Employing Technical Analysis
Technical Analysis (TA)
• Fundamental analysis: Analyzing business fundamentals using financial statements, valuation models, etc
• Technical analysis: Analyzing stock charts by identifying patterns in the stock price caused by supply and demand
The Keys to TA
• Price and Volume• The result 10,000 decisions, graphed
• Everything else is derived from those two
Supply and Demand
• The magnitude of the move is determined by supply/demand factors
• Impacted by the float size, type of shareholders
• In the short run, supply/demand imbalance
• can be caused by fundamentals
• can supersede fundamentals
Supply and Demand
• Supply/demand sweet spot:
• Owning a stock with a low float that is being accumulated by large funds
• Stated float vs. effective float
• What will cause investors to hoard or dump this stock?
Supply and Demand
Sentiment Cycles
Sentiment Cycles
Sentiment Cycles
Toolbox and Examples
• Price patterns• Support & resistance – trend lines (ASPS, BX)
• Bottoming (BAC, OZM, BX, Silver)• Topping (AAPL, TZOO, Silver, S&P 500)
• Continuation (ROP)• Volume patterns• Indicators
• Moving averages• Stochastics / MACD / RSI
Fundamentals & Momentum• Fundamentals should drive long term price
• Effect of earnings surprises and rising consensus earnings estimates
• Momentum may wane as investors await next catalyst
• Price response to news is important indicator
• Overbought vs oversold• Correction by time or price
Entry Checklist
• Price patterns:• Bottom: Losing downside momentum (double bottom, higher low, successful test of trendline, etc)
• Breakout: Upside breakout after basing/consolidating (continuation patterns, rectangular breakout, etc)
• Volume patterns:• Bottom: Declining volume on down days
• Breakout: >Avg volume on breakout, up days
Exit Checklist
• Price patterns:• Top: Losing upside momentum (double top, lower high, etc)
• Breakdown: Breakdown after basing/consolidating (continuation patterns, channels, etc)
• Volume patterns:• Top: Higher volume on down days, declining volume on up days
• Breakdown: >Avg volume on breakdown