What is Technical Analysis?
It is the study of the market action ( Stock, commodity, bond, currency) itself, based on the study of past market data (PRICE and VOLUME).
Major technical principle: “Technical analysis deals in probabilities, never certainties” Pring says.
The Basic Principles of Technical Analysis (Dow theory)
• Price discounts everything.
• Price moves in trends.
• History repeats itself.
Support & Resistance
What Is Support?
Support is 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. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.
Where Is Support Established?
Support levels are usually below the current price, but it is not uncommon for a security to trade at or near support. Technical analysis is not an exact science and it is sometimes difficult to set exact support levels. In addition, price movements can be volatile and dip below support 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.
Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level.
What Is Resistance ?
Resistance is 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. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.
Where Is Resistance Established ?
Resistance levels are usually above the current price, but it is not uncommon for a security to trade at or near resistance. In addition, price movements can be volatile and rise above resistance briefly. Sometimes it does not seem logical to consider a resistance level broken if the price closes 1/8 above the established resistance level. For this reason, some traders and investors establish resistance zones.
Support can be established with the previous reaction lows. Resistance can be established by using the previous reaction highs
Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level
The Basic Principle of TA
The Trend of a stock is the general direction of its price movement.
Types of Trends
Technical analysis is built on the assumption that prices trend. Trend Lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.
Uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net-demand is increasing, and shows a strong determination on the part of the buyers. As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent.
Downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net-supply is increasing even as the price decline, as well as the show the strong dominance of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.
Significance of a Trendline is a function of its length, the number of time it has been touched, and the angle of ascent or descent.
1 – Uptrend Phases
Following a Downtrend.
Negative economic and companies news.
Mark Up Phase
Good news begin to appear.
Strong corrections may appear at the beginning of this phase.
The buyers appear more aggressive.
Very High Profits.
New Category of investors Enter The Market.
Weakness Begins to appear.
Non Specialized Magazines publish The Market news.
2 – Downtrend Phases
Sharp Downward in Short Period.
Sharp Increasing in Selling Power.
Panic at The Market.
Discourage Selling Phase
Sharpness Becomes Less than Before.
Investors exit gradually.
Volume declines gradually.
Types of Charts
Bar Chart (OHLC)
The top of the bar represents the HIGH
The bottom represents the LOW
The left mark represents the OPEN
The right mark represents the CLOSE
The body of the candle marks the OPEN and CLOSE
A blank body means it Closed at the upper body (rise)
A shaded/filled candle means it closed at the lower body (decline)
The top line marks the HIGH
The bottom line marks the LOW