Undergraduate Investment Society Introduc)on to Technical Analysis Thursday, January 20, 2011 Prepared by: Kenny Lee
Key Terms/Concepts – 1 • Technical Analysis: An analysis of a stock or commodity that does not take the value of the underlying asset into account. – Technical analysis only looks at the price movement of the stock or commodity. – Based on three assumpJons: • Market discounts everything • Price moves in trends • History tends to repeat itself 2
Key Terms/Concepts -‐ 2 • Trend: General direcJon in which a stock or commodity is moving. • Uptrend: A series of higher highs and higher lows. (Bullish) • Downtrend: A series of lower highs and lower lows. (Bearish) • Channel: Two parallel trend lines that act as areas of support and resistance. – Upper trend line connects a series of highs – Lower trend line connects a series of lows
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Key Terms/Concepts -‐ 3 • Support: The price of a stock/commodity that seldom moves below. • Resistance: The price of a stock/commodity that seldom moves above.
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The Basic Set-‐Up •
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Short-‐Term Crude Oil
What can we see on this chart? 6
Short-‐Term Crude Oil
• Crude oil price is greater than MA 20, 50, 200 = bullish • Price bounced off the 50 and 20 day MA in November 2010 and January 2011 • Support at $88… took out exisJng resistance at $88 in November 7
Short-‐Term Analysis • When the short-‐term (20) MA is higher than the intermediate-‐term (50) MA, it means the trend is up. In the case of crude oil in the previous slide… 90.76 > 88.02 = Uptrend! • Every Jme the price falls to the 20 and 50 day moving average, it bounces back up. That shows investors are conJnuing to buy on the dips. • New support level at $88 means that there will be a lot of buyers when it hits that support level, it’s a psychological floor for investors. 8
Intermediate-‐Term Crude Oil
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Intermediate-‐Term Crude Oil
• Strong uptrend starJng from Aug. 2010 • Broke resistance at $84 • New support at $88 10
Long-‐Term Crude Oil
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Long-‐Term Crude Oil
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Price of Crude Oil above SMA 20, 50, 200 Long-‐term resistance at $85 finally broken, is now a support level Long-‐term resistance at $70 is now a second support level On a two year uptrend Traded in a channel from Oct. 2009 to Nov. 2010
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The Take-‐Away • Crude-‐oil seems to be in an uptrend from a short-‐term, intermediate-‐term, and long-‐term perspecJve • Technical analysis is not to be construed as 100% accurate. If used correctly, you can have a beier than 50/50 chance of guessing the correct price movement
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RSI •
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ADX • ADX (Average DirecJonal Index): An oscillator that fluctuates between 0 and 100. – < 20 means a weak trend, > 30 is a strong trend
• Signals:
– Bullish when +DI crosses over –DI line – Bearish when +DI crosses below the –DI line
• Math of +DI and –DI – – – –
UpMove = High(t) – High(t-‐1) Downmove = Low(t-‐1) – Low(t) If UpMove > DownMove & UpMove > 0, then +DM = UpMove If DownMove > UpMove & DownMove > 0, then –DM = DownMove
• ADX does not indicate trend direcJon, just the strength of the trend • Full derivaJon of ADX, +DI, -‐DI can be found at: <hip:// excelta.blogspot.com/2007/11/average-‐direcJonal-‐index-‐ adxmeaning.html>
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MACD • MACD (Moving Average Convergence/Divergence): A technical indicator used to spot changes in the strength, direc5on, momentum, and dura5on of a trend in a stock’s price. • Components of MACD: – MACD: EMA(12) – EMA(26) – Signal: EMA(9) of MACD – MACD Histogram: MACD – Signal Line
• What does this all mean? – When MACD > Signal = Bullish – When MACD < Signal = Bearish 16
Let’s analyze some charts! • The set-‐up for the following charts: – Website: hip://www.stockcharts.com – Overlay: SMA 20, 50, 200 – Indicators: RSI [14] (above); MACD [12, 26, 9] & Wilder’s DMI (ADX) [14] (below) – DuraJon: 3 month, daily, candlesJck, non-‐log scale
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CandlesJck 3 Month Symbol: CMI
Can you make some projecJons?
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RSI almost 70… overbought
Support at $107.50 Uptrend since Nov.
MACD < Signal… bearish +DI is weakening from 40 to 24.76 19
CandlesJck 3 Month Symbol: GLD
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RSI is neutral
Resistance at 139 Support at 133 Possible channel?
MACD < Signal Bearish… -‐DI > +DI… but >30, hard to say… leaning bearish 21
CandlesJck 3 Month Crude Oil
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RSI Neutral
Support at $88 2 month uptrend
Neutral MACD
Weak –DI, +DI Neutral 23
Recap Signal
RSI
ADX
MACD
What does it look Price DirecJon at?
Price Strength, DirecJon
Movement Strength
Strength, DirecJon, Momentum
Bullish
Price > Signal
Anything < 30
+DI > -‐DI, preferably > 30
MACD > Signal
Bearish
Price < Signal
Anything > 70
-‐DI > +DI, preferably > 30
MACD < Signal
• • • •
SMA, EMA (x)
When a stock/commodity is trading at resistance, wait for a breakout When a stock/commodity is trading at support, an opportunity to buy For short-‐term trading, when SMA, EMA (20) > SMA, EMA (50), it’s a buy signal For intermediate & long term trading, SMA, EMA (50) > SMA, EMA (200), buy!
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References • Investopedia.com: Technical Analysis • Stockcharts.com, data accurate as of 1/18/11
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QuesJons?
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