technical analysis iii: using charts to time selling
Post on 23-Jan-2016
26 Views
Preview:
DESCRIPTION
TRANSCRIPT
Technical Analysis III:Using Charts to Time Selling
Economics 98 / 198 DecalSpring 2008
CURRENT EVENTS / STOCK DISCUSSION
Using Charts to Time Selling
Current Rally’s FTD (Dow Jones)
S&P500 (Recent Activity)
LECTURE CONTENTUsing Charts to Time Selling
Summary of last lecture
• Technical Analysis
• Using stock charts to time market bottoms• Rally, follow-through, counting days
• Using stock charts to time buy points• Stock formations / bases
• Cup with handle / double bottom / flat base
• Strong characteristics of bases• Additional buy point: 50 Day moving average
Rally AttemptDay 1
Follow-throughDay 5
(+1.75% on on high volume)
S&P 500 (Early 2007 Follow-through)
Failed Rally Attempt
Day 1
Prior Downtrend
ROLL – Pullback to 50 DMA
Pullback
Bounces off 50DMA on above average volume
SPARSPAR
SPAR – Ascending Triangle
Volume perks up on breakout
Today’s lecture
• General principles for selling stocks whether for a loss or for a profit
• Key Selling Indicators• Market direction• Cutting losses short• Individual stock chart analysis
• Signs of weakness (churning, breaking support, resistance)
• climax tops• changes of trend
Why knowing when to sell is so important
Nasdaq (2000) Let’s say you bought an index fund or ETF here @
3,500
Why knowing when to sell is so important
Nasdaq (2000)
Within a year and a half, you would have lost your
profits plus more!
Why knowing when to sell is so important
Yahoo! (1997 – 2006)
Peak of $120
Bottom of $4.50
96% loss here
To recover from bottom, YHOO would have to increase 2600%
Fundamentals can look great at the top
Sell Decisions
• Sell decisions should be based largely on technical analysis• Don’t wait for fundamentals to deteriorate
• Market Conditions• Climax Tops• Signs of Weakness• Change of trend
#1 Selling Rule: Cutting losses early
• Set yourself a maximum sell rule• How much you set depends on your risk
tolerance (5 – 10% a good #)
• Why do it?
• Use stop-loss orders if you don’t have time or control with emotions
#1 Selling Rule: Cut Losses Early
Source: “How to Sell Stocks to Limit Losses.” IBD Online | Learning Center
Why cutting your losses is important
Chicago Board of Trade (CBOT)-Great fundamentals (strong earnings, sales growth, ROE, etc.)
-Cup with handle base
-Strong accumulation in base
-Break out on strong volume
Buy here @ $128
Why cutting your losses is important
Chicago Board of Trade (CBOT)-Action of the stock doesn’t go according to plan and eventually, reverses to below breakout point
-What do you do here?
Cut your losses early
Sell when 7% (or less) below buy point
I might be wrong and I should be cutting my losses here at @ $119
Why cutting your losses is important
Chicago Board of Trade (BOT)
Now I don’t know what to do with a 34% loss!!!! #$!@#$!
Bought here @ $128
MARKET ANALYSIS:TIMING TOPS / DOWNTRENDS
Using Charts to Time Selling
Market Direction: Downtrends / Tops
• Always preceded by signs of weakness (heavy selling) in major market indexes• Distribution Day (4 or 5 within 4
weeks) raises red flags
• Other market weakness signs• Days when market starts strong, but
ends very weak (low on the intra-day)• Leading stocks start to deteriorate
Let’s look at the NASDAQ during the 2000 Bubble as it happened
Many distribution days within short time: more selling than buying. Furthermore, many leaders were peaking as well. Clearly, institutions were getting rid of shares.
It went from good to bad to ugly
Market Direction: Downtrends / Tops
2000 Market Top4/5 distribution days can tip a market over, so 7 within 4 weeks screams out that the market is heading for the gutters
2000 Bubble: Leaders Breaking Down
The 2000 bubble went down in history as having the most climax tops at a market top (we’ll discuss this later).
