AIC SAW Fall 2010:
Technical Analysis
Sean Eimer
Diaries of a Trader
1)Apple (Aapl)
2)SanDisk (SNDK)
Apple
Quote:
Originally Posted by Fibman2005 on 8/24
I'm actually going bullish here. I agree, if it does
break below that level with conviction I can see it
going to 230. I bought a position at 241 looking
for a bounce. Full STO is oversold and Apple is
sitting on support right now with selling
volume declining. I think Apple will sit on
support until the market finds support. If Apple
does break below 239 (my stop) I'll buy more at the
230 level. Apple is range bound right now and
my target is set around 265-270. My analysis is
based of TA, but from a fundamental perspective
I like Apple at 14.8x forward earnings anyways.
To be clear, I have two portfolios and I have a long
position on Apple I don't trade in one, and in the
other I'm making a trade on Apple.
Posted on 8/31
I think the market is about to find support and I
think Apple can easily hit my target once the market
starts to take off. Apple has been holding pretty
well right at support ahead of tomorrows event.
I sold my margin on Apple at 244.20 today in
after-hours and will hold my original position
through the event. I'm looking to add more at a
pullback if we take off tomorrow or add more if we
break through support tomorrow. Keep in mind the
200 day moving average is at 231ish right now.
GLTA!
Current Stock Chart (Apple)
23.88% Since August 24th
SanDisk
Quote:
Originally Posted by Fibman2005
I actually like SNDK as a short here. The stock has been
in a healthy uptrend from 2009 to mid 2010 then traded
sideways. The stock recently broke through support and
is now testing the 38 level. SNDK posted a doji on the
daily w/ the high being 37.54 on Friday.
Until I get a better picture of trends in the NAND chip
market, this is going to be a trade instead of an investmet.
Demand still seems to be strong for NAND chips, but I fear
oversaturation which would lead to a decline in ASP for NAND
chips, a key revenue driver for Sandisk.
I'm going to short on Monday anywhere around 36 - 38 w/ a
stop around 38.50. In my experience, a doji at resistance
is usually bearish. Notice, the volume on the break of
support and the decrease of buying volume as the
stock went from 32 to 37.
SanDisk Enlarged
SanDisk Enlarged
What is Technical Analysis
Technical analysis is a method of evaluating securities by analyzing
the statistics generated by market activity, such as past prices
and volume. Technical analysts do not attempt to measure a
security's intrinsic value, but instead use charts and other tools to
identify patterns that can suggest future activity.
Basic Assumptions:
1) Market discounts everything
2) Price moves in trends
3) History tends to repeat itself
The Bottom Line:
Technical Analysis helps
define price objectives,
define risk, and take
emotion out of the trade
Technical analysts examine what investors fear or
think about fundamental developments
Technical Analysis combines the concept of
psychology and supply/demand.
Price action also tends to repeat itself because
investors collectively tend toward patterned
behavior – hence technicians' focus on identifiable
trends and conditions.
Static vs. Dynamic
Herd Mentality
Zero-Sum Game
Market Discounts Everything
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A major criticism of technical analysis is that it only considers
price movement, ignoring the fundamental factors of the
company.
However, technical analysis assumes that, at any given
time, a stock's price reflects everything that has or could
affect the company - including fundamental factors.
Technical analysts believe that the company's
fundamentals, along with broader economic factors and
market psychology, are all priced into the stock, removing
the need to actually consider these factors separately.
This only leaves the analysis of price movement, which technical
theory views as a product of the supply and demand for a
particular stock in the market.
Identifying the Trend:
“The trend is your friend”
What is a Trendline?
What Does a Trendline Mean?
A line that is drawn over pivot highs or under pivot lows to show
the prevailing direction of price. Trendlines are a visual
representation of support and resistance in any time frame.
