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Technical Analysis Categories
- Types of Charts
*
Bar Charts
*
Line Charts
*
Candlestick Charts
- Chart Reading
*
Trendlines
*
Resistance Levels
*
Support Levels
- Moving Average
* Simple Moving
Average
* Weighted Moving
Average
* Exponential
Moving Average
* Triangular Moving Average
- Momentum Indicators &
Oscillators
-
Rate of Change
-
Relative Strength Index
- Moving Averages
Convergence /
Divergences
-
Price Oscillator
-
Stochastic
-
Money Flow Index
-
Williams %R
-
Volume + Moving Average
- Stock Chart Overlays:
-
Bollinger Bands
-
Parabolic SAR
- Stock Chart Patterns:
*
Head and Shoulders
* V
Formations
* Double
Tops and Bottoms
* Triple
Tops and Bottoms
* Saucers
- Rounded Tops and
Bottoms
* Ascending,
Descending and
Symmetrical Triangles
* Channels
- Rectangles
* Rising
and Falling Wedges
* Bullish
and Bearish Flags
* Pennants
* Diamonds
* Cup and
Handle
* Pan and
Handle
* Spikes
* One-Day
Reversals
* Island
Reversal
- Dow Theory
- Elliot Wave Theory
- Spinella Heart Rate Theory
- Fibonacci
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Moving Averages
Moving averages measure the direction and momentum of a security. They
are lagging indicators, because they are developed from historical stock
prices. Moving averages are especially useful in analyzing upward and
downward trends. The longer moving averages are of value in verifying the
major trends in a stock. The shorter moving averages are good at identifying
new trend movements. As with all statistics, a smaller time frame can show
more details, but it can often be misleading, and obscure the larger
picture. Moving averages are particularly effective when stock prices are
mirroring the general direction of the major trend. However, when prices
move against the trend, because of the delayed effect of using averages,
they can actually become misleading.
Additionally, any one-day price blip can result in a misleading average.
Today’s computer models can measure moving averages for practically any time
duration. Typically, 5, 10, 20, 50, 100, and 200-day moving averages are
utilized. Before making investment decisions, always analyze the short-term
(5 and 10 day), as well as the long-term (50, 100, and 200-day) moving
averages.
Because longer-term time periods skew results towards prior historical
prices, various statistical averages have been developed to give greater
weight to the current stock prices. The four main moving averages that are
currently used are:
- Simple Moving Average
– It is calculated by adding the sum of the
closing stock prices for a selected period of time, then dividing by the
number of periods. For example, for a 5 day moving average, one needs to
add up the closing stock prices for the past 5 days, then divide by 5.
It’s easy to see that an unusual blip in a closing price can distort the
trendline.
- Weighted Moving Average
– It’s the sum of the days’ weighted
averages, assigning a heavier weight to the most recent stock price, and
the least weight to the oldest price. For example using a 5-day moving
average, the current price would be weighted as 5/15, and the prior day’s
price would is 4/15, while the first day’s price would be given a weight
of 1/15.
- Exponential Moving Average ("EMA")
– This algebraic formula gives
more weight to the recent stock prices, and less weight to the prior stock
prices. This enables individuals to identify trends early on, and to react
quickly.
- Triangular Moving Average
– The majority of the weight is placed
in the middle part of the time frame, resulting in a smoother
representation of the direction of the average.
Pure technical investors look at the direction of the slope of the moving
average. If the direction is upwards, it’s a signal to buy / long the
security. If the moving average is sloping down, it’s an indication to sell
or short the security. I break from the traditional technical analyst views
and evaluate each stock on its own individual merits.
Reproduced with
permission of Yahoo! Inc.
ã 2004 by
Yahoo! Inc.
YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.
It’s important to realize the relationship of the actual stock price to
its moving average. Using the above diagram of Johnson & Johnson as an
example, by overlaying the company’s moving average onto its stock chart,
one is basically dealing with two trendlines. The actual daily stock price
is the fast trendline; the moving average is the slower of the two. The
moving average eliminates some the choppiness inherent in the daily
fluctuations of stock prices, making it easier to identify trends. Some of
the stock momentum indicators also use two trendlines. The first trendline
is usually an algebraic formula based on historical prices. The second
trendline is often a slower moving average of the faster moving trend.
I used Johnson and Johnson as an example because it is one of the best of
the international healthcare conglomerates, and a solid holding for most
portfolios.
One can see from the JNJ diagram that while moving averages are a
following, rather than future indicator, they can be extremely helpful when
timing investment decisions.
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