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Support Equals Resistance
Another principle of technical analysis stipulates that support can turn into resistance and vice versa.
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After all, the data is the same and price action is price action. When all is said and done, it is the analysis of the price action that separates successful technicians from not-so-successful technicians.
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Arithmetic scales are useful for short-term charts and trading. Price movements (particularly for stocks) are shown in absolute dollar terms and reflect movements dollar for dollar.
W-Bottoms Using Bollinger Bands
W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms. A "W-Bottom" forms in a downtrend and involves two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first, but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band. Second, there is a bounce towards the middle band. Third, there is a new price low in the security. This low holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break.
Nordstrom (JWN) with a W-Bottom in January-February 2010. First, the stock formed a reaction low in January (black arrow) and broke below the lower band. Second, there was a bounce back above the middle band. Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, Bollinger Bands are calculated using closing prices so signals should also be based on closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high.
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Price Scaling
There are two methods for displaying the price scale along the y-axis: arithmetic and logarithmic. An arithmetic scale displays 10 points (or dollars) as the same vertical distance no matter what the price level.
SEC Filings Explained ~ S-1
Form S-1 is an SEC filing used by public companies to register their securities with the U.S. Securities and Exchange Commission (SEC) as the "registration statement by the Securities Act of 1933". The S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering (IPO). Other less detailed registration forms, such as Form S-3 may be used for certain registrations.
Every business day from 10 to 5, S-1 forms are filed with the SEC's EDGAR filing system, the required filing format of the U.S. Securities and Exchange Commission. However many of these (typically 30% to 90%) are of the related Form S-1/A, which is used for filing amendments to a previously filed Form S-1.
The S-1 form has an OMB Approval Number of 3234-0065 and the online form is only 8 pages. However the simplicity of the form's design is belied by theOMB Office's figure of the Estimated Average Burden - 972.32 hours. This means that long time and effort has been used to collect and display information about the filer (a corporate registrant or new registrant who intends to offer securities). The S-1 form requires that the registrant provide information from diverse sources and incorporate this information using many rules or regulations, such as General Rules and Regulations under the Securities Act, Regulation C,Regulation S-K and Regulation S-X.
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Keltner Channels
Introduction
Keltner Channels are volatility-based envelopes set above and below an exponential moving average. This indicator is similar to Bollinger Bands, which use the standard deviation to set the bands. Instead of using the standard deviation, Keltner Channels use the Average True Range (ATR) to set channel distance. The channels are typically set two Average True Range values above and below the 20-day EMA. The exponential moving average dictates direction and the Average True Range sets channel width. Keltner Channels are a trend following indicator used to identify reversals with channel breakouts and channel direction. Channels can also be used to identify overbought and oversold levels when the trend is flat.
In his 1960 book, How to Make Money in Commodities, Chester Keltner introduced the "Ten-Day Moving Average Trading Rule," which is credited as the original version of Keltner Channels. This original version started with a 10-day SMA of the typical price {(H L C)/3)} as the centerline. The 10-day SMA of the High-Low range was added and subtracted to set the upper and lower channel lines. Linda Bradford Raschke introduced the newer version of Keltner Channels in the 1980s. Like Bollinger Bands, this new version used a volatility based indicator, Average True Range (ATR), to set channel width. StockCharts.com uses this newer version of Keltner Channels.
Calculation
There are three steps to calculating Keltner Channels. First, select the length for the exponential moving average. Second, choose the time periods for the Average True Range (ATR). Third, choose the multiplier for the Average True Range.
Middle Line: 20-day exponential moving average
Upper Channel Line: 20-day EMA (2 x ATR(10))
Lower Channel Line: 20-day EMA - (2 x ATR(10)
Because moving averages lag price, a longer moving average will have more lag and a shorter moving average will have less lag. ATR is the basic volatility setting. Short timeframes, such as 10, produce a more volatile ATR that fluctuates as 10-period volatility ebbs and flows. Longer timeframes, such a 100, smooth these fluctuations to produce a more constant ATR reading. The multiplier has the most affect on the channel width. Simply changing from 2 to 1 will cut channel width in half. Increasing from 2 to 3 will increase channel width by 50%.
The chart above shows the default Keltner Channels in red, a wider channel in blue and a narrower channel in green. The blue channels were set three Average True Range values above and below (3 x ATR). The green channels used one ATR value. All three share the 20-day EMA, which is the dotted line in the middle. The indicator windows show differences in the Average True Range (ATR) for 10 periods, 50 periods and 100 periods. Notice how the short ATR (10) is more volatile and has the widest range. In contrast, 100-period ATR is much smoother with a less volatile range.
Interpretation
Indicators based on channels, bands and envelopes are designed to encompass most price action. Therefore, moves above or below the channel lines warrant attention because they are relatively rare. Trends often start with strong moves in one direction or another. A surge above the upper channel line shows extraordinary strength, while a plunge below the lower channel line shows extraordinary weakness. Such strong moves can signal the end of one trend and the beginning of another.
