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, March 30, 2010

MACD Part 2

Bearish Signals
MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals.
1.  Negative divergence
2.  Bearish moving average crossover
3.  Bearish centerline crossover Negative Divergence
A negative divergence forms when the security advances or moves sideways and MACD declines. The negative divergence in MACD can take the form of either a lower high or a straight decline. Negative divergences are probably the least common of the three signals, but are usually the most reliable and can warn of an impending peak.
Federal Express

The FDX chart shows a negative divergence when MACD formed a lower high in May and the stock formed a higher high at the same time. This was a rather blatant negative divergence and signaled that momentum was slowing. A few days later, the stock broke the uptrend line and MACD formed a lower low.
There are two possible means of confirming a negative divergence. First, the indicator can form a lower low. This is traditional peak-and-trough analysis applied to an indicator. With the lower high and subsequent lower low, the up trend for MACD has changed from bullish to bearish. Second, a bearish moving average crossover, which is explained below, can act to confirm a negative divergence. As long as MACD is trading above its 9-day EMA or trigger line, it has not turned down and the lower high is difficult to confirm. When MACD breaks below its 9-day EMA, it signals that the short-term trend for the indicator is weakening, and a possible interim peak has formed.
Bearish moving average crossover The most common signal for MACD is the moving average crossover. A bearish moving average crossover occurs when MACD declines below its 9-day EMA. Not only are these signals the most common, but they also produce the most false signals. As such, moving average crossovers should be confirmed with other signals to avoid
whipsaws and false readings.

Sometimes a stock can be in a strong uptrend and MACD will remain above its trigger line for a sustained period of time. In this case, it is unlikely that a negative divergence will develop. A different signal is needed to identify a potential change in momentum.
This was the case with MRK in February and March. The stock advanced in a strong up trend and MACD remained above its 9-day EMA for 7 weeks. When a bearish moving average crossover occurred, it signaled that upside momentum was slowing. This slowing momentum should have served as an alert to monitor the technical situation for further clues of weakness. Weakness was soon confirmed when the stock broke its uptrend line and MACD continued its decline and moved below zero.
Bearish centerline crossover A bearish centerline crossover occurs when MACD moves below zero and into negative territory. This is a clear indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.
The significance of the centerline crossover will depend on the previous movements of MACD as well. If MACD is positive for many weeks, begins to trend down and then crosses into negative territory, it would be considered bearish. However, if MACD has been negative for a few months, breaks above zero and then back below, it may be seen as more of a correction. In order to judge the significance of a centerline crossover, traditional technical analysis can be applied to see if there has been a change in trend, higher high or lower low.
The UIS chart depicts a bearish centerline crossover that preceded a 25% drop in the stock that occurs just off the right edge of the chart. Although there was little time to act once this signal appeared, there were other warnings signs just prior to the dramatic drop.
1.  After the drop to trendline support , a bearish moving average crossover formed.
2.  When the stock rebounded from the drop, MACD did not even break above the trigger line, indicating weak upside momentum.
3.  The peak of the reaction rally was marked by a shooting star candlestick (blue arrow) and a gap down on increased volume (red arrows).
4.  After the gap down, the blue trendline extending up from Apr-99 was broken.
In addition to the signal mentioned above, the bearish centerline crossover occurred after MACD had been above zero for almost two months. Since 20-Sept, MACD had been weakening and momentum was slowing. The break below zero acted as the final straw of a long weakening process.
Combining Signals
As with bullish MACD signals, bearish signals can be combined to create more robust signals. In most cases, stocks fall faster than they rise. This was definitely the case with UIS and only two bearish MACD signals were present. Using momentum indicators like MACD, technical analysis can sometimes provide clues to impending weakness. While it may be impossible to predict the length and duration of the decline, being able to spot weakness can enable traders to take a more defensive position.

Thursday, March 18, 2010

Head and Shoulders Bottom (Reversal)