Two types of trends:
1) Uptrend
2) Downtrend
Three Types of Markets:
1) Up
2) Down
3) Sideways
Moving Averages:
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Moving averages can be used to identify the
direction of the trend or define potential support
and resistance levels
Types of Moving Averages:
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Simple Moving Average
Exponential Moving Average
Time Series
Volume Weighted Moving Average (VWAP)
Triangular Moving Average
Variable Moving Average
How to use moving averages is more
important than the definitions. Most people
don’t know how to use moving averages
properly
Simple Moving Average
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A simple moving average is formed by computing
the average price of a security over a specific
number of periods. Most moving averages are
based on closing prices. As its name implies, a
moving average is an average that moves.
Popular time frames:
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10 day
20 day
50 day
100 day
200 day
Exponential Moving Average
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Exponential moving averages reduce the lag by
applying more weight to recent prices. The
weighting applied to the most recent price
depends on the number of periods in the moving
average.
Popular time frames:
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5 day
10 day
20 day
30 day
50 day
100 day
Which ema should
you use and when?
Moving Average Crossovers
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Used to identify changes in the trend
Most widely known is the golden cross where the 50 day
moving average crosses above the 100 day moving average
Ichimoku Clouds
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The Ichimoku Cloud is a versatile indicator that defines
support and resistance, identifies trend direction, gauges
momentum and provides trading signals.
With one look, chartists can identify the trend and look for
potential signals within that trend.
Trading Using the Cloud
We’ll go in more detail in later SAW presentations
Support & Resistance
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We’ve mentioned moving averages and trendlines
can act as support or resistance, but what does
that really mean?
Is Support and Resistance analogous to Supply
and Demand?
Is the market really just one large auction made
up of buyers and sellers?
Support & Resistance
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Support and resistance represent key junctures where the
forces of supply and demand meet.
Prices are driven by excessive supply (down) and demand
(up)
Supply = bearish, bears and selling
Demand = bullish, bulls and buying
As demand increases, prices advance
As supply increases, prices decline
When supply and demand are equal, prices move sideways
as bulls and bears fight for control
Support:
The price level at which demand is thought to be
strong enough to prevent the price from declining
further.
The logic dictates that as the price declines towards support and gets
cheaper, buyers become more inclined to buy and sellers become less
inclined to sell.
Resistance:
The price level at which selling is thought to be
strong enough to prevent the price from rising
further
The logic dictates that as the price advances towards resistance,
sellers become more inclined to sell and buyers become less inclined
to buy.
Note:
Technical analysis is not an exact science and it is sometimes difficult to
set exact support & resistance levels. In addition, price movements can
be volatile and dip below support & resistance briefly. Sometimes it does
not seem logical to consider a support level broken if the price closes 1/8
below the established support level. For this reason, some traders and
investors establish support zones.
Also, its often common for resistance to become support or support to
become resistance when a stock rises or falls
Possibly (not exact) = Dynamic???
So where does volume come into the equation and
can it be used as a confirmation since we
established the market is just one big auction?
How do you define a support or resistance zone and
how do you interpret that?
What does volume mean?
Volume
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The number of shares or contracts traded in a
security or an entire market during a given
period of time. It is simply the amount of
shares that trade hands from sellers to
buyers as a measure of activity
Used to measure the worth of a market move. If
the markets have made strong price move either
up or down the perceived strength of that
move depends on the volume for that period
Bottom Line: The higher the volume during
that price move the more significant the
move
Volume as Confirmation:
Support & Resistance Zones
(by Volume)
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We’ll go over in more detail Volume by Price in
later SAW presentations
BUT Volume by Price is a great way to define
support and resistance zones by showing the
level of strength of the zone by the amount of
market participants
Volume by Price – Showing
We’ll go over
Gaps
trading Gaps in
more detail in
later SAW
presentations, but
vol. by price help
identify gaps.
Basically, gaps
act as resistance
or support and
usually get filled.
There are some
very profitable
trading tactics to
profit from gaps
we’ll discuss in
future SAWs
Volume by Price Examples
The chart shows a long
Volume by Price bar
marking support around
42-44 in mid August.
