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Lecture 7 Technical Analysis

Lecture 7 Technical Analysis. Economics 98 / 198 Spring 2008. 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.

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Lecture 7 Technical Analysis

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  1. Lecture 7Technical Analysis Economics 98 / 198 Spring 2008

  2. Current Events / News Simulation Discussion

  3. Lecture Content

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

  5. Technical Analysis? Huh? • Don’t get intimidated when you 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 market actions

  6. Technical Analysis: Introduction to Stock Charts Chart Basics

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

  8. Charts • Maps price performance • Sheds light on supply and demand • “investment roadmap” • Price / volume relationship important

  9. Chart Types - Line Charts • Most basic of all charts • Just a line that connects the closing prices over a time frame • No trading range

  10. 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

  11. 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

  12. 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

  13. Chart Basics – Time Scale Daily Chart Weekly Chart

  14. Volume • Amount of shares that trade hands between seller and buyers • Price movements more significant when volume is above average

  15. Price and Volume Average Volume

  16. Trends are your Friends • Trend: general direction of stock • Uptrend: higher highs, higher lows

  17. Sometimes, trends difficult to see

  18. Trendlines • Simply put, a line drawn connecting three lows to represent the overall trend • Upward trendline represents support

  19. 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

  20. Technical Analysis: Introduction to Stock Charts By Johns Wu & thebulltrader.com SUPPORT / RESISTANCE

  21. 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.

  22. AMZN Example of Supports AMZN retraces from a monstrous rally to $60 AMZN stops tanking at $60. NOT A COINCIDENCE.

  23. $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.

  24. 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.

  25. 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.

  26. 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!!

  27. 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.

  28. BREAKOUT!! TGT Resistance Breakout RESISTANCEBECOMESSUPPORT

  29. SHLD Breakout Trade

  30. Technical Analysis: Introduction to Stock Charts Moving Averages

  31. 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

  32. WIRE – Support @ 10 WMA

  33. WIRE – Support @ 10 WMA

  34. CPA – Support at 20 & 50 DMA

  35. CPA – Support at 20 & 50 DMA 20 DMA and 50 DMA becomes points of support for this stock

  36. 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…

  37. Technical Analysis: Introduction to Stock Charts Tools for stock charts

  38. 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

  39. StockCharts.com

  40. Annotating in StockCharts

  41. 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

  42. Relative Strength Line Volume Moving averages

  43. Homework / Reading • “Technical Analysis: Introduction” • Investopedia Tutorial • Link is on the download page of the website

  44. 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

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