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					Tools of
Technical analysis
The Bar Chart
The Bar Chart
 (Continued)
       • Some of the most
         popular type of charts
       • Advantage is that it
         show the high, low,
         open and close for
         each day
The Bar Chart
 (Continued)
Candle Stick Charting
        Candle Stick Charting
            (Continued)
• Been around for hundreds of years
• Often referred to as “Japanese Candles” because
  the Japanese would use them to analyze the price
  of rice contracts
• Similar to bar chart, but uses color to show if
  stock was up (green) or down (red) over the day
• More than 20 patterns are used by technicians for
  candlestick charting. Some of the most popular
  include the following.
Candle Stick Charting
    (Continued)
          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)
• Top example is called a
  hammer and is a bullish
  pattern only if it occurs
  after the stock price has
  dropped for several days.
   – Theory is that pattern
     indicates a reversal
• Bottom is an example of a
  star, typically indicating a
  reversal and/or
  indecision.
         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
    Using the Moving Average
• Shows the average value of a security’s price
  over a period of time
   – Using compared or used in conjunction with EMA
     (see discussion below)
• The most commonly used averages are of
  20,30,50, 100 and 200 days
   – The longer the time span, the less sensitive the moving
     average to daily price changes
   – Moving averages are used to emphasize the direction
     of a trend and smooth out price and volume
     fluctuations (“noise”).
Moving Average
  Moving Average (Continued)
• Notice in April when the stock price dropped
  well below its 5-day average (the green line).
   – Bearish signal
• February it rose above its 50-day average and
  continued to rise for several weeks
   – Bullish signal
• Typically, when a stock moves below its moving
  average it is a bad sign, above it is a good sign
    Moving Averages (Continued)
• What do the different days mean?
  – 20 days - choppy line. It isn't the most accurate, but is
    probably the most useful for short term traders.
  – 30 day - similar to 20 day but provides a bit more
    certainty for the trend.
  – 50 day - moving averages provide a much less volatile,
    smooth line. This can be used to detect somewhat
    longer term trends.
  – 100 day - similar to the 50 day, it is less volatile, and
    one of the most widely used for long term trends.
  – 200 day - even less volatile, more of a rolling chart or
    smooth line. It doesn't react to quick movements in the
    stock price therefore it is rarely used.
Strategies for Moving Averages
• Filters
   – Used to increase confidence about an indicator
      • No set rules or things to look out for when filtering, just
        whatever makes you confident enough to invest your money
      • For example you might want to wait until a security crosses
        through its moving average and is at least 10% above the
        average to make sure that it is a true crossover.
            – Remember, setting the percentile too high could result in
              "missing the boat" and buying the stock at its peak.
      • Another filter is to wait a day or two after the security crosses
        over, this can be used to make sure that the rise in the security
        isn't a fluke or unsustained.
            – Again, the downside is if you wait too long then you could end
              up missing some big profits.
Strategies for Moving Averages
          (Continued)
• Crossovers
  – Not as easy as filtering
  – Several different types of crossover's, but all of them
    involve two or more moving averages.
     • In a double crossover you are looking for a situation where
       the shortest MA crosses through the longer one. This is
       almost always considered to be a buying signal since the
       longer average is somewhat of a support level for the stock
       price.
     • For extra insurance you can use a triple crossover, whereby
       the shortest moving average must pass through the two higher
       ones. This is considered to be an even stronger buying
       indicator.
     • Notice this happened in May for APPX
  Exponential Moving Averages
            (EMA)
• Calculated by applying a
  percentage of today's
  closing price to
  yesterday's moving
  average value.
• Use an exponential
  moving average to place
  more weight on recent
  prices.
  Relative Strength Index (RSI)
• A comparison between the days a stock finishes
  up against the days it finishes down.
• Big tool with momentum trading
• Ranges from 0 to 100
   – Stock considered overbought around the 70 level
   – Stock considered oversold around 30
• The shorter the number of days used to calculate
  the more volatile
Relative Strength Index (RSI)
         Money Flow Index
• Measures the strength of money flowing
  into and out of a stock
• Difference between money flow index and
  RSI is that RSI only looks at prices, Money
  Flow also looks at volume
• Ranges from 0 to 100
  – Overbought at 70
  – Oversold at 30
Money Flow Index
              Bollinger Bands
• Three lines used for Bollinger band indicator:
  the upper, lower, and the simple moving average
  that is between the two
   – Upper/lower bands are plotted two standard deviations
     away from a simple moving average
   – Bands widen when markets are more volatile and
     contract during less chaotic periods
• Closer price moves to upper band, the more
  overbought
• Closer to lower band, the more oversold
Bollinger Bands
       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 pressure 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          • Support/Resistance
  point                            reverse roles once
   – When price drops to a         penetrated.
     support level, it will        – Market price falls
     go back up                      below a support level,
                                     then the former
   – When price rises to a           support level becomes
     resistance level, it will       a resistance level
     go back down                    when the market later
                                     trades back up to that
                                     level
Resistance and Support
               Resistance




    Resistance/Support

                            Support
            Charting Patterns
• Cup and Handle
  – Pattern on bar chart as short as 7 weeks or as long as
    65 weeks
  – Cup in the shape of a U; Handle has a slight
    downward drift
  – Right hand side of pattern has low trading volume
  – As the stock comes up to test old highs, the stock will
    incur selling pressure by the people who bought at or
    near the old high
  – Selling pressure will take the stock price sideways for
    4 days to 4 weeks, then it takes off
Charting Patterns
           Head and Shoulders
• Resembles an “M” in which a stock’s price
   – Rises to a peak and then declines, then
   – Rises above the former peak and again declines, and
     then
   – Rises again but not the second peak and again declines
• The first and third peaks are shoulders, and the
  second peak forms the head.
• Very bearish indicator
Head and Shoulders
              Double Bottom
• Occurs when a stock price drops to a similar
  price level twice within a few weeks or months
• The double-bottom pattern resembles a “W”
• Buy when the price passes the highest point in
  the handle.
• In a perfect double bottom, the second decline
  should normally go slightly lower than the first
  decline to create a shakeout of jittery investors
• The middle point of the “W” should not go into
  new high ground.
• This is a very bullish indicator
Double Bottom

				
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