The head and shoulders bottom is sometimes referred to as an inverse head and shoulders. The pattern shares many common characteristics with its comparable partner, but relies more on volume patterns for confirmation.
As a major reversal pattern, the head and shoulders bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can be connected to form
resistance, or a neckline.
The price action forming both head and shoulders top and head and shoulders bottom patterns remains roughly the same, but reversed. The role of volume marks the biggest difference between the two. Generally speaking, volume plays a larger role in bottom formations than top formations. While an increase in volume on the neckline breakout for a head and shoulders top is welcomed, it is absolutely required for a bottom. We will look at each part of the pattern individually, keeping volume in mind, and then put the parts together with some examples.
Prior Trend: It is important to establish the existence of a prior downtrend for this to be a reversal pattern. Without a prior downtrend to reverse, there cannot be a head and shoulders bottom formation.
Left Shoulder: While in a downtrend, the left shoulder forms a trough that marks a new reaction low in the current trend. After forming this trough, an advance ensues to complete the formation of the left shoulder (1). The high of the decline usually remains below any longer trendline, thus keeping the downtrend intact.
Head: From the high of the left shoulder, a decline begins that exceeds the previous low and forms the low point of the head. After making a bottom, the high of the subsequent advance forms the second point of the neckline (2). The high of the advance sometimes breaks a downtrend line, which calls into question the robustness of the downtrend.
Right Shoulder: The decline from the high of the head (neckline) begins to form the right shoulder. This low is always higher than the head and usually in line with the low of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack and the right shoulder will be higher, lower, wider or narrower. When the advance from the low of the right shoulder breaks the neckline, the head and shoulders reversal is complete.
Neckline: The neckline forms by connecting reaction highs 1 and 2. Reaction high 1 marks the end of the left shoulder and the beginning of the head. Reaction high 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two reaction highs, the neckline can slope up, slope down or be horizontal. The slope of the neckline will affect the pattern’s degree of bullishness: an upward slope is more bullish than downward slope.
Volume: While volume plays an important role in the head and shoulders top, it plays a crucial role in the head and shoulders bottom. Without the proper expansion of volume, the validity of any breakout becomes suspect. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing the absolute levels associated with each peak and trough.
Volume levels during the first half of the pattern are less important that in the second half. Volume on the decline of the left shoulder is usually pretty heavy and selling pressure quite intense. The intensity of selling can even continue during the decline that forms the low of the head. After this low, subsequent volume patterns should be watched carefully to look for expansion during the advances.
The advance from the low of the head should show and increase in volume and/or better indicator readings (e.g. CMF > 0 or strength in OBV). After the reaction high forms the second neckline point, the right shoulder’s decline should be accompanied with light volume. It is normal to experience profit-taking after an advance. Volume analysis helps distinguish between normal profit-taking and heavy selling pressure. With light volume on the pullback, indicators like CMF and OBV should remain strong. The most important moment for volume occurs on the
advance from the low of the right shoulder. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout.
Neckline Break: The head and shoulders pattern is not complete and the downtrend is not reversed until neckline resistance is broken. For a head and shoulders bottom, this must occur in a convincing manner with an expansion of volume.
Resistance turned support: Once resistance is broken, it is common for this same resistance level to turn into support. Often, the price will return to the resistance break and offer a second chance to buy.
Price Target: After breaking neckline resistance, the projected advance is found by measuring the distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a price target. Any price target should serve as a rough guide and other factors should be considered as well. These factors might include previous resistance levels, Fibonacciretracements or long-term moving averages.
Alaska Air (ALK) formed a head and shoulders bottom with a downward sloping neckline. Key points include:
1.  The stock began a downtrend in early July and declined from 60 to 26.
2.  The low of the left shoulder formed with a large spike in volume on a sharp down day (red arrows).
3.  The reaction rally at around 42 1/2 formed the first point of the neckline (1). Volume on the advance was respectable with many gray bars exceeding the 60-day SMA. (Note: gray bars denote advancing days, blackbars declining days and the thin red horizontal is the 60-day SMA).
4.  The decline from 42 1/2 to 26 (head) was quite dramatic, but volume did not get out of hand. Chaikin Money Flow was mostly positive when the lows around 26 were forming.
5.  The advance off of the low saw a large expansion of volume (green oval) and gap up. The strength behind the move indicated that a significant low formed.
6.  After the reaction high around 39, the second point of the neckline could be drawn (2).
7.  The decline from 39 to 33 occurred on light volume until the final two days, when volume reached its highest point in a month. Even though there are two long black (down) volume bars, these are surrounded by above-average gray (up) volume bars. Also notice how trendline resistance near 35 became support around 33 on the price chart.
8.  The advance off of the low of the right shoulder occurred with above average volume. Chaikin Money Flow was at its highest levels and surpassed +20% shortly after neckline resistance was broken.
9.  After breaking neckline resistance, the stock returned to this newfound support with a successful test around 35 (green arrow).
AT&T (T) formed a head and shoulders bottom with a flat neckline. The shoulders are a bit shallow, but the neckline and head are wellpronounced. Key points include:
1.  The stock established a 6-month downtrend with the trendline extending down from Mar-98.
2.  After a head fake above the trendline in late June, the stock fell from 43 11/16 to 34 11/16 with a sharp increase in volume to form the left shoulder.
3.  The rally to 40 13/16 met resistance from the trendline and the reaction high became the first point of the neckline.
4.  The decline from 40 13/16 to 33 7/16 finished with a
piercing pattern to form the low of the head. Even though volume was heavy when the long black candlestick formed, the subsequent reversal occurred on even higher volume. This reversal was followed with a number of strong advances and up gaps. Also notice that Chaikin Money Flow was above +10% when the low of the head formed.
5.  The advance from the low of the head broke above the trendline extending down from Mar-98 and met resistance around 41. This reaction high formed the second point of the neckline.
6.  The right shoulder was quite short and shallow. The low was recorded at 37 7/16 and Chaikin Money Flow remained above +10% the whole time. Support was found from the trendline that offered resistance a few weeks earlier.
7.  The stock advanced sharply off of lows that formed the right shoulder and volume increased three straight days (blue arrow). This is a bit early, but volume remained just above average for the neckline breakout a few days later. Also Chaikin Money Flow remained above +10% the whole time.
8.  After the break of neckline resistance, the stock tested this newfound support twice while consolidating recent gains. The power arrived a few weeks later with a strong move off support and a huge increase in volume. The stock subsequently advanced from the low forties to the low sixties.
Head and shoulder bottoms are one of the most common and reliable reversal formations. It is important to remember that they occur after a downtrend and usually mark a major trend reversal when complete. While it is preferable that the left and right shoulders be symmetrical, it is not an absolute requirement. Shoulders can be different
widths as well as different heights. Keep in mind that technical analysis is more an art than a science. If you are looking for the perfect pattern, it may be a long time coming.
Analysis of the head and shoulders bottom should focus on correct identification of neckline resistance and volume patterns. These are two of the most important aspects to a successful read, and by extension a successful trade. The neckline resistance breakout combined with an increase in volume indicates an increase in demand at higher prices. Buyers are exerting greater force and the price is being affected.
As seen from the examples, traders do not always have to chase a stock after the neckline breakout. Many times, but certainly not always, the price will return to this new support level and offer a second chance to buy. Measuring the expected length of the advance after the breakout can be helpful, but don’t count on it for your ultimate target. As the pattern unfolds over time, other aspects of the technical picture are likely to take precedent. Technical analysis is dynamic and your analysis should incorporate aspects of the long, medium and short term picture.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

