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7/31/2019 Tech Analysis(Part1)May 2011t
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Presented by:Juan G. Barredo
Vice President
Chief Technical Analyst
CitisecOnline.com Inc.
Technical Analysis
the Classical Approach
CITISECONLINES T O C K B R O K E R S
Presents
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Outline
Technical Analysis Classical Analysis
Trend Analysis
Trend Directions and time frames
Support and Resistance
Drawing Trendlines
Corrections and Consolidations
Principle of Magnitude and Duration
Fibonacci Retracements Area Patterns
The Trading Routine
Examine your Market Environment
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Goal: SAME
Methodology: DIFFERENT
-difference lies in theessential use of timing and
risk management.
Investing: invest into stocks foran indefinite time believing
the prospects for that
company will eventually
boost its value.
Trading: engaging into qualifiedshort term opportunities that
result into the best risk-reward potential.
The Need for Timing
Trading fundamentally sound companies
potentially offer considerably higher rates of
return than long term investing, but it engenders
more preparatory work
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Technical Analysis
Technical Analysisis the study of Market Action, primarily throughthe use of Charts; for the purpose of forecasting future price Trends.
-- John J. Murphy Technical Analysis of the Financial Markets
What is it?
Price
Action
Study
Charts
Spot
Trends
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Groundings of TA
The market price tells you everything you need to know abouta stocks expectations. Whether the reason stemmed fromlogic or emotion, from careful assessment or speculation ithas all been factored in.
Price discounts everything
An object in motion tends to stay in motion; while an object atrest tends to stay at rest.
Prices move in trends
People will tend to react in similar fashion to certain kinds ofstimuli, thus grooming the repetitive aspect of price activity.
History repeats itself
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Graphic View of Price
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Volume the 3rd Dimension
Volume - measures theintensity participation of
the crowd
It takes volume for a
stock to rise; but prices
can fall of its own weight Advancing prices should
be accompanied by rising
or good volume. Without
it, advances may be
limited in duration
Volume bursts or dry
ups may lead to swing
highs and swing lows
Volume Bars
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Classical Analysis: Trends
Trends are durable swings in market condition; they last a considerableamount of time backed up by market forces (Demand & Supply)
Markets may take one of three general directions orTrends:Up, Down or Sideways
Trends are gauged or followed by the use of a Trendline a break of atrendline may signal a reversal or pause in trend
UP TRENDHigher-Highs and Higher-Lows
DOWN TRENDLower-Highs and Lower-Lows
SIDEWAYS TRENDRange bound Highs and Lows
also known as Consolidations
Trendlines drawn by connecting
major lowsTrendlines drawn by connecting
major highs
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Support and Resistance
Support that area under a price market where aconcentrated amount of demand or buying
interest has come to overpower selling pressure.
This area is usually depicted by price bottoms or
Up Trendlines.
Resistance - frames itself as that area over aprice market where concentrated selling pressure
prevents any further advance in price.
This area is usually depicted by price tops or
Down Trendlines.
Note: A break of any of the two should see acorresponding move in the direction of the break. And sometimes when support or resistancebreak they maychange roles where Supportbecomes Resistance or the inverse.
S
S
S
R
R
R
R
R
R
S
S
S
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Support and ResistanceNote:
Up Trends showsupport in control ofprices buy intopullbacks to this zone
Down Trends showresistance in control ofprices sell in rallies tothis zone
Sideward Trends
force prices to cascadebetween support andresistance rangetrade this boundary
Volume introduces itself along
with a rise in demand
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Trends in Time
Short Term = 3 Weeks to 3 Months
Medium Term = 3 Months to 9 Months
Long Term = 9-12 Months +
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Drawing Trendlines
Process of action:1. Start with what you have
connect clear support
or resistance points
2. After noticing a trendline
breakAct! (Sell or Buy)
3. If a new trend develops
redraw new opposing
trendline
4. On a false up trendline
break, a new trendline
must be outlined once
prices show higher-highs
(lower-lows in downtrends)
5. Try to ignore major highs
and lows usually seen off
tops and bottoms
second tops an bottoms
are better starting points
for trendlines
New shorter term trends may
start as soon as successful
double support tests or
higher-lows are made
This trendline
validated by
the breach of
previous high
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Corrections and Consolidations
It takes Time (Duration) to move a Price a certain distance (Magnitude)
---Any exaggerated movement in this relationship will be paid for by an adjustment
through Price (Correction) or Time (Consolidation).
