Introduction to technical analysis

Introduction To Technical Introduction To Technical AnalysisAnalysis

Christopher M. Quigley,Christopher M. Quigley,B.Sc., M.I.I. (Grad.), M.A., QFA.B.Sc., M.I.I. (Grad.), M.A., QFA.

Qualified Financial Adviser.Qualified Financial Adviser.www.Wealthbuilder.ie

[email protected]@gmail.com

http://www.wealthbuilder.ie/

““Price action is the most insightful data Price action is the most insightful data available because it is judgement backedavailable because it is judgement backed

by money.”by money.”

Introduction To Technical AnalysisIntroduction To Technical Analysis

SeminarSeminar Outline:Outline:

General IntroductionGeneral Introduction

Dow TheoryDow Theory

Charting Basics:Charting Basics:Line ChartsLine ChartsBar ChartsBar ChartsCandlestick ChartsCandlestick ChartsSupport Support ResistanceResistanceTrend LinesTrend LinesPrice ChannelsPrice Channels

Seminar Outline (Continued):Seminar Outline (Continued):

Charting Patterns:Charting Patterns:Falling WedgeFalling WedgeRising WedgeRising WedgeFlag/PennantFlag/PennantDouble Top/BottomDouble Top/BottomHead & Shoulder Top/BottomHead & Shoulder Top/BottomAscending/Descending TriangleAscending/Descending Triangle

Technical Indicators:Technical Indicators:Moving AveragesMoving AveragesÀ/D LineÀ/D LineIndicators:Indicators: MACDMACDIndicators:Indicators: Stochasics OscillatorStochasics OscillatorIndicators:Indicators: Bollinger BandsBollinger Bands

Seminar Outline (Continued):Seminar Outline (Continued):

Technical Analysis Application:Technical Analysis Application:Trade ExamplesTrade Examples

General Introduction General Introduction

Technical Analysis Is A Tool To Gain Insight Into Market Price Behaviour And So Technical Analysis Is A Tool To Gain Insight Into Market Price Behaviour And So Enable You To More Profitably Judge Investment Entry And Exit PointsEnable You To More Profitably Judge Investment Entry And Exit Points

In Essence Technical Analysis, Correctly Used, Will Motivate Investment Action That In Essence Technical Analysis, Correctly Used, Will Motivate Investment Action That Brings A Higher Probability Of Success Than Through The Use Of Pure Random Brings A Higher Probability Of Success Than Through The Use Of Pure Random ChoiceChoice

Dow Theory When Fully Comprehended, Demonstrates That The Market Is Not Dow Theory When Fully Comprehended, Demonstrates That The Market Is Not RandomRandom

This Theory Has Proved Itself Over 100 YearsThis Theory Has Proved Itself Over 100 Years The Hypothesis Works Because Price Action Is A Result Of Human DecisionsThe Hypothesis Works Because Price Action Is A Result Of Human Decisions Historical Observation Indicates That Price Conditions Change But Human Nature Historical Observation Indicates That Price Conditions Change But Human Nature

Does Not Does Not Thus Technical Analysis Is Basically A Type Of Behavioural or Social Science Thus Technical Analysis Is Basically A Type Of Behavioural or Social Science Such Study Cannot Predict The Future, Else There Would Be No Market, (For The Such Study Cannot Predict The Future, Else There Would Be No Market, (For The

Market Is A “Zero Sum Game”) But It Can Be A GuideMarket Is A “Zero Sum Game”) But It Can Be A Guide In My Experience Use Of Too Many Technicals Leads To” Paralysis By Analysis”. In My Experience Use Of Too Many Technicals Leads To” Paralysis By Analysis”.

