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Dollar and Commodities
While the Dollar and currency markets are part of intermarket analysis, the Dollar is a bit of a wild card. As far as stocks are concerned, a weak Dollar is not bearish unless accompanied by a serious advance in commodity prices. Obviously, a big advance in commodities would be bearish for bonds. By extension, a weak Dollar is also generally bearish for bonds. A weak Dollar acts an economic stimulus by making US exports more competitive. This benefits large multinational stocks that derive a large portion of their sales overseas.
What are the effects of a rising Dollar? A countries currency is a reflection of its economy and national balance sheet. Countries with strong economies and strong balance sheets have stronger currencies. Countries with weak economies and big debt burdens are subject to weaker currencies. A rising Dollar puts downward pressure on commodity prices because many commodities are priced in Dollars, such as oil. Bonds benefit from a decline in commodity prices because this reduces inflationary pressures. Stocks can also benefit from a decline in commodity prices because this reduces the costs for raw materials.
Daily Candlestick Chart for PRPM
[img]stockcharts.com/c-sc/sc?s=PRPM
"What" is More Important than "Why"
In his book, The Psychology of Technical Analysis, Tony Plummer paraphrases Oscar Wilde by stating, "A technical analyst knows the price of everything, but the value of nothing". Technicians, as technical analysts are called, are only concerned with two things:
What is the current price?
What is the history of the price movement?
The price is the end result of the battle between the forces of supply and demand for the company's stock. The objective of analysis is to forecast the direction of the future price. By focusing on price and only price, technical analysis represents a direct approach. Fundamentalists are concerned with why the price is what it is. For technicians, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspect. Technicians believe it is best to concentrate on what and never mind why. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it. Who needs to know why?
ADX: The average directional index, or ADX, was developed by J. Welles Wilder as a measure of a current market trend's strength. The ADX is derived from two directional indicators, known as DI and DI-, which are in turn derived from the directional movement index (DMI).
ADX is calculated by finding the difference of DI and DI-, as well as the sum of DI and DI-. The difference is divided by the sum, and the resulting number multiplied by 100. The product is known as the directional index, or DX. A moving average is then taken of DX, typically over a fourteen-day period (although any number of periods can be used.) This final moving average is the ADX.
The ADX takes the form of a number from 0 to 100. A value of 0 indicates that the market is equally likely to move in either a positive or negative direction, meaning that there is no overall market trend. A value of 100 indicates that the market is exclusively moving in either a positive or negative direction, indicating an extremely strong trend. Values of greater than 60 are uncommon in practice, and any value of greater than 40 is considered to be a strong trend. Any value less than 20 is considered to be a weak trend, and may signal an upcoming reversal. Because the ADX is derived from both positive and negative directional indicators, it only measures the magnitude of a trend rather than its direction.
Non-Random Walk Theory
A Non-Random Walk Down Wall Street is a collection of essays offering empirical evidence that valuable information can be extracted from security prices. Lo and MacKinlay used powerful computers and advanced econometric analysis to test the randomness of security prices. Although this book is a heavy read, the findings should be of interest to technical analysts and chartists. In short, this book documents the presence of predictable components in stock prices.
Just prior to this book, Andrew Lo wrote a paper for the Journal of Finance in 2000: Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation. Harry Mamaysky and Jiang Wang also contributed. The paper's opening remarks say it all:
"Technical analysis, also known as charting, has been part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis. The presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution conditioned on specific technical indicators, such as head-and-shoulders or double-bottoms, we find that over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value." This paper can be found at www.nber.org
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Daily Candlestick Chart for HEMP
[img]stockcharts.com/c-sc/sc?s=HEMP
Dark Cloud Cover: A bearish reversal pattern that continues the uptrend with a long white body. The next candle opens at a new high then closes below the midpoint of the body of the first candle. The pattern is more signficant if the second candle's body is below the center of the previous body. The pattern is casting a “dark cloud” over the bullish trend that preceded it. Confirmation of the pattern is achieved when another black candle, of smaller size, forms after the second candle
Support and Resistance Zones
Because technical analysis is not an exact science, it is useful to create support and resistance zones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case. Each security has its own characteristics, and analysis should reflect the intricacies of the security. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, then it is best to use support and resistance zones. These are only meant as general guidelines, and each trading range should be judged on its own merits.