Wednesday, March 17, 2010

The “Last” Stochastic Technique

The Stochastic oscillator is a momentum or price velocity indicator developed by George Lane. The calculation is very simple:
Where:
K = Lane’s Stochastic
C = latest closing price
L = then-period low price
H = the n-period high price
Additionally, Lane’s methods specifically required that the K be smoothed twice with three-period simple moving averages. Two other calculations are then made:
SK = three period simple moving average of K
SD = three period simple moving average of SK
The classic interpretation of a stochastic can be complicated. The basic method is to buy when the SK is above the SD, and sell when the SK moves below the SD. However, the stochastic employs a fixed period-to-period calculation that can move about erratically as the earliest data point is dropped for the next day’s calculation. Due to this instability and false signals generated, using a stochastic for entry and exit signals can incur a lot of unprofitable trades. To compensate for this inherent weakness, buy signals are generally reinforced when the crossover occurs in the 10-15% ranges, and sells in the 85-90% range.

Unfortunately, many techniques for using the stochastic oscillator can produce consistent losses over time. Some analysts have recommended smoothing the data further, or looking for aconfirming overbought/oversold ratio prior to selling or buying. Most secondary filters such as overbought/oversold indicators degrade the performance of the stochastic in that one does not take advantage of major trends, getting whipsawed in and out.K39 – The Last Stochastic TechniqueA study published in “The Encyclopedia of Technical Market Indicators” found that some very good signals were given by an unsmoothed 39 period stochastic oscillator (K = 39, no signal line). A buy signal is generated when K crosses above 50% and the closing price is above the previous week’s high close. Sell and/or sell short signals are created
when the K line crosses below 50% and the closing price is below the previous week’s low close. Taking a longer period, and not smoothing the data over a 3-period moving average allows the analyst to view Lane’s Stochastic.
Note: You can add the Last Stochastic to our SharpChart charting tool by adding the “Slow Stochastic” indicator with parameters of 39 and 1.
Here is an example. Alternately, you can choose “Scott McCormick’s Fund Settings” from the “Custom Settings” dropdown.
In the chart below for MSFT, we see that the 39 period K crossed above 50% on June 14, at around $72.00.
Weekly, Daily and Hourly through Minute data can all be used effectively for the 39 period stochastic. Using weekly data for three years, we see that the 39-Week Stochastic for MSFT didn’t cross below 50% until late February, 2000.

The whipsaw that occured for MSFT the following month shows the need for signal confirmation. If we look at CSCO for the last year on daily data, we see that by the 39 day stochastic, it was a hold from November 1999 at $35 through early April 2000 at $65 a share. Here again, we see a false rally at the end of April. What can be used for confirmation?

Notice that there was a bullish OBV crossover in early November 1999 and again in early June 2000 soon after the K line moved back above 50%. Although the Last Stochastic reversed in April, the OBV crossover did not occur. When the K line moved above 50% again in early June, confirmation soon followed.
One last point to remember is that all stocks are unique, and while the 39 period Stochastic is a useful technical indicator, one should always map the performance against your specific stock. Recently, most Tech stocks have evidenced a tendency to signal entry at a K crossover above 40% and a sell with K crossing below 60%. However, in volatile equities a second price or sentiment indicator along with a volume indicator provides the best confirmation.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

Friday, March 12, 2010

Percentage Volume Oscillator

The Percentage Volume Oscillator (PVO) is the percentage difference between two moving averages of volume. The indicator is calculated with the following formula:
Volume Oscillator (%) – PVO = ((Vol 12-day EMA – Vol 26-day EMA)/Vol 12-
day EMA) x 100
The 12-day exponential moving average (PVO) and 26-exponential moving average were used as examples. Typically, these can be changed to suit longer or shorter time periods. Because of its formula, the PVO has a maximum value of +100, but no minimum value. For example: if the 12-day EMA equals 2000 and the 26-day EMA equals 8000, then the PVO would equal -300 (((2000 – 8000)/2000) x 100) = -300. The absolute value is not as important as the direction or the crosses above and below the zero line.
Uses
The PVO can be used to identify periods of expanding or contracting volume in three different ways:
Centerline Crossovers: like the PPO, the PVO oscillates above and below thezero line. When PVO is positive, the shorter EMA of volume is greater than the longer EMA of volume. When PVO is negative, the shorter EMA of volume is less than the longer EMA of volume. A PVO above zero indicates that volume levels are generally above average and relatively heavy. When the PVO is below zero, volume levels are generally below average and light.
Directional Movement: General directional movement of the PVO can offer a
quick visual assessment of volume patterns. A rising PVO signals that volume levels are increasing and a falling PVO signals that volume levels are decreasing.
Moving average crossovers: The last variable in the PVO forms the signal line. For example: PVO(12,26,9) would include a 9-day EMA of PVO as well as a histogram representing the difference between the PVO and its 9-day EMA. When PVO moves above its signal line, volume levels are generally increasing. When PVO moves below its signal line, volume levels are generally decreasing.
Movements in the PVO are completely separate from price movements. As such, movements in PVO can correlated with price movements to assess the degree of buying or selling pressure. Advances combined with strength in the PVO would be considered strong. Should the PVO decline while a security’s price fell, it would indicate decreasing volume on the decline.
In the example above,

