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Technical Analysis

Bar Charts Point and Figure Charts Moving Averages


Souvik chatterjee

Bar Chart Information


High Open Close Low Daily Weekly Monthly

Chart formations
Trends Planes
    Other top and bottom formations Key Reversals Flags, Triangles and Pennants Gaps

Up Trend
Connect two or more daily price lows
 Preferably 10 days apart

When market closes below an uptrend line, a sell signal is generated Computer trading vs fundamental
 Computers may drive prices lower for a few days  If fundamentals dont support this, then prices will rally

Up Trend

Sell Signal

Down Trend
Connect two or more daily price highs
 Preferably 10 days apart

When market closes above a downtrend line, a buy signal is generated Computer trading vs fundamental
 Computers may drive prices higher for a few days  If fundamentals dont support this, then prices will decline

Down Trend

False Buy Signal

Trend line market signals


Speculators
 Buy and sell based on signals

Hedgers Short
 Place on sell signal  May choose to offset on buy signal

Hedgers Long
 Place on buy signal  May choose to offset on sell signal

Trend Line reliability


A close above a major down trend or below a major up trend will lead to a significant price move about 75% of the time

Resistant Planes
Life-of-contract highs can be very difficult for market to penetrate Strong Fundamental conditions needed to move market above resistance Sell signal if market fails to take out resistance Buy signal if market closes above resistance (particularly 2 closes above)

Resistant Planes
There are also intermediate resistance planes These are not as hard to penetrate as life-of-contract highs are

Resistance plane
Sell Signal

Resistance plane

Buy Signal Sell Signal

Support Planes
The mirror image of Resistance Planes Life-of-contract lows Buy signal if market fails to penetrate Sell signal if low is taken out

Support Planes

Sell Signal

Hedgers and Technical Analysis


If understand trends and support and resistance planes:
 Time placement of hedge  Set realistic market targets  Perhaps minimize margin calls

Other Bar Chart Formations


Double Top or Double Bottom Head and Shoulders Key Reversal Flags, Triangles and Pennants Gaps
 Common, break away, measuring, exhaustion

Double Top (triple top)

Head and Shoulders


Head

Shoulder

Shoulder

Neck line

Key Reversal
Higher high Lower low Close below prior day close
 Sell signal

Close above prior day close


 Buy signal

Flag
Decline

Project = Decline

Triangle or Pennant
Buy Signal if market breaks out to the top Sell signal if market breaks out to the bottom

Gaps
Break away

Measuring Exhaustion Common

Complements to Chart Patterns


Trading Volume Open Interest Relative Strength Index (RSI)

Trading Volume
Barometer of level of intensity in the market If buy/sell signal occurs on a relatively high volume day, then it is more reliable High/low volume is relative to past trading and relative to specific contract

Guidelines for trading volume


Look at all months being traded for a particular commodity Interpret volume on limit up/down days very carefully Usually low prior to holiday, 3 day weekend, or major report

Open Interest
# of contracts that are outstanding
 Have not been offset

No binding relationship between Open Interest and Trading Volume


 Day traders create volume, dont change open interest

Open Interest tends to peak and then decline prior to an uptrend reversal
 Less reliable on downtrend reversal

Relative Strength Index


Widely used measure of momentum in the market 14 day RSI is the most common To calculate
 Record last 14 day price changes (closes)  Sum the negative changes and positive changes and divide each by 14 to create (D) down average and (U) up average  RSI=U/(U+D) * 100

RSI Market Indicator


RSI > 70
 Market is thought to be over bought

RSI < 30
 Market is thought to be over sold

Numbers vary by commodity Major change in Supply or Demand may keep RSI above 70 or below 30 for an extended period of time

RSI example calculations


Close 2.40, 2.38, 2.36, 2.38, 2.36, 2.40, 2.44, 2.42, 2.44, 2.48, 2.56, 2.48, 2.52, 2.50, 2.46 Up .02 .04 .04 .02 .04 .08 .04
 Up sum = 28/14 =2

Down .02 .02 .02 .02 .08 .02 .04


 Down sum = 22/14=1.57

RSI = 2/(2+1.57) * 100 = 56

Point and Figure Charts


2 CRITICAL parameters
 The cell size  The reversal requirement

Cell size The value in terms of price increment for each cell Reversal requirement Magnitude of price change required for a reversal

Point and Figure Charts


There is no time on chart X use to plot uptrending prices O use to plot downtrending prices Only use daily high or low, close doesnt matter Buy/Sell signal generated when new Higher/Lower X/O is plotted

Moving Averages
May be a compliment to bar chart
 Single Moving Average 40-day  Help signal turning points in market

May be an alternative to bar chart


     Two moving averages employed Example 3-day and 10-day Example 9-day and 18-day Sell signal when shorter cuts longer from top Buy signal when shorter cuts longer from bottom

Buy B and Sell S Signals using the 4-day & 9-day Moving Average

S S B S

B B B S

B B

Moving Averages
Advantages
 Provide clear market signals  No guessing as to chart formation  Good if there are trends in the data

Disadvantage
 May generate multiple trades  Dont perform well in choppy (sideways) markets

Moving Average
Short Hedgers
 Place on Sell signals  Lift (offset) on Buy signals

Long Hedgers
 Place on Buy signals  Lift (offset) on Sell signals

Speculators
 Buy and Sell and Offset on all signals

Technical Analysis Summary


Technical Analysis does work It requires Work to make it work Need to study past technical analysis for several years worth of data on a particularly commodity before trading For hedgers
 Trends and Support/Resistance Planes  Moving Averages