Technical Analysis
Bar ChartsPoint and Figure ChartsMoving Averages
Bar Chart Information High Open Close Low
Daily Weekly Monthly
Chart formations
Trends Planes
Other top and bottom formations Key Reversals Flags, Triangles and Pennants Gaps
Up Trend
Connect two or more daily price lows Preferably 10 days apart
When market closes below an uptrend line, a sell signal is generated
Computer trading vs fundamental Computers may drive prices lower for a
few days If fundamentals don’t support this, then
prices will rally
Up Trend
Sell Signal
Down Trend
Connect two or more daily price highs Preferably 10 days apart
When market closes above a down- trend line, a buy signal is generated
Computer trading vs fundamental Computers may drive prices higher for a
few days If fundamentals don’t support this, then
prices will decline
Down Trend
False BuySignal
Trend line market signals
Speculators Buy and sell based on signals
Hedgers – Short Place on sell signal May choose to offset on buy signal
Hedgers – Long Place on buy signal May choose to offset on sell signal
Trend Line reliability
A close above a major down trend or below a major up trend will lead to a significant price move about 75% of the time
Resistant Planes
Life-of-contract highs can be very difficult for market to penetrate
Strong Fundamental conditions needed to move market above resistance
Sell signal if market fails to take out resistance
Buy signal if market closes above resistance (particularly 2 closes above)
Resistant Planes
There are also intermediate resistance planes
These are not as hard to penetrate as life-of-contract highs are
Resistance plane
Sell Signal
Resistance plane
Sell SignalBuy Signal
Support Planes
The mirror image of Resistance Planes Life-of-contract lows Buy signal if market fails to penetrate Sell signal if low is taken out
Support Planes
Sell Signal
Hedgers and Technical Analysis
If understand trends and support and resistance planes: Time placement of hedge Set realistic market targets Perhaps minimize margin calls
Other Bar Chart Formations
Double Top or Double Bottom Head and Shoulders Key Reversal Flags, Triangles and Pennants Gaps
Common, break away, measuring, exhaustion
Double Top (triple top)
Head and Shoulders
Shoulder Shoulder
Head
Neck line
Key Reversal Higher high Lower low Close below prior
day close Sell signal
Close above prior day close Buy signal
Flag
Decline
Project =Decline
Triangle or Pennant Buy Signal if
market breaks out to the top
Sell signal if market breaks out to the bottom
Gaps
Common
Break away
Measuring
Exhaustion
Complements to Chart Patterns
Trading Volume Open Interest Relative Strength Index (RSI)
Trading Volume
Barometer of level of intensity in the market
If buy/sell signal occurs on a relatively high volume day, then it is more reliable
High/low volume is relative to past trading and relative to specific contract
Guidelines for trading volume
Look at all months being traded for a particular commodity
Interpret volume on limit up/down days very carefully
Usually low prior to holiday, 3 day weekend, or major report
Open Interest
# of contracts that are outstanding Have not been offset
No binding relationship between Open Interest and Trading Volume Day traders create volume, don’t change
open interest Open Interest tends to peak and then
decline prior to an uptrend reversal Less reliable on downtrend reversal
Relative Strength Index
Widely used measure of momentum in the market
14 day RSI is the most common To calculate
Record last 14 day price changes (closes) Sum the negative changes and positive
changes and divide each by 14 to create (D) down average and (U) up average
RSI=U/(U+D) * 100
RSI Market Indicator
RSI > 70 Market is thought to be over bought
RSI < 30 Market is thought to be over sold
Numbers vary by commodity Major change in Supply or Demand
may keep RSI above 70 or below 30 for an extended period of time
RSI example calculations
Close 2.40, 2.38, 2.36, 2.38, 2.36, 2.40, 2.44, 2.42, 2.44, 2.48, 2.56, 2.48, 2.52, 2.50, 2.46
Up .02 .04 .04 .02 .04 .08 .04 Up sum = 28/14 =2
Down .02 .02 .02 .02 .08 .02 .04 Down sum = 22/14=1.57
RSI = 2/(2+1.57) * 100 = 56
Point and Figure Charts
2 CRITICAL parameters The cell size The reversal requirement
Cell size – The value in terms of price increment for each cell
Reversal requirement – Magnitude of price change required for a reversal
Point and Figure Charts
There is no time on chart X use to plot uptrending prices O use to plot downtrending prices Only use daily high or low, close
doesn’t matter Buy/Sell signal generated when new
Higher/Lower X/O is plotted
Moving Averages May be a compliment to bar chart
Single Moving Average 40-day Help signal turning points in market
May be an alternative to bar chart Two moving averages employed Example 3-day and 10-day Example 9-day and 18-day Sell signal when shorter cuts longer from top Buy signal when shorter cuts longer from
bottom
Buy B and Sell SSignals using the 4-day & 9-dayMoving Average
B
B B
BB
S S
S
S
S
B
Moving Averages
Advantages Provide clear market signals No guessing as to chart formation Good if there are trends in the data
Disadvantage May generate multiple trades Don’t perform well in choppy (sideways)
markets
Moving Average
Short Hedgers Place on Sell signals Lift (offset) on Buy signals
Long Hedgers Place on Buy signals Lift (offset) on Sell signals
Speculators Buy and Sell and Offset on all signals
Technical Analysis Summary
Technical Analysis does work It requires Work to make it work Need to study past technical analysis
for several years worth of data on a particularly commodity before trading
For hedgers Trends and Support/Resistance Planes Moving Averages