Thus I Advise The Use Of Some Indicators But Not Too ManyThus I Advise The Use Of Some Indicators But Not Too Many My Favourite Analysis Indicators Are: Moving Averages, MACD, Stochastics, Price My Favourite Analysis Indicators Are: Moving Averages, MACD, Stochastics, Price

(Candlestick Format) And The A/D Line(Candlestick Format) And The A/D Line In Addition Volume Bars, Bollinger Bands and The ADX Line Can Be UsefulIn Addition Volume Bars, Bollinger Bands and The ADX Line Can Be Useful

Dow TheoryDow Theory

You will not excel at investment doing You will not excel at investment doing actions by roteactions by rote

Ideally you must understand what you are Ideally you must understand what you are doing and why you are doing itdoing and why you are doing it

You must begin to think for yourselfYou must begin to think for yourself

Thus we must ask are the markets Thus we must ask are the markets understandable and logical or are they understandable and logical or are they random and chaotic random and chaotic

It is out contention that the markets are It is out contention that the markets are logical and to support this thesis we will logical and to support this thesis we will review Dow Theory (Elliott Wave Theory review Dow Theory (Elliott Wave Theory supports the same view from a different supports the same view from a different perspective).perspective).

Dow Theory was developed by Charles Dow Dow Theory was developed by Charles Dow and William Hamilton in the early 1900’sand William Hamilton in the early 1900’s

They both sought a system that would assist They both sought a system that would assist successful investment successful investment

As part of the process Charles Dow As part of the process Charles Dow pioneered the use of the Dow Transport pioneered the use of the Dow Transport index and the Dow Industrial indexindex and the Dow Industrial index

Why these indices?Why these indices?

They wanted to gain a unique insight into They wanted to gain a unique insight into how the economy was operating because how the economy was operating because they realised that the market was merely a they realised that the market was merely a perception of economic conditionsperception of economic conditions

Case in point let us use General Motors as Case in point let us use General Motors as an examplean example

If orders for cars were previously flat but If orders for cars were previously flat but then began to increase demand for steel then began to increase demand for steel would risewould rise

This steel would need to be shippedThis steel would need to be shipped Thus from a base pattern shipping activity Thus from a base pattern shipping activity

would spike up and load factors on railway would spike up and load factors on railway lines would rise, increasing turnoverlines would rise, increasing turnover

Thus Dow perceived rail or transport activity Thus Dow perceived rail or transport activity as an early or LEADING INDICATORas an early or LEADING INDICATOR

As the cars that were produced from the As the cars that were produced from the steel were sold the sales figures would steel were sold the sales figures would show up in the profits of GM show up in the profits of GM

The Dow industrials would improve in The Dow industrials would improve in performanceperformance

Thus the industrials were a CONFIRMING Thus the industrials were a CONFIRMING indicatorindicator

Dow and Hamilton in their writings were Dow and Hamilton in their writings were among the first to coin the terms Bull and among the first to coin the terms Bull and Bear marketsBear markets

BBUULL = BLL = BUUYY

BBEEAR = SAR = SEELLLL

With the system Charles Dow developed With the system Charles Dow developed certain rules:certain rules:

There can be three trends at play in the There can be three trends at play in the market at any timemarket at any time

Trends:Trends:

Primary TrendPrimary Trend

Secondary or Reactionary or Corrective Secondary or Reactionary or Corrective TrendTrend

Minor or Speculative TrendMinor or Speculative Trend

Primary TrendPrimary Trend This main trend can last for 2-3 years or for This main trend can last for 2-3 years or for

many decadesmany decades Once it is identified it is assumed to be in Once it is identified it is assumed to be in

place until otherwise disprovedplace until otherwise disproved Superior investment success involves Superior investment success involves

knowing this trend and knowing how to work knowing this trend and knowing how to work with itwith it

Secondary TrendSecondary Trend This movement is a reaction against the This movement is a reaction against the

main trend and is often tricky to distinguishmain trend and is often tricky to distinguish Very often such movements turn out to be Very often such movements turn out to be

“sucker” rallies or pullbacks“sucker” rallies or pullbacks This trend can last for a few days to many This trend can last for a few days to many

monthsmonths

Minor TrendMinor Trend

This movement is mainly speculative and This movement is mainly speculative and can be ignored from an investor point of can be ignored from an investor point of view view

It can last for a few days and weeksIt can last for a few days and weeks

Each major trend has 3 phases:Each major trend has 3 phases: Bull Trend:Bull Trend: AccumulationAccumulation Public ParticipationPublic Participation DistributionDistribution Bear Trend:Bear Trend: DistributionDistribution Public ParticipationPublic Participation AccumulationAccumulation

