Archive for the ‘Technical Analysis’ Category
Friday, February 8th, 2008 |
In my last technical analysis post moving averages and technical analysis, I ended by promising to show you how investors use technical analysis to make money in the stock market. That is a tall order!
First, let me tell you that there are many technical analysis strategies and indicators that traders use to make money in the stock market. In this post I will go through the basics of two distinct technical analysis strategies that are used to make money in the stock market.
1.) Many technical analysis strategies are based on momentum. That’s right, forget buy low and sell high; buy what’s going up and sell it when it goes up more. This is what technical analysts refer to as buy high and sell higher.
One popular momentum based investing style, CANSLIM, was developed by Investors Business Daily founder William O’Neill. This strategy identifies companies with accelerating earnings and revenues, along with a strong market and increasing investor sentiment (more money managers and mutual funds buying the stock).
Let’s face it, Economics 101 says that price is based on supply and demand. That said, and the average investor cannot move the price of a stock. Only the “Big money” such as mutual funds and pension funds can produce enough volume to significantly move the price of most stocks. You can learn more about CANLSIM at Investors Business Daily and see it used in real life over at Chris Perruna.com.
2) Other strategies look for reversal patterns in the charts. Some technical analysts will watch for increasing volume and stabilizing or rising stock prices to signal the reversal of a downtrend.
In markets that are downward trending, technical analysts will use price and volume, along with other indicators, in an attempt to find the bottom of a downward price trend.
Traders watching for these reversal situations will also monitor the previous support and resistance areas. If the stock has had previous support at a certain level, technical analysts will watch for that support to continue as the price drops to that level again. It is considered a Red flag when the price of a stock drops below its previous support level.
I know that I have been very vague and brief in my descriptions of these strategies. However, I always found it easier to understand when the information was explained without the jargon.
I sincerely hope that this has helped you to understand a little more about some technical analysis indicators. While I don’t use these to trade stocks, I do use some of these strategies to look for entry points to buy stocks that are already on my watch list for long-term buy and hold investment.
Posted in Technical Analysis | No Comments »
Wednesday, January 17th, 2007 |
With the Resources sector taking a recent drubbing, I set out to find a strong company that had been beaten down to invest a small amount of money in as a rebound or turnaround play. One of the best investment ideas that I have found is Encana (ECA).
*Please note that this chart is in Canadian Dollars (CDN).
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As you can see by the 6-month chart, Encana (ECA) appears to have leveled off above support levels and is turning around on increased volume.
Encana Fundamentals
ROA - 15.97%
ROEÂ - 38.08 %
Current Ratio - 0.99
Profit Margin - 46.8%
Encana’s dividend yield of 0.90% is above it’s 5-year average yield of 0.70% and have recently increased the dividend rate to $0.40 from $0.30 per share.
Please do your own due diligence.
Posted in Stock Studies, Technical Analysis | 3 Comments »
Monday, January 15th, 2007 |
A great article at Investors Business Daily outlines a buying strategy using the 10-week moving average (50 Day Moving Average).
They suggest that institutional investors (Hedge Funds, Mutual Funds, Pension Funds etc.) may make purchases as the stock pulls back to the 50 Day Moving Average.
Indeed, any time a stock rebounds from its 10-week or 50-day moving average, it can be just as opportune a time to buy as when it breaks out of a base. Or, it can be a good spot to buy additional shares.A little while after a leading stock breaks out of a base, it will often throttle back. That pullback often occurs at the 10-week average.
If the stock remains strong, it will rebound from that line.
Institutional investors like to buy stocks at a lower average cost, adding shares at key junctures such as when the stock hits its 10-week. That’s why a bounce back from the average is called “finding support”: institutions support the stock by buying more shares.
Look for stocks making their first or second pullbacks to the 10-week line after their initial breakouts. Third and subsequent pullbacks are riskier because the stock has probably extended itself too much.
Read on
Posted in Technical Analysis | No Comments »
Thursday, October 26th, 2006 |
When first posted about one of my stock preferences, Southern Peru Copper (PCU), it was October 12 and PCU closed the day at $49.02 USD.
It opened this morning, October 26, two weeks later at $53.01 USD. This is significant because it closed yesterday above it’s previous high.
Where technical analysis is concerned, a close above the previous high on large volume would indicate that there is little in the way of overhead resistance and the sentiment for a higher stock price is evident.
Southern Peru Copper has been making its gains in recent weeks on average volume. It would be prudent, in my opinion, to watch for the stock to close at a new high on volume significantly greater than the average volume. If the stock were to close significantly lower on larger than average volume, this would indicate a red flag and possible profit taking.
What are your thoughts on Southern Peru Copper?
Feel free to leave a comment and let me know if you think I’m off my rocker!
Posted in Stock Studies, Technical Analysis | 2 Comments »
Monday, September 25th, 2006 |
As promised, I have returned with more learning tools for technical analysis.
In the last post we covered, very quickly, some of the basics of technical analysis. I hope that you have been able to further research some of the investment philosophies and chart patterns that we talked about last time.
Today I want to show you one of the simplest technical analysis tools in action.
Moving averages
Moving averages play a role in technical analysis that is akin to watching the
headlines of the newspaper. It tells the investor what the market has been for a stock over a certain period of time. Moving averages are also used to smooth out price fluctuations, determine trends, and define support and resistance levels.
The most common moving average periods are 200 days and 50 days. As traders reduce their time span for trading a stock, they will look at shorter moving averages such as the 10 day or 5 day moving average to determine the most current momentum trend.
One of the most basic strategies for timing the market, or using technical analysis for trading stocks, is to watch for crossovers in the different moving averages. For instance, when a shorter moving average crosses a longer moving average, this is seen as a buy signal. The same holds true for the reverse situation if the longer moving average crosses the shorter moving average, we have a sell signal.
There are many more complicated technical analysis strategies and techniques, but several more complex techniques are formed from basic tenets of technical analysis such as moving averages.
I would like to point to Charles Kirk at The Kirk Report for a great example of this strategy and a chart that can be found here.
Stay tuned for more on technical analysis and how it can help you make money with dividend stocks.
Posted in Technical Analysis | 1 Comment »
Friday, September 22nd, 2006 |
In my last post I talked to you a about a dividend based investing strategy called the dividend growth model.
As promised, I am back today to give you a little background on technical analysis and stock trading. In order to get a grasp on technical analysis, we must first define some of the key terms that are used in the world of technical analysis.
Let us first start with the definition of technical analysis itself:
Technical analysis is based on the price patterns and charts of the stock and not it’s intrinsic value. A technical analyst believes that past price patterns and volume activity are indicative of future movement in the stock price.
Investopedia gives a very good example of the difference between fundamental investors and technical investors:
In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.
Technical analysis involves the identification of different chart patterns that are developed through recognized price and volume indicators. Examples of the these various chart patterns include: Cup with Handle, Gap Ups, Gap Downs, Wedge Formations, Saucer with Handle, head and shoulders and many others.
Example of these patterns can be found at Market Stock Watch.
Many technical analysts use a variety of indicators in conjunction with each other in order to forecast the future direction of the stock price or trends. Some indicators that technical analysts use include moving averages, the relative strength line, new highs and new lows, point and figure charts and other indicators.
Obviously this subject is very intense and will need to cover more than one post.
In fact, an entire site dedicated to this subject would be appropriate.
I will be back later with more information and examples of technical analysis in action.
Enjoy!
Posted in Technical Analysis | 1 Comment »
