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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 KLDO
[img]stockcharts.com/c-sc/sc?s=KLDO
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Downtrend Line
A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.
For a detailed explanation of trend changes, which are different than just trend line breaks, please see our article on the Dow Theory.
Daily Candlestick Chart for GRDO
[img]stockcharts.com/c-sc/sc?s=GRDO
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 MWIP
[img]stockcharts.com/c-sc/sc?s=MWIP
Drawdown: Drawdown is a measure of peak-to-trough decline, usually given in percentage form. In trading, drawdown refers to the reduction in your trading account from a trade or a series of trades.
For instance, your trading account is initially at $10,000 then you lost $2,500 today and $2,500 the next day. Your account would then be at $5,000 and you would’ve had a 50% drawdown. In other words, a drawdown measures how much you’ve lost before you get your account back to par. But with a $5,000 remaining balance, you’d need to win another $5,000 to bring your account back to breakeven … That’s a 100% gain!
Knowing your trade’s drawdown is an important part of risk management. Traders usually take note of their maximum drawdown, which is the largest top-to-bottom loss incurred under a trading strategy. While “Maximum Drawdown” sounds like your typical summer blockbuster movie, it ain’t cool since it basically measures your biggest losing streak!
Short selling is not as common as going long for several reasons:
It requires a margin account, which has special requirements.
There is the risk of losing more than 100% of your money from your investment portfolio.
Some people consider it wrong to bet against a company.
Despite these concerns, short selling is successfully used every day by thousands of traders. It is actually a healthy part of the markets. For example, when the markets are having a bad day, who is buying the shares that most people are trying to get rid of? Short sellers are, along with the "longs" who are trying to buy at bargain prices. They are trying to cover their shorted positions and take a profit.
Daily Candlestick Chart for CRNJF
[img]stockcharts.com/c-sc/sc?s=CRNJF
Detrended Price Oscillator: The Detrended Price Oscillator (DPO), as the name indicates, is a technical analysis tool designed to give information about the price of an asset without taking into account existing price trends. The logic behind this is that detrended prices can help traders to understand the buying and selling pressure in a market based on short-term fluctuations in the price of an asset, without taking into account larger upswings or downswings in price.
The Detrended Price Oscillator can be calculated by declaring a period of time that could be said to indicate a trend in price (for example, if prices steadily increase over a twenty-day period, then one could take "20" as the period of time that indicates a trend.) Divide this period by two and add one to arrive at a number n. Then take the moving average of an asset's price n days before the period in question, and subtract this from the asset's closing price for that period. The resulting number is the period's DPO. This calculation method ensures that although short-term price trends are included in a DPO chart, longer-term trends are excluded.
One of the fundamental assumptions of the DPO is that long-term price trends are composed of short-term price trends, and that only by looking at short-term trends can long-term trends be understood. By this rationale, particularly severe peaks and troughs in the DPO indicate probable reversals in the overall trend of the asset price, and traders should take appropriate positions to take advantage of these reversals in either direction.
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 SBRH
[img]stockcharts.com/c-sc/sc?s=SBRH
Commodity Channel Index: The Commodity Channel Index is a tool developed by Donald Lambert to measure the point at which cyclical price reversals for a given asset can be expected. One of the fundamental assumptions behind the CCI is that price trends reverse at regular intervals within an asset, allowing investors to take the appropriate action when the CCI indicates that one of those cyclical reversals is imminent.
The CCI is calculated first by averaging the high, low and closing prices into a measure called the True Price, or TP. A 20-period moving average of the TP becomes the Simple Moving Average of the True Price, or SMATP. A standard deviation of the difference between SMATP and TP over twenty periods is also taken. The difference between TP and SMATP is then divided by the product of this standard deviation and a constant value of .015 to produce the CCI.
The constant value of .015 ensures that the majority of CCI values fall between 100 and -100. In the case that the absolute value of CCI exceeds 100, Lambert's theory indicates that the market is approaching one of its cyclical reversals, and that traders should take the appropriate action. The CCI also indicates overbought and oversold levels, which are any levels whose absolute value exceeds 100. If the CCI moves outside of the -100 to 100 range and then returns, either a buy or sell signal is generated, depending on whether the CCI was below -100 (oversold) or above 100 (overbought.)
Trading Range
Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. A trading range is a period of time when prices move within a relatively tight range. This signals that the forces of supply and demand are evenly balanced. When the price breaks out of the trading range, above or below, it signals that a winner has emerged. A break above is a victory for the bulls (demand) and a break below is a victory for the bears (supply).
After an extended advance from 27 to 64, WorldCom (WCOM) entered into a trading range between 55 and 63 for about 5 months. There was a false breakout in mid-June when the stock briefly poked its head above 62 (red oval). This did not last long and a gap down a few days later nullified the breakout (black arrow). The stock then proceeded to break support at 55 in Aug-99 and trade as low as 50. Here is another example of support turned resistance as the stock bounced off 55 two more times before heading lower. While this does not always happen, a return to the new resistance level offers a second chance for longs to get out and shorts to enter the fray.
