INTEPRETING CHARTS Bar Chart Bar charts contain a series of bars ...
INTEPRETING CHARTS
Bar Chart
High Open Close
Low
Bar charts contain a series of bars that represents a trading day’s price action. Each bar contains information showing the trading day’s low, high, open and close prices. The bar chart is the most popular choice for displaying stock price information.
Line Chart
The Line Chart contains a continuous line representing only the closing prices of a stock.
Volume
The use of volume is basic and essential in technical analysis. Volume provides evidence of buying or selling interest within a given price move. Because volume often leads price, it can be a valuable indicator. Moving Averages Moving averages (MA) are one of the easiest and most popular tools available. MAs smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays. A 20-day MA, for example, is constructed by adding up the closing prices from the past 20 days and divides them by 20. As time passes, the MA will change because prices are constantly changing. The most commonly used moving averages are the 20, 30, 50 and 100 day MAs. Shorter length moving averages are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but only pick up the big trends
Sell Signal
Buy Signal
Signals to buy or sell are generated when the price crosses the MA. Like trendlines, the MA can provide a guide to support and resistance. Generally, when an MA has been crossed by the actual price it means that the MA acts as support or resistance. As the MA is a lagging indicator, a price crossover will usually mean that a trend reversal has taken place. The longer the MA, the greater is the significance of a crossover. For example, the crossover of a 50-day MA is more significant than that of a 20-day MA. Moving Average Crossover Sometimes it is useful to employ more than one moving average. Double MAs often provide useful signals.
Sell Signal
Buy Signal
With two MAs, a buy signal is produced when the shorter average crosses above the longer, and the reverse is true for the sell signal. Two common combinations are the 5 and 20-day averages and the 20 and 100-day averages. This method of using two MAs The technique of using two averages together can lag the market more than a single moving average but this method will produce fewer whipsaws (frequent changes in buy/sell signals).
Accumulation/Distribution The Accumulation-Distribution (AD) chart tracks buying pressure (accumulation) and selling pressure (distribution) on a stock. When accumulation occurs in a trading day, this means that most of the day’s trading volume is associated with upward price movement. The reverse is true of distribution.
AD Line Increasing
AD Line Decreasing
Price Decreasing
Price Increasing
Divergence – Buy Signal
Convergence – Sell Signal
The AD is a cumulative sum of positive accumulation values (buying pressure) and negative distribution values (selling pressure). If today's close is closer to the day’s high, then accumulation occurred for today. If today's close is close to the day’s low, then distribution occurred for today. A buy signal is obtained with by falling stock prices and a rising AD (also known as divergence). Conversely, a selling signal is obtained with by rising prices and a falling AD (also known as convergence). Because the AD is a leading indicator, when a divergence/convergence occurs, the price usually changes accordingly.
Chaikin Oscillator Just like the Accumulation/Distribution Line can be used to predict the future trend of stock prices, the Chaikin can be used to predict the trend of the Accumulation/Distribution Line. This means that movements in the Accumulation/Distribution Line are usually preceded by corresponding movements in the Chaikin Oscillator.
AD Line Decreases
Chaikin Increases
Stock Price Increase
Divergence Period Stock Price Increase Period
Divergence between Chaikin and AD Line
Price rises shortly after
When positive divergence in the Chaikin Oscillator with the Accumulation/Distribution Line occurs, this will usually be followed by a corresponding rise in the actual stock price. See pictures above. Conversely, when convergence occurs in the Chaikin Oscillator with the Accumulation/Distribution Line occurs, this will usually be followed by a corresponding drop in the actual stock price.
Bollinger Bands Bollinger Bands are used to provide an indication of whether current trends are likely to continue or reverse. They can also be used to determine the relative volatility of a market, based on the width of the band.
Tight band – indicating imminent trend change
This technique is one of the most popular forms of envelopes or channel indicators. Bollinger Bands are made of two parallel winding lines that create a band or channel. This band will contain the majority of price movements and are sensitive to volatility in the market. The bands are spread far apart during volatile markets and close together during calmer markets. When prices move outside the bands, this usually implies a continuation of the current trend. When the bands are unusually far apart, the current trend may be ending. When the two bands are very tight, the market may be about to initiate a new trend.
