ELLIOTT WAVE

A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 1 and 2. Since the first actionary wave,

Fibonacci studies: arcs, fans, retracements, and time

Overview: Leonardo Fibonacci was a mathematician who was born in Italy around the year 1170. It is believed that Mr. Fibonacci discovered..

Indicator

The Negative Volume Index (“NVI”) focuses on days where the volume decreases from the previous day. The premise being that the “smart money” takes positions on days when volume decreases

Basic Technicals

MACD technical analysis MACD technical analysis stands for moving average convergence/divergence analysis of stocks.

Fundamental Analysis

Doubling Stocks Review: Is this a scam? If you are looking for the truth about doubling stocks this is a necessity. One always thought there was something wrong with a doubling of stocks.

Tuesday, December 29, 2009

AVERAGE TRUE RANGE

The Average True Range (“ATR”) is a measure of volatility. It was introduced by Welles Wilder.New Concepts in Technical Trading Systems, and has since been used as a component of many indicators and trading systems.
Interpretation
Wilder has found that high ATR values often occur at market bottoms following a “panic” sell-off. Low Average True Range values are often found during extended sideways periods, such as those found at tops and after consolidation periods.The Average True Range can be interpreted using the same techniques that are used with the other volatility indicators. Refer to the discussion on Standard Deviation for additional information on volatility interpretation.
Example
The following chart shows McDonald’s and its Average True Range.

This is a good example of high volatility as prices bottom (points “A” and “A’”) and low volatility as prices consolidate prior to a breakout (points “B” and “B’”).
Calculation
The True Range indicator is the greatest of the following:
The distance from today’s high to today’s low.
The distance from yesterday’s close to today’s high.
The distance from yesterday’s close to today’s low.
The Average True Range is a moving average (typically 14-days) of the True Ranges.
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Momentam Indicator Accumulation/Distribution

ACCUMULATION/DISTRIBUTION
The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move.
Interpretation
The Accumulation/Distribution is really a variation of the more popular On Balance Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices.When the Accumulation/Distribution moves up, it shows that the security is being accumulated, as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed, as most of the volume is associated with downward price movement.
Divergences between the Accumulation/Distribution and the security’s price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security’s price is going down, prices will probably reverse.
Example
The following chart shows Battle Mountain Gold and its Accumulation/Distribution.
Battle Mountain’s price diverged as it reached new highs in late July while the indicator was falling. Prices then corrected to confirm the indicator’s trend.
Calculation
A portion of each day’s volume is added or subtracted from a cumulative total. The nearer the closing price is to the high for the day, the more volume added to the cumulative total. The nearer the closing price is to the low for the day, the more volume subtracted from the cumulative total. If the close is exactly between the high and low prices, nothing is added to the cumulative total.
ACCUMULATION SWING INDEX
The Accumulation Swing Index is a cumulative total of the Swing Index. The Accumulation Swing Index was developed by Welles Wilder.
Interpretation
Mr. Wilder said, “Somewhere amidst the maze of Open, High, Low and Close prices is a phantom line that is the real market.” The Accumulation Swing Index attempts to show this phantom line. Since the Accumulation Swing Index attempts to show the “real market,” it closely resembles prices themselves. This allows you to use classic support/resistance analysis on the Index itself. Typical analysis involves looking for breakouts, new highs and lows, and divergences.
Wilder notes the followingcharacteristics of the Accumulation Swing Index:
1.It provides a numerical value that quantifies price swings.
2.It defines short-term swing points.
3.It cuts through the maze of high, low, and close prices and indicates the real   strength and direction of the market.
Example
The following chart shows Corn and its Accumulation Swing Index.
You can see that the breakouts of the price trend lines labeled “A” and “B” were confirmed by breakouts of the Accumulation Swing Index trend lines labeled “A’” and “B’.”
Calculation
The Accumulation Swing Index is a cumulative total of the Swing Index. The Swing Index and the Accumulation Swing Index require opening prices.Step-by-step instructions on calculating the Swing Index are provided in Wilder’s book, New Concepts In Technical Trading systems.
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Saturday, December 26, 2009