Daily Candlestick Chart for MDIN
[img]stockcharts.com/c-sc/sc?s=MDIN
Daily Candlestick Chart for PGLC
[img]stockcharts.com/c-sc/sc?s=PGLC
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.
Deflation: Deflation is the opposite of inflation. It is the decrease in the price of a basket of goods and services. Deflation happens when the annual inflation rate turns negative. Such an event is usually brought about by a reduction in the money supply and/or credit.
Currency Impact
While inflation tends to decrease the purchasing power of a currency, deflation tends to result in an increase in the “real” value of money.
Daily Candlestick Chart for PUNK
[img]stockcharts.com/c-sc/sc?s=PUNK
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.
Daily Candlestick Chart for AGDY
[img]stockcharts.com/c-sc/sc?s=AGDY
Where does this overhead supply come from? Demand was obviously increasing around 18 from Oct-98 to Mar-99 (green oval). Therefore, there were a lot of bullish buyers of the stock around 18. When the price declined below 18 and fell to around 14, many of these (now unhappy) bulls were probably still holding the stock. This left a supply overhang (commonly known as resistance) around 18. When the stock rebounded to 18, many of the green-oval-bulls probably took the opportunity to sell and "escape" with little to no loss. When this supply was exhausted, the demand was able to overpower supply and advance above resistance at 18.
Daily Candlestick Chart for APXG
[img]stockcharts.com/c-sc/sc?s=APXG
Scale Settings
High points and low points appear to line up better for trend lines when prices are displayed using a semi-log scale. This is especially true when long-term trend lines are being drawn or when there is a large change in price. Most charting programs allow users to set the scale as arithmetic or semi-log. An arithmetic scale displays incremental values (5,10,15,20,25,30) evenly as they move up the y-axis. A $10 movement in price will look the same from $10 to $20 or from $100 to $110. A semi-log scale displays incremental values in percentage terms as they move up the y-axis. A move from $10 to $20 is a 100% gain, and would appear to be a much larger than a move from $100 to $110, which is only a 10% gain.
In the case of EMC, there was a large price change over a long period of time. While there were not any false breaks below the uptrend line on the arithmetic scale, the rate of ascent appears smoother on the semi-log scale. EMC doubled three times in less than two years. On the semi-log scale, the trend line fits all the way up. On the arithmetic scale, three different trend lines were required to keep pace with the advance.
In the case of Amazon.com (AMZN), there were two false breaks above the downtrend line as the stock declined during 2000 and 2001. These false break outs could have led to premature buying as the stock continued to decline after each one. The stock lost 60% of its value three times over a two year period. The semi-log scale reflects the percentage loss evenly, and the downtrend line was never broken.
Daily Candlestick Chart for HIMR
[img]stockcharts.com/c-sc/sc?s=HIMR
Daily Candlestick Chart for ARAH
[img]stockcharts.com/c-sc/sc?s=ARAH
Narrow Within the Group
Once the industry group is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within a group. The first task is to identify the current business and competitive environment within a group as well as the future trends. How do the companies rank according to market share, product position and competitive advantage? Who is the current leader and how will changes within the sector affect the current balance of power? What are the barriers to entry? Success depends on an edge, be it marketing, technology, market share or innovation. A comparative analysis of the competition within a sector will help identify those companies with an edge, and those most likely to keep it.
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 GWBU
[img]stockcharts.com/c-sc/sc?s=GWBU
The graph above shows the economic cycle in green, the stock market cycle in red and the best performing sectors at the top. The green economic cycle corresponds to the business cycle shown above. The centerline marks the contraction/expansion threshold for the economy. Notice how the red market cycle leads the business cycle. The market turns up and crosses the centerline before the economic cycle turns. Similarly, the market turns down and crosses below the centerline ahead of the economic cycle.
Daily Candlestick Chart for BMSN
[img]stockcharts.com/c-sc/sc?s=BMSN
Bank of Japan (BOJ) Monetary Policy Meeting and Announcement: Release schedule : No set time, usually between 2:00 and 4:00 (GMT); monthly, in the middle of the month
Source of report : Bank of Japan
Web Address : http://www.boj.or.jp/en/index.htm
Address of Release : http://www.boj.or.jp/en/theme/seisaku/kettei/index.htm
Schedule of Meetings : http://www.boj.or.jp/en/theme/seisaku/index.htm
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 SMAA
[img]stockcharts.com/c-sc/sc?s=SMAA
Daily Candlestick Chart for STEV
[img]stockcharts.com/c-sc/sc?s=STEV
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).
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