Technical Analysis

Economics 98 / 198 Fall 2007

Lecture 7

Announcements
Hand in homework by the end of class

Current Events / News Simulation Discussion

Lecture Content

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

Technical Analysis? Huh?

Dont get intimidated when 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 the market actions

Technical Analysis: Introduction to Stock Charts

CHART BASICS

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

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

Chart Types - Line Charts

Most basic of all charts Just a line that connects the closing prices over a time frame

No trading range

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

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

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

Chart Basics Time Scale

Daily Chart

Weekly Chart

Volume
Amount of shares that trade hands between seller and buyers

Price movements more significant when volume is above average

Price and Volume

Average Volume

Trends are your Friends

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

Sometimes, trends difficult to see

Trendlines
Simply put, a line drawn on a chart to represent the overall trend Upward trendline, connecting the lows, represents support

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

Technical Analysis: Introduction to Stock Charts

SUPPORT / RESISTANCE
By Johns Wu & thebulltrader.com

Chart Analysis : Support

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

AMZN Example of Supports

AMZN retraces from a monstrous rally to $60

AMZN stops tanking at $60. NOT A COINCIDENCE.

GOOG Support Psychology

$510. MANNNN, I should have bought GOOG

$$$$$!!

GOOG skyrockets from AWESOME earnings, but should I buy it????

OK. Im not gonna miss out again. BUY @ $452

CAUTION: Supports can breakdown.

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.

Chart Analysis : Resistance

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

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!!

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.

TGT Resistance Breakout

BREAKOUT!!

RESISTANCE BECOMES SUPPORT

SHLD Breakout Trade

Technical Analysis: Introduction to Stock Charts

MOVING AVERAGES

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

WIRE Support @ 10 WMA

WIRE Support @ 10 WMA

CPA Support at 20 & 50 DMA

CPA Support at 20 & 50 DMA

20 DMA and 50 DMA becomes points of support for this stock

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

Technical Analysis: Introduction to Stock Charts

TOOLS FOR STOCK CHARTS

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

StockCharts.com

Annotating in StockCharts

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

Relative Strength Line

Volume

Moving averages

Homework / Reading
Technical Analysis: Introduction
Investopedia Tutorial Link is on the download page of the website

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