Stock Chart Technical Analysis
occurs when a particular study or indicator does not confirm the price action of the security. A divergence will usually result in the security reversing direction and that can be a major reversal point or just a short term correction, you never know.
displays the difference between two moving averages or studies of a security's price. When the short term moving average crosses the longer-term moving average, a buy signal would be indicated if it crossed up and a sell if it crosses down.
are probably the best known and most versatile analytical tool we have and can be applied to security price as well as indicators to smooth out price fluctuations and emphasis trend direction.
The most popular settings are 50 and 200 day MA’s for intermediate and long term investors and many interpretations and strategies are designed around this basic tool. One popular strategy is to enter a position when prices rise above the MA and stay long until prices fall below the MA and the MA turns down, and additional positions are added when the security’s price pulls back to the rising MA. Conversely short positions are entered or added when a price pulls back up to and touches a falling MA.
Traders often use shorter terms averages, 10 and 30 days are popular with both plotted on the same chart and a buy signal is generated when the 10 day moving average crosses above the 30 day and both averages are moving in an upward direction. A sell signal is given when the shorter average falls below the 30 day average and it too begins to decline. While 10 and 30 days are popular periods there is no setting that fits all markets, investment styles and stocks, stay flexible.
Longer term periods can be used to reduce whipsaws but this will tend to reduce the number of buy and sell signals the averages generate.
Exponential Moving Averages gives more importance to the most recent days as compared to the Simple Moving Average that treats each day equally.
A study created by John Bollinger are moving average envelops surrounding the price line and are made sensitive to changes in volatility of the underlying security by calculating the envelope bands at two standard deviation levels above and below the moving average. Bands widen when the volatility of the security increases and contract when it decreases. The bands are used in conjunction with RSI, MACD and Rate of Change and in general look for buying opportunities when prices are on the lower line and selling opportunities when prices are near the upper band.
The time period for the moving average varies but Mr. Bollinger recommends 10 days for short term traders, 20 days for intermediate term and 50 days for long term trading.
is a tool used to measure trends and consists of a straight line drawn through the prices using the least squares method to plot the line. Two parallel lines are drawn equidistant above and below the linear regression line and these lines act as support and resistance. The space between the parallel lines is where equilibrium exists and if stock price moves to one of the channels prices will usually move back to center or the opposite channel line while a significant penetration of either line on volume, would indicate a breakout is occurring.
or Moving Average Convergence/Divergence is a technical indicator created by George Appel that uses three moving average to gauge the intensity of public sentiment. RealtimeStockquote.com uses 12, 25 and 9 as our default settings but users are encouraged to experiment with other settings that may more closely reflect their investment style and market conditions and those settings can be saved by the user. MACD is calculated by subtracting a 25 period exponential moving average from a 12 period EMA. A Trigger line is then calculated by using a 9 period EMA of the MACD and as in all of our technical indicators periods can be weeks, days or even 1 minute intervals.
We take pride in clean, crisp, large, easy to read charts and accordingly we have adopted the method of displaying the MACD value as a red histogram and the signal line as a blue line opposed to other charting services that have lines running all over the page but convey no more meaning or information.
Money Flow Index
(MFI) is a momentum indicator and a refinement of RSI that incorporates volume into the calculation and measures the strength of money flowing in and out of a security. As a momentum indicator look for tops to occur when the MFI hits 80 and for bottoms to occur when MFI is below 20. An investor looking for intermediate term highs and lows should consider 13 for the time period setting and for the more aggressive trader signals can be identified using 10 or 9 period setting.
Day traders might try using a 9 period setting on a 15/30 minute intraday chart.
MFI is also a valuable divergence indicator. If the stock continues to make new reaction highs while MFI does not confirm those highs or lows (visa versa) a reversal is probably in order.
The MFI is not related to what some technicians call Money Flow which is just a derivative of OBV (OBV X stock price).
On Balance Volume
(OBV) is the first and still the most popular indicator to measure positive and negative volume flows and was created by Joe Granville and introduced in his 1963 book, Granville's New Key to Stock Market Profits. The concept behind the indicator is that volume precedes price. OBV is calculated by adding a period's volume when the close is up and subtracts the period's volume when the close is down. A cumulative total of the volume additions and subtractions create the OBV line. This line can then be compared with the chart of the underlying security to look for divergences or confirmation between OBV and price. If a stock continues to rise while the OBV levels off or declines a divergence is occurring and a reversal in the stock price is very likely and conversely if a stock makes a new reaction low that is not confirmed by the OBV line the security will most likely soon rise.
Relative Strength Comparative
compares the performance trend of a stock to an index. This comparison removes the emotion from the equation and many times a drop in relative strength can indicate a coming drop in actual price of the stock.
The object is to identify which stocks are performing the best or the worst assuming that trends will persist for some time as strong stocks stay strong and weak stocks stay that way.
It is probable that before a stock price drops sharply it will first loose relative strength against an index and visa versa on the upside.
Price Rate of Change
(ROC) This oscillator measures change or momentum as a percentage rather than in points and the latest plot is calculated as a ratio of the last price to the price a certain number of periods (N) ago. The ROC is displayed in an overbought/oversold format and RealtimeStockquote.com uses 16 days as our default but good results can be had with shorter settings. As with all overbought /oversold indicators, it is prudent to wait for a turn before placing a trade and the turn can be identified by waiting for a crossover of the oscillator lines.
Relative Strength Index
or (RSI) is an excellent overbought/oversold indicator that can be used to predict reversal points. Conceived by J. Welles Wilder, Jr. this momentum oscillator measures the velocity of directional price movement and buy signals are triggered at 30 and sell signals at 70 when the traditional 14 period parameter is used. Not all stocks act the same and buy and sell levels will vary from one stock to another with some topping out above 70 and others turning before that level is reached. Many traders are using shorter periods than 14 resulting in an indicator that reaches extremes sooner and are also using 20 for buy signals and 80 for sells signals. RealtimeStockquote.com allows a user to vary indicator parameters to their investment style and market conditions and some users find periods as low as 8 on our intraday charts to be valuable.
The Relative Strength Index (RSI) should not be confused with the traditional relative strength which is a measure of a security's strength against that of another, usually a market index. See below.
Another valuable way to use RSI is to look for divergence in stock price action and RSI. If an upward sloping stock price is accompanied by a downward sloping RSI a divergence is occurring and the stock price will usually reverse.
is an oscillator developed by Dr. George Lane that measures the position of a stock compared with it's recent trading range and indicates overbought or oversold conditions. It displays the current price as a percentage relative to the stocks trading range (high/low) over the specified period of time, RealtimeStockquote.com uses 15 as the default time period but users can adjust that to match their investment style and shorter periods will provide more signals but too few periods will provide false signals making the indicator useless. When the last price is near the top of the recent trading range (above 80%, 15 periods), the stock is overbought and may be due for a correction. Oversold conditions are indicated by a reading below 20%.
Like RSI, a divergence between the stock price and the stochastic can indicate a change in security's trend.
Willaims % R
created by Larry Williams to indicate overbought and oversold conditions based on today's price in relation to past prices. This indicator has an excellent ability to anticipate price reversals and often tops out and turns down days before the stock price breaks. We use 12 as our default setting but traders are using shorter periods with good results and when the indicator is near the top of the trading range, above 85, the security is in an oversold condition. The overbought condition exists at 15% or below.