Technical Analysis serves to determine "when to buy or when to sell" shares. It is concerned with the use of graphs to study historical price and volume patterns in order to predict the future course of share prices. It determines the 'optimum time to buy and sell shares' as opposed to the "intrinsic value' of shares.

Step 3: Get your Timing Right

With technical analysis, timing is the critical success factor.

• • • • • • • Technical Analysis discounts fundamental factors and these fundamentals are reflected in the price and volume.

Price is determined by supply and demand, while volume is determined by commitment to supply and demand.

Price and volume form trends and these trends form patterns.

The analyst's job is to identify these patterns for future buying and selling

opportunities.

The key assumption upon which technical analysis is based is that the sum of everything that everyone knows or feels about a share, sector or market is reflected in the price and volume.

Prices move when there is a change in the feeling or when new knowledge becomes available.

Technical analysis is the study of the share's

price and volume

chart to search for historical patterns which may help to predict the future price patterns.

Share prices move in a series of peaks and troughs. The direction of those peaks and troughs determine the direction or "trend" of the market. There are three kinds of trend, namely:

An

up-trend

- there are more buyers than sellers (i.e. demand exceeds supply); A

down-trend

- there are more sellers than buyers (i.e. supply exceeds demand); A

sideways trend

- there is a battle for supremacy between the buyers and sellers (i.e. supply and demand are equal).

USEFUL TIPS

• It must be remembered that no indicator should be used alone.

• Always put a 10-day moving average on all your technical indicators as further confirmation.

• We suggest that you start by using these few technical indicators discussed below as a starting point.

Over the years, technicians have devised a number of different ways of physically representing market data on charts.

The most popular charts are the closing line chart an the bar chart.

Closing line charts

- The closing line chart is the simplest price chart to read and represents the relationship between time and price.

It is used in conjunction with moving averages to reveal the main trend of the share and to provide buy and sell signals.

Closing line charts are useful for longer-term investing as they highlight the primary cycle (i.e. Bull or Bear market) better.

Bar charts

- A bar chart adds more information to a price chart as it also represents the relationship between the highest and lowest prices recorded during a particular trading period (i.e. daily or weekly).

These two values are plotted and joined with a vertical line or 'bar'. The length of this vertical line represents the trading range or volatility for that share for that particular period.

The closing price for the session is then indicated on this vertical line as a short horizontal line or 'tick' protruding to the right.

The interpretation of the bar chart is based on chart formations and the relationship between price and volume. These charts are used mainly for jobbing or short-term speculating. They also highlight chart patterns, which are of a much shorter-term nature e.g. exhaustion and breakaway price gaps, key reversal days, etc.

High Close Open Low

Once you have established whether the current market is a 'trending' or 'trading market' and where the market is now compared to the primary, secondary cycles and short-term daily fluctuations, then you consider getting your timing right. Moving averages are very basic tools and they are your starting point when it comes to technical indicators.

•

Moving Averages

- Moving averages are probably the most widely used method of identifying trend reversals, since they do • a good job of smoothing out these random fluctuations. The moving average serves two functions, namely: To smooth out the daily fluctuations in the share's price so that the basic underlying trend and cycle can be seen; It can also give you "buy" and "sell" signals. A buy or bullish signal is given when the price crosses above the average. A sell or bearish signal occurs when it moves below.

Use two different moving average time periods - the longer period for the trend, while the shorter period as a trigger. For example, start with a 21& 40-day Simple Moving Average (SMA).

•

The OB/OS indicator

- The OB/OS indicator is an oscillator (i.e. it moves above and below a zero line) has been developed to calculate the

percentage change between the moving average and the price

.

Early watch signals

indicator crosses above or below moving average.

occur when the OB/OS its 10-day –

Buy signals

occur when the OB/OS indicator crosses above zero line into overbought territory.

•

Sell signals

occur when the OB/OS indicator crosses below zero line into oversold territory.

•

The Momentum indicator

- The Momentum indicator is also and oscillator and measures the

rate of change in price

price itself.

as opposed to

Early watch signals

occur when the Momentum indicator crosses above or below its 10-day moving average •

Buy signals

indicator occur crosses when above the oscillator Momentum line into overbought territory.