FILE
is shown with two PVO settings: PVO (12,26,9) in the top window and PVO (5,60,1) in the bottom window. When the final variable is set at 1, as with PVO(5,60,1) there is no signal line or histogram. During August and September, the stock traded between 15 and 21, and the PVO remained mostly below zero. There was a small bounce above zero with the late August advance, but the stock remained confined to its trading range. When the stock began to advance off of its low in October, the PVO moved into positive territory with a sharp rise (green line). The advance was confirmed with expanding volume and the stock broke resistance. The breakout with expanding volume signaled exceptionally strong buying pressure.
On SharpCharts, the PVO has three variable boxes and appears in the same format as the Percentage Price Oscillator (PPO). The default setting is (12,26,9): the first variable is for the short exponential moving average (EMA) of volume, the second is for the long exponential moving average of volume and the third is for the signal line. The signal line is the EMA of the indicator itself (the PVO) and can also be made longer or shorter. The histogram (solid area above and below zero) represents the difference between the PVO and its signal line. For those who do not wish to have a trigger line or histogram, the third variable (the signal line) can be set equal to 1.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

MACD Part 2

Bearish Signals
MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals.
1.  Negative divergence
2.  Bearish moving average crossover
3.  Bearish centerline crossover
Negative Divergence
A negative divergence forms when the security advances or moves sideways and MACD declines. The negative divergence in MACD can take the form of either a lower high or a straight decline. Negative divergences are probably the least common of the three signals, but are usually the most reliable and can warn of an impending peak.
Federal Express

The FDX chart shows a negative divergence when MACD formed a lower high in May and the stock formed a higher high at the same time. This was a rather blatant negative divergence and signaled that momentum was slowing. A few days later, the stock broke the uptrend line and MACD formed a lower low.
There are two possible means of confirming a negative divergence. First, the indicator can form a lower low. This is traditional peak-and-trough analysis applied to an indicator. With the lower high and subsequent lower low, the up trend for MACD has changed from bullish to bearish. Second, a bearish moving average crossover, which is explained below, can act to confirm a negative divergence. As long as MACD is trading above its 9-day EMA or trigger line, it has not turned down and the lower high is difficult to confirm. When MACD breaks below its 9-day EMA, it signals that the short-term trend  for the indicator is weakening, and a possible interim peak has formed.
Bearish moving average crossover
The most common signal for MACD is the moving average crossover. A bearish moving average crossover occurs when MACD declines below its 9-day EMA. Not only are these signals the most common, but they also produce the most false signals. As such, moving average crossovers should be confirmed with other signals to avoid whipsaws and false readings.

Sometimes a stock can be in a strong uptrend and MACD will remain above its trigger line for a sustained period of time. In this case, it is unlikely that a negative divergence will develop. A different signal is needed to identify a potential change in momentum. This was the case with MRK in February and March. The stock advanced in a strong up trend and MACD remained above its 9-day EMA for 7 weeks. When a bearish moving
average crossover occurred, it signaled that upside momentum was slowing. This slowing momentum should have served as an alert to monitor the technical situation for further clues of weakness. Weakness was soon confirmed when the stock broke its uptrend line and MACD continued its decline and moved below zero.
Bearish centerline crossover
A bearish centerline crossover occurs when MACD moves below zero and into negative territory. This is a clear indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.

The significance of the centerline crossover will depend on the previous movements of MACD as well. If MACD is positive for many weeks, begins to trend down and then crosses into negative territory, it would be considered bearish. However, if MACD has been negative for a few months, breaks above zero and then back below, it may be seen as more of a correction. In order to judge the significance of a centerline crossover, traditional technical analysis can be applied to see if there has been a change in trend, higher high or lower low.
The UIS chart depicts a bearish centerline crossover that preceded a 25% drop in the stock that occurs just off the right edge of the chart. Although there was little time to act once this signal appeared, there were other warnings signs just prior to the dramatic drop.
1.  After the drop to trendline support , a bearish moving average crossover formed.
2.  When the stock rebounded from the drop, MACD did not even break above the trigger line, indicating weak upside momentum.
3.  The peak of the reaction rally was marked by a shooting star candlestick (blue arrow) and a gap down on increased volume (red arrows).
4.  After the gap down, the blue trendline extending up from Apr-99 was broken.
In addition to the signal mentioned above, the bearish centerline crossover occurred after MACD had been above zero for almost two months. Since 20-Sept, MACD had been weakening and momentum was slowing. The break below zero acted as the final straw of a long weakening process.
Combining Signals
As with bullish MACD signals, bearish signals can be combined to create more robust signals. In most cases, stocks fall faster than they rise. This was definitely the case with UIS and only two bearish MACD signals were present. Using momentum indicators like MACD, technical analysis can sometimes provide clues to impending weakness. While it may be impossible to predict the length and duration of the decline, being able to spot vweakness can enable traders to take a more defensive position.
After issuing a profit warning in late Feb-00, CPQ dropped from above 40 to below 25 in a few months. Without inside information, predicting the profit warning would be pretty much impossible. However, it would seem that smart money began distributing the stock before the actual warnings. Looking at the technical picture, we can spot evidence of this distribution and a serious loss of momentum.
1.  In January, a negative divergence formed in MACD.
2.  Chaikin Money Flow turned negative on January 21.
3.  Also in January, a bearish moving average crossover occurred in MACD (black arrow).
4.  The trendline extending up from October was broken on 4-Feb.
5.  A bearish centerline crossover occurred in MACD on 10-Feb (green arrow).
6.  On 16, 17 and 18-Feb, support at 41 1/2 was violated (red arrow). A full 10 days passed in which MACD was below zero and continued to decline (thin red lines). The day before the gap down, MACD was at levels not seen since October. For those waiting for a recovery in the stock, the continued decline of momentum suggested that selling pressure was increasing, and not about to decrease. Hindsight is 20/20, but with careful study of past situations, we can learn how to better read the present and prepare for the future.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

