In this course, we will embark on a journey to demystify the language of charts, indicators, and patterns. Technical analysis is not just about predicting the future; it's about understanding the present and gaining insights into market psychology.

Course Highlights:

Who Should Take This Course?

No matter your level of expertise, join us as we unravel the mysteries of technical analysis, providing you with the tools and knowledge to navigate the stock market with confidence. Get ready to transform the way you perceive and engage with the financial markets!

There are numerous ‘FREE’ sources where you can get charts online. If you have an online broker you most likely have access to a charting package also.

Our favorite ‘FREE’ resource is finance.yahoo.com. The reason we like them best is that you also get real time data for FREE too. Most other FREE charting packages are using data that is 20 minutes delayed.

In our experience there is no need to pay for real time data...just use the charts on finance.yahoo.com!

For the purposes of this course we will teach you based on the charts available on finance.yahoo.com. But you can apply the principles to any charting package.

CLICK HERE to watch a video showing you how to get FREE charts for any company you want.

A chart is a sequence of prices plotted against a timeframe. Prices are on the y axis (vertical) and timeframe is on the X axis (horizontal). See the line chart below of Apple Computers (AAPL). Price is on the right hand side (y axis) and time frame is on the bottom (x Axis).

Line Chart of Apple (AAPL)

In its simplest form charts are just a picture of price movement for a stock over a given timeframe.

You can view charts over different time frames. You can get a chart for 1 day, 2 days, 1 week, 1 months, 1 year, 5 years etc… The timeframe you pick will give you a very different picture of the stock. Look at the two chart examples of Apple Computers below. The first chart is a 5 day chart and the other is a 1 year chart.

You might conclude from looking at the 5 day chart of Apple (above) that it is not performing very well. The price has fallen substantially over the past 5 days. But hold your judgment for one moment...let’s look at the 1 year chart.

What a difference! You can see that AAPL has performed very well over the past year. In technical analysis it is very important to look at charts from different time frames. Do not pass judgment based on just one time frame.

From the chart above you can see that each time period is separated into a ‘Bar’ structure. The left hand tick on each bar is the ‘open’ price for the period selected, the right hand tick on each bar is the ‘close’ price for the period selected and the main bar is the high and low price for the day. See below:

The green candles are ‘UP’ periods and the red candles are ‘DOWN’ periods.

There is a difference between a ‘TimeFrame’ and a ‘Time Period/Interval’. The ‘Time Frame’ is simply the look back period for the stock. For example, a one year chart or a one month chart. A ‘Time Period’ is the data in between the Time Frame that is represented by each ‘Bar’ or ‘Candle’. For example, daily data, weekly data or even five minute data.

The ‘Time Period’ is what each ‘Bar’ represents. See below an example of daily time period and weekly time Period for AAPL.

A daily time period/interval will have the open, high, low and close for one day trading in each ‘Bar’ or ‘Candle’. A weekly time period will have the open, high, low and close for one week trading. We prefer to look at daily time periods.

In stock technical analysis, traders and investors use various indicators to analyze and make decisions about stock prices and trends. These indicators can be categorized into three main timeframes: short term, intermediate term, and long term. Each category serves a different purpose and provides insights into different aspects of a stock's price movement. Here's an explanation of the differences between these three types of indicators:

It's important to note that the choice of indicators and the specific timeframes used can vary depending on the individual trader or investor's goals and trading style. Some traders may combine indicators from different timeframes to get a more comprehensive view of the market.

Additionally, it's essential to consider that while technical analysis can provide valuable insights into past price movements and potential future trends, it does not guarantee successful trading or investing outcomes. Traders and investors should use technical indicators in conjunction with other forms of analysis, risk management strategies, and a clear understanding of market dynamics.

Support and resistance are foundational concepts in technical analysis that help traders and investors identify potential price levels where a security may experience buying or selling pressure.

Let's explore these concepts in more detail:

In summary, support and resistance are fundamental concepts in technical analysis, providing valuable insights into potential price reversals and areas of buying or selling interest. Incorporating these concepts into your analysis can enhance your ability to make informed trading and investment decisions.

Support

Support is usually lower than the current price or sometimes at around the same price level. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further.

