I am trying to learn as much as I can about technical analysis and came across a good introductory book on Stock market technical analysis.
I would highly recommend you reading this book if you are interested in technical analysis of stock price & volume action. I would give his eBook a 4/5.
Fundamental analysis focuses on the intrinsic value of the market. If market price is below the intrinsic value, then the market is undervalued and should be bought or vice versa.
The intrinsic value of the business enterprises is estimated as the present value of the assets of these enterprises and the ‑ow of future dividends to be paid by these enterprises to shareholders. The fundamental analysis is good for selection of securities to be invested and not good for catching the timing of buying and selling.
Technical analysis concentrates on the study of market supply and demand. Technical analysis focuses on the movement of the prices and the trade volume and tries to forecast the future movement of the prices. Technical analysis concentrates on the change of the prices, and therefore you would know the timing of buying and selling, but not on the intrinsic value, and therefore you would not know whether you were properly investing.
Among the various methods of technical analyses, this booklet is following three methods, i.e., Candlestick Charts, Trendlines, and Moving Averages.
Candlestick charts are one of the price recording methods developed in Japan but widely used globally, which indicate the current market situation at all times, though the charts pick up only the figures of the open, the close, the high, and the low.
Trendlines and Moving Averages are the methods used to understand the major tendency of price change, namely, the trend. These methods of analysis are widely known as Trend Analysis. Trend analysis has been used from older times but has become popular only in the last half a century.
First, draw the vertical line from the highest price to the lowest during a day.
Then, draw the rectangle shape from the open price to the close price over the above vertical line. And if the close price is higher than the open price, this rectangle shape is shown in white and if the open is higher, it is shown in black.
This white line is called “the sunny line” and black line “the shadow line”.
The length of the real body tells us the strength of the momentum of both seller and buyer. When the buyers are stronger, they keep buying and the white real body becomes longer, and when the sellers are stronger, they keep selling and the black becomes longer.
The unusual long big real body is appearing occasionally once a month or two months, when the movement becomes 2 to 3% of the price (the usual average movement is around 1%.).
The long real body and the short shadow simply tell us that most of the investors have followed the strong movement of the price and show their momentum.
When both the real body and the shadow are short, it tells us that the momentum of selling and buying is almost equal or investors see the market on the sidelines with no clear direction, or nobody is interested in the current market and leave it as it is.
The word “Trend” means the direction of the price movement when you use this word as technical term for the market. In upward phase it is called “uptrend”. The continuous change to a certain direction is called “long-term trend”. The rapid and big change is called “strong trend”.
You must find out a broader perspective on a direction of the trend by having got rid of the trifle and unnecessary movements. One method to gain such a perspective is to draw a straight line which could suggest a certain trend and thus is called” Trendline”.
There are two trend lines. One is the uptrend line analyzing the uptrend and another is the downtrend line analyzing the downtrend. The uptrend line is sometimes called support line and the downtrend line is called resistance line.
The uptrend line is the extended line drawn from low milestone price to then the next low milestone price when the market is considered in the uptrend.
The downtrend line is the extended line drawn from high milestone price to the next high milestone price when the market is considered in the downtrend.
And when the actual stock price crosses under the uptrend line or crosses over the downtrend line, either case is considered the signal of the reversal point of the trend price.
Line 1 drawn from A to B and extended
Line 2 drawn from C to D and extended
Line 3 drawn from D to E and extended
All lines are upward line. You can see the change of the pitch from Line 2 to Line 3 getting faster.
The point where the actual stock price crossed under Line 3 was the turning point of the reversal of uptrend which clearly shows that the 8 -year long rising market came to an end.
This average recorded the highest of US$13,930 on October 2007 and then came the 2008 financial crisis triggered by the bankruptcy of Lehman Brothers, and fell to US$7,062 on February 2009.
Line 1 drawn from A to B and extended
Line 2 drawn from B to C and extended was added because the pitch of falling became much faster.
The turning point of the stock price was the price just over the Line 2 and after that the price was rising tremendously. Especially, the time when the price crossed over Line 1, the market became more confident on the uptrend.
The continuing uptrend means that the low price of turning point becomes higher than the low price of the previous turning point and simultaneously, the high price of turning point becomes higher than the high price of the previous turning point. This means that the both the low price and the high price of each turning point are rising.
One of the methods to extract a trend after eliminating the trifle and meaningless change of the market is called “smoothing out” the unevenness of prices. You can eliminate such small changes by calculating an average of a certain period of the price data. The term moving is used because only the latest prices of specified time span are used in the calculation. This means that the period of price data to be averaged moves forward with each new trading day. And when you draw a line by connecting these averages, this line is, thus, called “Moving Average”. This “Moving Average” is sometimes abbreviated to MA.
While the trendline is basically drawn outside the change of the prices, the moving average is drawn over the change of the prices. The moving average is automatically drawn from the change of price and reflect automatically and successively the movement of the change of the prices without being influenced by drawers’ consideration. The moving average shows the trend of the change of the prices and is regarded as one of the trendlines in a broad sense.
Vice versa, see no.4; if the moving average is falling from top left to bottom right, it means the downward trend.
See no.5; if the price crosses down through the falling moving average, this means the acceleration of paces of falling. See no.6; if the price crosses up through the moving average line, this means the slowing down of paces of falling.
After that, if the moving average line turns to upward-sloping, this means entering the upward trend.