Lecture 7

Technical Analysis
Economics 98 / 198
Fall 2007
 Announcements
• Hand in homework by the end of class
Current Events / News

Simulation Discussion
Lecture Content
 Today…
• Introduction to technical analysis

– Basics & definitions

– Stock charts & chart types
– Moving Averages
– Trends / Channels
– Support & Resistance
– Volume
 Technical Analysis? Huh?
• Don’t get intimidated when hear “technical
analysis”

• Comes down to your supply and demand

– How is this different from fundamental analysis?

• Tries to make sense of market emotions by

studying the market actions
Technical Analysis: Introduction to Stock Charts

CHART BASICS
 Basic Terms
• Volatility
• Fluctuations
• 52-week high / low
• Price / trading range
• Open / closing price
Charts
• Maps price performance

• Sheds light on supply

and demand

• “investment roadmap”

• Price / volume
relationship important
 Chart Types - Line Charts
• Most basic of all charts

• Just a line that connects

the closing prices over a
time frame

• No trading range
 Chart Types – Bar Chart
• Vertical line represents highs/lows of the day
• Horizontal line represents closing price
• Red = down
• Blue/Black = up

Daily High
Closing Price
Daily Low Price Gap
Chart Types – Candlestick Charts
• Vertical line represents the
trading range
• Wide bar represents open
and close
• White bar – Up and closes
above opening price
• Red Bar – down
• Black bar – up, but closes
below the opening price
 Chart Basics – Time Scale
• Time Scale
– Dates along bottom of chart (varies from
seconds to decades)

– Common Types: intraday, daily, weekly, monthly

– Subtle differences between different time scales

Chart Basics – Time Scale

Daily Chart Weekly Chart

Volume
• Amount of shares that
trade hands between
seller and buyers

• Price movements
more significant when
volume is above
average
 Price and Volume

Average
Volume
 Trends are your Friends
• Trend: general direction of stock
• Uptrend: higher highs, higher lows
Sometimes, trends difficult to see
 Trendlines

• Simply put, a line

drawn on a chart to
represent the overall
trend

• Upward trendline,
connecting the lows,
represents support
 Channels
• Two parallel trend lines that act as areas of
support and resistance (more later)
• Any break through the channel is a break of the
trend, otherwise the price should stay in range
Technical Analysis: Introduction to Stock Charts

SUPPORT / RESISTANCE
By Johns Wu & thebulltrader.com
Chart Analysis : Support
Price at which BUYERS > SELLERS consistently.
Buyers who missed out on the first dip will be
pressured to buy if price continues to respect the
support.
AMZN Example of Supports

AMZN retraces from a AMZN stops tanking at

monstrous rally to $60 $60. NOT A
COINCIDENCE.
GOOG Support Psychology $510. MANNNN, I should have
bought GOOG

$$$$$!!

OK. I’m not

GOOG skyrockets from gonna miss
AWESOME earnings, but out again.
should I buy it???? BUY @ $452 CAUTION:
Supports can
breakdown.
Support Breakdowns
SELL if support “breaks down”, because it
signifies that BUYERS no longer overpower
SELLERS.
Breakdowns are a BEARISH SELL signal.
You should have sold here,
at the BREAK DOWN.
Chart Analysis : Resistance
Price at which SELLERS overwhelm
BUYERS consistently.
When a stock makes a new high and
then retraces, sellers who missed out @
the previous peak will feel pressured to sell
when price climbs back to that level.
TM – Resistance Psychology
Finally! $138. I better
sell this time.

Should I sell?? Na, I’ll

take my chances.

I should have sold

when TM was $138!!
Resistance Breakouts
When price “breaks out” above resistance, it
becomes a new support level. *** IMPORTANT ***
Breakout signifies clear dominance of BUYERS.
(good time to buy)
This is a BULLISH BUY signal.
My favorite trade setup.
TGT Resistance Breakout

BREAKOUT!!

RESISTANCE BECOMES
SUPPORT
SHLD Breakout Trade
Technical Analysis: Introduction to Stock Charts

MOVING AVERAGES
 Moving Averages (DMA or WMA)
• Most popular are 50-day and 200-day
• Shows the average price of the last # days and
plots it on a line
• Often acts as areas of support and/or resistance
WIRE – Support @ 10 WMA
WIRE – Support @ 10 WMA
CPA – Support at 20 & 50 DMA
CPA – Support at 20 & 50 DMA

20 DMA and 50 DMA

becomes points of
support for this stock
 So…
• Charts are fundamental to technical analysis

• Important to understand what is shown on a

chart and the information it conveys

• Chart patterns and bases to come…

Technical Analysis: Introduction to Stock Charts

TOOLS FOR STOCK

CHARTS
Charting on StockCharts.com
Getting comprehensive stock charts

• Type in the company symbol

• Once you’re at the stock page, click on
annotate to draw your own trendlines.

• From there, you will get lots of tools for

analyzing stock charts
StockCharts.com
Annotating in StockCharts
 Using Charts on Investors.com
• Log in using your username and password
(you all have one as of now)
• Enter a symbol for the stock and then click
on IBD Charts just below it
– There are links throughout the website that link
to IBD charts

– Right clicking on the chart will give you important

data for that day or week
 Relative
Strength Line

Volume Moving
averages
 Homework / Reading

• “Technical Analysis: Introduction”

– Investopedia Tutorial
– Link is on the download page of the website
 Next Week
• We’ll be going over strategies using charts to
buy stocks
– Timing market bottoms
– Identifying chart bases / patterns
– Timing your stock purchases (after you’ve done
your research / stock screens)

• This is going to be the most technical / complicated

part so make sure you understand the basics