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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 7 technical analysis

Lecture 7Technical Analysis

Economics 98 / 198

Fall 2007

announcements
Announcements
  • Hand in homework by the end of class
current events news
Current Events / News

Simulation Discussion

today
Today…
  • Introduction to technical analysis
    • Basics & definitions
    • Stock charts & chart types
    • Moving Averages
    • Trends / Channels
    • Support & Resistance
    • Volume
technical analysis huh
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
basic terms
Basic Terms
  • Volatility
  • Fluctuations
  • 52-week high / low
  • Price / trading range
  • Open / closing price
charts
Charts
  • Maps price performance
  • Sheds light on supply and demand
  • “investment roadmap”
  • Price / volume relationship important
chart types line charts
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
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
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
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 scale14
Chart Basics – Time Scale

Daily Chart

Weekly Chart

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

Average Volume

trends are your friends
Trends are your Friends
  • Trend: general direction of stock
  • Uptrend: higher highs, higher lows
trendlines
Trendlines
  • Simply put, a line drawn on a chart to represent the overall trend
  • Upward trendline, connecting the lows, represents support
channels
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
chart analysis support

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 Example of Supports

AMZN retraces from a monstrous rally to $60

AMZN stops tanking at $60. NOT A COINCIDENCE.

goog support psychology

$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

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

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

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

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

BREAKOUT!!

TGT Resistance Breakout

RESISTANCEBECOMESSUPPORT

moving averages dma or wma
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 dma36
CPA – Support at 20 & 50 DMA

20 DMA and 50 DMA becomes points of support for this stock

slide37
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…
charting on stockcharts com
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
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
slide43

Relative Strength Line

Volume

Moving averages

homework reading
Homework / Reading
  • “Technical Analysis: Introduction”
    • Investopedia Tutorial
    • Link is on the download page of the website
next week
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