Support is usually drawn as a line connecting common price points where the stock has rebounded from in the past. See chart below for an example of ‘Support’ with SPY (SPY is an ETF that tracks the S&P 500 index). SPY in recent months has hit the $260 price level on 3 different occasions and then rebounded upwards from that level. Therefore $260 is considered a support level for the stock. Investors trading SPY may get interested in buying the stock the next time it hits the $260 area.

The logic of support dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

Please note, that this is not an exact science and just because a stock held a previous price point in the past does not mean it will hold the same price point in the future. It is important to have done your fundamental analysis too. Ask yourself the question ’What is my realistic price target for the stock in 12 months time?’ (we teach you about price targets in our other fundamental courses).

Traders using technical analysis generally use support as an area of interest...they will use other technical indicators to get ‘buy’ signals. We will discuss these later.

Old support becomes new resistance

When a support price is broken… traders then look for the next level of support below the previous support price. It is important to make sure that support is actually broken. A couple of hours trading below a support line doesn’t mean a support line is broken… a couple of days trading does!

Finally, when support is broken the old support is now considered the new resistance price.

Resistance

Resistance is usually higher than the current price or sometimes at around the same price level. Resistance is the price level at which supply is larger than demand which prevents the price from rising further.

Resistance is usually drawn as a line connecting common price points where the stock has rebounded lower from in the past. See chart below for an example of resistance with SPY (SPY is an ETF that tracks the S&P 500 index). SPY in recent months has hit the $280 price level on 3 different occasions and then rebounded lower from that level. Therefore $280 is considered a resistance level for the stock. Investors trading SPY may get interested in shorting or selling the stock the next time it hits the $280 area.

The logic of resistance dictates that as the price rises towards resistance and gets more expensive, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Please note, that this is not an exact science and just because a stock fell from a previous price point in the past does not mean it will do so in the future. It is important to have done your fundamental analysis too. What is your realistic price target for the stock in 12 months time? (we teach you about price targets in our other courses).

Traders using ‘Technical Analysis’ generally use ‘Resistance’ as an area of interest...they will use other technical indicators to get ‘sell’ signals. We will discuss these later.

Old Resistance becomes new Support

When a resistance price is broken… traders then look for the next level of resistance above the previous resistance price. It is important to make sure that resistance is actually broken. A couple of hours trading above a resistance line doesn’t mean a resistance line is broken… a couple of days trading does!

Finally, when resistance is broken the old resistance is now considered the new support price.

There are three types of trends:

See examples below.

See chart of Apple below. Apple was in a long term downtrend. A technician will wait for the downtrend to finish - they will not try and buy the stock at its lowest price. Instead, they will wait for the downtrend to be confirmed as ‘broken’ and then wait to buy when other indicators give them the signal. A downtrend is considered broken when the stock makes a higher high which breaks it out of its downtrend. This must be confirmed by trading higher for at least 2-3 days.

Please note, that it is very important for you to also do your fundamental homework on the stock. What do you think it is worth and why? In this case with Apple let’s assume that you liked the fundamentals of the stock and want to buy. You would simply wait for the downtrend to be over and then take a position when you get your next buy signal (assuming this is below your target price!).

Similar can be used for uptrends. If the trend is broken it may be time to consider protective option strategies or to simply sell the stock. This again will depend on your target price for the stock.

Tip: Trends should be identified using a 1 year chart.

Moving averages are a widely used and versatile tool in technical analysis, providing valuable insights into the direction and strength of a trend. Let's break down the concept of moving averages:

What is a Moving Average?

A moving average is a statistical calculation used to analyze data over a certain period, smoothing out fluctuations to identify trends more easily. In the context of financial markets, the most common moving averages are applied to price data.

Types of Moving Averages:

How Moving Averages Work:

Practical Considerations:

In conclusion, moving averages are a versatile tool in technical analysis, providing traders with a visual representation of trends, potential reversal points, and market momentum. By understanding how to interpret and apply moving averages, traders can make more informed decisions in the dynamic world of financial markets.

