There’s a very straight forward discussion of technical analysis in the Online version of Barron’s, by Technician Michael Kahn. He outlines the three basic goals of TA as a tool:
• Seeing where the stock is currently trading and figuring out how it got there. (using trends, support and resistance levels).
• Determining the power of a trend (as well as signs of a pending end of a trend). Includes Technical concepts as trading volume and momentum.
• Making comparisons of the stock to the market, its peers in its own industry and even to its own history. (relative performance and moving averages are covered here).
Kahn also delivers a checklist of key technical tools:
• Trends and trendlines: There is no secret to finding a trend. If prices are generally rising and making higher highs as well as higher lows, then we have a rising trend. We want stocks that are in rising trends.
• Support and Resistance: These are terms that simply tell us what price levels are likely to bring out the buyers (demand) or the sellers (supply), respectively. What we want to see is a current price that has either just moved through resistance (demand overwhelmed supply) or one that is far from the next resistance level.
• Moving Averages: Moving averages, or simply price averages, are just average prices over a user-defined period of time, usually 50 or 200 days. They help us determine if a trend is turning, as prices cross the averages. We are looking for price to be above selected averages but not too far above them.
• Volume and Momentum: These two indicators confirm the health of a trend or warn of an impending change. Is buying spreading to other investors, as evidenced by rising trading volume? We also want to know if days when prices rise outnumber and result in bigger price moves than days when prices fall (momentum). If either volume or momentum starts to fade, then we can surmise that the trend is weakening.
• Relative Performance: Relative performance charts simply divide the price of a stock by a relevant market index or industry group. The theory is that we should buy strong stocks in strong sectors and this is how we find them.
Lastly, the series shows how to put the theory and tools to work. The author gets specific about the process of morphing from a "stock idea" to an actual buy or sell decision:
1. Look at the trend. We want a rising trend or one that is just starting to do so.
2. Find nearby support and resistance levels. We are trying to find stocks where demand exceeds supply and new supply is not likely to develop soon
3. Determine if the current trend is healthy. We want prices to be above a relevant moving average but not so far that the stock is prone to a snapback decline as profit taking sets in.
4. Check volume and momentum indicators to be sure that they are not fading as the stock price rises. A falling indicator warns that there might be technical problems before price action sours.
5. Find out if the stock is leading a benchmark. Is the particular stock at least matching the performance of the market and its peers?
6. If the stock passes all these tests, we have a candidate for purchase.
Its a good two part article, well worth reading . . .
Why Technical Analysis Matters
Barron’s, MONDAY, NOVEMBER 6, 2006
Putting Stocks to the Technical Test
Barron’s, MONDAY, NOVEMBER 13, 2006
For the next edition of our series Blogger Spotlight: Tim Iacono and The Mess That Greenspan Made.
Tim is a software engineer in his mid-forties, living in Southern
California. He calls his blog is a "vain attempt to stave off a
mid-life crisis, and here’s hoping that it’s going to work."
This is part of our ongoing short list of excellent but somewhat overlooked
blogs that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
Much has been made of the "tightening" by central
banks around the world, particularly the multi-year "baby-step" therapy applied
to short-term interest rates here in the U.S.
treatment was just concluded a few months ago under the watchful eye of Fed
Chairman Ben Bernanke – the baby steps weren’t the new Fed Chief’s idea, but he
is saddled with what they have produced.
Having wondered what effect these rising rates have had on the creation of both
consumer debt and new money, the construction of a chart showing all three laid
together is a task that has sat near the top of the To Do list around here for
It can now be checked off.
Nearly all of this data is available at the Federal Reserve website. The only
part for which one has to look elsewhere is the last six months of M3 Money
Supply – the central bank stopped divulging this data earlier this
The trend is still up -
Category: Blog Spotlight