With an exponential moving average as its foundation, Keltner Channels are a trend following indicator. As with moving averages and trend following indicators, Keltner Channels lag price action. The direction of the moving average dictates the direction of the channel. In general, a downtrend is present when the channel moves lower, while an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways.
A channel upturn and break above the upper trendline can signal the start of an uptrend. A channel downturn and break below the lower trendline can signal the start a downtrend. Sometimes a strong trend does not take hold after a channel breakout and prices oscillate between the channel lines. Such trading ranges are marked by a relatively flat moving average. The channel boundaries can then be used to identify overbought and oversold levels for trading purposes.
Versus Bollinger Bands
There are two differences between Keltner Channels and Bollinger Bands. First, Keltner Channels are smoother than Bollinger Bands because the width of the Bollinger Bands is based on the standard deviation, which is more volatile than the Average True Range (ATR). Many consider this a plus because it creates a more constant width. This makes Keltner Channels well suited for trend following and trend identification. Second, Keltner Channels also use an exponential moving average, which is more sensitive than the simple moving average used in Bollinger Bands. The chart below shows Keltner Channels (blue), Bollinger Bands (pink), Average True Range (10), Standard Deviation (10) and Standard Deviation (20) for comparison. Notice how the Keltner Channels are smoother than the Bollinger Bands. Also notice how the Standard Deviation covers a larger range than the Average True Range (ATR).
Uptrend
The chart below shows Archer Daniels Midland (ADM) starting an uptrend as the Keltner Channels turn up and the stock surges above the upper channel line. ADM was in a clear downtrend in April-May as prices continued to pierce the lower channel. With a strong thrust up in June, prices exceeded the upper channel and the channel turned up to start a new uptrend. Notice that prices held above the lower channel on dips in early and late July.
Even with a new uptrend established, it is often prudent to wait for a pullback or better entry point to improve the reward-to-risk ratio. Momentum oscillators or other indicators can then be employed to define oversold readings. This chart shows StochRSI, one of the more sensitive momentum oscillators, dipping below .20 to become oversold at least three times during the uptrend. The subsequent crosses back above .20 signaled a resumption of the uptrend.
Downtrend
The second chart shows Nvidia (NVDA) starting a downtrend with a sharp decline below the lower channel line. After this initial break, the stock met resistance near the 20-day EMA (middle line) from mid May until early August. The inability to even come close to the upper channel line showed strong downside pressure.
A 10-period Commodity Channel Index (CCI) is shown as the momentum oscillator to identify short-term overbought conditions. A move above 100 is considered overbought. A subsequent move back below 100 signals a resumption of the downtrend. This signal worked well until September. These failed signals indicated a possible trend change that was subsequently confirmed with a break above the upper channel line.
Flat Trend
Once a trading range or flat trading environment has been identified, traders can use the Keltner Channels to identify overbought and oversold levels. A trading range can be identified with a flat moving average and the Average Directional Index (ADX). The chart below shows IBM fluctuating between support in the 120-122 area and resistance in the 130-132 area from February to late September. The 20-day EMA, middle line, lagged price action, but flattened out from April to September.
The indicator window shows ADX (black line) confirming a weak trend. Low and falling ADX shows a weak trend. High and rising ADX shows a strong trend. ADX was below 40 the entire time and below 30 most of the time. This reflects the absence of trend. Also, notice that ADX peaked in early June and fell until late August.
Armed with the prospects of a weak trend and trading range, traders can use Keltner Channels to anticipate reversals. In addition, notice that the channel lines often coincide with chart support and resistance. IBM dipped below the lower channel line three times from late May until late August. These dips provided low-risk entry points. The stock did not manage to reach the upper channel line, but did get close as it reversed in the resistance zone. The Disney chart shows a similar situation.
Conclusions
Keltner Channels are a trend following indicator designed to identify the underlying trend. Trend identification is more than half the battle. The trend can be up, down or flat. Using the methods described above, traders and investors can identify the trend to establish a trading preference. Bullish trades are favored in an uptrend and bearish trades are favored in a downtrend. A flat trend requires a more nimble approach because prices often peak at the upper channel line and trough at the lower channel line. As with all analysis techniques, Keltner Channels should be used in conjunction with other indicators and analysis. Momentum indicators offer a good complement to the trend-following Keltner Channels.
Line charts show less clutter, but do not offer as much detail (no high-low range).
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1. Effects on stability (Risks Associated with ETF’s)
ETFs that buy and hold commodities or futures of commodities have become popular. For example, SPDR Gold Shares ETF (GLD) has 41 million ounces in trust. [49] The silver ETF, SLV, is also very large. The commodity ETFs are in effect consumers of their target commodities, thereby affecting the price in a spurious fashion. [50] In the words of the IMF, “Some market participants believe the growing popularity of exchange-traded funds (ETFs) may have contributed to equity price appreciation in some emerging economies, and warn that leverage embedded in ETFs could pose financial stability risks if equity prices were to decline for a protracted period.”