Also notice that the stock
forged at least three
reaction lows around 42
from early July to mid
August. This support
(demand) zone is clearly
marked.
Volume by Price Examples
The chart shows
SNDK breaking
below the previously
identified Volume
by Price support
zone with high
volume.
Demand crumbled,
supply won the day
and prices moved
sharply lower.
Market Indicators
This is where it gets fun
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I have counted over 100 different types of market
indicators on Think or Swim platform and that number will
continue to grow as traders come up with new indicators
Popular indicators:
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Average True Range (ATR)
Commodity Channel Index (CCI)
Chaikin Money Flow (CMF)
Detrended Price Oscillator (DPO)
Moving Average Convergence-Divergence (MACD)
Money Flow Index (MFI)
On Balance Volume (OBV)
Percentage Price Oscillator (PPO)
TRIX
Ultimate Oscillator
Williams %R
Relative Strength Index
Is the Market Trending or
Oscillating?
How the market is acting will determine which indicators we should use
You SHOULD NEVER USE oscillating indicators when the market is
trending or vice versa…NEVER!
Oscillating:
Moving up and down with
no apparent trend
Popular Oscillating
Indicators:
1) Full Stochastics
2) Williams %R
3) Force Index
We’ll discuss more in greater
detail in future SAWs. For now
we’ll focus on the most
important one…Full Stochastics
Stochastic Calculus?
Stochastic calculus is a branch of mathematics that operates on
stochastic processes. It allows a consistent theory of integration to be
defined for integrals of stochastic processes with respect to stochastic
processes. It is used to model systems that behave randomly
Stochastic Calculus and how it relates to interpreting cycles and stock patterns in the market is what I’m
currently doing my research on. Part of my thesis relates to taking static indicators and making them
dynamic. I’ve taken this concept and have been creating my own indicator that can show whether the
market is trending or oscillating and how to trade that cycle.
Some interesting phenomenon occurs when you use stochastic calculus on a summation index, price
ratios, etc. Basically anything put price.
•For our purposes though, we’ll just start off with using the Full Stochastic
Indicator
Full Stochastic
How do you know
what time frame to
use?
How do you know
what parameters to
use?
Is it easier to short
or go long using
Stochastics?
Notice how combining Full Stochastics and support/resistance
make for profitable trades
Is the Market Trending or
Oscillating?
How the market is acting will determine which indicators we should use
You SHOULD NEVER USE oscillating indicators when the market is
trending or vice versa…NEVER!
Trending: Rising
prices or declining prices
over indicated time period
Popular Trending
Indicators:
1) MACD
2) RSI
3) ROC
We’ll discuss more in greater
detail in future SAWs. For now
we’ll focus on the most
important ones…RSI & MACD
Relative Strength Index (RSI)
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The Relative Strength Index (RSI) is a momentum oscillator
that measures the speed and change of price movements
Traditionally, and according to Wilder, RSI is considered
overbought when above 70 and oversold when below 30
Signals can also be generated by looking for divergences,
failure swings and centerline crossovers.
RSI can also be used to identify the general trend
Using RSI
RSI tends to fluctuate between 40 and 90 in a bull
market (uptrend) with the 40-50 zones acting as
support. These ranges may vary depending on RSI
parameters, strength of trend and volatility of the
underlying security.
Exact opposite
occurs for bear
markets
Bear Markets
Divergences
You want RSI to be increasing with the
upward trend or decreasing when the stock
is downward trend. This is convergence and
anything else is divergence
Notice: Stock fell
after bearish
divergence and
stock rose after
bullish divergence
Does this mean
a new trend or
just a
reallocation of
supply or
demand?
