Wednesday, May 28, 2008

Technical Stock Analysis : Thoughts on Technical Stock Chart Analysis

I wanted to Blog about this topic but wanted to provide some examples and give my personal thoughts about Technical Analysis. I want to explain what I look for on the charts. Keep in mind, fundamentals are always the keys to a stocks performance but I believe Technical Analysis can be a huge asset to an Investor or a Stock Trader, if he/she uses it right.

First, here is the Wikipedia description of Technical Analysis.

Technical analysis is a financial markets technique that claims the ability to forecast the future direction of security prices through the study of past market data, primarily price and volume.[1] In its purest form, technical analysis considers only the actual price behavior of the market or instrument, on the assumption that price reflects all relevant factors before an investor becomes aware of them through other channels. Technical analysts may employ models and trading rules based, for example, on price transformations, such as the Relative Strength Index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns. OK, so I guess the things I look for differ somewhat from that description.

What I look for the most are:

Support Levels ( Buy Interest from Investors or Traders ) and Resistance Levels ( Sell Interest from Investors or Traders ). For me this is key in deciding where to buy a stock and where I should most likely sell it.

Here is an example of FSLR First Solar today.

First Solar has solid support at the $260 level and I have been pounding the table on this. This to me is where buyers are ready to step in after the stock has fallen. But what do I consider a true break of support? Well, you have to figure out if you are a Day Trader or a Short or Long Term Investor/Trader. For the Day Traders, support was broken this morning causing the stock to sink down to $253 in about 20 minutes. That is a big down move. Short Term Traders/Investors or people investing for the Long Term are looking to see how it closes the day. As you can see....FSLR is back over $260 and breaking out to $266. FSLR hit support, found buyers, and is now rising from the buying interest. From this point of view, FSLR is still solid because although it broke down intra day, it finished strong and support is still intact at the $260 level. Chances are, buying will increase even more if $260 is tested again.

So to sum this up in regard to Technical Analysis.....Day Traders are worried about what the stock will do in the next hour.....Short Term/ Long Term traders or Investors are looking several days, months, or years out when making a decision now.I also use moving averages especially the 10, 50, 200 Day. To me personally, nothing beats support and resistance levels, but the average price per 10,50,200 days are sometimes important. I have found from experience that the 200 Day moving average is a major support and resistance level. If a stock closes below this level you sell, if the stock rises above this level its a good signal to get back in.

What I don't use: I don't use Bollinger Bands or anything really technical because these are just bogus. I cannot find where buyers are waiting to get in from a Bollinger Band. I will occasionally use RSI and MACD levels, but only when they are ready to cross a certain point. Fibonacci retracement levels are also way to technically bogus. Again, I look at my level 2 data and can see big buy or sell orders coming in at a certain area and know where there is support over several days. The Technical Charts are great because I can visualize this.Technical Charts are a great tool for those who don't to carried away. Know where there are serious buyers and know where they are selling so that you can trade or invest off of this info. Keep track of recent stock price lows and highs because chances are when those points are broken...the stock will go each way respectively