, the reversal is generally sharp. Triangles are: 1. Frequent. 2. Not very reliable.
Tech analysis part 1