Essentially, this means GET OUT!!!!!
The Aftermath
2000 Bubble
Yahoo Inc. DOWN 88% in 12 months
Qualcomm Inc. DOWN 88% in 31 months
2004 Market Downtrend
CSCO. DOWN 38% in 8 months
Leading stocks of current market uptrend usually fall the hardest when
market tops occur
Market Direction: Downtrends / Tops
Dow Jones 1929
PROFIT-LOSS PLANUsing Charts to Time Selling
Profit & Loss Plan
• Most stocks after bases move up 20-25%, build bases / patterns, and then in some cases, resume advances
• If all goes according to plan, take your profit at this 20-25% gain point
the exception to this is…
Exception…
• If stock rises 20% in 1-4 weeks on heavy volume, then hold on for at least another 8 eight weeks
• Why do this? Quick, strong advance shows unusual strength in the stock. Potential to be a great winner.
• After that, re-evaluate to see if stock should be held for longer term
“Bulls make money and bears make money, but pigs get slaughtered.”
INDIVIDUAL STOCK CHART ANALYSIS: SELLING
Using Charts to Time Selling
General Signs of Weakness
• Downward Reversals• Stock begins to move up, only for a
sudden change downwards in price• Even worse, when volume is HIGH
• Distribution• Stock closes at a lower price than prior
day/week on above-average volume• In general words, big selling
Change of Trend
• Long-term uptrend line is broken on overwhelming volume
• Greatest one-day price drop
• 200-day moving average line turns down
• Living below 10-week moving average
Source: “How to Sell Stocks to Maximize Your Profits: Moving Averages” IBD Online | Learning Center
The stock cuts the 50 DMA on heavy volume.
It’s not getting support at this level Rallies back
on light volume
Example 1 50DMA Violation
Source: “How to Sell Stocks to Maximize Your Profits: Moving Averages” IBD Online | Learning Center
Example 1 50DMA Violation
The stock cuts the 50 DMA on heavy volume.
It’s not getting support at this level Rallies back
on light volume
Example 2
Stock cuts 50DMA on heavy volume and struggles to rally above that line.
50 DMA becomes level of resistance
Example 2
Stock cuts 50DMA on heavy volume and struggles to rally above that line.
50 DMA becomes level of resistance
Example 3
The stock had already a big move up. If a stock closes with its largest one day gain in the entire move, watch out. This usually occurs at the peak.
Largest one day drop
(-3.50)
If a stock has its largest one day drop, then consider selling if confirmed by other signals (distribution, reversals, climax activity)
Example 3
Largest one day drop
(-3.50)
Big reversal
Gap-downThe stock had already a big move up. If a stock closes with its largest one day gain in the entire move, watch out. This usually occurs at the peak.
If a stock has its largest one day drop, then consider selling if confirmed by other signals (distribution, reversals, climax activity)
Example 4Weekly Trendline Broken
If you connect lows of weekly closes, can identify a major trend line here
Consider selling if confirmed by other signals when stock breaks major trend line on overwhelming volume
NOTE: Don’t draw too many lines. Trend lines drawn on too short of time periods aren’t valid
Example 4Weekly Trendline Broken
If you connect lows of weekly closes, can identify a major trend line here
Consider selling if confirmed by other signals when stock breaks major trend line on overwhelming volume
NOTE: Don’t draw too many lines. Trend lines drawn on too short of time periods aren’t valid
Climax Tops
• Explosive price / volume action of leading stocks and/or industries • Indicate trouble ahead for the stock• Occurs at end of the stock’s run
• Traits• Exhaustion Gaps• Excessive Stock Splits• Huge price spreads with reversals• Extended +100% over 200-day moving average• Huge price-run up at end of movement (25% -
50% in 3 weeks or less)
Example 1
Source: “How to Sell Stocks to Maximize Your Profits: Climax Tops” IBD Online | Learning Center
Climax top shows abnormal activity after stock’s previous run-up.
Notice the BIG reversal at the peak on extremely high volume.
Can you see the difference in price
movement behavior?
