Very Short-Term Indicators

Although market sentiment indicators generally focus on spotting long-term trend reversals, the concept of sentiment can be used as a short-term contrarian indicator. Let’s look at a few ways in which following these indicators might provide clues to short-term trading opportunities. 1. Breadth and New Highs to New Lows Although breadth and new high-low

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Periods Longer Than Four Years in Technical Analysis

Let’s begin by looking at cycles occurring over a long period (over four years) of time. These cycles include Kondratieff waves, 34-year historical cycles, and decennial cycles. 1. Kondratieff Waves, or K-Waves Nicolas D. Kondratieff, an economist who lived in Communist Russia, studied historical commodity prices in the 1920s. He analyzed European agricultural prices

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Periods of Four Years or Less in Technical Analysis

A day is a definite period of time. A year, within small limits, is also definite. A month, however, may be lunar or solar; it may also be a number of other things. Hence 40 months of our present calendar must remain an approximation and certainly not an exact measure of the duration of

January Signals in Technical Analysis

1. January Signals One of the first indications that the Efficient Markets Hypothesis had flaws was the observation that in January the stock market appeared to have several consistent price patterns. The stock market cannot be considered efficient if every year the same pattern forms and can be traded profitably. For many years, this

Events in Technical Analysis

Short-term traders sometimes practice what is called event trading. This is when either a news announcement is due, a surprise news announcement occurs, or a holiday is soon to occur. Holidays are seasonal and, thus, included here. The major holidays during the year have shown to have recurring patterns. For example, some analysts have

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Funds in the Marketplace

Let’s begin by looking at the money that is available within the financial marketplace. Two of the topics we consider, money market funds and margin accounts, measure the amount of funds available within the markets to flow toward additional stock purchases. 1. Money Market Funds When aggressive investors or traders become nervous about the

Funds Outside the Security Market

Funds that are currently in the financial market are undoubtedly important, but the availability of funds outside the financial market also plays an important role in determining market conditions. The value of and the liquidity of household financial assets are important considerations when measuring how much money households might move into the securities markets.

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The Cost of Funds and Alternative Investments

The interest rate represents the price of borrowing funds. It is the cost that borrowers have to pay to use money; the higher the price, the less likely borrowers are to borrow. It is also the reward that lenders receive for letting someone borrow their money; investors compare this return with the expected return

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Fed Policy

The Federal Reserve System (www.federalreserve.gov), often referred to as “the Fed,” is the independent federal organization that determines and implements monetary policy for the United States. The Federal Reserve’s policy regarding the money supply is the principal determinant of short-term interest rates. The Federal Reserve has three main tools for adjusting the money supply:

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History of Charting in Technical Analysis

According to exhaustive research on technical analysis by Lo and Hasanhodzic (2010), the earliest known recording of commodity prices with the intent to predict from them was in ancient Babylonia in the first millennium B.C. These recordings were diaries of traders and astronomers who were attempting to correlate astrology with price changes. By the

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What Data Is Needed to Construct a Chart?

To construct reliable charts, the technical analyst must be sure of the trustworthiness of the data. During a normal trading day, many errors appear on the tape, from which most data originates, that someone must screen out and adjust. Some trade reports show the wrong price or volume; some trades are in error and

What Types of Charts Do Analysts Use in Technical Analysis?

In early markets, when the price for a security or good might be established only once or twice a day, the chart was extremely simple. It was merely a graph of closing prices connected by a line, sometimes directly connected, and sometimes connected by perpendicular lines. In Japan, this type of chart was called

What Type of Scale Should Be Used in Technical Analysis?

Price units are generally plotted on the vertical axis of stock charts. The analyst must determine the scale, or the distance between these price units, to use. Generally, two types of scales are used: an arithmetic scale and a semi-logarithmic scale. Arithmetic Scale For all the charts we have examined so far, along with

Point and Figure Charts in Technical Analysis

The point and figure chart records price data using a different technique than line, bar, and candlestick charts. At first, it may appear that the construction of these charts is somewhat tedious. In addition, these kinds of charts are rarely published or discussed in the popular financial news. Because many of the point and

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Cloud Charts (Ichimoku Kinko Hyo) in Technical Analysis

Japanese Cloud charts are a relatively new method of interpreting price data. They use calculations similar to Western charts such as moving averages, but they also use such calculations as ranges and areas between plotted lines. While the charts themselves are easily read by Westerners, their interpretation follows a definite set of quite different

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Other Charting Methods Independent of Time in Technical Analysis

Beyond point and figure charts being independent of time, several chart methods—mostly of Japanese derivation—ignore time. These are rarely used in investment technical analysis because they are more suited for short-term trading. They include Kagi, Renko, and Line-Break charts. 1. Kagi Chart Similar to a point and figure chart in philosophy, the Kagi chart

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Chapter Objectives

By the end of this chapter, you should Know why identifying trends is paramount to profits in securities Be able to recognize an uptrend, a downtrend, and a trading range Understand the concept of support and resistance Be familiar with the major methods of determining trends Be familiar with the major signals that a

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Trend – The Key to Profits in Technical Analysis

Remember that profit with minimum capital risk in the securities markets is the sole objective, and technical analysis is an effective way to profit as well as to control risk. In earlier chapters, we emphasized the importance of determining and riding the directional trend in the security markets. The key to profiting in the

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Trend Terminology

Trends define a direction in prices. When we refer to a trend, we describe a directional trend, one of rising or falling prices from which a profit can be generated with a trend-following method. We refer to a sideways trend as a trading range or neutral area. These are the recognized terms for describing

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Basis of Trend Analysis – Dow Theory

As we learned in Chapter 6, “Dow Theory,” Charles Dow was one of the first of the modern technicians to write about the fact that stock market prices trade in trends. Virtually all items that trade in free, liquid markets trade in trends. As noted by Dow, investors or traders must concentrate on the

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