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Price Discounts Everything
This theorem is similar to the strong and semi-strong forms of market efficiency. Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technical analysts, fundamental analysts and many others. It would be folly to disagree with the price set by such an impressive array of people with impeccable credentials. Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.
Economic Forecast
First and foremost in a top-down approach would be an overall evaluation of the general economy. The economy is like the tide and the various industry groups and individual companies are like boats. When the economy expands, most industry groups and companies benefit and grow. When the economy declines, most sectors and companies usually suffer. Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market as well. Below is a chart of the S
Daily Candlestick Chart for ABHI
[img]stockcharts.com/c-sc/sc?s=ABHI
Weaknesses of Technical Analysis Analyst Bias
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.
Open to Interpretation
Daily Candlestick Chart for VIZS
[img]stockcharts.com/c-sc/sc?s=VIZS
Daily Candlestick Chart for ORRV
[img]stockcharts.com/c-sc/sc?s=ORRV
Introduction to Chart Patterns
There are hundreds of thousands of market participants buying and selling securities for a wide variety of reasons: hope of gain, fear of loss, tax consequences, short-covering, hedging, stop-loss triggers, price target triggers, fundamental analysis, technical analysis, broker recommendations and a few dozen more. Trying to figure out why participants are buying and selling can be a daunting process. Chart patterns put all buying and selling into perspective by consolidating the forces of supply and demand into a concise picture. As a complete pictorial record of all trading, chart patterns provide a framework to analyze the battle raging between bulls and bears. More importantly, chart patterns and technical analysis can help determine who is winning the battle, allowing traders and investors to position themselves accordingly.
In many ways, chart patterns are simply more complex versions of trend lines. It is important that you read and understand our articles on Support and Resistance as well as Trend Lines before you continue.
Chart pattern analysis can be used to make short-term or long-term forecasts. The data can be intraday, daily, weekly or monthly and the patterns can be as short as one day or as long as many years. Gaps and outside reversals may form in one trading session, while broadening tops and dormant bottoms may require many months to form.
Amazon.com, Inc. (AMZN) chart patterns example chart from StockCharts.com
Amazon (AMZN)[Amzn]
CIENA Corp. (CIEN) chart patterns example chart from StockCharts.com
CIENA (CIEN)[CIEN]
Bond Auction: A government bond auction is the process of selling short and long-term government bonds to investors in an attempt to minimize the cost of financing national debt.
The process starts with the central bank announcing how much money it intends to borrow. Details like the term length of the bonds and the date of the auction are included in the announcement.
Interested market players like broker-dealers, institutions, and individual investors then submit the amount of bonds that they’re willing to buy and bid at the yield that they want to be paid. Take note that the specific processes of bond auctions are different across countries.
The success of a government bond auction can be measured by the bid-to-cover ratio, a metric that measures how much the total bids exceed the initial amount that the central bank was aiming for.
For example, an auction collects bids worth $100 billion, but the central bank had only aimed for $45 billion. The bid-to-cover ratio is 2.22 ($100/$45). An auction with a bid-to-cover ratio of 2.00 or higher is usually considered as successful.
Traders also look at the change in bond yields after each auction. A higher yield means that investors are demanding a higher price for holding the government bond. Alternatively, a lower bond yield usually signals higher investor confidence and lower borrowing costs for the government (which would make it easier to pay debts).
Daily Candlestick Chart for GMXS
[img]stockcharts.com/c-sc/sc?s=GMXS
Diamond: The diamond formation, more commonly known as a diamond top, is a relatively rare chart formation used in technical analysis. When a diamond top forms, it forms at the conclusion of a long uptrend in price, and it indicates an imminent reversal of the trend. As such, the diamond top formation generates a very strong sell signal.
Traders and technical analysts recognize a diamond formation by first recognizing a head-and-shoulders formation (a peak and trough, followed by a higher peak and another trough, followed by a peak somewhere below the level of the previous peak: in other words, three peaks, the middle one being the tallest.) Four trendlines are drawn: one (ascending) from the first peak to the second peak, one (descending) from the second peak to the third peak, one (ascending) from the second trough to the low of the third peak, and one (descending) from the first trough to the second trough. The four lines altogether form a rough diamond shape, giving the chart its name.
The diamond top forms an overall descending trend channel, allowing traders to determine levels of support and resistance for the asset's price as it enters a downtrend or a momentary reversal. However, if the lower support line of the channel is broken, traders consider it likely that asset prices will reverse and begin again to climb.
