11 Dec 2012 Investor Education Series: Introduction to Technical Analysis
Technical analysis is basically the study of prices to make better investments, with charts being the primary tool. (Technical Analysis from A to Z – Steven B Achelis). The roots stem from the Dow Theory developed by Charles Dow in the early 1900s. Technical analysis is the process of analysing a share’s historical prices to try and predict probable future prices.
Technical analysis is usually done on Bar charts or Candlesticks, rarely on end-of-day line charts.
If the share price moved up in the period, the candlestick will be coloured blue and red if it went down:
Up Trend or Bull Trend:
An Up Trend is when share prices make higher and higher highs and higher and higher lows. JSE Allshare Index Bull Trend since middle 2012:
Down Trend or Bear Trend:
A down trend is when prices make lower and lower highs and lower and lower lows. The JSE Allshare Index in the 2008 Bear Trend:
Why “Bull” or “Bear”?
The terminology evolved because of the way each kill or attack. A bull strikes upward with its horns to kill and a bear slams down with its paws while standing upright. Up trends are therefore called Bull markets and down trends are called Bear markets.
Using Trendlines to Trade:
Many so-called technical analysts base their analysis. Trendlines are very weak indicators.
1. When a trendline is broken it is not necessarily an indication the trend will change as some seem to think. The trend can reverse, or it can move sideways or the trend can continue, just at a different pace. (See example below).
2. There is no target price to be established when a trendline is broken as is the case with other technical analysis patterns which we will discuss in future series.
3. One can draw too many 2 point trendline, so a trendline should have at least 3 touch points to have any meaning.
Multiple Trendlines when the Sasol moved sideways in 2009 and 20120:
Importance of Volume:
Volume is used to assess the strength of the trend, up or down and also acts as confirmation of a breakout. Volume is low, average, or high (one third of the time on the chart for each).
• Healthy Price Uptrend: volume to increase on rallies in price and decrease on selloffs.
• Healthy Price Downtrend: Volume should increase on days when prices close lower and decrease on price up days.
• Breakout Volume: Volume should increase when a price breaks out of a pattern to confirm. If volume is low on the breakout day, be careful.
• Blowoff volume – extraordinarily high volume can indicate that price trend is exhausting and can reverse.
Head Sanlam iTrade
Title: Technical Analysis from A to Z. Author: Steven B Achelis. ISBN: 1-55738-816-4 Publisher: McGraw-Hill, USA. Comment: Very good, easy to understand.
Title: The Winning Edge. Author: Yonaton Rom. ISBN: Also on CD. Publisher: email@example.com Comment: Good introduction, also does courses.
Title: Technical Analysis of Stock Trends. Author: John Magee. ISBN: 9780814408643 Publisher: AMACOM. Comment: The Definitive work on T A.
Title: Technical Analysis of the Financial Markets. Author: John J Murphy. ISBN: 9780735200661 Publisher: Prentice Hall Press. Comment: Definitive work on T A.