Simple Moving Averages (SMA) and Exponential Moving Averages (EMA) are two types of moving averages used in technical analysis. While both are designed to smooth out price data and identify trends, they differ in their calculation methods and responsiveness to recent price changes. Let's explore the key differences between the two:

Practical Considerations: Choosing the Right Type:

In summary, while both SMAs and EMAs serve the purpose of smoothing price data to identify trends, the key distinction lies in their calculation methods and responsiveness. SMAs offer a more stable, lagging view of the market, while EMAs provide a more responsive, faster-reacting perspective. Traders choose between the two based on their specific analytical needs and the dynamics of the market they are trading.

In a previous module we discussed ‘support’ and ‘resistance’. Moving averages can act as support and resistance for stocks also. This is where they can be useful in technical analysis. See chart below of AAPL the 10 day moving average acted as support and resistance.

The support and resistance picture changes with different time periods for the moving average.

At Share Navigator, we look at five different time periods for simple moving averages:

200 day moving average - this is the primary moving average that we look at. It will give you a longer term view of the trend of the stock and represents roughly 1 years of daily trading data. Stocks trading above the 200 day moving average is seen as a positive sign for the stock. Stocks trading below the 200 day moving average is see as a negative for the stock. See chart of SPY below with the 200 day moving average in green. You can see that SPY broke down below its 200 day moving average which acted as support on 3 occasions prior to the breakdown. The 200 day moving average will change at a slower rate than shorter moving averages. This is because there is more data which has a greater smoothing effect on the moving average.

100 day moving average - this is the second one we look at. A shorter time period than the 200 day moving average. The reason we look at this time period is because we want to see the shorter term trend supporting the longer term 200 day moving average. See chart below of SPY. The 100 day is the purple line. Stock prices are trading below it which is negative. You can also see that it is trending lower and migrating down lower towards the 200 day moving average. This is telling us that the short term action in the market is clearly lower.

50 day moving average - this is the third moving average that we look at. A shorter time period than the 100 day moving average. The reason we look at this time period is because we want to see the shorter term trend supporting the longer term 100 day and 200 day moving average. See chart below of SPY.

The 50 day is the blue line. Stock prices are below it which is negative. Recently, SPY made an attempt to break above it which may have indicated a change in sentiment at least in the short term but as it stands now that effort was a failure with stock prices trading below the 50 day moving average again.

Also, you can see that the trend of the 50 day moving average has turned down in early February. This was the first real warning sign from a moving average perspective that sentiment in SPY was changing for the worse.

Here you can see why we look at different time periods with moving averages. It gives us a fuller picture of what is happening with the share price of the stock. Clearly the 50 day and 100 day moving averages have shown that recent price action in stocks had changed and acted as early warning signs that the recent uptrend maybe over.

Another classic Bearish indicator is the 'Death Cross' .... this is when the 50 day moving average crosses down below the 200 day moving average. Technical Analysts see this as a very bearish signal .... however this is not much good to you because as you can see from the chart above much of the damage is done in the share price before the crossover occurs.

The opposite to the death cross is the 'Golden Cross' - this is when the 50 day moving average crosses above the 200 day moving average and is seen as a very bullish indicator. Again much of the gain may have already happened by the time they cross.

We use them just as confirmation of an overall trend ... nothing more or nothing less.

10 day and 20 day moving averages - short term moving averages which active traders use. We do not use these to form an overall opinion of the intermediate or long term price direction. But we do use them to give us a picture of what is happening in the short term with the stock. See chart below of SPY.

SPY 10 day (red line) and 20 day (yellow line) moving averages

It is clear from the chart above that the short term 10 and 20 day moving averages are currently in an uptrend but it wasn’t so long ago that they were in a downtrend. These shorter term moving averages are more volatile than the longer term averages because there is less price data included in the calculation. Notice how the moving average can act as support and resistance for the stock.

Traders watching these moving averages would want to see the intermediate and longer term moving averages breached before getting too confident. Short term moving averages can change direction quickly and this recent rally may just indicate a 'relief' rally. Short term moving averages can be useful in trying to identify an early change in sentiment.