Eliottwave- Extension

Most impulses contain what Elliott called an extension. Extensions are elongated impulses with exaggerated subdivisions. The vast majority of impulse waves do contain an extension in one and only one of their three actionary subwaves. At times, the subdivisions of an extended wave are nearly the same amplitude and duration as the other four waves of the larger impulse, giving a total count of nine waves of similar size rather than the normal count of “five” for the sequence. In a nine-wave sequence, it is occasionally difficult to say which wave extended. However, it is usually irrelevant anyway, since under the Elliott system, a count of nine and a count of five have the same technical significance. The diagrams in Figure 1-5, illustrating extensions, will clarify this point.



Figure 5
The fact that extensions typically occur in only one actionary subwave provides a useful guide to the expected lengths of upcoming waves. For instance, if the first and third waves are of about equal length, the fifth wave will likely be a protracted surge. (In waves below Primary degree, a developing fifth wave extension will be confirmed by new high volume, as described in Lesson 13 under “Volume.”) Conversely, if wave three extends, the fifth should be simply constructed and resemble wave one.
In the stock market, the most commonly extended wave is wave 3. This fact is of particular importance to real time wave interpretation when considered in conjunction with two of the rules of impulse waves: that wave 3 is never the shortest actionary wave, and that wave 4 may not overlap wave 1. To clarify, let us assume two situations involving an improper middle wave.
Fig 1                       Fig 2                      Fig3
In Figure 1, wave 4 overlaps the top of wave 1. In Figure 2, wave 3 is shorter than wave 1 and shorter than wave 5. According to the rules, neither is an acceptable labeling. Once the apparent wave 3 is proved unacceptable, it must be relabeled in some way that is acceptable. In fact, it is almost always to be labeled as shown in Figure 3, implying an extended wave (3) in the making. Do not hesitate to get into the habit of labeling the early stages of a third wave extension. The exercise will prove highly rewarding, as you will understand from the discussion under Wave Personality in Lesson 14. Figure 1-8 is perhaps the single most useful guide to real time impulse wave counting in this course.
Extensions may also occur within extensions. In the stock market, the third wave of an extended third wave is typically an extension as well, producing a profile such as shown in Figure 4. Figure 5 illustrates a fifth wave extension of a fifth wave extension.
Figure 4 Figure 5
Truncation
Elliott used the word “failure” to describe a situation in which the fifth wave does not move beyond the end of the third. We prefer the less connotative term, “truncation,” or “truncated fifth.” A truncation can usually be verified by noting that the presumed fifth wave contains the necessary five subwaves, as illustrated in Figures 6 and 7. Truncation often occurs following an extensively strong third wave.


Figure 6
Figure 7
The U.S. stock market provides two examples of major degree truncated fifths since 1932. The first occurred in October 1962 at the time of the Cuban crisis (see Figure 8). It followed the crash that occurred as wave 3. The second occurred at year-end in 1976 (see Figure 9). It followed the soaring and broad wave (3) that took place from October 1975 to March 1976.
Figure 8
Figure 9
We have found one case in which the pattern’s boundary lines diverged, creating an expanding wedge rather than a contracting one. However, it is unsatisfying analytically in that its third wave was the shortest actionary wave, the entire formation was larger than normal, and another interpretation was possible, if not attractive. For these reasons, we do not include it as a valid variation.
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Friday, December 25, 2009

SUPPORT & RESISTANCE

Think of security prices as the result of a head-to-head battle between a bull (the buyer) and a bear (the seller). The bulls push prices higher and the bears push prices lower. The direction prices actually move reveals who is winning the battle.
Using this analogy, consider the price action of Phillip Morris in Figure 1.During the period shown, note how each time prices fell to the $45.50 level, the bulls (i.e., the buyers) took control and prevented prices from falling further. That means that at the price of $45.50, buyers felt that investing in Phillip Morris was worthwhile (and sellers were not willing to sell for less than $45.50). This type of price action is referred to as support, because buyers are supporting the price of $45.50.
 Similar to support, a “resistance” level is the point at which sellers take control of prices and prevent them from rising higher. Consider Figure 7. Note how each time prices neared the level of $51.50, sellers outnumbered buyers and prevented the price from rising.
 The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations. The bulls think prices will move higher and the bears think prices will move lower.Support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel
prices will move lower.But investor expectations change with time! For a long time investors did not expect the Dow Industrial to rise above 1,000 (as shown by the heavy resistance at 1,000 in Figure).Yet only a few years later, investors were willing to trade with the Dow near 2,500.

