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Where Is Support Established?
Support levels are usually below the current price, but it is not uncommon for a security to trade at or near support. Technical analysis is not an exact science and it is sometimes difficult to set exact support levels. In addition, price movements can be volatile and dip below support briefly. Sometimes it does not seem logical to consider a support level broken if the price closes 1/8 below the established support level. For this reason, some traders and investors establish support zones.
Daily Candlestick Chart for UNDT
[img]stockcharts.com/c-sc/sc?s=UNDT
Elder Impulse System ~ Timeframe
The Elder Impulse System can be used across different timeframes, but trading should be in harmony with the bigger trend. Elder recommends setting your trading timeframe and then calling it intermediate. Multiply this intermediate timeframe by five to get your long-term timeframe. Traders using daily charts for an intermediate timeframe can simply move to weekly charts for a long-term timeframe. The choice is not as clear cut for smaller or longer timeframes. A little judgment is required. Traders using 10-minute charts to chart their "intermediate" timeframe can use 60-minute charts for their "long-term" timeframe. Investors using weekly charts can base the bigger picture on monthly charts. Once the trading timeframe is decided, chartists can then use the longer timeframe to identify the bigger trend. This can even be accomplished using one chart. Chart 2 shows daily bars with the Elder Impulse System and the 65-day exponential moving average, which is five times the 13-day EMA. The long-term trend is considered up when SPY is above the 65 day EMA or when MACD (1,65,1) is positive.
Again, other methods for determining the weekly trend can be used instead of using the MACD(1,65,1) zero crossover on the daily chart. We will use that technique in this article to simplify the charts and discussion.
Disparity Index: The disparity index is a percentage measurement for the position of the current closing price of an asset relative to that asset's moving average. Traders commonly attribute this measurement to Steve Nison, based on his book Beyond Candlesticks.
The disparity index can take either a positive or a negative value. A positive value indicates that the asset's price is rapidly increasing, while a negative value indicates that the price is rapidly decreasing. A value of zero means that the asset's current price is exactly consistent with its moving average.
The disparity index crossing the zero line reflects an extremely rapid change in the trend of a given asset, and is therefore a strong early-warning indicator of the asset's increasing momentum.
Nison's book suggests that the disparity index can indicate whether an asset is overbought (in the case of a positive value) or oversold (in the case of a negative.) Since overbought and oversold assets are very vulnerable to rapid price reversals, the disparity index is a good indicator of when following the trend of a given asset might be a dangerous proposition.
The top of the market cycle is marked by relative strength in materials and energy. These sectors benefit from a rise in commodity prices and a rise in demand from an expanding economy. The tipping point for the market comes when leadership shifts from energy to consumer staples. This is a sign that commodity prices are starting to hurt the economy.
Daily Candlestick Chart for ADVC
[img]stockcharts.com/c-sc/sc?s=ADVC
$HEMP BarChart Trader's Cheat Sheet
http://www.barchart.com/cheatsheet.php?sym=HEMP
Daily Candlestick Chart for BRYN
[img]stockcharts.com/c-sc/sc?s=BRYN
Daily Candlestick Chart for ERBB
[img]stockcharts.com/c-sc/sc?s=ERBB
Double Top: Any chart pattern similar to the one show below is known as a ‘Double Top’ and it is arguably one of the most widely recognized and compelling technical signals known amongst the forex trading community. It is considered a reliable test of a previous high or low.
The double top formation is identified as a distinctive chart pattern revealing a rally to new high followed by a moderate retreat which is then in turn followed by a second rally in which to test the new high.
The double top chart pattern classically reveals itself by occurring in the shape of the letter ‘M’. A third rally added to this would result in the occurrence of a triple top resulting in three peaks.
A double top is considered a bearish and is generally thought to be stronger when the equal points are further apart and the price objective usually occurs at an equal distance beyond the correction low.