Wednesday, March 10, 2010

Rectangle (Continuation Pattern)

A rectangle is a continuation pattern that forms as a trading range during a pause in the trend. The pattern is easily identifiable by two comparable highs and two comparable lows. The highs and lows can be connected to form two parallel lines that make up the top and bottom of a rectangle. Rectangles are sometimes referred to as trading ranges, consolidation zones or congestion areas.

There are many similarities between the rectangle and the symmetrical triangle. While both are usually continuation patterns, they can also mark trend significant tops and bottoms. As with the symmetrical triangle, the rectangle pattern is not complete until a breakout has occurred. Sometimes clues can be found, but the direction of the breakout
is usually not determinable beforehand. We will examine each part of the rectangle and then provide an example with MU.
1.Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation.
2.4 points: At least two equivalent reaction highs are required to form the upper resistance line and two equivalent reaction lows to form the lower support line. They do not have to be exactly equal, but should be within a reasonable proximity. Although not a prerequisite, it is preferable that the highs and lows alternate.
3.Volume: As opposed to the symmetrical triangle, rectangles do not exhibit standard volume patterns. Sometimes volume will decline as the pattern develops. Other times volume will gyrate as the prices bounce between support and resistance. Rarely will volume increase as the pattern matures. If volume declines, it is best to look for an expansion on the breakout for confirmation. If volume gyrates, it is best to assess which movements (advances to resistance or declines to support) are receiving the most volume. This type of volume assessment could offer an indication on the direction of the future breakout.
4.Duration: Rectangles can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a flag, also a continuation pattern. Ideally, rectangles will develop over a 3-month period. Generally, the longer the pattern, the more significant the breakout. A 3-month pattern might be expected to fulfill its breakout projection. However, a 6-month pattern might be expected to exceed its breakout target.
5.Breakout Direction: The direction of the next significant move can only be determined after the breakout has occurred. As with the symmetrical triangle, rectangles are neutral patterns that are dependent on the direction of the future breakout. Volume patterns can sometimes offer clues, but there is no confirmation until an actual break above resistance or break below support.
6.Breakout Confirmation: For a breakout to be considered valid, it should be on a closing basis. Some traders apply a filter to price (3%), time (3 days) or volume (expansion) for confirmation.
7.turns into potential resistance and visa versa. After a break above resistance (below support), there is sometimes a return to test this newfound support level (resistance level). (For more detail, see this article on support and resistance.) A return to or near the original breakout level can offer a second chance to participate.
8.Target: The estimated move is found by measuring the height of the rectangle and applying it to the breakout.
Rectangles represent a trading range that pits the bulls against the bears. As the price nears support, buyers step in and push the price higher. As the price nears resistance,    bears take over and force the price lower. Nimble traders sometimes play these bounces by buying near support and selling near resistance. One group (bulls or bears) will exhaust itself and a winner will emerge whenthere is a breakout. Again, it is important to remember that rectangles have a neutral bias. Even though clues can sometimes be
gleaned from volume patterns, the actual price action depicts a market in conflict. Only until the price breaks above resistance or below support will it be clear which group has  won the battle.

In the summer of 1999, Micron Electronics (MU) advanced from the high teens to the low forties. After meeting resistance around 42, the stock settled in a trading range between 40 and 30 to form a rectangle.
The prior intermediate trend was established as bullish by the advance from the high teens to the low forties. However, it was unclear at the time if this trading range would be a reversal or a continuation pattern. The horizontal resistance line at 40 can be extended back to the Feb-99 high and marked a serious resistance level.
The red resistance line at 40 was formed with three reaction highs. The first reaction high may be a bit suspect, but the second two are robust. The parallel support line at 30 was touched three times and established a solid support level. After the high at point 5 was reached, the rectangle was valid.
As the pattern developed, volume fluctuated and there was no clear indication (bullish or bearish break) until mid-February. The first bullish clue came when the stock declined from 38 to 31 and Chaikin Money Flow failed to move below -10%. Money flows held steady throughout the decline and turned positive as soon as the stock turned back up. By the time the stock reached 39 3/4 (surpassing its previous reaction high in the process), CMF was at +20%. Also notice the strength behind the advance after a higher low.
The duration of the pattern was 5 months. Due to long-term overhead resistance at 40, the pattern needed more time to consolidate before a breakout. The longer consolidation made for bigger expectations after the breakout.
The breakout occurred with a large expansion in volume and a huge moved above resistance.
After the breakout, there was a slight pullback to around 46, but the volume behind the advance indicated a huge breakout. Stocks do not always return to the point of breakout. In the example above, LMT makes a classic return to the breakout. The set up and strength behind the breakout should be assessed to determine the possibility of a second chance opportunity.
The target advance of this breakout was 10 points, which was the width of the pattern. However, judging from the duration and strength of the breakout, expansion of volume and new all-time highs, it was apparent that this was no ordinary breakout. Therefore an ordinary target was useless! After an initial advance as high as 55 13/16, the stock pulled back to 46 and then moved above 70. Another trading range subsequently developed with resistance in the low 70s and support in the upper 40s.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

Tuesday, March 9, 2010

What are Charts?