When investor expectations change, they often do so abruptly. Note how when prices rose above the resistance level of
Hasbro Inc. in Figure 9, they did so decisively. Note too, that the breakout above the resistance level was accompanied with a significant increase in volume.
 Once investors accepted that Hasbro could trade above $20.00, more investors were willing to buy it at higher levels (causing both prices and volume to increase). Similarly, sellers who would previously have sold when prices approached $20.00 also began to expect prices to move higher and were no longer willing to sell.The development of support and resistance levels is probably the most noticeable and reoccurring event on price charts. The penetration of support/resistance levels can be triggered by fundamental changes that are above or below investor
expectations (e.g., changes in earnings, management, competition, etc) or by self-fulfilling prophecy ( investors buy as they see prices rise). The cause is not as significant as the  effect–new expectations lead to new price levels.Figure  shows a breakout caused by fundamental factors. The breakout occurred when Snapple released a higher than expected earnings report. How do we know it was higher than expectations? By the resulting change in prices following the report!
Other support/resistance levels are more emotional. For example, the DJIA had a tough time changing investor expectations when it neared 3,000 (see Figure).
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Thursday, December 24, 2009

Fibonacci Break-out Trading System

The GOLDEN RATIO 1.618
Leonardo Pisa no was a 13th century mathematician and is famous for a sequence of numbers, Fibonacci numbers.  Fibonacci numbers are 0,1,1,2,3,5,8,13,21,34… The next number in the sequence is 55.  The sum of the two prior numbers makes the next number.  After 55 would come 89.
As you go farther to the right in the Fibonacci sequence, the relationship of a Fibonacci number to the preceding Fibonacci number approaches the Golden Ratio, a ratio of approximately 1:1.618
The relationship between the numbers is .618, or 1.618.It is not really the numbers that are of importance in trading the financial markets,but the relationship between the numbers.
It seems that when it comes to stunning beauty or randomness this number  is an integral part of it.
The Fibonacci Spiral is inherent in the Fibonacci numbers and the Golden Ratio. It has been cited as a generative form in nature, describing the patterns and quinces of natural objects ranging from the shell of the nautilus on a micro-level, to galaxies on a macro-level.
For trading, the Fibonacci sequence of numbers is a tool of precision for the trader that understands how to properly apply the techniques.
This book is not intended to provide you with much in the way of “proof” about how incredible Fibonacci tools can be used successfully.  If you doubt the validity of Fibonacci sequence as it relates to the financial markets do some research on Google or yahoo and you will find ample material on the subject.
Once you have concluded that “yes” this is for me then come back to this book and we can start immediately.
I’m not one to fill up a book with junk making it difficult for the skimmer it recognize the gold that lies within the pages.You will find that everything i write is to the point and without fluff.
Fibonacci Reversal Break-out System:
This system has some relatively straight forward rules to follow.  I will apply this system to a 10 min. chart and show you the buy and sell signals and triggers. If you would like to apply the set-up to a different time frame feel free to do so.  A glance at the past and a study of a reasonable time frame will tell you immediately how well the system will perform in that time frame.All that is required for the system to perform well is good volume and liquidity.  I tend to lean toward emini’s or the QQQQ, SPY, XLE, XLF and OEX to name a few.  These are highly liquid huge volume etf’s / funds.  The more volume the more reliable technical patterns we can expect.
You will love this system because it provides plenty of trades and its very simple to follow.
Rules :
1. 10 min.chart
2. Break-Out entry
3. Fibs.extension exit
1.) On a 10 min. chart we look for any break-out in either direction.  For a sideways trending stock we will look for a breakout in either direction.  For a falling stock we will look for a breakout to the upside, and for a rising stock we will look for a breakout to the downside.
2.) For a falling stock we will  use resistance lines / lines drawn on the highs.
3.) For a falling we will look to support and draw lines on the lows.
4.) On the 10 min chart we would look for our patterns to be over at least a 2 day period.
Heres a recent shot of the last several days of AAPL.  Lets begin here and identify our signals triggers and exits.
In total notice we are looking at about 5 days.
The first thing to do is identfy the tops. I prefer to use the tops where you get the most contact on the resistance line.Others use the highest highs.Experiment with what works best for you.I also give more weight to the most recent highs as you can see.
No matter how you choose to draw your highs your looking for a breakout from those highs.This is our signal.  The swing low following the signal is our trigger for entry.

