Lecture 7

Technical AnalysisEconomics 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 BASICSTechnical 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 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

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 / RESISTANCETechnical 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.

BUY @ $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 out @ 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 AVERAGESTechnical 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 – Support @ 10 WMA

WIRE – Support @ 10 WMA

CPA – Support at 20 & 50 DMA

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 CHARTSTechnical 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