•

Sell signals

occur when the Momentum indicator crosses territory.

below oscillator line into oversold

The MACD indicator –

is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line, is then plotted on top of the MACD to show buy/sell opportunities.

The result is an indicator that oscillates above and below zero.

•

Early watch signals

occur when the MACD indicator crosses above or below its trigger line.

•

Buy signals

occur when the MACD indicator crosses above oscillator line into overbought territory.

•

Sell signals

occur when the MACD indicator crosses below oscillator line into oversold territory.

The Relative Strength Index (RSI) indicator –

is a method of measuring the relative strength of a share against itself. This indicator works on the principle of what goes up for a "time“ must come down and is a simple ratio of how much the share goes up in a certain period of time versus how much it goes down in the same period. Put another way, imagine an elastic band. If you stretch it too far and let one side go, it will snap back. In the same way, if the market has risen or fallen too far, it will 'snap‘ back.

• Early watch signals occur when the RSI indicator crosses above or below its 10-day moving average. •

Buy signals

occur when the RSI indicator

crosses above 30% level.

•

Sell signals

occur when the RSI indicator

crosses below 70% level.

The Slow Stochastic indicator

– measures the relationship between the close, high and low and is based on the assumption that closing prices tend to accumulate near the top of each period's trading range during price up-trends, and at the bottom during price downtrends .

• • Early watch signals occur when the Stochastic indicator crosses above or below its %D-line.

Buy signals

occur when the Stochastic indicator

crosses above 20% level.

Sell signals

occur when the Stochastic indicator

crosses below 80% level.

Volume Indicators

- The volume is the number of shares traded within a particular period. This is recorded using a straightforward histogram (vertical bar graph) at the base of the price chart.

Interpretation of the bar chart is based on the relationship between price and volume. The analyst will attempt to identify periods of accumulation, which usually precede an upward move, or to establish trends, which are likely to continue for some time in the same direction .

The On Balance Volume (OBV)

indicator - The OBV indicator is a running total of volume. It creates a volume line along the bottom of a price chart.

If the share price close is positive, that day's volume is added.

If the days close was lower, the volume is subtracted.

So on up days, volume is added. And on down days, the volume is subtracted.

The result is a fluctuating line.

The Volume Price Trend (VPT) indicator -

The interpretation of the VPT indicator is similar to the interpretation of On Balance Volume (OBV) indicator.

trends, which are likely to continue for some time in the same direction .

Many investors feel that the VPT more

accurately illustrates the flow of money

into and out of a share than does OBV.

This is because OBV adds the same amount of volume to the indicator regardless of whether the share closes up a fraction or doubles in price. However, the VPT adds only a small portion of volume to the indicator when the price changes by a small percentage and adds a large portion of volume to the indicator when prices change by a large percentage.

•

Relative Strength analysis

is often used to compare a share or sector's performance with a market index. It is also useful in developing spreads (i.e., buy the best performer and sell the weaker issue).

The Relative Strength indicator -

Strength Analysis compares Relative two data streams to show how the shares are performing relative to the JSE Overall index.

If the trend of the Relative Strength graph is

upwards

, then the share or sector is

outperforming

relative to the underlying share or sector.

If the trend of the Relative Strength graph is

downwards

, then the share or sector is

underperforming

relative to the underlying share or sector.

If the trend of the Relative Strength graph is

moving sideways

, then the share or sector is

market performing or neutral

relative to the underlying share or sector.

• • • • • • Establish the trend – Is it upwards, downwards or sideways?

Establish the cycles – Is it a Bull or Bear market? Or Correction or Rally?

Moving Averages - Start with a 21 & 40-day moving average Establish Overbought and Oversold levels - OB/OS; Momentum; RSI, Slow Stochastic and MACD. Volume Analysis - Volume histogram; On Balance Volume (OBV) and Volume Price Trend (VPT) indicators.

Relative Strength Analysis - Compare share or sector relative to the JSE Overall Index.

Step #3 would have provided you with a more in-depth understanding of how to use technical analysis indicators to assist you buying and selling shares at the right time!

Activity: Compile graphs using the technical analysis indicators you have learned to the shares in your Watchlist.