The signal is the break-out.The trigger is the first successful swing low when price exceeds the high of the first candlestick in the swing low pattern.
Use your 1.618 extension as an exit range.  In this case it’s text book perfect.  We use last swing low before the break-out and the high of the first candlestick in the trigger swing low.
Look at how perfect we determined our exit. Its the exact opposite for short positions.
Here’s the next trade same chart.  We have price now up trending, we were in about half of  this move.  As indicated here price breaks thru support initiating our signal.
Now we look for our swing high trigger for entry.
So we start at the low of the middle candlestick in the trigger pattern.  We drag the Fibonacci tool to the high of the swing high before the break-out to lay out or Fibonacci extensions.
This places the important Fibs extensions, the 161.8 and the 261.8.  Notice how price blew thru 161.8.This gives us a hint to wait until we reach the 261.8 fibs extension.
We wait for the 261.8 and it blows thru again.  At this point we exit as soon as the candlestick closes beyond the 261.8.
Make this system your own by adding an indicator rule.  Here’s one I use that works very well.I sometime use a 31 day moving average and will only enter a trade if the trigger swing occurs on the side of the moving average in the direction of the trade.
On some stocks I have used a combination of two moving averages with the system Experiment with indicators and moving averages.
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Wednesday, December 23, 2009

Top and Bottom Formations

The most elusive and unrealistic goal of trading is to buy at the bottom or sell at the top. Prices rarely stop where you expect. The only way to
see a top or bottom is after they occur. In this chapter we will look at the most popular top and bottom formations and see which ones are the best candidates for trading, and when they can be used.
We have already seen some of the top and bottom patterns, although they may have occurred at different places in the price move. Spikes and
reversal days, island reversals, and “V”tops and bottoms are simple formation.Rounded tops and Bottoms and head-andshoulders formations take longer to develop but are very reliable.
“V”TOPS
The classic topis an inverted “V”although it is called a “V”top.It is a sharp run up with a single day marking the high, and then an equally fast price drop. It is always accompanied by high volatility and usually high volume. The final peak may also be an upward spike. There is a classic “V” Top in Amazon during January 1999,Show in fig.and another potentia,smaller formation in April that looked as though it was a “V” top two days after, which quickly disappeared into a broader formation of no particular pattern.You can’t tell a “V” top,after one day down. The final peak in late April 1999 is broader than a classic “V”top but may still go under the same name.
“V” Top in crude oil
The top in January 1999 is a classic “V”top the highest top in late April is slightly broader, the result of a three-day price pattern. Just before the last top, in early April, was a potential “V” top that disappeared after three days.
The Blow – Off
A “V” top with an extended spike at the top is thought of as a blow-off.High volatility, high volume, and a pattern of accelerating upward prices must reach a point where the momentum can’t be sustained.The range on the last day is wider than previous days, and the following day opens much lower and day is wider than previous days, and the following day opens much lower and remains lower. The market thinks about whether it can muster enough energy to continue the run-up, decides that it cannot, and collapses. Every-one changes their opinion from bull to bear on the same day, and each wants out before the others. Prices drop faster than they rose during the last part of the bull market.
“V” Bottoms
“V” bottoms are much less common that their upside counterparts.They occur more often in futures, where supply and demand can change dramat-basically and leverage causes surges of buying and selling. Both “V” tops and bottoms should be read as a sign that prices have gone too far, too fast. Both buyers and sellers need time to reevaluate the fundamentals to decide where prices should be. “V”bottons are followed by a rebound and then a period of sideways movement.
DOUBLE TOPS AND BOTTOMS
A double top is just what you would expect, one price peak followed a few days or weeks by another peak, stopping very close to the same level. A dou-ble bottom , more common than a double top, is the occurrence of two price valleys with the lowest prices at nearly the same level. Because prices are more likely to settle for a while at a lower price than a high one, prices often test a previous support level, causing a double bottom.

