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Technical Analysis Guide for Investors

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7 views3 pages

Technical Analysis Guide for Investors

Uploaded by

cat.sis
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Technical)Analysis)for)the)Fundamental)Investor)Script)

Some%guidelines%on%using%technical%analysis%
! Technical*analysis*takes*finesse*and*practice,*it’s*more*of*an*art*and*a*science*
! The*interpretation*of*the*technical*analysis*can*also*vary*stock*by*stock*
o For*example,*some*stocks*may*be*highly*cyclic,*some*not—this*can*affect*how*you*apply*
the*analysis*
! There*is*much,*much*more*to*technical*analysis*than*we’ll*go*over*today,*this*is*merely*an*
introduction*
! As*always,*this*webinar*is*for*demonstration*purposes*only,*and*nothing*presented*is*
recommendation*to*buy*or*sell*a*stock.*

Chart%Patterns%
! These*are*recognizable*chart*patterns*within*a*price*chart*that*can*confirm*a*trend*or*signal*
trend*reversal*
! There*are*hundreds*of*these,*we*won’t*go*over*them*today*

Moving%Averages%
! Moving*averages*are*used*to*find:!
o Trends*–*it*smoothes*out*fluctuations*and*makes*it*easier*to*see*if*the*stock*is*going*up,*
down,*or*sideways;*helpful*if*the*stock*has*volatility!
o Trend!reversals*–*by*crossovers*between*a*shorter*and*longer*average!
! Bullish*crossover:*shorter!term*average*crosses*above*the*longer!term*average!
! Bearish*crossover:*shorter!term*averages*crosses*below*the*longer!term*
average!
o Support*and*resistance*levels*–*when*the*price*crosses*the*moving*average!
! The*Simple*Moving*Average*(SMA)*shows*the*average*closing*price*over*the*last*n!days!
o You*can*adjust*the*time*periods*or*add*a*third*time*period!
! Example:!FB!(1/year!time!period)!with!SMA!
o Bullish*crossover*August*8th—trend*picking*up!
o 50!day*SMA*as*resistance*from*January*27!29!
! The*Exponential*Moving*Average*(EMA)*is*similar*to*SMA*but*more*sensitive*to*the*more*recent*
price*changes*!

Bollinger%Bands%
! Bollinger*Bands*measure*the*overbought*and*oversold*conditions*of*the*market*in*order*to*
predict*future*price*movement!
o If*the*price*is*toward*the*top*of*the*band,*it’s*overbought—could*take*a*downturn!
o If*the*price*is*toward*the*bottom,*it’s*oversold—could*taken*an*upturn!
o The*price*can*quickly*correct*it*if*gets*outside*the*band!
! Because*the*width*of*the*band*uses*standard*deviation,*which*is*a*measure*of*volatility,*the*
bands*widen*during*period*of*high*volatility!
o A*narrowing*of*the*bands*can*signal*an*imminent*increase*in*volatility!
! Example:!ACE!!

Moving%Average%Convergence%Divergence%
! MACD*is*a*momentum*indicator*that’s*meant*to*spot*subtle*changes*in*the*trend*of*a*stock*
! The*MACD*line*itself*(blue)*is*the*26!day*EMA*subtracted*from*the*12!day*EMA*and*is*plotted*
against*the*9!day*EMA*“signal”*line*(green);*the*signal*line*subtracted*from*the*MACD*is*the*
“divergence”*(the*green*histogram)*
o When*there*are*crossovers*it’s*a*signal*to*buy*or*sell:*
! When*the*divergence*goes*positive,*it’s*bullish*
! When*the*divergence*goes*negative,*it’s*bearish*
! Bullish*signals*are*considered*stronger*when*above*the*zero!line*
! Bearish*signals*are*considered*stronger*when*they*are*below*the*zero*line*
! Example:!WYNN!*
o Bearish*crossover*on*March*10!11—the*MACD*picked*up*on*this*very*quickly*
o MACD*can*be*used*to*interpret*the*sideways*trend**

