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 –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

CHART BASICS Technical Analysis: Introduction to Stock Charts

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 Daily Low Closing Price 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 ChartWeekly 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

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

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

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

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.

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. $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.

Chart Analysis : Resistance Price at which SELLERS overwhelm BUYERS consistently. When a stock makes a new high and then retraces, sellers who missed the previous peak will feel pressured to sell when price climbs back to that level.

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.

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!!

SHLD Breakout Trade

MOVING AVERAGES Technical Analysis: Introduction to Stock Charts

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

WIRE – 10 WMA

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…

TOOLS FOR STOCK CHARTS Technical Analysis: Introduction to 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

StockCharts.com

Annotating in StockCharts

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

Moving averages Volume Relative Strength Line

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