Double Tops
Tops and bottoms occur at the same level because traders believe that the same reason prices failed to go higher the first time will be the reason they fail the second time. At extreme tops and bottoms this is true. The very high or low prices are not supported by the fundamentals of the business or by the supply and demand numbers. They are pushed to extremes by crowd psychology without regard to reason. Traders, looking for a place to sell at an unreasonably high price, target the previous point where prices failed. As prices move higher to test that level, increased speculative selling causes the buyers to realize that something is wrong, and they back away from the mar-
ket, causing prices to drop and forming a double top.Although a classic double top is thought to peak at exactly the same price, selling in anticipation of that test of the top may cause the second peak to be lower than the first.shows one type of double top in
crude oil. Although some double tops are two sharp peaks, this one looks as though it was gathering energy yet still failed to make new highs.
Double Top in crude oil
The double top, formed at the beginning of 1990, turned into a rounded top. Prices have been created by back-adjusting individual futures contracts; therefore, the scale on the right doesn’t  show the actual prices in 1990. The pattern,however, show is  identical.
A double bottom in Cisco.
In this double bottom pattern there are four failed attempts to move lower, followed by a faster break upward. When prices penetrate the highs between the two bottom patterns, we have a confirmation of the bottom. Our first profit target would be an equal distance above the confirmation, at about $7.50.
Double Bottoms
Bottoms are more orderly than tops. They should be quiet rather than normal investor to recognize that there is little additional downside potential.Economists might call this the point of equilibrium.Neither buyers nor sellers are convinced that prices will continue to move. They wait for fur-thernews.
Double bottoms will often test the same price level because large posi-tion traders accumulate more stock, or increase their futures position, each time the price falls to their target level. Once prices are low, there is less chance of absolute loss. Selling a double top can be very risky. The greatest risk when buying a double bottom is that your timing is wrong. If prices don’t rally soon, you’ve used your capital poorly.
Cisco shows a double bottom in Figure 11.4, although it lacks the clear decline in volatility that we would like to see. The small spikes down show four attempts to go lower, followed by a faster move up. When prices cross above the highs formed between the two bottom patterns, we have a com-vpletion, or confirmation , of the double bottom.
TRIPLE TOPS AND BOTTOMS
Triple tops and bottoms are considerably less common than double tops and bottoms, and much less likely to turn at exactly the same price. Figure 11.5 shows a classic triple top in natural gas. There are many other patterns that comprise this top, including an island reversal as the first peak, a spike as the second, and finally a lower, wider peak that ends the move.If you look at the days following the first two peaks, each looked as though it marked the top. After the first island reversal, prices dropped $2; after the second peak there was another large gap down and a one-day loss of more than $1. We can say only that investors were very nervous at $10. A triple bottom that can be traded is most likely to occur at low prices and low volatility, much the same as a double bottom. Prices show an inabil-ity to go lower because investors are willing to accumulate a position at a good value.
Natural gas shows a classic triple top.
Triple tops can contain other patterns. In this chart, the first peak is an island reversal and the second is a spike. The third peak fails to reach the highest price, making it easier for traders to sell.
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Tuesday, December 22, 2009