Daily Candlestick Chart for IWSY
[img]stockcharts.com/c-sc/sc?s=IWSY
Supply, Demand, and Price Action
Many technicians use the open, high, low and close when analyzing the price action of a security. There is information to be gleaned from each bit of information. Separately, these will not be able to tell much. However, taken together, the open, high, low and close reflect forces of supply and demand.
The annotated example below shows a stock that opened with a gap up. Before the open, the number of buy orders exceeded the number of sell orders and the price was raised to attract more sellers. Demand was brisk from the start. The intraday high reflects the strength of demand (buyers). The intraday low reflects the availability of supply (sellers). The close represents the final price agreed upon by the buyers and the sellers. In this case, the close is well below the high and much closer to the low. This tells us that even though demand (buyers) was strong during the day, supply (sellers) ultimately prevailed and forced the price back down. Even after this selling pressure, the close remained above the open. By looking at price action over an extended period of time, we can see the battle between supply and demand unfold. In its most basic form, higher prices reflect increased demand and lower prices reflect increased supply.
Daily Candlestick Chart for GLDG
[img]stockcharts.com/c-sc/sc?s=GLDG
Descending Trendline: Descending trendlines are a variety of trendlines, one of the most fundamental tools for technical analysis. Descending trendlines are simply trendlines with a negative slope, indicating falling prices. There are two types of descending trendlines: descending top trendlines, in which the high prices for an asset are falling, and descending bottom trendlines, in which the low prices for the asset are falling.
The rules for trading using descending trendlines are the same as the rules for trading with trendlines in general. A descending top trendline is a measure of the resistance to an asset's price, and traders consider a break in price through the descending top to be buy signal for the asset. A descending bottom trendline is a measure of the support in an asset's price, and traders consider a break in price through the descending bottom to be a sell signal for the asset. Many traders consider it necessary for additional signals to appear on the chart before a broken descending trendline is confirmed, and before those traders will take the appropriate market action.
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.
Daily Candlestick Chart for CGMX
[img]stockcharts.com/c-sc/sc?s=CGMX
What Is Support?
Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.
Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level.
Daily Candlestick Chart for PRPM
[img]stockcharts.com/c-sc/sc?s=PRPM
Daily Candlestick Chart for FRZT
[img]stockcharts.com/c-sc/sc?s=FRZT
Daily Candlestick Chart for KDKN
[img]stockcharts.com/c-sc/sc?s=KDKN
Daily Candlestick Chart for KLDO
[img]stockcharts.com/c-sc/sc?s=KLDO
Pictorial Price History
Even if you are a tried and true fundamental analyst, a price chart can offer plenty of valuable information. The price chart is an easy to read historical account of a security's price movement over a period of time. Charts are much easier to read than a table of numbers. On most stock charts, volume bars are displayed at the bottom. With this historical picture, it is easy to identify the following:
Reactions prior to and after important events.
Past and present volatility.
Historical volume or trading levels.
Relative strength of a stock versus the overall market.
Daily Candlestick Chart for TAGG
[img]stockcharts.com/c-sc/sc?s=TAGG
Daily Candlestick Chart for BLSP
[img]stockcharts.com/c-sc/sc?s=BLSP
What is Technical Analysis 2
Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low, or close for a given security over a specific time frame. The time frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action.
Daily Candlestick Chart for TFONF
[img]stockcharts.com/c-sc/sc?s=TFONF
To assess a industry group's potential, an investor would want to consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, its industry group is likely to exert just as much, or more, influence on the stock price. When stocks move, they usually move as groups; there are very few lone guns out there. Many times it is more important to be in the right industry than in the right stock! The chart below shows that relative performance of 5 sectors over a 7-month time frame. As the chart illustrates, being in the right sector can make all the difference.
Daily Candlestick Chart for ADFS
[img]stockcharts.com/c-sc/sc?s=ADFS
What is a stock split and a reverse stock split?
A stock split is an increase in the number of outstanding shares of a stock. The price of the stock is immediately adjusted so that the total equity remains the same. For instance, if a $100/share stock splits 2 for 1, there will be twice as many shares but they only be worth $50 each now. This is usually done to make the stock more affordable to the public.
A reverse stock split is a decrease in the number of shares. This is usually done to raise the price per share to meet stock exchange requirements or simply to look more "healthy."
Daily Candlestick Chart for MDGEF
[img]stockcharts.com/c-sc/sc?s=MDGEF
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.
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