Sometimes, there is a price cluster with a high or low spike sticking out. A price cluster is an area where prices are grouped within a tight range over a period of time. The price cluster can be used to draw the trend line, and the spike can be ignored. The Coca Cola (KO) chart shows an internal trend line that is formed by ignoring price spikes and using the price clusters, instead. In October and November 1998, Coke formed a peak, with the November peak just higher than the October peak (red arrow). If the November peak had been used to draw a trend line, then the slope would have been more negative, and there would have appeared to be a breakout in Dec-98 (gray line). However, this would have only been a two-point trend line, because the May-June highs are too close together (black arrows). Once the Dec-99 peak formed (green arrow), it would have been possible to draw an internal trend line based on the price clusters around the Oct/Nov-98 and the Dec-99 peaks (blue line). This trend line is based on three solid touches, and it accurately forecasts resistance in Jan-00 (blue arrow).
Daily Candlestick Chart for HCBP
[img]stockcharts.com/c-sc/sc?s=HCBP
Breakaway gaps are the exciting ones. They occur when the price action is breaking out of their trading range or congestion area. To understand gaps, one has to understand the nature of congestion areas in the market. A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so. The area near the top of the congestion area is usually resistance when approached from below. Likewise, the area near the bottom of the congestion area is support when approached from above. To break out of these areas requires market enthusiasm and, either, many more buyers than sellers for upside breakouts or more sellers than buyers for downside breakouts.
Daily Candlestick Chart for AEMD
[img]stockcharts.com/c-sc/sc?s=AEMD
Random Versus Non-Random
The great debate continues to rage between random walkers and non-random walkers. Two competing books best represent these theories. Originally written by Burton Malkiel in 1973, A Random Walk Down Wall Street has become a classic in investment literature. The book has been revised numerous times with new editions as recently as 2007. Malkiel, a Princeton Economist, argues that price movements are largely random and investors cannot outperform the major indices.
Written by Andrew W. Lo and A. Craig MacKinlay in 2001, the appropriately entitled A Non-Random Walk Down Wall Street provides the counter argument. Lo, an MIT Finance professor and MacKinlay, a Wharton Finance professor, argue that price movements are not all that random and that predictable components do indeed exist. Let the battle begin!
Where Is Resistance Established?
Resistance levels are usually above the current price, but it is not uncommon for a security to trade at or near resistance. In addition, price movements can be volatile and rise above resistance briefly. Sometimes it does not seem logical to consider a resistance level broken if the price closes 1/8 above the established resistance level. For this reason, some traders and investors establish resistance zones.
Daily Candlestick Chart for MNLU
[img]stockcharts.com/c-sc/sc?s=MNLU
$PSPW BarChart Trader's Cheat Sheet
http://www.barchart.com/cheatsheet.php?sym=PSPW
Daily Candlestick Chart for AXLX
[img]stockcharts.com/c-sc/sc?s=AXLX
$UNDT BarChart Trader's Cheat Sheet
http://www.barchart.com/cheatsheet.php?sym=UNDT
DeMarker Indicator: The Demarker Indicator is a technical analysis tool developed by Tom Demarker for identifying high-risk buying or selling areas in a given market.
Two variants of the Demarker Indicator exist, one bounded by values from -100 to 100, the other bounded by values from 0 to 1. The basic principle behind the Indicator is the same in either case. If the high price for a period is higher than the previous period's high, the DeMax variable for that period is the difference between the highs; the DeMin variable for the period works similarly for the low prices. The Demarker Indicator is then the moving average of DeMax divided by the sum of the moving averages of DeMax and DeMin. Thus, the higher the value of DeMax relative to DeMin, the greater the value of the Demarker Indicator.
On the 0 to 1 Demarker Indicator scale, a value anywhere above .7 indicates that a downward price turn is imminent, while a value anywhere below .3 indicates that the price will shortly turn upward. Values between .3 and .7 indicate relatively low-risk periods for entering a given asset market. Thus savvy traders can use the Demarker Indicator either to determine when to enter a market, or when to buy or sell an asset in order to capitalize on probable imminent price trends.