Dow Theory Dow Theory AssumptionsAssumptions

Dow Theory AssumptionsDow Theory Assumptions

The Averages Discount EverythingThe Averages Discount Everything This means that all free knowledge and This means that all free knowledge and

news is discounted in the market price at news is discounted in the market price at any timeany time

Thus if you know how to read the market Thus if you know how to read the market you will comprehend all that there is to know you will comprehend all that there is to know


Manipulation Of The Market Is ImpossibleManipulation Of The Market Is Impossible Because the main market is so big and Because the main market is so big and

broad no one group can control it alone, broad no one group can control it alone, thus price movement is based on the thus price movement is based on the perception of economic factorsperception of economic factors


To Have A Valid Dow Signal Both The Dow To Have A Valid Dow Signal Both The Dow Transport Index And The Dow Industrial Transport Index And The Dow Industrial Index Must ConfirmIndex Must Confirm

This is perhaps the most important of the This is perhaps the most important of the Dow Theory rules. History has shown that Dow Theory rules. History has shown that there can be many false movements of there can be many false movements of either index but confirmation by both greatly either index but confirmation by both greatly improves the reliability and use of the theoryimproves the reliability and use of the theory


Trend must be confirmed by volumeTrend must be confirmed by volume

Dow Theory ApplicationDow Theory Application

A BULL TREND IS SIGNALED BY A BULL TREND IS SIGNALED BY HIGHERHIGHER HIGHS HIGHS AND AND HIGHER LOWSHIGHER LOWS


A BEAR TREND IS SIGNALED BY A BEAR TREND IS SIGNALED BY LOWER LOWER HIGHSHIGHS And And LOWER LOWSLOWER LOWS


There is always a main or primary trend in There is always a main or primary trend in operation and the successful investor needs operation and the successful investor needs to know how to recognise the signatures of to know how to recognise the signatures of these trendsthese trends


Dow and Hamilton believed that the trend Dow and Hamilton believed that the trend was your friendwas your friend

That the probability of investment success That the probability of investment success was greatly improved if you knew what the was greatly improved if you knew what the trend was and invested with ittrend was and invested with it

They understood that the They understood that the SENTIMENTSENTIMENT of of investors moved the market and that it was investors moved the market and that it was unwise to fight this sentimentunwise to fight this sentiment


Never invest if the trend cannot be identifiedNever invest if the trend cannot be identified Until the trend is apparent and congruent it Until the trend is apparent and congruent it

is best to stay out of the market on the is best to stay out of the market on the sidelines in cash because in such cases sidelines in cash because in such cases there is above average riskthere is above average risk

Dow and Hamilton only advised investment Dow and Hamilton only advised investment for the big movesfor the big moves


The theory accepts that the stock market The theory accepts that the stock market values equities through subjective sentimentvalues equities through subjective sentiment

In a bull market stocks thus may become In a bull market stocks thus may become overvaluedovervalued

In a bear market equities may become In a bear market equities may become undervaluedundervalued

Therefore the seasoned investor works with Therefore the seasoned investor works with such sentimentsuch sentiment


We will now quickly review examples of the We will now quickly review examples of the theory in actiontheory in action

Example 1. 1998-2000 Tech CrashExample 1. 1998-2000 Tech Crash

Example 2.Example 2. 2003 Post Iraq War Rally2003 Post Iraq War Rally

Example 3.Example 3. 2007 Sub-Prime Bust2007 Sub-Prime Bust

2000 Tech Crash2000 Tech CrashDow 20Dow 20

&&Dow 30Dow 30

2000 Tech crash observations2000 Tech crash observations Even though the Dow 30 moved to higher Even though the Dow 30 moved to higher

highs in the 1highs in the 1stst Qtr. Of 1999 the confirmation Qtr. Of 1999 the confirmation failed with the Dow 20 in the second Qtr. Of failed with the Dow 20 in the second Qtr. Of 1999. 1999.