At Share Navigator, we use moving averages for two purposes only:

That’s it! We do not use moving averages to give us buy and sell signals. We believe that they offer no statistical advantage in this regard and therefore we don’t use them. There are far better indicators to help you to identify buy and sell signals. Instead, we use moving averages to give us an overall picture for the stock. Nothing more nothing less!

We look at two momentum indicators here - RSI and The Stochastic Oscillator. Like all technical indicators there are pros and cons to each.

Many investors follow indicators without really understanding how they came to being or the logic behind them. Whilst you will never need to calculate a stochastic it is a good idea for you to understand how they are calculated. Then you can make up your own mind as to the merits of the indicator. As we have said we love it and find it reliable in sideways trending stocks but not so reliable in bull or bear markets.

Let us break the formula down for you before we show you how to use the Stochastics indicator.

The 'Look Back Period' = The Time Period we are using for calculation, it can be hours, days, weeks or months. Typically we use a 14 day look back period.

The Formula:

%K Line = (Closing Price - Minus Lowest price during look back period) divided by (Highest Price during look back period minus lowest price during look back period)*100

% D Line = 3 day moving average of %K

Let’s give you an example. Look at 14 days of data for SPY below:

Let’s breakdown the information needed:

Lowest Price during look back period = 267.76

Highest Price during look back period = 275.19

Latest closing price = 274.90

Let’s put the numbers into the formula:

% K Line = (274.90 - 267.76)

divided by

(275.19-267.76) *100

Stochastic Value = 96.097

% D Line = is a 3 day moving average of %K above we only have 1 day's data of % K. But if we did have 3 days we would simply add them up and divide by 3.

Important Note: At Share Navigator, we believe that stochastics are best used in sideways trending markets. This is where they can offer you a statistical advantage against the market. But in Bull and Bear Markets we have not found any statistical advantage with stochastics. Therefore it is important for you to establish the trend of the stock first before using the stochastics indicator.

Stochastics are plotted on a chart and minimum value is 0 and maximum value is 100. The idea is quite simple and you get messages from it:

Let’s look at a great example with SPY. In February 2018, SPY broke down from a long Bull run and started into a sideways trend (see chart below).

Support for the stock was circa $260 and resistance was $280. Let’s track how accurate stochastics were during this period. Below we have plotted another chart and circled the buy signals in green and sell signals in red. Notice how they correspond to the movement in SPY.

False Signal

Technical Analysis not an exact science. As we have already mentioned, we do not find any statistical advantage with stochastics in Bear and Bull markets. Even in sideways trending markets there can be false signals. It is important for you to use other indicators such as Money Flow.

Let’s look at the same example on SPY of a False signal.

On May 25th 2018 we got a sell signal for SPY. This may have caused you to ‘short’ SPY. The ETF fell for a few days and it looked like the trade was another winner but then the share price caught a bid and started rising again. In this scenario the signal ended up being false and would have resulted in a small loss if you closed out the position when stochastics went back above 80.

Remember, if you are using charts you are most likely trying to trade frequently to generate profits. Not every trade will be a winner. There will be losers. This is part and parcel of ‘trading’ as opposed to ‘investing’. Sometimes you have to take the hit and wait for the next signal.

In this case it came almost one monthly later and is proving to be a winner.

The Relative Strength Index (RSI) is a popular momentum oscillator used in technical analysis to measure the speed and change of price movements. RSI values range from 0 to 100 and are used to identify overbought and oversold conditions, as well as potential trend reversals. Here's an explanation of RSI with examples:

The RSI is calculated using the following formula:

RSI = 100 - (100 / (1 + RS))

Where:

Step-by-Step Calculation:

Let's calculate the 14-day RSI for a hypothetical stock using daily price data. We'll assume the following closing prices over the last 14 days:

Step 1: Calculate the daily price changes (gains and losses) for each day:

Step 2: Calculate the average gains and average losses over the 14-day period:

Average Gain = [(1.00 + 1.00 + 1.50 + 1.50 + 1.50 + 1.00) / 14] = 0.79 (rounded to two decimal places)

Average Loss = [(3.00 + 3.50 + 1.50 + 0.50) / 14] = 0.54 (rounded to two decimal places)

Step 3: Calculate the Relative Strength (RS):

