Technical Analysis: Your Guide to Finding Hidden Entry Points

Even after you find a company you love, find the right valuation, you may want a good entry point.  I’ve seen companies that have great numbers continue to tank. I have no idea why. Maybe the public doesn’t know about them. Maybe rumors affect them. Maybe they are hidden gems. Perhaps I don’t know what professionals know. Maybe I don’t have my numbers right and I’m missing something. I really don’t know why.  What this tells me is I can’t just a buy the right company at the wrong time and wait forever for them to turnaround.  Once I’ve done the fundamental analysis and found a company to be great, I need to get in at the right time!  This is where I use the technical analysis (charting & indicators), along with several strategies.

You may not want to INVEST in a company for a long term, but may just want to trade a stock.  Understanding technical analysis is key for traders, who are looking for short-term in/out of market.

Technical analysis can involve many complex techniques with 100’s of different indicators.  I want to cut to the chase and introduce you to most widely use indicators and strategies that are most commonly used by investors and traders.

CHARTS

Line Chart

Line chart are simply connected with close of the day.  Line charts are important when you want to take the noise out of the chart, they usually get the close of one day and the close of the next day and connect them through dotted line.

Bar Chart

These charts plots open, high, low and closing price.

Candlestick Chart

They are my favorite, since they provide the most information. Up candle is clear or blue and down candle is red or black.  Up candle means that the chart is on bull or upward trend, meaning it closed higher than it opened. Down cancel means that the chart is on bear or downward trend, meaning it closed lower than it opened.  The lines extending up and the lines extending down are the high and low of the day.

Moving Averages (MAVG)

Moving averages are very popular and many, many investors and fund managers pay attention to them.  Moving averages takes the price over “X” period and averages them out.  This could be over 10, 20, 50, 100, 200 days.  These averages help you identify the trend of stocks. In an upward trend moving averages follow the stock (are under the stock price). In downward trend these moving averages are above the stock.  Thus, crossing of price and MAVG are crucial trigger point, especially to most technical traders.  There are two main type of moving averages. Exponential, which will have current periods weighted more heavily and simple where all price points have equal weight.  Main point to keep in mind here is if the moving average is below the stock price the stock is bullish and if the moving average is above the stock price than the stock is bearish.

In this ARLP chart you will see that when moving average is mostly under the stock the stock is on upward trend, when the moving average makes its way above the stock the stock is falling or on downward trend.  Thus, the crucial point is when the moving average is crossing the stock price.  This is when buying and selling happens.

Volume

Volume shows how many trades are being made over specified period (usually day).  If the volume is higher you are probably going to be able to trade in/out faster as more people are buying/selling.  Volume tells us number of shares that are being traded, it does not tell us if those traded are being bought or sold.  We don’t know exactly how many shares are being bought or sold but if you look at the stock price of the stock and high volume, you can guess if there are more sellers or buyers.   If the stock price is moving up and the volume is higher you know there are more buyers putting money into that security. If the stock price is down and the volume is higher you can guess there are more sellers taking their money out of that security.  Remember huge moves are usually fund managers who are deciding to take their money in or out.  If you start to see stock price continue to rise but the volume is “drying out” getting less, you can assume that interest in that stock is getting less and thus maybe warning of a reversal. If the stock starts to decline with higher volume, you know that sellers are starting to sell.  If you are having hard time figuring out if the volume is high or low, you can also have MAVG on volume and see if volume is higher or lower than the MAVG.

Some of the indicators relating to volume you may want to learn are: On-Balance Volume Indicator, Chaikin Money Flow and Klinger Volume Oscillator.

Support

Is a floor or base. It’s historical price level at which stock no longer falls but either moves sideways or reverses up.  Crossing of support level is a key alert for technical traders.  Chart below shows “HALL” chart with support at $10.

Resistance

Resistance is the ceiling which stock prices can’t break above.  A price at which the security has hard time breaking through.  Once this price is reached stocks usually move sideways or start to reverse direction and move down.  Chart below shows “HALL” chart with resistance at $11.75.

This is a 3-day chart of “HALL” from Jan 1, 2016 to Dec. 31st, 2017

Trendlines

There is no stock that moves continuously straight up or straight down.  In an upward trend (bull trend) stocks usually rise, consolidate (move sideways) and then move back up in staircase.  In a downward trend (bear trend) stocks move down, consolidate and move down again. They may do this again and again to form a trend.  In a rising stock, you can connect/draw a line at the lows of the stock price (as seen below) to form a rising trendline.  Same can be done on dropping stock to form a declining trendline.  If you can figure out this pattern, you can better understand your entry points and understand if this a bull or bear market/stock.

RSI: Relative Strength Index

The relative strength index (RSI) is a technical indicator developed by J. Welles Wilder.  RSI can be used as a momentum indicator, but it is graphed as an oscillator.  Most importantly it is used to show you overbought (too many investors have bought this security and soon investors will start to take the profit and thus stock should decline) and oversold (too many investors have sold this security and soon investors will start to buy the stock, since it’s a bargain and the price should rise) condition.   Traditionally the RSI is considered overbought when above 70 and oversold when below 30, however you can modify these settings to fit your chart, some also use the setting 80/20.

The below chart is “T” AT&T from 2013-2018.  The top part is RSI and the bottom part is the price of the stock.  RSI has two horizontal lines at 30 (bottom) and 70 (top). The vertical lines are drawn anytime RSI is >70 or <30.  This chart illustrates that when RSI <30, the stock price is oversold and thus should be bought and will rise and when RSI>70, it is overbought and thus should be sold as price will drop.  Again, bear in mind no one indicator will be right all the time as in this case, however it does illustrated how RSI could possibly be used to show overbought/oversold condition.

MACD

Moving Average Convergence Divergence is a momentum indicator that shows the relationship between two moving averages of prices.  At first this may seem over complicated, but let’s break it down.

1. The MACD is usually calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA, this would be your MACD line.
2. A 9-day EMA of the MACD Line is plotted with the indicator, it’s called the signal line. It is primarily used to see the trend.
3. The MACD-Histogram measures the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its signal line and negative when MACD is below its signal line.

There are 100’s of indicators on the market today, you can literally spend years learning their equations and mathematical calculations.  As you gain more expertise, you can add more of them to your arsenal, and weed out the ones that are over complicated without giving you any new information.  

For example, There are several momentum indicators, several oscillators, etc.  If you are using 1 momentum you don’t need to use other momentum indicators, this will tell you pretty much the same thing.  I want you to use this section as a building block of what you learned in fundamental analysis.  Eventually you would want to learn all facets of investing/trading system.