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.
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Below is a table in order of the sum of the 3, 6, and 12 month returns for individual country ETFs. Each column represents returns for various timeframes and the percent each ETF is above (or below) the 200 day moving averages as of January's close. This list is tracked monthly on the right hand side of my blog Scott's Investments.
Note that all country ETFs are above their 200 day moving average except PGJ (China), GXC (China), FXI (China), EWP (Spain), EWG (Germany), and EWI (Italy). This is a significant change versus last month when none of the ETFs were below the 200 day SMA.
The top 5 based on the sum of the 3-6-12 month returns are below. There are some familiar names: RSX (Russia), [[[TUR]] (Turkey), EIS (Israel), EWZ (Brazil), and ECH (Chile). At the end of December the top 5 were the same 5 ETFs in slightly different order.
One potential strategy investors could use would be to purchase the top ETFs based on the sum of their returns over 3, 6, and 12 months. Or, one could purchase ETFs based solely on 6 month returns (a strategy featured on ETF Screen). An additional twist would be to only purchase the top performing ETFs if they are also above the 200 day moving average.
The data source for the information below is Finviz, which has some of the best free financial data on the web (as well as a new elite service).
Ticker Company Free Trend Analysis Performance (Quarter) Half Year Year Sum 200-Day SMA Price
RSX
Market Vectors Russia ETF Here
12.94% 38.50% 182.29% 233.73% 20.76% 31.08
TUR
iShares MSCI Turkey Invest Mkt Index Here
14.10% 24.74% 134.01% 172.85% 24.26% 55.67
EIS
iShares MSCI Israel Cap Invest Mkt Index Here
10.16% 15.36% 79.76% 105.28% 16.10% 54
EWZ
iShares MSCI Brazil Index Here
-0.19% 16.16% 87.45% 103.42% 5.79% 64.69
ECH
iShares MSCI Chile Investable Mkt Idx Here
15.11% 20.09% 67.13% 102.33% 17.48% 55.77
EWA
iShares MSCI Australia Index Here
-3.39% 16.57% 84.76% 97.94% 8.08% 21.1
PIN
PowerShares India Here
4.23% 8.42% 81.28% 93.93% 6.56% 20.72
THD
iShares MSCI Thailand Invest Mkt Index Here
1.35% 12.40% 80.09% 93.84% 7.61% 39.71
EWT
iShares MSCI Taiwan Index Here
3.43% 7.96% 79.61% 91.00% 6.98% 12.07
EWW
iShares MSCI Mexico Investable Mkt Idx Here
7.25% 15.35% 66.12% 88.72% 9.43% 46
EWY
iShares MSCI South Korea Index Here
4.85% 10.59% 71.28% 86.72% 9.01% 45.44
EWD
iShares MSCI Sweden Index Here
-2.11% 8.14% 76.67% 82.70% 5.41% 22.72
EWS
iShares MSCI Singapore Index Here
4.86% 5.69% 69.50% 80.05% 8.51% 10.78
EZA
iShares MSCI South Africa Index Here
4.72% 10.71% 62.04% 77.47% 5.40% 52.63
EWO
iShares MSCI Austria Investable Mkt Idx Here
-3.79% 13.32% 67.86% 77.39% 2.43% 18.8
EWK
iShares MSCI Belgium Investable Mkt Idx Here
1.37% 18.49% 56.41% 76.27% 7.73% 12.56
EWN
iShares MSCI Netherlands Invstbl Mkt Idx Here
2.65% 16.23% 49.42% 68.30% 9.26% 19.68
PGJ
PowerShares Gldn Dragon Halter USX China Here
0.14% -3.32% 71.34% 68.16% -0.44% 22.12
EWM
iShares MSCI Malaysia Index Here
1.44% 10.47% 54.92% 66.83% 8.63% 10.55
GXC
SPDR S
After an extended advance from 27 to 64, WorldCom (WCOM)[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.
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Form 20-F ~ SEC Filings Explained
Form 20-F is an SEC filing submitted to the US Securities and Exchange Commission used by certain foreign private issuers to provide information.
20-F, 20-F/A Annual and transition report of foreign private issuers pursuant to sections 13 or 15(d)
20FR12B, 20FR12B/A Form for initial registration of a class of securities of foreign private issuers pursuant to section 12(b)
20FR12G, 20FR12G/A Form for initial registration of a class of securities of foreign private issuers pursuant to section 12(g)
The postfix /A stands for 'Amendment'
The report must be filed within six months after the end of the fiscal year.
Key points on the benefits of arithmetic and semi-log scale
Arithmetic scales are useful when the price range is confined within a relatively tight range.
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