A price chart is a sequence of prices plotted over a specific time frame. 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 just technical analysis. Because charts provide an easy-to-read graphical representation 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 Time frame
The time frame 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.

Daily data is made up of intraday data that has been compressed to show each day as a single data point, or period. Weekly data is made up of daily data that has been compressed to show each week as a single data point. The difference in detail can be seen with the daily and weekly chart comparison above. 100 data points (or periods) on the daily chart is equal to the last 5 months of the weekly chart, which is shown by the
data marked in the rectangle. The more the data is compressed, the longer the timeframe possible for displaying the data. If the chart can display 100 data points, a weekly chart will hold 100 weeks (almost 2 years). A daily chart that displays 100 days would represent about 5 months. There are about 20 trading days in a month and about 252 trading days in a year. The choice of data compression and timeframe depends on the data available and your trading or investing style.
Traders usually concentrate on charts made up of daily and intraday data to forecast short-term price movements. The shorter the time frame and the less compressed the data is, the more detail that is available. While long on detail, short-term charts can be volatile and contain a lot of noise. Large sudden price movements, wide high-low ranges and price gaps can affect volatility, which can distort the overall picture.
Investors usually focus on weekly and monthly charts to spot long-term trends and forecast long-term price movements. Because long-term charts (typically 1-4 years) cover a longer timeframe with compressed data, price movements do not appear as extreme and there is often less noise.
Others might use a combination of long-term and short-term charts. Long-term charts are good for analyzing the large picture to get a broad perspective of the historical price action. Once the general picture is analyzed, a daily chart can be used to zoom in on the last few months.
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, low and close for a particular day. Weekly charts would have a bar for each week based on Friday’s close and the high and low for that week.
Bar charts can also be displayed using the open, high, low and close. The only difference is the addition of the open price, which is displayed as a short horizontal line extending to the left of the bar. Whether or not a bar chart includes the open depends on the data available.

Bar charts can be effective for displaying a large amount of data. Using candlesticks, 200 data points can take up a lot of room and look cluttered. Line charts show less clutter, but do not offer as much detail (no high-low range). The individual bars that make up the bar chart are relatively skinny, which allows users the ability to fit more bars before the chart gets cluttered. If you are not interested in the opening price, bar charts are an ideal method for analyzing the close relative to the high and low. In addition, bar charts that include the open will tend to get cluttered quicker. If you are interested in the opening price, candlestick charts probably offer a better alternative.
Candlestick Chart:
Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For a candlestick chart, the open, high, low and close are all required. A daily candlestick is based on the open price, the intraday high and low, and the close. A weekly candlestick is based on Monday’s open, the weekly high-low range and Friday’s close.

Many traders and investors believe that candlestick charts are easy to read, especially the relationship between the open and the close. White (clear) candlesticks form when the close is higher than the open andblack (solid) candlesticks form when the close is lower than the open. The white and black portion formed from the open and close is
called the body (white body or black body). The lines above and below are called shadows and represent the high and low.
Point & Figure Chart:
The charting methods shown above all plot one data point for each period of time. No matter how much price movement, each day or week represented is one point, bar or candlestick along the time scale. Even if the price is unchanged from day to day or week to week, a dot, bar or candlestick is plotted to mark the price action. Contrary to this methodology, Point & Figure Charts are based solely on price movement and do not take time into consideration. There is an x-axis but it does not extend evenly across the chart.


The beauty of Point & Figure Charts is their simplicity. Little or no price movement is deemed irrelevant and therefore not duplicated on the chart. Only price movements that exceed specified levels are recorded. This focus on price movement makes it easier to identify support and resistance levels, bullish breakouts and bearish breakdowns. This article has a more detailed explanation of Point & Figure Charts.
Price Scaling
There are two methods for displaying the price scale along the y-axis: arithmetic and logarithmic. An arithmetic scale displays 10 points (or dollars) as the same vertical distance no matter what the price level. Each unit of measure is the same throughout the entire scale. If a stock advances from 10 to 80 over a 6-month period, the move from 10 to 20 will appear to be the same distance as the move from 70 to 80. Even
though this move is the same in absolute terms, it is not the same in percentage terms.
A logarithmic scale measures price movements in percentage terms. An advance from 10 to 20 would represent an increase of 100%. An advance from 20 to 40 would also be 100%, as would an advance from 40 to 80. All three of these advances would appear as the same vertical distance on a logarithmic scale. Most charting programs refer to the logarithmic scale as a semi-log scale, because the time axis is stilldisplayed arithmetically.


