|
Technical analysis is the examination of past price movements to forecast future price direction. It is sometimes referred to as chartist analysis because it relies almost exclusively on charts for analysis.
Technical analysis is applicable to foreign currencies, 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 commodity/security over a specific timeframe. The time frame can be based on intraday (tick, 5-minute, 15-minute or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume and/or open interest figures with their study of price action.
Trends
The first trend theory holds that an uptrend remains intact as long as each successive intermediate high than those preceding it and each reaction stop at a higher point than did earlier reactions. Conversely, a downtrend prevails when each intermediate decline carries price falling short of earlier rallies.
Uptrend - series of successively higher peaks and troughs
Downtrend - series of declining peaks and troughs
Sideways - horizontal peaks and troughs
Basic: Support & Resistance
Support and resistance levels are unquestionably among the most important of all technical considerations. They are areas, which prices are expected to have difficulty moving beyond, and they therefore deserve especially careful considerations in buying and selling decisions. Support and resistance levels on bar chart can be divided into three basic categories: 1. congestion areas; 2. areas at which previous advances and declines were turned back; and 3. transformed support and resistance levels-i.e., former highs that have been penetrated and thereby turned into support levels. The basic idea behind resistance and support theory is simply that price level that were significant in the past will have significant impact on price action in the future.
Major Support (troughs)
Price level or area on the chart where buyer interest is sufficiently strong enough to overcome or digest selling pressure and a price decline is turned back up again.
Major Resistance (peak)
Price level or area over the market where selling pressure overcomes or digests buying pressure and a price advance is turned back.
Significance of a Trendline
1. The longer the trendline has been intact, the more significant the trendline.
2. The more the number of times the trendline has been tested, the stronger the trendline
Validity of Trendline Violation
1. The price filter used is a 1% or 3% penetration criteria to eliminate whipsaws. A closing price penetration
beyond the trendline is more significant than just an intra-day penetration.
2. The time filter requires that prices close beyond the trendline for 2 successive days.
Chart Configuration
Flag and Pennant
The parallelogram and triangle formations that sometimes form after a rapid vertical move indicates that another similar move is likely to follow. Technicians often follow that flags mark the half way point of a price move, measuring from the level of decisive break away from the previous formation.
Many chartist mark flags and pennants among the most dependable signals, particularly with reference to the direction of the impending move.
Triangles
Triangles can be continuation or reversal patterns, but seem to fall on the former category more often. They appear when there are simultaneous short-term uptrend and downtrend lines which intersect. The conventional chart interpretation holds that triangles signal impending large move with the direction of the move likely to be in the direction of the steeper trendline. An Ascending Triangle is likely to breakout in either direction. Subjectively, triangles appear to be fairly reliable indicators, especially when no more than tree of four oscillations occur before the breakout.
Gaps
Gaps are simply areas within the boundary of activities where no actual trading occurred. Technicians generally place gaps into one of these four categories: Common Gaps are blank areas between two consecutive days trading ranges, within which activity takes place in the recent past. They are usually considered tops and have meaning. Break Away Gaps occur when prices suddenly explode out of a considerable length of time (or in which no trading has ever taken). Run Away Gaps appear following an already substantial price move, while Exhaustion Gaps are supposed to make the final stages of a major move.
Reversal Formations
Reversal
The reversal on either a daily or weekly chart is simplest of trend change formations. A downside reversal occurs when the price registers a new high during the course of a day (or week) and then closes the day (or week) sharply lower. Price action immediately following a daily or weekly reversal varies considerably. In some cases key reversals make the beginning of dramatic retracements of the preceding move, while in others the reversals simply mark the beginning of a more gradual trend change.
Island Reversal
These are small top or bottom formation set apart by gaps on either side. The island consists of a single day or reversal days, and the entire formation is closely related to the daily or weekly reversal phenomena. The key difference is simply that following the gap on the island area, prices hold for on more several days before the buying(or selling) power disappear between trading sessions.
Double Top or Bottom
These patterns form when successive intermediate term highs or lows stop approximately at the same level. A double top is considered complete only if the decline from the second peak carries prices below the first stopping point. Double top can be subdivided into two rather instinct types, which might be called short-range and long-range. Short-range double tops generally form between 8 to 10 weeks and result form the kind of activity described as Previous high as Resistance. Long-range double tops develop over much longer intervals and are frequently associated with a widespread reluctance to pay prices above many levels that have gained a certain historical respect. For psychological reasons, round numbers are often especially likely areas for longer-range double tops.
