Technical
The job of technical analysis is to synthesize the overall trend, support, resistance, momentum, buying/selling pressure, and relative strength in order to ascertain:
- Strength of the current trend.
- Maturity or stage of the current trend.
- Reward-to-risk ratio of a new position.
- Potential entry levels for a new long position.
technical analysis of stocks is based on the principle that past price movements are a predictor of the future moves in price. Trading volume is often combined with prior price movement to help improve these price prediction models.
The reason technical analysis has value is that directional price moves are often sustained for a period of time, allowing analysts to detect and profit from the change in price.
Only historical price and volume data is used for technical analysis.
- price and volume often reveal the collective psychology (the “fear/greed balance”) of a market's participants
- charts can reveal changes in the fear/greed balance soon after those changes occur and that provides opportunities for profitable trades
Technical analysis can only be used to determine the likely direction of future prices. It cannot anticipate news events or how investors will respond to them.
Linear Regression
- When considering stocks, the two variables we are: time (IV) and price (DV)
- Using linear regression, a trader can identify key price points— entry price, stop-loss price, and exit prices.
Terms
Price action
- def - the actual historical price of the stock that you see when you look at a chart. This is to be contrasted with non-actual prices, such as moving averages
Resistance, Support & Momentum
A stock is said to be in a period of congestion when its movement is confined by its resistance and support barriers (in other words, within the trading range). When we are in this period, the implication is that the forces of supply and demand are deadlocked. When prices move out of this trading range, it signals that either supply or demand has started to get the upper hand. If prices move above the upper band of the trading range (ie. break resistance), then demand is winning. If prices move below the lower band (ie. break support), then supply is winning.
Things to keep in mind:
- Resistance + Support Lines are horizontal, while diagonal lines are known as Trend Lines
- trend lines tend to be more open to interpretation than horizontal resistance + support lines.
- The more recent levels of support or resistance are more relevant in comparison to levels that are from further in the past.
- Levels of support or resistance that are tested often are stronger than levels only tested once and therefore they are harder to break through.
- Look for individual indecision candles in the area of support or resistance because that is where the buyers and sellers are fighting to take control.
- An engulfing candle or doji at support or resistance will help confirm a possible price action reversal.
- Often half-dollar ($0.50) and whole dollar numbers act as a support or resistance level, especially in lower than $10.00 stocks.
- Support or resistance lines do not give you an exact price. They are more of an “area” where you will find this level.
- The level of support or resistance should provide a very clear indication that it is in fact a level of support or resistance. If after reaching that price the stock flounders around that price level, and does not clearly reverse direction, then it may not be respecting that level. A common phrase is “the trend is your friend” – floundering around a price level will, more often than not, result in the price action continuing in the direction it was going initially.
- If the price of a stock breaks through a level of resistance and continues higher, then that level of resistance now becomes a level of support if a downturn in price occurs. The same applies for downtrending stocks that break a level of support. That level of support now becomes a resistance level should the stock turn and try to move higher.
- For swing trading, you can use other tools to confirm support or resistance.
- You can look at moving averages like the 20, 50 and 200-day moving averages because an apparent level of support or resistance may also be happening at one of those levels.
- Other tools can be used, such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD), may also be used to confirm your assumption about a level of support or resistance.
Resistance
- Resistance is a price level where selling is strong enough to interrupt or reverse an uptrend.
- Resistance is represented in a chart by a horizontal line connecting 2 or more tops.
- When a stock is on the uptrend, a portion of the stock's owners will have sell limit orders where they want to take their profit. This causes the stock to hit a seemingly arbitrary line, called the
resistance
Support
- Support is a price level where buying is strong enough to interrupt or reverse a downtrend
- Support is represented in a chart by a horizontal line connecting 2 or more bottoms
- When a stock is on the downtrend, there are more and more buyers who want to buy in at the better and better discounts. This puts upward pressure on the stock
Momentum
Momentum is usually measured with an oscillator such as MACD. If MACD is above its 9-day EMA (exponential moving average) or positive, momentum will be considered bullish or at least improving.
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