Daily Candlestick Chart for PSID
[img]stockcharts.com/c-sc/sc?s=PSID
Methods to Establish Support and Resistance?
Support and resistance are like mirror images and have many common characteristics.
Highs and Lows
Support can be established with the previous reaction lows. Resistance can be established by using the previous reaction highs.
The above chart for Halliburton (HAL) shows a large trading range between Dec-99 and Mar-00. Support was established with the October low around 33. In December, the stock returned to support in the mid-thirties and formed a low around 34. Finally, in February the stock again returned to the support scene and formed a low around 33 1/2.
After each bounce off support, the stock traded all the way up to resistance. Resistance was first established by the September support break at 42.5. After a support level is broken, it can turn into a resistance level. From the October lows, the stock advanced to the new support-turned-resistance level around 42.5. When the stock failed to advance past 42.5, the resistance level was confirmed. The stock subsequently traded up to 42.5 two more times after that and failed to surpass resistance both times.
$PNGB BarChart Trader's Cheat Sheet
http://www.barchart.com/cheatsheet.php?sym=PNGB
Daily Candlestick Chart for NWMT
[img]stockcharts.com/c-sc/sc?s=NWMT
Management
In order to execute a business plan, a company requires top-quality management. Investors might look at management to assess their capabilities, strengths and weaknesses. Even the best-laid plans in the most dynamic industries can go to waste with bad management (AMD in semiconductors). Alternatively, even strong management can make for extraordinary success in a mature industry (Alcoa in aluminum). Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can management deliver on its promises? If management is a problem, it is sometimes best to move on.
Daily Candlestick Chart for HPGI
[img]stockcharts.com/c-sc/sc?s=HPGI
Analyst Bias ~ Weaknesses of Technical Analysis
Just as with fundamental analysis, technical analysis is subjective and our personal biases can be reflected in the analysis. It is important to be aware of these biases when analyzing a chart. If the analyst is a perpetual bull, then a bullish bias will overshadow the analysis. On the other hand, if the analyst is a disgruntled eternal bear, then the analysis will probably have a bearish tilt.
$ILVC BarChart Trader's Cheat Sheet
http://www.barchart.com/cheatsheet.php?sym=ILVC
Daily Candlestick Chart for CONX
[img]stockcharts.com/c-sc/sc?s=CONX
Beige Book: A summary of economic conditions around the United States compiled for the Federal Reserve Board. Each Federal Reserve Bank gathers anecdotal information on current economic condition in its District through reports from Bank and Branch directors and interviews with key businessmen, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. This report allows outsiders to know what the Fed governors are looking at as they prepare for their upcoming FOMC meeting.
$KKPT BarChart Trader's Cheat Sheet
http://www.barchart.com/cheatsheet.php?sym=KKPT
Daily Candlestick Chart for MEEC
[img]stockcharts.com/c-sc/sc?s=MEEC
Volume will (should) pick up significantly, for not only the increased enthusiasm, but many are holding positions on the wrong side of the breakout and need to cover or sell them. It is better if the volume does not happen until the gap occurs. This means that the new change in market direction has a chance of continuing. The point of breakout now becomes the new support (if an upside breakout) or resistance (if a downside breakout). Don't fall into the trap of thinking this type of gap, if associated with good volume, will be filled soon. It might take a long time. Go with the fact that a new trend in the direction of the stock has taken place, and trade accordingly. Notice in the chart below how prices spent over 2 months without going lower than about 41. When they did, it was with increased volume and a downward breakaway gap.
General Motors Corp. (GM) Breakaway Gap example chart from StockCharts.com
A good confirmation for trading gaps is if they are associated with classic chart patterns. For example, if an ascending triangle suddenly has a breakout gap to the upside, this can be a much better trade than a breakaway gap without a good chart pattern associated with it. The chart below shows the normally bullish ascending triangle (flat top and rising, lower trend line) with a breakaway gap to the upside, as you would expect with an ascending triangle.
Ambac Financial Group, Inc. (ABK) Breakaway Gap example chart from StockCharts.com
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