Technical Analysis Spot

Welcome to Charting 101…

Many investors believe in technical analysis or fundamental analysis. Although I am a fan of applying both to my investment strategies, it is my purpose here to only discuss pure technical analysis. I will identify stocks to watch, setups for possible entry positions, and buy or sell recommendations based on my favorite indicators (RSI, MACD, and DMI).

What is TA all about?

Technical Analysis is the study of historical stock price data in the form of trends, volume, indicators, etc. One uses TA in trying to predict future movement. In many cases, patterns are formed which often tell stories about recent price movement and where future prices are likely to do.

Many people use candlestick charting when viewing stock charts. For example, if you go to Bigcharts and click on interactive charting, you will be taken to a page where you can alter how you view your stock, what time frame you would like, and compare it to other stocks or indicators. Click here to learn more about candlesticks and how to read them.

When individual candlesticks are placed after each other in their respective time frames we can sometimes begin to see…

Candlestick Reversal Patterns

The next sets of candlesticks shown below are known as the “hammer” and the “hanging man.” The lower shadows attached to the bodies should be twice the length of the real body itself. These candlesticks will have no upper shadow and appear to have a “flat head.” When you come across a hammer which has formed after a downtrend, remember that the trend may then slow down and change direction by moving sideways or changing directions by heading straight into an uptrend. A hanging man represents the exact opposite. Once you see a hanging man following an uptrend, take profits right away. This is a selling indicator which now represent a change in trend may occur in a negative direction.

In the next graph we will take a look at “bullish engulfing” and “bearish engulfing” patterns. These patterns can also predict a trend change. This pattern consists of two candlestick bodies of opposing color in which the second body is larger and “engulfs” the previous body. Remember that these reversal patterns do not always promise a trend change. Instead, they should be viewed upon as a “look out” for price changes in the future.

This…

Head and Shoulders Reversal Pattern

Another setup is known as the “head and shoulders” pattern. In figure 20 we see that this pattern can be bullish or bearish. A bearish pattern forms by forming a person-like shape complete with shoulders and a head in the middle. If the pattern were to be completely flipped upside down with the head forming at the bottom, we would call it a bullish head and shoulders pattern.

Cup and Handle Reversal Pattern

Another common reversal setup is known as the “cup and handle” pattern as seen below:

The picture is self-explanatory…

Momentum Bullish Divergence

To find a bullish divergence on daily charts, we will use a 3-month charting window. You may use charts that are greater than the 3-month period, but do not try this technique when looking at charts under the given 3-month time frame. Be certain to use a 28-period momentum indicator as well. With this 28-period, each momentum length will be 1 hour each. When a divergence is found make sure that the divergence lasts at least six periods.
The steps used in finding a divergence are as follows:

1. Find the lowest price low on

…