Head and Should Formation
The head and shoulder top (as well as the inverted head and shoulder bottom) has historically one of the most popular and widely followed of chart formations. The left shoulder result from an advance followed by a relatively similar decline, the head is formed by a large rally falling short of the top of the head and subsequent decline that carries prices below the line connecting the body joints of the head ?called the neckline. Several ideas concerning head and shoulder formation have gained widespread acceptance by technicians. First, the pattern is not complete until the neckline is decisively penetrated. Unless and until this occurs no reversal is considered given. Second, after this confirming penetration, prices frequently rally back to the vicinity of the neckline before the final move begins. Third, the vertical distance form the top of the head to the neckline provides a measure of the extent of the decline likely to occur from the neckline before the final begins. The existence of this concrete measuring rule perhaps accounts for part of this information popularity among chartists. Fourth, a market is considered extremely vulnerable to step decline if the rally is forming the right shoulder is unable to carry as afar as the top of the left shoulder.
Technical Studies
Relative Strength Index
The Relative Strength Index (RSI) indicator calculates a value based on the cumulative strength and weakness of price, specified in the input Price, over the period specified in the input Length. For that number of bars, RSI accumulates the points gained on bars with higher closes and the points lost on bars with lower closes. These two sums are indexed, with the index plotted on the chart. The RSI plots as an oscillator with a value from 0 to 100. The direction of RSI should confirm price movement. For example, a rising RSI confirms rising prices.
RSI can also help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a new high in RSI may indicate a false breakout. RSI is also used to identify overbought and oversold conditions when the RSI value reaches extreme highs or lows.
Stochastic
The Stochastic Slow indicator calculates the location of a current price in relation to its range over a period of bars. The default settings are to use the most recent 14 bars (input StochLength), the high and low of that period to establish a range (input PriceH and PriceL) and the close as the current price (input PriceC).
This calculation is then indexed, smoothed and plotted as SlowK. A smoothed average of SlowK, known as SlowD, is also plotted. SlowK and SlowD plot as oscillators with values from 0 to 100. The direction of the Stochastics should confirm price movement. For example, rising Stochastics confirm rising prices.
Stochastics can also help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a new high in Stochastics may indicate a false breakout. Stochastics are also used to identify overbought and oversold conditions when the Stochastics reach extreme highs or lows. Additionally, SlowK crossing above the smoother SlowD can be a buy signal and vice versa.
Moving Average
The moving average may be the most widely used indicator. The Mov Avg 2 line indicator calculates and plots two simple arithmetic averages of the same prices, specified by the Price input, from each of the most recent number of bars specified by the Length inputs. For example, the default setting is to calculate and plot a simple average of the closing prices of the last 9 bars and a simple average of the closing prices of the last 18 bars. The average of shorter length (also known as the fast average) will be more sensitive to current price changes than the average of greater length (also known as the slow average).
Moving averages are generally used for trend identification. Attention is given to the direction in which the averages are moving and to the relative position of prices and the averages. Rising moving average values (direction) and prices above the short moving average and the short moving average above the long moving average (position) would indicate an uptrend. Declining moving average values and prices below the short moving average and the short moving average below the long moving average would indicate a downtrend. Displaced moving averages plot the moving average values of a previous bar or later bar on the current bar.
Momentum
The Momentum indicator calculates and plots the net change, expressed in points, between each bar's price, as specified by the input Price, and that price the number of bars ago specified in the input Length. The default settings calculate and plot the net change between the close of a bar and the close ten bars earlier. Measuring current prices versus earlier prices sheds light on the pace of a trend and possible trend reversals. It may also be useful in identifying overbought and oversold conditions when the Momentum becomes extremely strong or weak.
Fibonacci Retracements
Fibonacci Retracements are displayed by first drawing a trendline between two extreme points, for example, a trough and opposing peak. A series of nine horizontal lines are drawn intersecting the trendline at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, 100%(Some of the lines will probably not be visable because they will be off the scale.).
After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.
|