Relative%Strength%Index%(RSI)%and%Money%Flow%Index%(MFI)%
! The*RSI*and*the*MFI*are*oscillators:*they*fall*in*a*bounded*range,*from*0*to*100*
o Like*all*technicals,*they*try*to*predict*where*the*stock*price*is*heading*by*finding*short!
term*overbought*and*oversold*conditions*of*a*security;*they*also*can*help*confirm*a*
trend*or*predict*a*trend*reversal*
! The*MFI*incorporates*volume*into*its*calculation,*so*it*helps*tell*if*there*is*too*much*or*too*little*
volume*associated*with*a*move*
! General*guidelines*for*the*RSI:**
o If*it’s*at*70*or*above,*it’s*overbought"*the*price*could*go*down*
o If*it’s*at*30*or*below,*it’s*oversold"*the*price*could*go*up*
o For*the*MFI,*these*values*are*80*and*20,*respectively*
! If*the*RSI/MFI*cross*these*thresholds,*the*price*can*experience*a*quick*
correction*
! Example:!XL!–!price!correction*
o When*the*RSI/MFI*spiked,*the*stock*generally*took*a*downturn*
! Example:!TWX!–!divergence*
o Recently,*the*price*is*rising*but*the*RSI/MFI*are*headed*down,*could*signal*a*reverse*in*
the*current*uptrend*

Volume%
! This*is*the*daily*trading*volume*of*the*stock*which*is*very*important*for*technical*analysis—
mouseover*the*bar*for*the*exact*date*and*volume*
o It’s*used*to*confirm*trends*and*chart*patterns,*or*to*predict*trend*reversals*(through*
divergence)*
! Trend*confirmation:*volume*moving*with*the*trend*signals*a*stronger*trend*
! Example:!BMA!–!trend!confirmation*
o Beginning*of*chart*shows*volume*ramping*up*with*the*price*
! Example:!NRG!–!divergence!
o Recently*the*stock*price*is*rising*but*the*volume*is*falling—this*is*divergence*and*could*
signal*a*trend*reversal!

Volume%by%Price%
! Volume*by*Price*is*used*to*find*support*and*resistance*levels*for*a*stock*
! Each*bar*represents*a*price*range,*the*length*of*the*bar*indicates*how*much*trading*occurred*in*
that*price*range—mouseover*the*different*sections*for*a*tooltip*
o The*green*portion*shows*the*amount*of*trading*when*the*price*moved*hirer*
o The*red*portion*shows*the*amount*of*trading*when*the*price*moved*lower*
o The*longest*bar*can*be*used*to*spot*possible*support*and*resistance*levels*
! Note*that*these*bars*change*depending*on*the*time*period*selected*
o Because*they*depend*on*data*from*the*whole*time*period,*you*can*only*use*it*to*analyze*
the*data*towards*the*end*of*the*time*period*
! Example:!AIG!–!demonstrate!length!of!bars!!
! Example:!WLP!–!demonstrate!support!
o The*longest*bar*looks*likes*a*support!
o Add*in*Volume*and*Candlesticks*and*you*can*see*the*volume*spiked*on*January*30th*as*it*
hit*the*support*and*rallied*

Scrolling%Through%Technicals%
! With*the*table*and*the*chart*linked,*it’s*easy*to*scroll*through*the*technicals*of*stocks*in*the*
table*
o You*could*do*this*each*day,*or*several*times*a*day,*to*find*the*ideal*time*to*enter*in*a*
position*for*a*stock*you’ve*been*watching*
! Premium*users*can*save*a*chart*“shortcut”*with*any*technicals*they*like*in*order*to*easily*access*
them*

Screening%on%Technicals%
! The*Momentum*Screener*(in*the*Library)*incorporate*technicals:*Bollinger*Bands,*Simple*Moving*
Average,*Range*
! You*can*create*a*new*screener**
o Look*in*the*“Technical*Indicators”*folder*
o You*can*run*your*screener*on*any*population*of*stocks*in*Stock*Rover*(for*example,*the*
S&P*500)*
! Add*any*promising*stocks*to*Technical*Watchlist*
! Create*a*note*(premium)*with*your*thoughts**

Common questions

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Moving averages aid in recognizing support and resistance levels by acting as dynamic thresholds. When a price crosses a moving average, it can establish new support or resistance levels—support when prices fall to the moving average and rebound, and resistance when rising prices are unable to surpass the moving average . These levels offer traders significant clues regarding possible price movements and decision points in trading strategies.