Relative Strength Index The RSI is a momentum indicator, or oscillator. It can provide early warning signals of trend changes but should be used in conjunction with other indicators. The RSI measures the relative changes between different closing prices, and provides an indication of overbought and oversold conditions.
Overbought – Sell Signal Oversold – Buy Signal
RSI is plotted on a vertical scale of 0 to 100. When the RSI is above 70%, it is considered overbought. When it is below 30%, it is considered oversold. An overbought or oversold condition merely indicates that the current price is considered relatively high/low as compared to its previous prices. It is therefore just an indication that there may be an opportunity to buy or sell, but does not provide the final signal. When the RSI crosses above the 70% level, it basically is a warning for you to prepare to sell. When the RSI falls below 30% you have a warning to prepare to buy. The actual buy and sell signals are when the RSI reverses and crosses through the 50% level. Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. Please see chart above.
Williams %R The Williams %R is a momentum indicator that identifies overbought or oversold markets. The indicator is plotted on an inverted 0 to 100 scale. Generally, readings below 90% give a buy indication - during bull markets. And readings above 10% give a sell signal during bear markets. As with other momentum indicators, the Williams %R is not very useful in a sideways market. The market needs to be either trending up or down for the signals to be reliable.
Overbought – Sell Signal Overbought – Sell Signal
Oversold – Buy Signal
Oversold – Buy Signal
Some other traders use readings below 80% to indicate oversold markets and readings above 20% to indicate overbought markets. These levels can also be used as early warning signals. The actual buy signal is triggered when the Williams %R has bottomed and is now trending upwards. Conversely, the actual sell signal is when the Williams %R has topped and is now trending downwards.
Moving Average Convergence/Divergence (MACD) The MACD is a momentum indicator that shows the relationship between two moving averages of prices. The MACD is basically a difference between a 26-day and 12-day exponential moving average and are displayed as a series of vertical lines. A blue signal line, a 9-day exponential moving average, is plotted on top of the MACD to show buy/sell opportunities.
A sell signal occurs when the MACD falls below its signal lineSimilarly, a buy signal occurs when the MACD rises above its signal line. Some traders also buy/sell when the MACD goes above/below zero. The MACD can be used as an overbought/oversold indicator. When the MACD lengthens, it is likely that the stock price is overbought/oversold and will soon return to more realistic levels. MACD can also provide warning of important market turns through divergence/convergence. When the MACD diverges from the stock price, it can provide a signal that a trending market may reverse. A positive divergence occurs when MACD begins to advance and the market is still in a downtrend and makes a new low. Stock prices may subsequently reverse their downtrend. Conversely, a convergence occurs when MACD begins to decline and the market is still in a uptrend and makes a new high. Stock prices may subsequently reverse their uptrend.
Reversal Forecasting - Williams’ 1.28 Rule Reversal forecasting is a technique that lets traders forecast the next price reversal. The Williams’ 1.28 rule was devised by Larry Williams that makes use of high or low points. The example below illustrates the use of this rule.
High
High
Two consecutive high points were identified and the number of trading days in between these points was counted. You can do this in ShareJunction by dragging your mouse in the chart. As you drag your mouse, the number of days between the start and end of the line is displayed at the bottom of the chart. In the example above, the number of days in between 2 consecutive highs is 15 days. Multiply that number by 1.28. The next reversal day should then be a couple of days around 19.2 days from the lowest close between the high points.
Reversal
High High
Low
From the chart above, around 19 days after the identified low point, a price reversal occurred in early January. Reversal forecasting when used with other charts can provide the trader with a powerful tool for forecasting price changes.
Reversal Forecasting – Fibonacci Method The Fibonacci method is very similar to the Williams’ 1.28 rule. It also makes use of high or low points. The example below illustrates the use of this rule.
High
High
Two consecutive high points were identified and the number of trading days in between these points was counted. In the example above, the number of days in between 2 consecutive highs is 15 days. Multiply that number by 1.618. The next reversal day should then be a couple of days around 24.27 days from the second high point.
