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Lecture 7 Technical Analysis. Economics 98 / 198 Fall 2007. 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
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Lecture 7Technical Analysis Economics 98 / 198 Fall 2007
Announcements • Hand in homework by the end of class
Current Events / News Simulation Discussion
Today… • Introduction to technical analysis • Basics & definitions • Stock charts & chart types • Moving Averages • Trends / Channels • Support & Resistance • Volume
Technical Analysis? Huh? • Don’t 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
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 By Johns Wu & thebulltrader.com Support / Resistance
Chart Analysis : Support Price at whichBUYERS>SELLERSconsistently. 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.
$510. MANNNN, I should have bought GOOG $$$$$!! GOOG Support Psychology OK. I’m not gonna miss out again. BUY @ $452 GOOG skyrockets from AWESOME earnings, but should I buy it???? CAUTION: Supports can breakdown.
Support Breakdowns You should have sold here, at the BREAK DOWN. SELL if support “breaks down”, because it signifies that BUYERS no longer overpower SELLERS. Breakdowns are a BEARISH SELL signal.
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.
Finally! $138. I better sell this time. TM – Resistance Psychology Should I sell?? Na, I’ll 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.
BREAKOUT!! TGT Resistance Breakout RESISTANCEBECOMESSUPPORT
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
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 you’re at the stock page, click on annotate to draw your own trendlines. • From there, you will get lots of tools for analyzing stock charts
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 • We’ll be going over strategies using charts to buy stocks • Timing market bottoms • Identifying chart bases / patterns • Timing your stock purchases (after you’ve done your research / stock screens) • This is going to be the most technical / complicated part so make sure you understand the basics