Returning to the analysis of Halliburton (HAL), we can see that the November high of the trading range (33 to 44) extended more than 20% past the low, making the range quite large relative to the price. Because the September support break forms our first resistance level, we are ready to set up a resistance zone after the November high is formed, probably around early December. At this point though, we are still unsure if a large trading range will develop. The subsequent low in December, which was just higher than the October low, offers evidence that a trading range is forming, and we are ready to set the support zone. As long as the stock trades within the boundaries set by the support and resistance zone, we will consider the trading range to be valid. Support may be looked upon as an opportunity to buy, and resistance as an opportunity to sell.
Chart Basics
A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as time series plots.
On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right. The price plot for IBM extends from January 1, 1999 to March 13, 2000.
Technicians, technical analysts and chartists use charts to analyze a wide array of securities and forecast future price movements. The word "securities" refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures or market indices. Any security with price data over a period of time can be used to form a chart for analysis.
Daily Candlestick Chart for ACCP
[img]stockcharts.com/c-sc/sc?s=ACCP
Irrational Exuberance Ties with Technical Analysis
Many of the theories put forth in this book fall in the realm of behavioral finance or behavioral economics. Behavioral finance is considered a branch of technical analysis. In fact, Irrational Exuberance was required reading for the Chartered Market Technician (CMT) exam on 2011. Behavioral finance is an attempt to understand the behavior of investors and institutions when investing in stocks, bonds, real estate, tulips or other securities. What prompts individuals to buy or sell a security? How do investors handle risk or loss? Why do speculative bubbles appear and then burst? Is there such thing as the dumb money and the smart money? Shiller sheds light on the investing process by highlighting the key factors that led to Irrational Exuberance in the late 1990's.
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Daily Candlestick Chart for MGLT
[img]stockcharts.com/c-sc/sc?s=MGLT
An Oldie but Goodie
Much of our understanding of chart patterns can be attributed to the work of Richard Schabacker. His 1932 classic, Technical Analysis and Stock Market Profits, laid the foundations for modern pattern analysis. In Technical Analysis of Stock Trends (1948), Edwards and Magee credit Schabacker for most of the concepts put forth in the first part of their book. We would also like to acknowledge Messrs. Schabacker, Edwards and Magee, and John Murphy as the driving forces behind these articles and our understanding of chart patterns.
Pattern analysis may seem straightforward, but it is by no means an easy task. Schabacker states:
The science of chart reading, however, is not as easy as the mere memorizing of certain patterns and pictures and recalling what they generally forecast. Any general stock chart is a combination of countless different patterns and its accurate analysis depends upon constant study, long experience and knowledge of all the fine points, both technical and fundamental, and, above all, the ability to weigh opposing indications against each other, to appraise the entire picture in the light of its most minute and composite details as well as in the recognition of any certain and memorized formula.
Even though Schabacker refers to "the science of chart reading", technical analysis can at times be less science and more art. In addition, pattern recognition can be open to interpretation, which can be subject to personal biases. To defend against biases and confirm pattern interpretations, other aspects of technical analysis should be employed to verify or refute the conclusions drawn. While many patterns may seem similar in nature, no two patterns are exactly alike. False breakouts, bogus reads and exceptions to the rule are all part of the ongoing education.
Careful and constant study are required for successful chart analysis. On the AMZN chart above, the stock broke resistance from a head and shoulders reversal. While the trend is now bearish, analysis must continue to confirm the bearish trend.
Novellus Systems, Inc. (NVLS) chart patterns example chart from StockCharts.com
Novellus (NVLS)[Nvls]
Some analysts might have labeled the NVLS chart as a head and shoulders pattern with neckline support around 17.50. Whether or not this is robust remains open to debate. Even though the stock broke neckline support at 17.50, it repeatedly moved back above its support break. This refusal might have been taken as a sign of strength and justified a reassessment of the pattern.
Daily Candlestick Chart for SANP
[img]stockcharts.com/c-sc/sc?s=SANP
Bank of England: The Bank of England is the central bank of the United Kingdom. Sometimes known as the 'Old Lady' of Threadneedle Street, the Bank was founded in 1694, nationalised on 1 March 1946, and gained independence in 1997. Standing at the centre of the UK's financial system, the Bank is committed to promoting and maintaining monetary and financial stability as its contribution to a healthy economy.
