Price Chart Technical Analysis 101

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By Emilu Bailes

As an active investor, I am most fond of technical analysis. I’m not saying that I don’t think fundamentals are important. I’m just admitting that I like hearing what the price chart ‘tells me.’ WHAT? Am I saying my ears are involved in this, and not my eyes? Not at all. The price chart is the way to come to a confident expectation about the coming price movement.

William J. O’Neil said, “Buy on the Fundamentals and Technicals. Sell on the Technicals only!”

On chart platforms, there are ways the price changes have occurred and a suggestion of the path the prices are on; bullish, bearish, or range bound. In fact, each charting package has a variety of technical indicators: moving averages (simple or exponential), oscillators, ADX, MACD, RSI, CCI, Stochastic, Bollinger Bands, ATR, Aroon Oscillator, etc. Do you know how to use them? Have you learned how they determine where they are going to be in conjunction with the price chart? Do you need to study and understand ALL of them?

It’s been my experience that the most consistent application of technical tools has been to study a small number of indicators, manually applying the math associated with them to determine what must happen to cause them to move into certain changes that “say” the trend is becoming bullish (or not.) In addition, having agreeable trend changes clustered within two or three indicators together serves to “confirm” that the trend change is highly probable.

When we take a look at the AAPL (Apple, Inc) daily price chart, we can see the RSI oscillator above the price chart, two exponential moving averages on the price chart, volume and MACD both below the price chart. What have they ‘told’ us? First, focus on the tools displaying the month of August 2012. The RSI shows that the 14 period look back closed higher and higher, moving above the mid-point of 50 on the oscillator and kept moving up to the “overbought” area (above 70 on the RSI.) Looking straight down below that point on the RSI we notice that the shorter term EMA rose above the longer term EMA, and remained above it for weeks. Moving our eyes straight down again we see the MACD that rose above the signal line, confirming that the trend was changing to bullish by three technical indicators. The beauty of these three together is that they combine both oscillators and trending indicators. We can also see a strong message by viewing the price and volume over the period in site. Stockcharts.com demonstrates the volume bars as RED when the price closes below the prior price bar and grey when the price closes above the prior price bar. The thin red line that is a horizontal ray over the volume bars is the average volume over a look-back period of time. (In this case, 50 days.) This tells us when the buyers or sellers are bulging higher than normal. The largest volume of investors are selling-off v. buying-up, but this requires a horizontal scan of the eyes to view the split of the Supply and Demand over the look-back time.

One more thing I enjoy thinking about is any divergence. Move the eyes down from the price low posted at $502.82 to the MACD. You can see that the MACD was at an ultimate low in mid-November. Also, look up to the RSI above the price chart. This tool has virtually spent 99% of its time since the peak in late September in the bearish mode, below the 50. Price on Friday, March 1, 2013 was at a new low, approximately $70.00 per share below that point of $502.82 per share. Are the RSI and MACD at new low points, too? Well, no. Does this mean the price has gone down as far as it’s going to go? I’m not predicting anything. But, I find this an interesting view of what to expect in the near term. The ‘message’ I hear from the technical analysis is strong and clear!

 

 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Basics , Investing Ideas , Options

Referenced Stocks: AAPL

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