Technical Analysis

Technical analysis

Charting represents a key activity in technical analysis. Graphical representation is the very basis of technical analysis.

The price chart is the basic tool used by the technical analyst to study the share price movement.

The oldest charting procedure was known as the point and figure ( P & F ) charting.

Price charts :

A share may be traded in the market on each trading day important prices are :

High price Low price Opening price Closing price

The charts are : Line chart Bar chart Japanese candlestick chart

Charts :

It is the simplest price chart, the closing prices of a share are plotted on the XY graph.

All these points would be connected by a straight line which would indicate the trend of the market as shown in the figure

1. Line chart

Chart Types - Line Charts

Most basic of all charts

Just a line that connects the closing prices over a time frame

Days

It is perhaps the most popular chart used by technical analysis.

A bar is formed by joining the highest and the lowest price of a particular day by a vertical line.

The top of the bar represents the highest price of the day.

The bottom of the bar represents the lowest price of the day.

A small hash on the left side of the bar represents the opening price of the day.

A small horizontal hash on the right side of the bar represents the closing price of the day.

Bar chart :

Chart Types – Bar Chart Vertical line represents highs/lows of the day Horizontal line represents closing price Red = down Blue/Black = up

Daily High

Daily Low

Closing Price

Price Gap

15/0

8/20

13

16/0

8/20

13

17/0

8/20

13

18/0

8/20

13

19/0

8/20

13

20/0

8/20

130

1

2

3

4

5

6

7

open

To draw a Japanese candlestick chart all the four prices are required high, low, open , closing prices.

The highest price and the lowest price of a day are joined by a vertical bar.

The opening and closing price of the day which would fall between the highest and the lowest prices would be represented by a rectangle.

So that the price bar chart looks like a candlestick.

Japanese candle stick :

01/0

5/20

02

01/0

6/20

02

01/0

7/20

02

01/0

8/20

02

01/0

9/20

020

1

2

3

4

5

6

Close

There are three types of candlestick are

White candle stick Black candle stick Doji candle stick

A white candlestick is used to represent a situation where the closing price of the day is higher than the opening price

A white candlestick indicates a Bullish trend.

White candlestick :

A Black candlestick is used when the closing price of the day is lower than the opening price.

Black candlestick indicates a Bearish trend.

Black candlestick :

A doji candlestick is one when the closing price and the opening price of the day are the same.

Doji candlestick :

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

Trend is the direction of movement of share prices in the market.

When the prices move upwards, it is a raising trend or uptrend.

When the prices moves downwards, we have a falling trend or downtrend.

Trend and Trend Reversals :

Share prices seldom move in a straight line. The main trend is interrupted by short term counter movements known as secondary reactions. The result is a Zigzag movement giving raise to alternating tops and bottoms.

The formations of higher bottoms and higher tops indicates a raising trend, while the formation of lower tops and lower bottoms indicates a falling trend.

The change in the direction of trend is referred to as trend reversal

A share that exhibits a raising trend may start to move narrowly or fall after sometime.

This change in the direction of movement represents a trend reversal.

The reversal from a raising trend to a falling trend is marked by the formation of a lower top and a lower bottom and vice versa.

A technical analyst tries to identify the trend reversals at an early stage so as to trade profitably in the market.

when the trend reverses and begins to raise the technical analyst would recommend purchase of the share.

When the trend begins to fall, sale is indicated.

During a flat trend the investor should stay away from the market.

These patterns are used by the technical analysts to identify trend reversal and predict the future movement of prices.

The chart patterns are classified as :

Support and Resistance pattern Reversal patterns Continuation patterns

Chart Patterns :

Support and Resistance are price levels at which the downtrend or uptrend in price movements is reversed.

Support : Support occurs when price is falling but

bounces back or reverses direction every time it reaches a particular level.

When all these low points are connected by a horizontal line, it forms the support line

Support level is the price level at which sufficient buying pressure is exerted to halt the fall in prices.

Support and Resistance :

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.

Resistance occurs when the share price move upwards.

The price may bounce back every time it

reaches a particular level. A horizontal line joining these tops forms the

resistance level. Thus, resistance level is the price level

where sufficient selling pressure is exerted to halt the ongoing rise in the price of a share.

Resistance :

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.

If the scrip were to break the support level and move downwards, it has bearish implications signaling the possibility of a further fall in prices.

Similarly, if the scrip were to penetrate the resistance level it would be indicative of a bullish trend or a further rise in prices.

Once a support level is violated, it would reverse roles and become a resistance level which is violated becomes the new support level for any future downward movement in price.

Price movements exhibit uptrend and downtrends. The trends

Reversal Patterns :

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

RESISTANCE BECOMES SUPPORT

BREAKOUT!!

AMZN Example of Supports

AMZN retraces from a monstrous

rally to $60

AMZN stops tanking at $60. NOT A COINCIDENCE.

GOOG Support Psychology

GOOG skyrockets from AWESOME earnings,

but should I buy it????

$510. MANNNN, I should have bought GOOG

OK. I’m 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.

TM – Resistance Psychology

I should have sold when TM was $138!!

Finally! $138. I better sell this time.

Should I sell?? Na, I’ll take my chances.

SHLD Breakout Trade

Thank you