Technical Analysis: Bar Charts Point and Figure Charts Moving Averages
Technical Analysis: Bar Charts Point and Figure Charts Moving Averages
Technical Analysis: Bar Charts Point and Figure Charts Moving Averages
Bar Charts
Point and Figure Charts
Moving Averages
Bar Chart Information
High
Open
Close
Low
Daily
Weekly
Monthly
Chart formations
Trends
Planes
Sell Signal
Down Trend
Connect two or more daily price highs
Preferably 10 days apart
When market closes above a down-
trend line, a buy signal is generated
Computer trading vs fundamental
Computers may drive prices higher for a
few days
If fundamentals don’t 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
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, don’t 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
S S
S
B
S
B
S
B B
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
Don’t 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