The principle of Magnitude and Duration
Time
(Duration)
Price
(Magn
itude)
(1) Correction in Time
(2) Correction in Price
50
45
40
35
30
25
20
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Corrections in Action
Corrections in price
Corrections in time
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Fibonacci Retracements
The Golden Ratio of 61.8% Leonardo Pisano (1200), more
popularly know as Fibonacci
Natural relationship of expansion
and contraction to maintain balance
Fibonacci series of numbers
(0,1,1,2,3,5,8,13, 21,34,55,)
% Down % Up
38.2% 34 61.8%
38.2% 55 61.8%
38.2% 89 61.8%
38.2% 144 61.8%
38.2% 233 61.8%
Phi = 1.618
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Fibonacci in Action
Corrections within up trends
that find support after makingpullbacks of 38.2% to 61.8%may be bought
Note: It isnt as important to buy as
cheap as possible as it is to buy atthe right time
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Area Pattern Consolidations
Consolidations are depicted by sidewaysmoving markets
They enter into a meditative pause to fix
price swing exaggeration by winding up
between support and resistance
Market Exaggeration:Overbought an upward swing moving too
fast too soon; offering ripeness for profit
taking (reaction)Oversold a downward swing moving too
fast too soon; offering grounds for bargainhunting (rally)
Push out of a consolidation/pattern:Breakout a condition where prices shove
themselves above a patterns Resistance
Breakdown if prices slip below Support
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Studying Patterns
Examine a patterns
SHAPECan give clues to its eventual
directional bias. Watch actions
of demand versus supply and
look for partiality.
SIZECan measure likely price
targets after a breakout
scenario.
Note:Vertical size of pattern =Minimum size of potential moveLonger the horizontal width =the greater the durability of the
swing
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Area Patterns: Continuations
Ascending
Descending
Symmetrical
Rectangle Flags & Pennants
Wedges
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Area Patterns: Reversals
Double Tops
Broadening
Head & Shoulders
Rounding Tops Cup and Handle
One Day Reversals (ODR)
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Sample Patterns
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Breakout Targets
TRIANGLE230- 80 = 150
Breakout point: 170
Thus: 170 + 150 = 320
RECTANGLE325 - 210 = 115
Breakout point: 325
Thus: 325 + 115 = 440
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The Trading Routine
Creating a Trading PlanWhen choosing a potential stock candidate (after screening it
fundamentally), it is always good practice to technicallyevaluate how much upside one would have compared with itsdownside.
1) Looking for a Justified Entry
2) Establishing your Exit
3) Estimating your Technical Risk-Reward
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A Justified Entry (for up trends)
Breakout swings from
Consolidations
Breakout Moves
Support rebounds from Up
Trendlines or Range lows
Support Bounce
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A Justified Entry
Looking for Price TargetsIn order to choose the more promising alternative it is always
good practice to technically evaluate how much upside onewould have
1) Trendline Projection
2) Range in a Price Channel
3) Height of its current Area Pattern
4) Distance to its next major Resistance / Support
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Looking for Price Targets
A
B
C
D
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A break below Trendlines
Up Trendline Break
Breakdown from Consolidations
Breakdown Conditions
Establish your Exit Strategy
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Establish your Exit Strategy
Price Targets and TriggeredYou must develop the ability to patiently stay with winning
trades to allow them to create the profits you expected if notmore take some profits or sell on these circumstances:
1) Once price targets are hit
2) Take windfall profits on Overbought rushes
when momentum runs dry
3) Once price stops are hit
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Establish your Exit Strategy
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Establish your Exit Strategy
Price StopsWhen holding a position through a trend it would be prudent tofollow it with a protective tool called a Price Stop. Once this
price is violated, one must liquidate or lighten current positions
to safeguard the value of positions.
1) Trendline (or Moving Average) breaks
2) Consolidation/ Pattern lows
3) Trailing stops
Last reaction lows
For runners previous day lows or 10-day MA
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Establish your Exit Strategy
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Establish your Exit Strategy
Price Stop for runners:
Day Lows (for super fast moves)
16-day Moving Average
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Assessing your Risk-Reward
Evaluate your prospectsA key component in being a successful trader is to determine
your risk versus reward level and use that optimum ratio toguide your investment decisions.
1) Estimate your upsides and downsides thenpick out Risk-Reward opportunities of 1:3+
2) Remember selling too soon may inhibit your
ratio keep yourself with the trend
3) You now have a trade plan be disciplined
enough to follow it!
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Examine your Market
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Examine your Market
www.stockcharts.com Candleglance Group
20-day MA Short Term Trend | 50-Period MA Medium Term Trend
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What we have learned
1. Technical Analysis
2. Spotting and following trends
3. Corrections and
Consolidations are necessary
breathing spots
4. Establish a trading plan by
knowing your upsides and
downsides5. Examine your market
surroundings and retool your
strategy
Knowledge born from actual
experience is the answer to why
one profits; lack of it is the reason
one loses
- Gerald M. Loeb