Chart Analysis

What are Charts?
A price chart is a sequence of prices plotted over a specific timeframe. In statistical
terms, charts are referred to as time series plots.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right. The price plot for MMM extends from January 1, 1999 to March 13, 2000.
Technicians, technical analysts and chartists use charts to analyze a wide array of securities and forecast future price movements. The word “securities” refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures or market indices. Any security with price data over a period of time can be used to form a chart for analysis.
While technical analysts use charts almost exclusively, the use of charts is not limited to of a security’s price movement over a specific period of time, they can also be of great benefit to fundamental analysts.A graphical historical record makes it easy to spot the effect of key events on a security’s price, its performance over a period of time and whether it’s trading near its highs, near its lows, or in between.
How to Pick a Timeframe
The timeframe used for forming a chart depends on the compression of the data: intraday, daily, weekly, monthly, quarterly or annual data. The less compressed the data is, the more detail is displayed.
How are Charts Formed?
We will be explaining the construction of line, bar, candlestick and point & figure charts. Although there are other methods available, these are 4 of the most popular methods for displaying price data.
Line Chart:
The line chart is one of the simplest charts. It is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a period of time, creates the line.
Some investors and traders consider the closing level to be more important than the open, high or low. By paying attention to only the close, intraday swings can be ignored. Line charts are also used when open, high and low data points are not available. Sometimes only closing data are available for certain indices, thinly traded stocks and intraday prices.
Bar Chart:
Perhaps the most popular charting method is the bar chart. The high, low and close are required to form the price plot for each period of a bar chart. The high and low are represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. On a daily chart, each bar represents the high, on Friday’s close and the high and low for that week.



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Friday, December 18, 2009

Fibonacci as a Technical Analysis Tool

While there have been countless books and articles written on the use of Fibonacci in technical analysis, the basics are
simple.
On the price scale, these ratios, and several others related to the Fibonacci sequence, often indicate levels at which strong resistance and support will be found. Many times, markets tend to reverse right at levels that coincide with the Fibonacci ratios.  On the time scale Fibonacci ratios are one method of identifying potential market turning points. When Fibonacci levels of price and time coincide you have high probability entry points.
In the next few pages I will talk about how I use the two most common applications of Fibonacci:
•     Price Retracements – A strategy for quality entry points
•     Price Extensions – An approach to determining how far price will run
Then after we have covered the basics we will talk about bringing it all together and using both Fibonacci Retracements
and Fibonacci Extensions at same time and how clustering of these ratios increases the probability of profit.
Fibonacci Retracements:
The Fibonacci Retracement is probably the most heavily used Fibonacci tool in the toolset. You will find Fibonacci
Retracements as a solid tool in identifying key support and resistance areas.
If prices have fallen from a recent swing high down to a swing low, the expectation is that price should retrace distance, high to low, by a ratio ofthe Fibonacci sequence. .  I have Fibonacci Retracements successfully used on tick charts  through monthly and yearly charts. It is important to note, the larger price move from swing high to swing low, the more accurate the retracement projections. Identification and selection of the correct swing points are keys to success.
While there are many variations of the ratio set, simple is better, let’s focus on four major retracement levels.
•     23.6% — The shallowest of the retracements. In very strong trending markets price typically quickly bounces in
the area of this ratio.
•     38.2%   — This is the first line of defense of the current trend. Breaking this level starts to erode the underlying
trend.
•     50% — the neutral point of any retracement. This is the critical tipping point.
•     61.8% — retracing to this typically signals a breakdown in the trend.
•     100% — matching the move
In this section we will also show examples of how potential opportunities when price retraces beyond 100% by following
another set of Fibonacci ratios:
•     138.2%
•     161.8%
•     200%
Notice in each case we have simply added 100% to the standard ratio set. I use this set of retracements on a daily
basis, from 23.6% all the way to 200% and sometimes 300% For my style of trading I find 38.2%, 50% and 61.8% quite
reliable.I use the other primarily as confirmation levels.
So let’s take a look at some examples of Fibonacci Retracements in use.
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Basic Fibonacci Calculation Method