Reversal
High High
From the chart above, around 24 days after the identified low point, a price reversal occurred in mid January.
Bar Chart
High Open Close
Low
Bar charts contain a series of bars that represents a trading day’s price action. Each bar contains information showing the trading day’s low, high, open and close prices. The bar chart is the most popular choice for displaying stock price information.
Line Chart
The Line Chart contains a continuous line representing only the closing prices of a stock.
Volume
The use of volume is basic and essential in technical analysis. Volume provides evidence of buying or selling interest within a given price move. Because volume often leads price, it can be a valuable indicator. Moving Averages Moving averages (MA) are one of the easiest and most popular tools available. MAs smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays. A 20-day MA, for example, is constructed by adding up the closing prices from the past 20 days and divides them by 20. As time passes, the MA will change because prices are constantly changing. The most commonly used moving averages are the 20, 30, 50 and 100 day MAs. Shorter length moving averages are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but only pick up the big trends
Sell Signal
Buy Signal
Signals to buy or sell are generated when the price crosses the MA. Like trendlines, the MA can provide a guide to support and resistance. Generally, when an MA has been crossed by the actual price it means that the MA acts as support or resistance. As the MA is a lagging indicator, a price crossover will usually mean that a trend reversal has taken place. The longer the MA, the greater is the significance of a crossover. For example, the crossover of a 50-day MA is more significant than that of a 20-day MA. Moving Average Crossover Sometimes it is useful to employ more than one moving average. Double MAs often provide useful signals.
Sell Signal
Buy Signal
With two MAs, a buy signal is produced when the shorter average crosses above the longer, and the reverse is true for the sell signal. Two common combinations are the 5 and 20-day averages and the 20 and 100-day averages. This method of using two MAs The technique of using two averages together can lag the market more than a single moving average but this method will produce fewer whipsaws (frequent changes in buy/sell signals).
Accumulation/Distribution The Accumulation-Distribution (AD) chart tracks buying pressure (accumulation) and selling pressure (distribution) on a stock. When accumulation occurs in a trading day, this means that most of the day’s trading volume is associated with upward price movement. The reverse is true of distribution.
AD Line Increasing
AD Line Decreasing
Price Decreasing
Price Increasing
Divergence – Buy Signal
Convergence – Sell Signal
The AD is a cumulative sum of positive accumulation values (buying pressure) and negative distribution values (selling pressure). If today's close is closer to the day’s high, then accumulation occurred for today. If today's close is close to the day’s low, then distribution occurred for today. A buy signal is obtained with by falling stock prices and a rising AD (also known as divergence). Conversely, a selling signal is obtained with by rising prices and a falling AD (also known as convergence). Because the AD is a leading indicator, when a divergence/convergence occurs, the price usually changes accordingly.
Chaikin Oscillator Just like the Accumulation/Distribution Line can be used to predict the future trend of stock prices, the Chaikin can be used to predict the trend of the Accumulation/Distribution Line. This means that movements in the Accumulation/Distribution Line are usually preceded by corresponding movements in the Chaikin Oscillator.
AD Line Decreases
Chaikin Increases
Stock Price Increase
Divergence Period Stock Price Increase Period
Divergence between Chaikin and AD Line
Price rises shortly after
When positive divergence in the Chaikin Oscillator with the Accumulation/Distribution Line occurs, this will usually be followed by a corresponding rise in the actual stock price. See pictures above. Conversely, when convergence occurs in the Chaikin Oscillator with the Accumulation/Distribution Line occurs, this will usually be followed by a corresponding drop in the actual stock price.
Bollinger Bands Bollinger Bands are used to provide an indication of whether current trends are likely to continue or reverse. They can also be used to determine the relative volatility of a market, based on the width of the band.
Tight band – indicating imminent trend change
This technique is one of the most popular forms of envelopes or channel indicators. Bollinger Bands are made of two parallel winding lines that create a band or channel. This band will contain the majority of price movements and are sensitive to volatility in the market. The bands are spread far apart during volatile markets and close together during calmer markets. When prices move outside the bands, this usually implies a continuation of the current trend. When the bands are unusually far apart, the current trend may be ending. When the two bands are very tight, the market may be about to initiate a new trend.