The behavior of Bollinger Bands can predict future market volatility. When the bands widen, it indicates increased volatility, while narrowing bands suggest decreased market volatility . An imminent increase in volatility is often predicted when the bands narrow considerably, known as a Bollinger Squeeze, which often precedes drastic movements in stock price . This enables investors to anticipate and prepare for increased market activity.

Considering both the RSI and MFI offers a more comprehensive evaluation of overbought or oversold conditions due to the incorporation of volume within the MFI. While the RSI focuses solely on price movements, the MFI includes trade volumes, providing additional context on whether price changes are supported by strong market interest . This dual analysis allows for a better understanding of market dynamics and more accurate predictions of potential trend reversals.

The Exponential Moving Average (EMA) has the advantage over the Simple Moving Average (SMA) in that it is more sensitive to recent price changes. Unlike the SMA, which gives equal weight to all data points, the EMA applies more weight to the most recent prices, allowing for a quicker reaction to new price movements . This increased sensitivity makes the EMA more effective for spotting trends and reversals in rapidly changing markets.

Volume by Price indicators reveal insights into support and resistance levels by displaying the amount of trading occurring at various price levels. The longest bar indicates heavy trading volume, suggesting a strong support or resistance level within that price range . This analysis shifts with different time periods and helps investors understand where the stock might encounter buying or selling pressure, assisting in decision-making regarding entry and exit points .

The MACD is a momentum indicator that identifies bullish or bearish trends through its line crossovers. It is calculated by subtracting the 26-day EMA from the 12-day EMA, with crossovers above the signal line indicating a bullish trend, while crossings below suggest a bearish trend . Additionally, a positive divergence indicates bullish momentum, while a negative divergence suggests bearish momentum. Trends are considered stronger when above or below the zero line, respectively . These indicators help traders make informed buy or sell decisions.

Volume changes in stock trading play a crucial role in confirming trends or suggesting possible trend reversals. A volume that increases along with price movement suggests a stronger continuation of the trend, serving as confirmation . On the other hand, when price and volume movements diverge, with price increasing but volume decreasing, it could signal an impending trend reversal . Volume acts as a reinforcing indicator of trend validity.

Bollinger Bands are helpful in anticipating future price movements by measuring the market's overbought and oversold conditions. When a stock's price approaches the top of the band, it is considered overbought, indicating the possibility of a downturn, while approaching the bottom suggests it is oversold and may see an upturn . The bands widen during periods of high volatility and narrow when volatility decreases, with narrowing often signaling an upcoming increase in volatility . This tool helps investors prepare for potential price movements.

The concept of moving averages is crucial in technical analysis for identifying trends and potential reversals in stock prices. A 'bullish crossover' occurs when a shorter-term moving average crosses above a longer-term moving average, signaling a potential upward trend reversal . Conversely, a 'bearish crossover' happens when a shorter-term moving average crosses below a longer-term moving average, indicating a potential downward trend reversal . These crossovers help investors to identify changes in market sentiment and potentially adjust their trading strategies accordingly.

The Relative Strength Index (RSI) is an oscillator that indicates overbought or oversold conditions in a stock, offering insights into potential price corrections. An RSI reading of 70 or above is considered overbought and suggests that the price might soon decrease, whereas an RSI of 30 or below indicates oversold conditions, suggesting a potential price increase . Thus, when the RSI crosses these threshold levels, it can signal that a price correction may be imminent.

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