Who was Fibonacci?
Leonardo Pisano, was Italian mathematician born in Pisa during the The middle  Ages. He was renowned as one of the most talented mathematicians of his day. The name Fibonacci itself was a nickname given to Leonardo. It was derived from his grandfather’s name and means son of Bonaccio.
While most attribute the Fibonacci Sequence to Leonardo, he was not responsible   for discovering the sequence. In 1202 Leonardo published a book called,Liber  Abaci.In it he derived a method for calculating the growth of the rabbit population.
Suppose a newly-born pair of rabbits, one male, one female, are put in a field.Rabbits are able to mate at the age  of one month so that at the end of its   second month a female can produce another pair of rabbits. Suppose that our rabbits never die and that the female always produces one new pair (one male, one female) every month from the second month on. The puzzle that Fibonacci posed was…How many pairs will there be in one year?
At the end of the first month, they mate, but there is still one only 1 pair.
At the end of the second month the female produces a new pair, so now there are 2 pairs of rabbits in the field.
At the end of the third month, the original female produces a second pair, making 3 pairs in all in the field.
At the end of the fourth month, the original female has produced yet another new pair, the female born two monthsago produces her first pair also, making 5 pairs.
This mathematical progression is now recognized as the Fibonacci Sequence.  Starting with zero and adding one,each new number in the sequence is the sum of the previous two numbers. In our example, 0+1 = 1, 1+1=2, 1+2=3,
2+3=5, and so on.
The sequence of numbers looks like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, to infinity. From this sequence.you can easily reason that at the end of one year there would be 233 pairs of rabbits.
This sequence has repeatedly appeared in popular culture from architecture to music to television. While the series is a powerful tool, the analysis of one number with the number up to four places to the right. The first three are shown below. While some are not exact, if you repeat this mathematical analysis through multiple sets of data, you will see.we arrive at some well known and fairly consistent ratios.
21/34   = 0.61764  ~  0.618                                34/21    =  1.61904  ~ 1.619
21/55   = 0.38181  ~  0.382                                55/21    =  2.61904  ~ 2.619
21/89   = 0.23595  ~  0.236                                89/21    =  4.23809  ~ 4.238
The dimensional properties adhering to the 1.618 ratio occur throughout nature and the ratio is most referred to as The Golden Ratio. The uncurling of a fern and the patterns found on various mollusk shells are commonly cited examples of this ratio.
This number, when added to 0.618, equals 1.
These ratios have been used for over a hundred years in the financial markets by the likes of W.D. Gann and Ralph Nelson Elliot. Up until the late 90s the tracking and use of these numbers were a manual process.  With the proliferation of real-time charting and data, software that automatically calculated and displayed these levels brought Fibonacci into the financial mainstream.
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Thursday, December 17, 2009

What is Technical Analysis?

Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.

Technical analysis is applicable to stocks, indices, commodities, futures or any trad able instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low, or close for a given security over a specific time frame. The time frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action.
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Market Capitalization

The term “cap”, as in small-cap, mid-cap, and large-cap. Cap is short for capitalization. As a stock market term, the capitalization of a company is found by multiplying the total number of shares times the current share price.
If a company has 500 million shares trading at $20 a share, its market cap is $10 billion (500,000,000 x $20). This is the total value of the company’s stock, the value that the world of stock market investors has placed on the company (at least for today, investors are quick to change their minds).
Today, we define a large-cap company as one whose stock is valued at over $10 billion, a mid-cap from $1 to $10 billion, a small-cap from $250 million to $1 billion, and a company whose stock value is under $250 million as a micro-cap. Depending on who you listen to or how old your reference is, these definitions will vary.
A related point – don’t think a company is big just because it has a high stock price, or that it is small just because its stock price is low.
For example, Disney trading at $23 is not smaller than Barnes & Noble trading at $33, since Disney has 2,048,690,000 shares outstanding (called the “float”) and B&N has just 68,585,000 shares. That’s a $4.7 billion market cap for Disney versus only $226 million for Barnes & Noble.

Simple Moving Averages

Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays.