Relative Strength Index The RSI is a momentum indicator, or oscillator. It can provide early warning signals of trend changes but should be used in conjunction with other indicators. The RSI measures the relative changes between different closing prices, and provides an indication of overbought and oversold conditions.
Overbought – Sell Signal Oversold – Buy Signal
RSI is plotted on a vertical scale of 0 to 100. When the RSI is above 70%, it is considered overbought. When it is below 30%, it is considered oversold. An overbought or oversold condition merely indicates that the current price is considered relatively high/low as compared to its previous prices. It is therefore just an indication that there may be an opportunity to buy or sell, but does not provide the final signal. When the RSI crosses above the 70% level, it basically is a warning for you to prepare to sell. When the RSI falls below 30% you have a warning to prepare to buy. The actual buy and sell signals are when the RSI reverses and crosses through the 50% level. Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. Please see chart above.
Williams %R The Williams %R is a momentum indicator that identifies overbought or oversold markets. The indicator is plotted on an inverted 0 to 100 scale. Generally, readings below 90% give a buy indication - during bull markets. And readings above 10% give a sell signal during bear markets. As with other momentum indicators, the Williams %R is not very useful in a sideways market. The market needs to be either trending up or down for the signals to be reliable.
Overbought – Sell Signal Overbought – Sell Signal
Oversold – Buy Signal
Oversold – Buy Signal
Some other traders use readings below 80% to indicate oversold markets and readings above 20% to indicate overbought markets. These levels can also be used as early warning signals. The actual buy signal is triggered when the Williams %R has bottomed and is now trending upwards. Conversely, the actual sell signal is when the Williams %R has topped and is now trending downwards.
Moving Average Convergence/Divergence (MACD) The MACD is a momentum indicator that shows the relationship between two moving averages of prices. The MACD is basically a difference between a 26-day and 12-day exponential moving average and are displayed as a series of vertical lines. A blue signal line, a 9-day exponential moving average, is plotted on top of the MACD to show buy/sell opportunities.
A sell signal occurs when the MACD falls below its signal lineSimilarly, a buy signal occurs when the MACD rises above its signal line. Some traders also buy/sell when the MACD goes above/below zero. The MACD can be used as an overbought/oversold indicator. When the MACD lengthens, it is likely that the stock price is overbought/oversold and will soon return to more realistic levels. MACD can also provide warning of important market turns through divergence/convergence. When the MACD diverges from the stock price, it can provide a signal that a trending market may reverse. A positive divergence occurs when MACD begins to advance and the market is still in a downtrend and makes a new low. Stock prices may subsequently reverse their downtrend. Conversely, a convergence occurs when MACD begins to decline and the market is still in a uptrend and makes a new high. Stock prices may subsequently reverse their uptrend.
Reversal Forecasting - Williams’ 1.28 Rule Reversal forecasting is a technique that lets traders forecast the next price reversal. The Williams’ 1.28 rule was devised by Larry Williams that makes use of high or low points. The example below illustrates the use of this rule.
High
High
Two consecutive high points were identified and the number of trading days in between these points was counted. You can do this in ShareJunction by dragging your mouse in the chart. As you drag your mouse, the number of days between the start and end of the line is displayed at the bottom of the chart. In the example above, the number of days in between 2 consecutive highs is 15 days. Multiply that number by 1.28. The next reversal day should then be a couple of days around 19.2 days from the lowest close between the high points.
Reversal
High High
Low
From the chart above, around 19 days after the identified low point, a price reversal occurred in early January. Reversal forecasting when used with other charts can provide the trader with a powerful tool for forecasting price changes.
Reversal Forecasting – Fibonacci Method The Fibonacci method is very similar to the Williams’ 1.28 rule. It also makes use of high or low points. The example below illustrates the use of this rule.
High
High
Two consecutive high points were identified and the number of trading days in between these points was counted. In the example above, the number of days in between 2 consecutive highs is 15 days. Multiply that number by 1.618. The next reversal day should then be a couple of days around 24.27 days from the second high point.
Reversal
High High
From the chart above, around 24 days after the identified low point, a price reversal occurred in mid January.