RS = Average Gain / Average Loss = 0.79 / 0.54 ≈ 1.46 (rounded to two decimal places)

Step 4: Calculate the RSI:

RSI = 100 - (100 / (1 + RS)) = 100 - (100 / (1 + 1.46)) ≈ 59.52 (rounded to two decimal places)

So, the 14-day RSI for this hypothetical stock is approximately 59.52. This RSI value indicates the momentum and relative strength of the stock over the past 14 days. It's above 50, suggesting that there has been more upward momentum than downward momentum during this period, but it's not in overbought territory (above 70) or oversold territory (below 30). Traders would typically use this RSI value in conjunction with other analysis to make trading decisions.

Example 1: Overbought Condition Imagine you are analyzing the daily price chart of a stock, and the RSI has recently risen to 75. This indicates that the stock may be overbought, meaning it has had a strong upward move, and there's a chance it could reverse or correct in the near future. Traders might consider this a warning sign to be cautious about buying the stock at this point.

Example 2: Oversold Condition On the same daily chart, the RSI has dropped to 25. This suggests that the stock may be oversold, implying it has had a significant downward move, and there's a possibility of a price bounce or reversal. Traders might view this as an opportunity to consider buying the stock, especially if other indicators or analysis align with this signal.

Example 3: Bullish Divergence Suppose a currency pair has been in a downtrend, making lower lows on its price chart. However, during the same period, the RSI has been making higher lows. This bullish divergence can be a signal that the downtrend is losing momentum, and there might be a potential reversal or at least a temporary bounce in the price of the currency pair.

Example 4: Bearish Divergence Conversely, let's say a stock has been in an uptrend, making higher highs on its price chart. However, the RSI has been making lower highs. This bearish divergence could indicate that the uptrend is weakening, and there's a possibility of a reversal or correction in the stock's price.

It's important to note that while RSI can provide valuable insights into potential price reversals or shifts in momentum, it should be used in conjunction with other technical indicators and analysis methods for more robust trading decisions. False signals can occur, so risk management and confirmation from other sources are essential for successful trading.

Stochastics and the Relative Strength Index (RSI) are both popular technical indicators used by traders and analysts in the field of technical analysis to make informed decisions about buying or selling assets, particularly in the context of financial markets like stocks, currencies, or commodities. However, they have different purposes and calculations, and traders may use them for different reasons or in different market conditions. Here's a brief comparison of stochastics and RSI:

In practice, traders often use a combination of technical indicators, including both stochastics and RSI, to make more informed trading decisions. These indicators should be used in conjunction with other analysis methods and risk management strategies to mitigate potential losses. It's also important to note that no single indicator is foolproof, and they should be used as part of a comprehensive trading strategy.

Bollinger Bands, developed by John Bollinger in the 1980s, are a popular technical analysis tool that helps traders assess volatility, identify potential trend reversals, and gauge the relative strength of a price movement. This indicator consists of three bands – an upper band, a lower band, and a middle band – that are plotted on a price chart.

In conclusion, Bollinger Bands are a versatile tool for technical analysis, providing insights into market volatility, trend strength, and potential reversal points. When used judiciously and in conjunction with other analytical tools, they can be valuable aids in making informed trading decisions.

Let us break the formula down for you before we show you how to use the Bollinger Bands. The Look Back Period = The Time Period we are using for calculation, it can be hours, days, weeks or months. Typically we use a 20 day look back period for Bollinger Bands.

The Formula:

Middle Band = 20 day moving average

Upper Band = 20 day moving average plus 2 standard deviations of price

Lower Band = 20 day moving average minus 2 standard deviations of price

Standard deviation tells you the normal price from the mean price and can be calculated easily in an excel spreadsheet by:

Let’s give you an example. Look at 20 days of data for SPY below:

Let’s breakdown the information needed:

20 day moving average = 273.88

Standard Deviation = 2.84

Let’s put the numbers into the formula:

Middle Band = 273.88

Upper Band = 273.88 + (2.84*2) = 279.57

Lower Band = 273.88 - (2.84*2) = 268.19

Important Notes:

Let’s look at a great example with SPY. In February 2018, SPY broke down from a long Bull run and started into a sideways trend (see chart below).

