by Profit Scanner | April 10, 2014 10:45 am
Profit Scanner powered by Recognia uses technical analysis to help traders and investor alike discover opportunity in the market. However, if you’re not all that familiar with technical analysis, here’s a look at some different patterns and metrics we look at, and why they’re important.
In alphabetical order…
The Commodity Channel Index (CCI) measures the deviation of the price from its average value, and traders use it to signal when a stock is oversold (bullish) or overbought (bearish).
After a temporary interruption, the prior uptrend is set to continue. A Continuation Wedge (Bullish) represents a temporary interruption to an uptrend, taking the shape of two converging trendlines both slanted downward against the trend. During this time the bears attempt to win over the bulls, but in the end the bulls triumph as the break above the upper trendline signals a continuation of the prior uptrend.
This pattern tells traders that after a temporary interruption, the prior downtrend is set to continue. A Continuation Wedge (Bearish) represents a temporary interruption to a downtrend, taking the shape of two converging trendlines both slanted upward against the trend. During this time the bulls attempt to win over the bears, but in the end the bears triumph as the break below the lower trendline signals a continuation of the prior downtrend.
When a Descending Continuation Triangle materializes, it tells traders that sellers have become more active than buyers. A break down through the stock’s support confirms this, signaling that a prior downtrend is likely to continue.
As with anything in a market, a stock’s price is dependent upon supply and demand. The Descending Continuation Triangle tends to form because a supply of the shares at a specific price is available to meet demand, which is represented by a lower flat line on the chart that serves to prop up the price. But when buyers deplete the supply, the shares rapidly break down and fall below the bottom boundary line and continue moving lower.
This pattern tells traders that the recent uptrend is due to reverse, now that selling pressure has overwhelmed prior buying pressure. Following a clear uptrend, we see two candlesticks where the black real body of the second completely envelops the white real body of the first, showing that the bears have taken over from the bulls.
A Head-and-Shoulders Bottom tells traders a stock’s price seems to have reached the end of a period of “accumulation” at the bottom of a major downtrend; the break up through resistance signals a reversal to a new uptrend. The Head and Shoulders Bottom is created by three successive declines in the price following a significant downtrend.
A bearish Head-and-Shoulders Top can signal that prices seem to have reached the end of a “distribution” period at the top of a major uptrend. The stock breaks down through support, pointing to a reversal that would result in a new downtrend.
An Inside Bar develops during a strong downtrend, when the trading range is completely within the boundaries of the prior bar. A bullish Inside Bar tells traders that the balance between buyers and sellers, recently dominated by the bears, is smoothing out. We may see higher prices ahead. This suggests increasing power for the bulls.
The KST, or “Know Sure Thing,” is an oscillator that combines multiple time frames into a single measure of momentum. It most commonly indicates bullish and bearish momentum signals as it crosses above and below its moving average.
Moving averages (MAs) are incredibly important to technical analysis. You don’t need to be an expert to use them effectively but it’s key to know that moving averages track the average price of a stock or index over a specific time period, such as days, weeks, months. They appear as lines on a chart, and each bar in a chart represents a time period. In a weekly chart, for example, the time period represents one week.
Traders typically use moving averages to remove the “noise” of the market’s short-term volatility, which makes major trends easier to identify. They can also help gauge momentum changes in an equity.
Though the “exponential moving average” (EMA) can be insightful, the “simple moving average” (SMA) is the most basic type, and it’s what we’ll look at in some of the following charts. The SMA attributes equal weight to all time periods and averages out the sum. Hence, the 50-day moving average would typically average the closing price of each of the past 50 trading days.
To use moving averages more effectively, traders look at when they “cross” or “crossover” in two main ways:
In general, the longer the time period the moving average looks at, the longer the trend is expected to be in place. Good rules of thumb are:
As the Profit Scanner powered by Recognia tells us, the MACD (Moving Average Convergence Divergence) plots the difference between a shorter-term (12-bar) and a longer-term (26-bar) exponential moving average (EMA). Bullish and bearish events are generated respectively as the MACD fluctuates above and below zero to indicate whether prices in the shorter term are stronger or weaker than the longer term average. A 9-period EMA of the MACD is overlayed as a “signal line,” which smoothes out the MACD to provide a clearer view of whether it’s moving upward or downward.
A bullish event is generated when the MACD crosses above the signal line, showing that the current MACD is actually higher than its average, a sign of increasing strength for the price.
A Bullish Symmetrical Continuation Triangle tells traders the price has broken upward out of a consolidation period, suggesting a continuation of a previous uptrend.
This pattern tells trades that price has broken downward out of a consolidation period, suggesting a continuation of the prior downtrend. A Bearish Symmetrical Continuation Triangle shows two converging trendlines as prices reach lower highs and higher lows. Volume diminishes as the price swings back and forth between an increasingly narrow range reflecting uncertainty in the market direction. Then well before the triangle reaches its apex, the price breaks down below the lower trendline with a noticeable increase in volume, confirming the pattern as a continuation of the prior downtrend.
Williams Percent Range (often written as %R) is a basic momentum indicator that uses recent prices and volume to measure on overbought or oversold condition; see here for more on how traders use it.
Profit Scanner powered by Recognia can help traders of all levels uncover these signals to determine the best timing to buy. Or use Profit Scanner’s technical insight to validate your own trading ideas. See how easy this powerful tool is to help you uncover hidden opportunities in the market.
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