Transcript Lecture 4: Technical Market Analysis

Lecture 7
Technical Analysis
Economics 98 / 198
Spring 2008
Current Events / News
Simulation Discussion
Lecture Content
Today…
• Introduction to technical analysis
– Basics & definitions
– Stock charts & chart types
– Moving Averages
– Trends / Channels
– Support & Resistance
– Volume
Technical Analysis? Huh?
• Don’t get intimidated when you hear
“technical analysis”
• Comes down to your supply and demand
– How is this different from fundamental analysis?
• Tries to make sense of market emotions by
studying market actions
Technical Analysis: Introduction to Stock Charts
CHART BASICS
Basic Terms
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Volatility
Fluctuations
52-week high / low
Price / trading range
Open / closing price
Charts
• Maps price performance
• Sheds light on supply
and demand
• “investment roadmap”
• Price / volume
relationship important
Chart Types - Line Charts
• Most basic of all charts
• Just a line that connects
the closing prices over a
time frame
• No trading range
Chart Types – Bar Chart
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Vertical line represents highs/lows of the day
Horizontal line represents closing price
Red = down
Blue/Black = up
Daily High
Closing Price
Daily Low
Price Gap
Chart Types – Candlestick Charts
• Vertical line represents the
trading range
• Wide bar represents open
and close
• White bar – Up and closes
above opening price
• Red Bar – down
• Black bar – up, but closes
below the opening price
Chart Basics – Time Scale
• Time Scale
– Dates along bottom of chart (varies from
seconds to decades)
– Common Types: intraday, daily, weekly, monthly
– Subtle differences between different time scales
Chart Basics – Time Scale
Daily Chart
Weekly Chart
Volume
• Amount of shares that
trade hands between
seller and buyers
• Price movements
more significant when
volume is above
average
Price and Volume
Average
Volume
Trends are your Friends
• Trend: general direction of stock
• Uptrend: higher highs, higher lows
Sometimes, trends difficult to see
Trendlines
• Simply put, a line
drawn connecting
three lows to
represent the overall
trend
• Upward trendline
represents support
Channels
• Two parallel trend lines that act as areas of
support and resistance (more later)
• Any break through the channel is a break of the
trend, otherwise the price should stay in range
Technical Analysis: Introduction to Stock Charts
SUPPORT / RESISTANCE
By Johns Wu & thebulltrader.com
Chart Analysis : Support
Price at which BUYERS > SELLERS consistently.
Buyers who missed out on the first dip will be
pressured to buy if price continues to respect the
support.
AMZN Example of Supports
AMZN retraces from a
monstrous rally to $60
AMZN stops tanking at
$60. NOT A
COINCIDENCE.
GOOG Support Psychology
$510. MANNNN, I should have
bought GOOG
$$$$$!!
GOOG skyrockets from
AWESOME earnings, but
should I buy it????
OK. I’m not
gonna miss
out again.
BUY @ $452
CAUTION:
Supports can
breakdown.
Support Breakdowns
SELL if support “breaks down”, because it
signifies that BUYERS no longer overpower
SELLERS.
Breakdowns are a BEARISH SELL signal.
You should have sold here,
at the BREAK DOWN.
Chart Analysis : Resistance
Price at which SELLERS overwhelm
BUYERS consistently.
When a stock makes a new high and
then retraces, sellers who missed out @
the previous peak will feel pressured to sell
when price climbs back to that level.
TM – Resistance Psychology
Finally! $138. I better
sell this time.
Should I sell?? Na, I’ll
take my chances.
I should have sold
when TM was $138!!
Resistance Breakouts
When price “breaks out” above resistance, it
becomes a new support level. *** IMPORTANT ***
Breakout signifies clear dominance of BUYERS.
(good time to buy)
This is a BULLISH BUY signal.
My favorite trade setup.
TGT Resistance Breakout
BREAKOUT!!
RESISTANCE BECOMES
SUPPORT
SHLD Breakout Trade
Technical Analysis: Introduction to Stock Charts
MOVING AVERAGES
Moving Averages (DMA or WMA)
• Most popular are 50-day and 200-day
• Shows the average price of the last # days and
plots it on a line
• Often acts as areas of support and/or resistance
WIRE – Support @ 10 WMA
WIRE – Support @ 10 WMA
CPA – Support at 20 & 50 DMA
CPA – Support at 20 & 50 DMA
20 DMA and 50 DMA
becomes points of
support for this stock
So…
• Charts are fundamental to technical analysis
• Important to understand what is shown on a
chart and the information it conveys
• Chart patterns and bases to come…
Technical Analysis: Introduction to Stock Charts
TOOLS FOR STOCK
CHARTS
Charting on StockCharts.com
Getting comprehensive stock charts
• Type in the company symbol
• Once you’re at the stock page, click on
annotate to draw your own trendlines.
• From there, you will get lots of tools for
analyzing stock charts
StockCharts.com
Annotating in StockCharts
Using Charts on Investors.com
• Log in using your username and password
(you all have one as of now)
• Enter a symbol for the stock and then click
on IBD Charts just below it
– There are links throughout the website that link
to IBD charts
– Right clicking on the chart will give you important
data for that day or week
Relative
Strength Line
Volume
Moving
averages
Homework / Reading
• “Technical Analysis: Introduction”
– Investopedia Tutorial
– Link is on the download page of the website
Next Week
• We’ll be going over strategies using charts to
buy stocks
– Timing market bottoms
– Identifying chart bases / patterns
– Timing your stock purchases (after you’ve done
your research / stock screens)
• This is going to be the most technical / complicated
part so make sure you understand the basics