The Bank of England has been in place for more than three hundred years, although it wasn't nationalized until 1946. It serves a dual role as both a consumer bank and a government bank. As such, the "Old Lady of Threadneedle Street," as the Bank of England is often called, holds a primary role in the financial status of the United Kingdom.
In 1998 the bank's governing body was changed by the Bank of England Act. Now the Bank of Directors is composed of sixteen non-executive directors, two deputy governors, and the bank's governor. This has modified the bank's responsibilities; their two main purposes now include maintaining the UK's Monetary and financial stability, although it still has as many small-scale account holders as it does large corporate accounts.
In regards to the foreign exchange market, the Bank of England manages the Exchange Equalisation Account. The EEA was formed in 1932 and is the account responsible for influencing the exchange rate of the UK's gold reserves. It also holds foreign currencies and gold for trading purposes
What is a small-cap stock? Mid-cap? Large-cap?
These terms refer to a company's market capitalization, which is the number of outstanding shares times the stock's price.
Small cap: $250 Million to $2 Billion, approximately
Mid cap: $2 Billion to $10 Billion, approximately
Large cap: $10 Billion and up, approximately
Staples/Discretionary Ratio
Chartists can also compare the performance of the consumer discretionary sector to the consumer staples sector for clues on the economy. Stocks in the consumer discretionary sector represent products that are optional. These industry groups include apparel retailers and produces, shoe retailers and produces, restaurants and autos. Stocks in the consumer staples sector represent products that are necessary, such as soap, toothpaste, groceries, beverages and medicine. The consumer discretionary sector tends to outperform when the economy is buoyant and growing. This sector underperforms when the economy is struggling or contracting.
Chartists can compare the performance of these two with a simple ratio chart of the Consumer Discretionary SPDR (XLY) divided by the Consumer Staples SPDR (XLP). The chart above shows this ratio with the S
Daily Candlestick Chart for EVPH
[img]stockcharts.com/c-sc/sc?s=EVPH
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Validation of Trend Lines
It takes two or more points to draw a trend line. The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line. It can sometimes be difficult to find more than 2 points from which to construct a trend line. Even though trend lines are an important aspect of technical analysis, it is not always possible to draw trend lines on every price chart. Sometimes the lows or highs just don't match up, and it is best not to force the issue. The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity.
The chart of Microsoft (MSFT) shows an uptrend line that has been touched 4 times. After the third touch in Nov-99, the trend line was considered a valid line of support. Now that the stock has bounced off of this level a fourth time, the soundness of the support level is enhanced even more. As long as the stock remains above the trend line (support), the trend will remain in control of the bulls. A break below would signal that net-supply was increasing and that a change in trend could be imminent.
Daily Candlestick Chart for VIZS
[img]stockcharts.com/c-sc/sc?s=VIZS
Broadening Formation: A broadening formation is an example of a consolidation pattern and a highly useful tool in the prediction of the likelihood of a reversal in the direction of a current trend. When found in an uptrend it indicates not a continuation of that trend, but a near-term reversal of the price action.
The broadening formation occurs when the fluctuation within the price produces a series of higher highs and of lower lows that steadily widen over time and are generally thought to be found only in found in topping formations where they are considered to be the result of unrealistic expectations of bullish investors.
Unlike the majority of other consolidation patterns, broadening formations feature increasingly wide ranges and are subject to much greater levels of volatility as time passes. Volume levels increase as the share price rises, which although normally indicates a bullish position rallies in this instance usually prove to be very short lived and the following declines are prone to decimating former support levels leading to an eventual collapse.
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Daily Candlestick Chart for WSHE
[img]stockcharts.com/c-sc/sc?s=WSHE
Binary Options: In finance, binary option (also called fixed return option, all or nothing or digital option)is a type of option where the payoff is either some fixed amount of some asset or nothing at all.[1] Binary options have been available since the middle of 2008. Binary options are trading options that pay out a pre-set and fixed amount if the underlying asset on which the option is based reaches the trader’s selected ‘direction’ (up or down compared with advertised value at the time of purchasing that option) at expiry time.[2]
The Binary Option is a prediction on which way the price of a stock, commodity, index or foreign currency will move by a designated expiration time. Traders can never purchase or own the asset, they can only predict the direction that the asset will go. There are only two possible outcomes and the price of the asset does not matter, all that matters is if the prediction was correct or incorrect.
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Daily Candlestick Chart for BGEM
[img]stockcharts.com/c-sc/sc?s=BGEM
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Accumulative Swing Index: The accumulative swing index, or ASI, is a tool developed by J. Welles Wilder to measure the breakout potential of a given market.