The chart above uses the 4th-Quarter performance of Verisign to illustrate the difference in scaling. On the semi-log scale, the distance between 50 and 100 is the same as the distance between 100 and 200. However, on the arithmetic scale, the distance between 100 and 200 is significantly greater than the distance between 50 and 100.
Key points on the benefits of arithmetic and semi-log scales:
1.Arithmetic scales are useful when the price range is confined within a relatively tight range.
2.Arithmetic scales can be useful for short-term charts and trading. Price movements (particularly for stocks) are shown in absolute dollar terms and reflect movements dollar for dollar.
3.Semi-log scales are useful when the price has moved significantly, be it over a short or extended timeframe
4.Semi-log scales can be useful for long-term charts to gauge the percentage movements over a long period of time. Large movements are put into perspective.
Conclusions
Even though many different charting techniques are available, one method is not necessarily better than the other. The data may be the same, but each method will provide its own unique interpretation, with its own benefits and drawbacks. A breakout on the Point & Figure Chart may not occur in unison with a breakout in a candlestick chart. Signals that are available on candlestick charts may not appear on bar charts.
How the security’s price is displayed, be it a bar chart or candlestick chart, with an arithmetic scale or semi-log scale, is not the most important aspect. After all, the data is the same and price action is price action. When all is said and done, it is the analysis of the price action that separates successful technicians from not-so-successful technicians. The choice of which charting method to use will depend on personal preferences and trading or investing styles. Once you have chosen a particular charting methodology, it is probably best to stick with it and learn how best to read the signals. Switching back and forth may cause confusion and undermine the focus of your analysis. Faulty analysis is rarely caused by the chart. Before blaming your charting method for missing a signal, first look at your analysis.
The keys to successful chart analysis are dedication, focus and consistency.
Dedication: Learn the basics of chart analysis, apply your knowledge on a regular basis and continue your development.
Focus: Limit the number of charts, indicators and methods you use. Learn how to use these and learn how to use them well.
Consistency: Maintain your charts on a regular basis and study them often (daily if possible).

Saturday, March 6, 2010

Standard Deviation (volatility)

Standard deviation is a statistical term that provides a good indication of volatility. It measures how widely values (closing prices for instance) are dispersed from the average. Dispersion is difference between the actual value (closing price) and the average value (mean closing price). The larger the difference between the closing prices and the average price, the higher the standard deviation will be and the higher the volatility. The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility.
The calculation for the standard deviation is based on the number of periods chosen. 20 days, which represents about a month, is a popular number of periods to use and will be used in the example below.
The steps for a 20-period standard deviation formula are as follows:
1.  Calculate the mean price. Sum the 20 periods and divide by 20. This is also the average price over 20 periods. (2246.06/20 = 112.30)
2. For each period, subtract the mean price from the close. This gives us the deviation for each period (-3.30, -9.24….).
3.  Square each period’s deviation (10.91, 85.38…).
4. Add together the squared deviations for periods 1 through 20 (921.28).
5. Divide the sum of the squared deviations by 20 (921.28/20 = 46.06).
6. Calculate the square root of the sum of the squared deviations. The square root of 46.06 equals 6.787.
The standard deviation for the 20 periods is 6.787. This example was formed with a price series for IBM. The chart below shows how the standard deviation can change over time.

After extended periods of consolidation, the standard deviation (or volatility) dropped. Notice that in late December the stock traded in a tight range and volatility dropped. Later in mid-March, the stock also traded in a tight range and volatility dropped. When the stock took off in the second half of March, volatility also rose.
VSTR, which is in the same price range as IBM, has a higher standard deviation. Until late December, the standard deviation was below 5. With the sharp advance in late December, the standard deviation rose from 5 to above 15. Since then it leveled out around 10 and has recently risen above 17. This is quite a volatile stock and its options will have more premium than IBM options. The higher the volatility for a particular stock, the higher the option premiums. The lower the volatility is for a particular stock, the lower the option premiums.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

Thursday, March 4, 2010

Introduction
Developed by Marc Chaikin, the Chaikin Money Flow oscillator is calculated from the daily readings of the Accumulation/Distribution Line. The basic premise behind the Accumulation Distribution Line is that the degree of buying or selling pressure can be determined by the location of the close relative to the high and low for the corresponding period (Closing Location Value). There is buying pressure when a stock
closes in the upper half of a period’s range and there is selling pressure when a stock closes in the lower half of the period’s trading range. The Closing Location Value multiplied by volume forms the Accumulation/Distribution Value for each period. (See our Chart School article for a detailed analysis of the Accumulation/Distribution Line.)
Ciena
Methodology
The CIEN chart details the breakdown of the daily Accumulation/Distribution Values and how they relate to Chaikin Money Flow. The formula for Chaikin Money Flow is the cumulative total of the Accumulation/Distribution Values for 21 periods divided by the cumulative total of volume for 21 periods. On the CIEN chart, the purple box encloses 21 days of Accumulation/Distribution Values. The total of these 21 days divided by the total for the 21 days of volume forms the value of Chaikin Money Flow at the end of that day (purple arrow). To calculate the next day, the Accumulation/Distribution Value from the first day is removed and the value for the next day is entered into the equation.
The number of periods can be changed to best suit a particular security and timeframe. The 21-day Chaikin Money Flow is a good representation of the buying and selling pressure for the past month. A month is long enough to filter out the random noise. By using a longer timeframe, the indicator will be less volatile and be less prone to whipsaws. For weekly and monthly charts, a shorter timeframe is usually suitable. Generally speaking, Chaikin Money Flow is considered bullish when it is positive and bearish when it is negative. The next item to assess is the length of time Chaikin Money Flow has remained positive or negative. Even though divergences are not an intricate part of the strategy behind Chaikin Money Flow, the absolute level and general direction of the oscillator can be important.
Accumulation Indications
The Chaikin Money Flow oscillator generates bullish signals by indicating that a security is under accumulation. There are three items that determine if a security is under accumulation and the strength of the accumulation.
1.  The first and most obvious signal to look for: is Chaikin Money Flow greater than zero? It is an indication of buying pressure and accumulation when the indicator is positive
2.  The second item: determine how long the oscillator has been able to remain above zero. The longer the oscillator remains above zero, the more evidence there is that the security is under sustained accumulation. Extended periods of accumulation or buying pressure are bullish and indicate that sentiment towards the security remains positive.
3.  The third indication: the actual level of the oscillator. Not only should the oscillator remain above zero, but it should also be able to increase and attain a certain level. The more positive the reading is, the more evidence of buying pressure and accumulation. There is such a thing as weak buying! This is usually a judgment call, based on prior levels for the oscillator.
Alcoa