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). They are described in more detail below.
Simple Moving Average (SMA)
A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
10+ 11 + 12 + 13 + 14 = 60
(60 / 5) = 12
The calculation is repeated for each price bar on the chart. The averages are then joined to form a smooth curving line – the moving average line. Continuing our example, if the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day simple moving average would be calculated as follows:
11 + 12 + 13 + 14 +15 = 65
(65 / 5) = 13
Over the last 2 days, the SMA moved from 12 to 13. As new days are added, the old days will be subtracted and the moving average will continue to move over time.
In the example above, using closing prices from Eastman Kodak (EK), day 10 is the first day possible to calculate a 10-day simple moving average. As the calculation continues, the newest day is added and the oldest day is subtracted. The 10-day SMA for day 11 is calculated by adding the prices of day 2 through day 11 and dividing by 10. The averaging process then moves on to the next day where the 10-day SMA for day 12 is calculated by adding the prices of day 3 through day 12 and dividing by 10.

Simple Moving Averages

Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays.
mova1-1sunw
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). They are described in more detail below.
Simple Moving Average (SMA)
A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
10+ 11 + 12 + 13 + 14 = 60
(60 / 5) = 12
The calculation is repeated for each price bar on the chart. The averages are then joined to form a smooth curving line – the moving average line. Continuing our example, if the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day simple moving average would be calculated as follows:
11 + 12 + 13 + 14 +15 = 65
(65 / 5) = 13
Over the last 2 days, the SMA moved from 12 to 13. As new days are added, the old days will be subtracted and the moving average will continue to move over time.
In the example above, using closing prices from Eastman Kodak (EK), day 10 is the first day possible to calculate a 10-day simple moving average. As the calculation continues, the newest day is added and the oldest day is subtracted. The 10-day SMA for day 11 is calculated by adding the prices of day 2 through day 11 and dividing by 10. The averaging process then moves on to the next day where the 10-day SMA for day 12 is calculated by adding the prices of day 3 through day 12 and dividing by 10.
movingavesma10
The chart above is a plot that contains the data sequence in the table. The simple moving average begins on day 10 and continues.
This simple illustration highlights the fact that all moving averages are lagging indicators and will always be “behind” the price. The price of EK is trending down, but the simple moving average, which is based on the previous 10 days of data, remains above the price. If the price were rising, the SMA would most likely be below. Because moving averages are lagging indicators, they fit in the category of trend following indicators. When prices are trending, moving averages work well. However, when prices are not trending, moving averages can give misleading signals.

Wednesday, December 16, 2009

Basic Stock Market Q & A

S&P CNX Nifty – Frequently Asked Questions
Basics
1.  What should a stock market index be?
2.  What do the ups and downs of an index mean?
3.  What is the basic idea in an index?
4.  What kind of averaging is done?
5.  What is the portfolio interpretation of index movements?
6.  Why are indexes important?
7.  What kinds of indexes exist?
Index construction
1.  Isn’t averaging like diversification; cancelling out vulnerability to one stock?
2.  Then a larger number of stocks in an index will give more diversification — isn’t that
a good thing? Why don’t we put all the stocks of the country into the index?
Component illiquidity contaminates index
1.  What is wrong with the price information for illiquid stocks?
2.  A stock may be liquid on one exchange and illiquid on another — what price do you
take when calculating the index?
3.  What is `stale prices’?
4.  What is `bid-ask bounce’?
5.  What about market manipulation  – how would manipulation of an index take place,
and how would an index be made less vulnerable to manipulation?
6.  So diversification yields diminishing returns, and illiquid stocks are best kept out of
an index…. what is the ideal middle road?
The S&P CNX Nifty
1.  How does the S&P CNX Nifty work?
2.  What is `impact cost’?
3.  What do you mean by `an S&P CNX Nifty trade’?
4.  What’s the impact cost on Rs.3 million of the full S&P CNX Nifty?
Index revision
1.  Why does the index keep changing from time to time?
2.  When a stock goes out and a new stock comes in, doesn’t that make index levels non-
comparable?
3.  Index revision sounds dangerous in terms of political pressures. Won’t speculators try
to push a stock they have purchased into the index? Or remove a stock from the index
when they are shorting it?
High quality information
1.  How is the S&P CNX Nifty closing price calculated?
2.  What is special about the NSE closing price?
3.  What about dividends?