The ASI takes the form of a number from 100 to -100, with positive values indicating an upward trend and negative values indicating a downward trend. Once calculated, the ASI can be charted in conjunction with a candlestick chart. The chief value of the ASI is that it's susceptible to the same technical analysis tools as a candlestick chart, allowing traders to use trendlines, wedges, triangles and other tools in order to determine support and resistance levels. However, ASI charts are much simpler and smoother than candlestick charts, making them both easier to analyze and less susceptible to indicating false breakouts. If the absolute value of the ASI for a given day exceeds the absolute value of the ASI at the time of a previous breakout, a new breakout from the trend is imminent, and traders can take positions accordingly.
The ASI is based on Wilder's swing index, which is an extremely complex calculation that incorporates high, low and close prices for an asset along with numerous other variables, some of them specific to certain kinds of markets. On its own, the swing index isn't particularly useful as a predictive tool, but the swing indexes for several successive days can be incorporated by another calculation into the ASI, which fulfills Wilder's original intention for the measure. Full instructions for calculating the swing index and ASI are available in Wilder's "New Concepts in Technical Trading Systems", and a number of popular pieces of trading software are able to calculate the ASI automatically.
Daily Candlestick Chart for CDXC
[img]stockcharts.com/c-sc/sc?s=CDXC
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Kagi Chart Parameters
There are three ways to specify the reversal amount that is used in the construction of a Kagi chart: Absolute points, Percentage, and Average True Range (ATR).
Absolute Points
With the Absolute Points method, you specify the number of points that a stock must reverse before a change in the Kagi line occurs. The advantage of this method is that it is very easy to understand and predict where reversals will occur. The disadvantage is that the point value needs to be different for high priced stocks than for low priced stocks. Typically, you will need to choose a value that is roughly 1/20th the average price of the stock during the time frame you want to chart. Common values include 1, 2, 4, and 10.
Important Note: The Default for Kagi "Pts" method is currently 14, which is too large for most stocks. You'll need to change it to a smaller number to get a useful chart.
Percentage
The Percentage method causes a reversal each time prices move more than the percentage that you specified. This has the advantage of not needing to change the setting if the value of the stock changes significantly during the time period being charted. The disadvantage is that it isn't easy to predict exactly where the next reversal will occur.
Average True Range (ATR)
The Average True Range (ATR) method uses the value of the ATR indicator to determine where the next reversal should occur. The ATR indicator is designed to ignore the normal volatility of a stock, and thus it can "automatically" find good reversal levels regardless of the value or volatility of the stock selected. ATR with a value of 14 is the default value for Kagi charts and should generate a very usable chart in most cases.
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Daily Candlestick Chart for SUGO
[img]stockcharts.com/c-sc/sc?s=SUGO
Fat Tails and Trends
Historic stock returns are not normally distributed. What does this mean? If one were to measure the height of 1000 people and plot the distribution, this distribution would form the classic bell curve. The most recurring height (value) would be in the middle and the remaining heights would be equally distributed on either side. Furthermore, 68.5% of all values would fall within ±1 standard deviation of the mean, 95.4% would fall within ±2 standard deviations and 99.7% would fall within ±3 standard deviations. The solid black line shows a typical bell curve with a normal distribution.
Statisticians have found that a distribution of stock returns forms a curve with "fat tails". For example, this could be a distribution of the 1000 weekly returns for a basket of stocks. In a normal distribution, 99.7% of all these returns would be within ±3 standard deviations of the mean. This, however, is not the case for stock returns. Instead, the distribution has fat tails (black dotted lines). This means a relatively high number of returns fall outside the normal distribution. Some are lower and some are higher. These abnormal returns provide evidence of extended moves, outsized moves or trends. Note that the image above is just a hypothetical example to illustrate a point.
Daily Candlestick Chart for ONTC
[img]stockcharts.com/c-sc/sc?s=ONTC
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Investor Hub Alerts: Sign up for 'STOCKGOODIES PLAYS OF THE WEEK ' E-Mail List UPDATE; 5-1-22 courtesy of charting /\ wit tweezer top calls /\ Tony @Montana_Trades Really good study sheet on Candlestick Patterns [-chart]pbs.twimg.com/media/FRn8188XMAAdZvk?format=jpg&name=small[/chart]
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