On the chart for AA, Chaikin Money Flow actually strengthened while the stock continued to decline. For most of October, the stock traded flat while Chaikin Money Flow remained positive and continued to strengthen. The accumulation levels, as evidenced by Chaikin Money Flow, were very strong in October. The stock fell at the end of October and Chaikin Money Flow declined in November. When the stock fell, distribution levels never surpassed -.10, indicating that selling pressure was not that intense. In late November, the stock managed a comeback and broke resistance at 64.
Chaikin Money Flow formed a higher low and returned to positive territory to confirm the breakout. Selling pressure dried up quickly and Chaikin Money Flow was able to bounce back in strong fashion. The evidence is clearly bullish, but to capitalize a trader would have had to act fast.
AOL

The chart for AOL is a bit different. The stock formed a double bottom in August and September while Chaikin Money Flow formed a rather large positive divergence. This divergence was not a signal, but would have served as an alert that the selling pressure was decreasing. Divergences can be difficult to act on and should be used in conjunction with other aspects of technical analysis. By the time the stock broke resistance at 52, Chaikin Money Flow has moved from a mildly bearish levels just above -.10 to moderately bullish levels just above +.13. The interesting point about AOL is the period from 28-Sept to 22-Oct (gray lines). During this period, the stock traded sideways, but Chaikin Money Flow continued to strengthen as buying pressure intensified. The oscillator moved from +.1208 on 28-Sept to +.2377 on 22-Oct. Buying pressure has nearly doubled. This was a clearly bullish indication and the stock soon obliged with an advance from the low fifties to over 90.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

J. Welles Wilder Jr. developed the Average Directional Index (ADX) in order to evaluate the strength of the current trend, be it up or down. It’s important to detemine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and/or moves above 20, it is a sign that the trading range is ending and a trend could be developing.

When ADX begins to weaken from above 40 and/or moves below 40, it is a sign that the current trend is losing strength and a trading range could develop.

ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the
Negative Directional Indicator (-DI).
More on ADX can be found in Wilder’s book, New Concepts In Technical Trading Systems, written in 1978. Wilder’s indicators remain some of the best and most popular indicators today.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.

Tuesday, March 2, 2010

Price Price Channel

A price channel is a continuation pattern that slopesup or down and is bound by an upper and lower trendline. The upper trendline marks
resistance and the lower trendline
marks support. Price channels with negative slopes (down) are considered bearish and those with positive slopes (up) bullish. For explanatory purposes, a “bullish price channel” will refer to a channel with positive slope and a “bearish price channel” to a channel with negative slope.
1.Main trendline : It takes at least two points to draw the main trendline. This line sets the tone for the trend and the slope. For a bullish price channel, the main trendline extends up and at least two reaction lows are required to draw it. For a bearish price channel, the main trendline extends down and at least two reaction highs are required to draw it.
2.Channel line:The line drawn parallel to the main trendline is called the channel line. Ideally, the channel line will be based off oftwo reaction highsor lows. However, after the main trendline hasbeen established, some analysts draw the parallel channel line using only one reaction high or low. The channel line marks support in a bearish price channel and resistance in a bullish price channel.
3.Bullish price channel:As long as prices advance and trade within the channel,the trend is considered bullish. The first warning of a trend change occurs when prices fall short of channel line resistance. A subsequent break below main trendline support would provide further indication of a trend change. A break above channel line resistance would be bullish and indicate an acceleration of the advance.
4.Bearish price channel: As long as prices decline and trade within the channel, the trend is considered bearish. The first warning of a trend change occurs when prices fail to reach channel line support. A subsequent break above main trendline resistance would provide further indication of a trend change. A break below channel line support would be bearish and indicate an acceleration of the decline.
5.Scaling: Even though it is a matter of personal preference, trendlines seem to match reaction highs and lows best when semi-logscales are used. Semi-log scales reflect price movements in percentage terms. A move from 50 to 100 will appear the same distance as a move from 100 to 200.
In a bullish price channel, some traders look to buy when prices reach main trendline support. Conversely, some traders look to sell (or short) when prices reach main trendline resistance in a bearish price channel. As with most price patterns, other aspects of technical analysis should be used to confirm signals.
Because technical analysis is just as much art as it is science, there is room for flexibility. Even though exact trendline touches are ideal, it is up to each individual to judge the relevance and placement of both the main trendline and the channel line. By that same token, a channel line that is exactly parallel to the main trendline is ideal.

CSCO provides an example of an 11-month bullish price channel that developed in 1999.
1.Main trendline: The January, February and March reaction lows formed the beginning of the main trendline. Subsequent lows in April, May and August
confirmed the main trendline.
2.Channel line: Once the main trendline was in place, the channel line beginning from the January high was drawn. A visual assessment reveals that these trendlines look parallel. More precise analysts may want to test the slope of each line, but a visual inspection is usually enough to ensure the “essence” of the pattern.
3.Bullish price channel: Subsequent touches along the main trendline offered good buying opportunities in mid April, late May and mid August.
The stock did not reach channel line resistance until July (red arrow) and this marked a significant reaction high.
4.The September high (blue arrow) fell short of channel line resistance, but only by a small margin that was probably insignificant.
5.The break above channel line resistance in Dec-99 marked an acceleration of the but the advance was powerful and the trend never turned bearish. Price channels will not last forever, but the underlying trend remains in place until proven otherwise.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.