Moving Average Convergence
Divergence (MACD)
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Moving Average Convergence-Divergence (MACD) is one of the
simplest and most effective momentum indicators available
MACD turns two trend-following indicators, moving averages, into
a momentum oscillator by subtracting the longer moving average
from the shorter moving average
As a result, MACD offers the best of both worlds: trend following
and momentum
MACD fluctuates above and below the zero line as the moving
averages converge, cross and diverge
Traders can look for signal line crossovers, centerline crossovers
and divergences to generate signals
Because MACD is unbounded, it is not particularly useful for
identifying overbought and oversold levels.
Interpretation
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Positive MACD indicates
that the 12-day EMA is
above the 26-day EMA.
Positive values increase as
the shorter EMA diverges
further from the longer
EMA. This means upside
momentum is increasing
Negative MACD indicates
that the 12-day EMA is
below the 26-day EMA.
Negative values increase as
the shorter EMA diverges
further below the longer
EMA. This means
downside momentum is
increasing
Signal Line Crossovers
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A bullish crossover
occurs when MACD
turns up and crosses
above the signal line
A bearish crossover
occurs when MACD
turns down and
crosses below the
signal line
Crossovers can last a
few days or a few
weeks, it all depends
on the strength of the
move
Divergences
Similar to what we said for RSI
Notice: Stock fell
after bearish
divergence and
stock rose after
bullish divergence
Does this mean
a new trend or
just a
reallocation of
supply or
demand?
Putting it all Together!
Quote:
Originally Posted by Fibman2005
Some of the indicators I use analyze summation indexes and time. We're two-three standard
deviations away from the mean suggesting the market is at an extreme level right now. Using
Stochastic calculus, the differential suggests the market is in a rotating phase as the differential
approaches zero.
Combine this with the fact that the market is teetering at resistance (Psychological Resistance as
well) @ 11,000 on the Dow suggests the market needs to cool off. Unfortunately, what needs to happen
and what does happen are completely different, I just don't like the odds of the market being pushed that
much higher in the short run.
Market internals are starting to diverge and everyone thinks its a win-win scenario with the Fed initiating
Quantitative Easing. On the bear side, I like how CNBC is bringing this win-win scenario and the "currency
war" to everyone's attention. This is going to be an important week for equities with earnings coming out
and I think a lot of good news is already baked into the market. Still waiting for the dollar to find support
and rise. I'm only holding my SNDK short around the 40 level, but looking to get into some short-bias etfs.
Unfortunately, probability is only a probability and shouldn't be taken as anything else. Also,
there's no indication whether the market experiences an extreme sell off or just a minor
correction. Though, important to note that the market volume is on the weak side and VIX is
below 20.
Something to Consider (Not to
scare you off though)
From a good friend and very experienced trader:
Markets have gotten much more complex and far less predictable in the last 2-3 years.
However, that does not mean that you cannot develop a system (either by using stocks
or options), were you can take advantage of these erratic price swings. If there
something that you must understand is the following; today's market operate in a
different manner than they did before. That is, today's markets merely reflect actual
valuations, instead, markets reflect (or trade on) expectations. Whether your right or
wrong on your expectation, it doesn't really matter, as long as your able to correctly read
the trend.
This 'game' will obviously set the market to eventually fail (as most expectations will
never be met), but in the meantime, you can take advantage of it and trade on it.
I guess the point(s) I am trying to get across is this; 1)understand how to minimize risk
and optimize profits, 2)understand that today's markets operate in a different manner,
and as a result, you will have to adapt to it, and 3) trade based on expectations, not
actual salutations (If markets were trading at actual valuations, as they were designed to
do, we would be below DOW 9K, but hey, human are the most irrational being on the
face of this planet).
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Its important to understand the indicators and definitions
within technical analysis. But just like Fundamental
Analysis, its interpretation is what separates the profitable
traders from everyone else.
How you should use certain indicators and the combination
of such indicators will be discussed in future SAW
presentations. Also, looking at efficiency ratios with respect
to trends and going over certain trades will be discussed in
full detail.
The goal is to provide you with the tools of technical
analysis and teach you to use them accurately to profit
from inefficiencies in the market