NOTE: Climax tops occur at end of a stock’s run. Increasing price movements at beginning of a stock’s move is positive.
Source: “How to Sell Stocks to Maximize Your Profits: Climax Tops” IBD Online | Learning Center
HUGE REVERSAL on explosive volume
(ended on the bottom of the intraday spread)
Example 2
Notice the explosiveness of the price movements at the end of the stock’s move. 60% gain in 8 days.
Exhaustion gap to finish the climax top off
Example 3
Telecom stocks enjoyed huge up-trend ride during late 1990’s
Climax action by leading stocks gave sell signals for the industry and the market in general
Notice the explosive action by the leading stocks
Source: “Topping Action By Industry’s Leaders Flashes Sell Signal.” Investors Business Daily Online
Other Signs of Weakness (secondary indicators)
• Heavy volume without further upside price progress (churning, sign of distribution)• Accumulation days with larger distribution days
• New highs on low volume• Big buyers lost appetite for rise
• Signs of poor rally (decline on big volume, and then rally on low volume)
Notice how the stock reaches new highs and the advance is on very tame volume. This is a sign of weakness and raises a red flag.
Rally on light volumeNotice a sharp decline from the first peak
And then, a rally on very light volume
Rally on light volume
Notice a sharp decline from the first peak
And then, a rally on very light volume
Churning
Source: “How to Sell Stocks to Maximize Your Profits: Churning” IBD Online | Learning Center
If you look at the arrows, you’ll notice this stock acting quite volatile (major price increases / decreases) on huge volume without really making any significant moves.
This shows that buying action is being met with selling action. This should raise a red flag. Sellers eventually may overwhelm buyers.
Source: “How to Sell Stocks to Maximize Your Profits: Churning” IBD Online | Learning Center
Other points
• Don’t let the stocks that rise 10-20% to drop back into loss column
• Be patient for advances to complete• “It never is your thinking that makes big
money. It is the sitting.” - Jesse Livermore
EXAMPLESUsing Charts to Time Selling
Example
Source: Saito-Chung, David. “Exhaustion Gap Precedes Energetic Sell-Off.” Investors Business Daily. 07/13/2001.
From peak, QCOM traced a downtrend and went 68% below its all-time high
Very apparent here that QCOM experienced a climax top at the end of its run
We can see an exhaustion gap, and many instances of churning.
Example
Source: Saito-Chung, David. “Exhaustion Gap Precedes Energetic Sell-Off.” Investors Business Daily. 07/13/2001.
From peak, QCOM traced a downtrend and went 68% below its all-time high
Very apparent here that QCOM experienced a climax top at the end of its run
We can see an exhaustion gap (2), and two instances of major churning (4).
Example
Price had increased eightfold from 1999-2000
At peak, 85% above 50-day and 294% above 200-day (2)
From peak, fell as much as 61%
Source: Wise, Christina. “Confirm Sell Signals with Moving Averages.” Investors Business Daily. 07/11/2001.
Also, see instances of churning on heavy volume (2)
See a climax run towards the end of the run (1)
Example
Price had increased eightfold from 1999-2000
At peak, 85% above 50-day and 294% above 200-day (2)
From peak, fell as much as 61%
Source: Wise, Christina. “Confirm Sell Signals with Moving Averages.” Investors Business Daily. 07/11/2001.
Also, see instances of churning on heavy volume (2)
See a climax run towards the end of the run (1)
EBay – 2005
EBay – 2005
Down 80% over next 6 months
FRE – 2005
Summary
• Cut losses short• Know the market and when it is topping!
• Distribution days can tell you a lot
• Have a profit & loss plan• Watch for any abnormal activity
• Price and Volume• Climax Top• Changes in Trend• Weak action
Next week’s lecture
• If you don’t have the time or don’t have the skill to constantly monitor your portfolio or manage your own investments…
• Wait until next week’s lecture!
Homework
• Final Stock Analysis• 2 pages• Analyze your simulated portfolio• Just talk about your favorite buys and sells
and back up your case with fundamental/technical reasoning
top related