Support for the stock was circa $260 and resistance was $280. Let’s track how Bollinger Bands may have helped us to identify possible reversals. Below you will see possible bullish reversals in green and bearish reversals in red. Notice how the the share price moved after the out bands were reached.

Example: We got our second green reversal notice on Feb 5th. Now as we have already mentioned, we would not use this as our buy indicator. We would simply make note that there has been an extreme move to the downside. This gathers our interest and we will use other indicators such as stochastics to identify when to buy. In fact, in this example we did not get our buy signal for another 3 days. Surely enough the stock retraced from its lower bollinger band back to the 20 day moving average and hit the upper bollinger band. The stock hit the upper bollinger band on March 12th (1 month later). This is when we may start considering selling the position. Again, we would use another indicator like stochastics for our sell signal.

Important Notes:

False Signals

Technical Analysis is not an exact science. As we have already mentioned, we do not find any statistical advantage with Bollinger Bands in Bear and Bull markets. Here are some important things to note:

Let’s look at the same examples of SPY ‘Walking the Bands’

Let’s incorporate Stochastics with Bollinger Bands to give us some buy and sell signals.

Look at the chart of SPY below. Bollinger Band on Top and Stochastics on the bottom. We use the Bollinger Bands to let us know that a reversal maybe imminent but we do not use it for a buy or sell signal. Instead we use the Stochastics to give us the buy and sell signals.

You will notice from below that the stochastic indicator gave you buy signals days after the initial touch of the bollinger band. This gave us a much better entry price in the stock than using the Bollinger Bands as a buy signal. This again highlights why you should wait for other indicators to give you the buy and sell signal.

The Moving Average Convergence Divergence (MACD) is a popular momentum and trend-following indicator in technical analysis. Developed by Gerald Appel, MACD is used to identify potential trend reversals, momentum shifts, and the strength of a trend. It consists of two main components: the MACD line and the Signal line.

In summary, the MACD indicator is a versatile tool that helps traders identify trends, momentum shifts, and potential reversal points. By analyzing the relationship between the MACD line and the Signal line, traders can gain insights into the strength and direction of market trends, aiding in the decision-making process.

MACD is plotted on a chart with the MACD line and Signal Line. MACD is great for visualizing when shorter term moving averages are diverging and converging. It can also provide buy and sell signals (although we prefer stochastics for this in sideways trending markets). The idea for buy and sell signals is quite simple:

Let’s look at a great example with SPY. But before we do, please note that we will never make a decision based on MACD alone, we will use other indicators such as stochastics, bollinger bands and money flow to help us make our decision. In fact, we prefer using stochastics for buy and sell signals and then using MACD to confirm. We have found that stochastics provide better entry and exit prices. We will demonstrate this later for you in this module.

The chart of SPY above gives you buy and sell signals based on MACD alone. See the chart below to see the corresponding move in the share price of SPY. Now look at that chart below. This plots the price movement of SPY versus the buy and sell signals received from MACD.

We prefer to use MACD to confirm our buy or sell signals from Stochastics.

This is not an exact science. Because MACD is based off moving averages, we have found a bit of a ‘LAG’ factor with buy and sell signals.

Let’s look at the same example on SPY.

Look at the third buy signal on SPY. On April 10th we got a buy signal and the mid price for SPY was $263. On the 2nd May we got a sell signal but the mid price was still only $263. In this case we did not make any money but if we had sold earlier we would have made a nice profit. Next, we will show you how to use MACD in conjunction with Stochastics.

See below the chart of SPY with PRICE, MACD, and Stochastics. There are two examples here of how stochastics tend to give you earlier entry signals.

Let’s compare both signals:

Example 1:

You can see from our first example that stochastics got you in earlier to the stock and also out earlier for a higher profit. Let’s look at another example.

Example 2:

You can see again from above that stochastics provide better entry and exit prices.

However, MACD still plays an important role in confirming your thesis. Also MACD is more beneficial than stochastics in Bull and Bear markets. As we have mentioned before we only use stochastics in sideways trending markets. MACD can be beneficial in Bull markets.

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