Lecture 7 Technical Analysis

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Lecture 7Technical Analysis

• Economics 98 / 198
• Spring 2008

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Current Events / News
Simulation Discussion
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Lecture Content
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Today

• Introduction to technical analysis
• Basics definitions
• Stock charts chart types
• Moving Averages
• Trends / Channels
• Support Resistance
• Volume

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Technical Analysis? Huh?

• Dont get intimidated when you hear technical
  analysis
• Comes down to your supply and demand
• How is this different from fundamental analysis?
• Tries to make sense of market emotions by
  studying market actions

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Chart Basics

• Technical Analysis Introduction to Stock Charts

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Basic Terms

• Volatility
• Fluctuations
• 52-week high / low
• Price / trading range
• Open / closing price

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Charts

• Maps price performance
• Sheds light on supply and demand
• investment roadmap
• Price / volume relationship important

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Chart Types - Line Charts

• Most basic of all charts
• Just a line that connects the closing prices over
  a time frame
• No trading range

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Chart Types Bar Chart

• Vertical line represents highs/lows of the day
• Horizontal line represents closing price
• Red down
• Blue/Black up

Daily High
Closing Price
Daily Low
Price Gap
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Chart Types Candlestick Charts

• Vertical line represents the trading range
• Wide bar represents open and close
• White bar Up and closes above opening price
• Red Bar down
• Black bar up, but closes below the opening price

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Chart Basics Time Scale

• Time Scale
• Dates along bottom of chart (varies from seconds
  to decades)
• Common Types intraday, daily, weekly, monthly
• Subtle differences between different time scales

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Chart Basics Time Scale
Daily Chart
Weekly Chart
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Volume

• Amount of shares that trade hands between seller
  and buyers
• Price movements more significant when volume is
  above average

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Price and Volume
Average Volume
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Trends are your Friends

• Trend general direction of stock
• Uptrend higher highs, higher lows

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Sometimes, trends difficult to see
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Trendlines

• Simply put, a line drawn connecting three lows to
  represent the overall trend
• Upward trendline represents support

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Channels

• Two parallel trend lines that act as areas of
  support and resistance (more later)
• Any break through the channel is a break of the
  trend, otherwise the price should stay in range

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SUPPORT / RESISTANCE

• Technical Analysis Introduction to Stock Charts

By Johns Wu thebulltrader.com
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Chart Analysis Support

• Price at which BUYERS gt SELLERS consistently.
• Buyers who missed out on the first dip will be
  pressured to buy if price continues to respect
  the support.

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AMZN Example of Supports
AMZN retraces from a monstrous rally to 60
AMZN stops tanking at 60. NOT A COINCIDENCE.
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GOOG Support Psychology
510. MANNNN, I should have bought GOOG
!!
OK. Im not gonna miss out again. BUY _at_ 452
GOOG skyrockets from AWESOME earnings, but should
I buy it????
CAUTION Supports can breakdown.
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Support Breakdowns

• SELL if support breaks down, because it
  signifies that BUYERS no longer overpower
  SELLERS.
• Breakdowns are a BEARISH SELL signal.

You should have sold here, at the BREAK DOWN.
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Chart Analysis Resistance

• Price at which SELLERS overwhelm BUYERS
  consistently.
• When a stock makes a new high and then retraces,
  sellers who missed out _at_ the previous peak will
  feel pressured to sell when price climbs back to
  that level.

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TM Resistance Psychology
Finally! 138. I better sell this time.
Should I sell?? Na, Ill take my chances.
I should have sold when TM was 138!!
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Resistance Breakouts

• When price breaks out above resistance, it
  becomes a new support level. IMPORTANT
• Breakout signifies clear dominance of BUYERS.
  (good time to buy)
• This is a BULLISH BUY signal.
• My favorite trade setup.

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TGT Resistance Breakout
BREAKOUT!!
RESISTANCE BECOMES SUPPORT
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SHLD Breakout Trade
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Moving Averages

• Technical Analysis Introduction to Stock Charts

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Moving Averages (DMA or WMA)

• Most popular are 50-day and 200-day
• Shows the average price of the last days and
  plots it on a line
• Often acts as areas of support and/or resistance

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WIRE Support _at_ 10 WMA
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WIRE Support _at_ 10 WMA
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CPA Support at 20 50 DMA
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CPA Support at 20 50 DMA
20 DMA and 50 DMA becomes points of support for
this stock
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So

• Charts are fundamental to technical analysis
• Important to understand what is shown on a chart
  and the information it conveys
• Chart patterns and bases to come

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Tools for stock charts

• Technical Analysis Introduction to Stock Charts

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Charting on StockCharts.com

• Getting comprehensive stock charts
• Type in the company symbol
• Once youre at the stock page, click on annotate
  to draw your own trendlines.
• From there, you will get lots of tools for
  analyzing stock charts

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StockCharts.com
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Annotating in StockCharts
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Using Charts on Investors.com

• Log in using your username and password (you all
  have one as of now)
• Enter a symbol for the stock and then click on
  IBD Charts just below it
• There are links throughout the website that link
  to IBD charts
• Right clicking on the chart will give you
  important data for that day or week

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Relative Strength Line
Moving averages
Volume
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Homework / Reading

• Technical Analysis Introduction
• Investopedia Tutorial
• Link is on the download page of the website

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Next Week

• Well be going over strategies using charts to
  buy stocks
• Timing market bottoms
• Identifying chart bases / patterns
• Timing your stock purchases (after youve done
  your research / stock screens)
• This is going to be the most technical /
  complicated part so make sure you understand the
  basics