This failure was a warning to seasoned This failure was a warning to seasoned investorsinvestors

Both averages collapsed in the 3Both averages collapsed in the 3rdrd. Qtr. Of . Qtr. Of 20012001

2003 Iraq War Rally2003 Iraq War RallyDow 20Dow 20

&&Dow 30Dow 30

2003 Iraq War Rally Observations2003 Iraq War Rally Observations

The Dow 30 moved to higher highs In the The Dow 30 moved to higher highs In the 22ndnd Qtr. Of 2003 Qtr. Of 2003

This price action was confirmed by the Dow This price action was confirmed by the Dow 20 towards the end of the 220 towards the end of the 2ndnd Qtr. Also. Qtr. Also.

Both indices exploded hard in the 3Both indices exploded hard in the 3rdrd. Qtr . Qtr 20032003

2007 Sub-Prime Bust2007 Sub-Prime BustDow 20Dow 20

&& Dow 30Dow 30

2007 Sub-Prime Bust Observations2007 Sub-Prime Bust Observations

Lower highs and lower lows were indicated Lower highs and lower lows were indicated by the Dow 30 towards the last Qtr. Of 2007by the Dow 30 towards the last Qtr. Of 2007

This was confirmed by the Dow 20This was confirmed by the Dow 20 An attempted rally by the Dow 20 in the An attempted rally by the Dow 20 in the

second Qtr. Of 2008 was not confirmed by second Qtr. Of 2008 was not confirmed by the Dow 30the Dow 30

Both indices collapsed in the 3Both indices collapsed in the 3rdrd. Quarter of . Quarter of 20082008

Charting BasicsCharting Basics

A technical analysis chart is basically a A technical analysis chart is basically a graph with price annotated on the left and graph with price annotated on the left and time on the bottomtime on the bottom

Its purpose is to analyse past price changes Its purpose is to analyse past price changes to try to predict future price movement with a to try to predict future price movement with a higher degree of probability than random higher degree of probability than random guessguess

There are three types of chart:There are three types of chart: Line ChartLine Chart Bar Chart Bar Chart Candlestick ChartCandlestick Chart

Line Chart:Line Chart: A Line chart simply graphs the Closing price A Line chart simply graphs the Closing price

of an instrumentof an instrument

Bar Chart:Bar Chart: This chart gives you the high, low, open (left This chart gives you the high, low, open (left

tick) and closing (right tick) prices.tick) and closing (right tick) prices.

Candlestick Chart:Candlestick Chart: Japanese Candlestick charts are one of the Japanese Candlestick charts are one of the

oldest type of charts used for price oldest type of charts used for price prediction. They date back to the 1700s, prediction. They date back to the 1700s, when they were used for predicting rice when they were used for predicting rice prices. prices.

Candlestick Chart:Candlestick Chart: The Candlestick format shows the full range The Candlestick format shows the full range

of price movement i.e. high, low, open and of price movement i.e. high, low, open and close in a more graphic manner than on the close in a more graphic manner than on the Bar chart . Thus we more easily get a sense Bar chart . Thus we more easily get a sense of market sentiment behind price changes. of market sentiment behind price changes.

Price: Candlestick Format ExamplesPrice: Candlestick Format Examples



Price Support & Resistance:Price Support & Resistance: Support is the price level at which demand is Support is the price level at which demand is

thought to be strong enough to prevent the price thought to be strong enough to prevent the price from declining further. The logic dictates that as from declining further. The logic dictates that as the price declines towards support and gets the price declines towards support and gets cheaper, buyers become more inclined to buy and cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time sellers become less inclined to sell. By the time the price reaches the support level, it is believed the price reaches the support level, it is believed that demand will overcome supply and prevent the that demand will overcome supply and prevent the price from falling below support. price from falling below support.

Resistance is the price level at which selling is Resistance is the price level at which selling is thought to be strong enough to prevent the price thought to be strong enough to prevent the price from rising further. from rising further.

Trend Lines & Price ChannelsTrend Lines & Price Channels

Trend Lines:Trend Lines: Technical analysis is built on the assumption that Technical analysis is built on the assumption that

prices trend. Trend Lines are an important tool in prices trend. Trend Lines are an important tool in technical analysis for both trend identification and technical analysis for both trend identification and confirmation. A trend line is a straight line that confirmation. A trend line is a straight line that connects two or more price points and then connects two or more price points and then extends into the future to act as a line of support extends into the future to act as a line of support or resistance.or resistance.

Price Channel:Price Channel: A price channel is a continuation pattern that A price channel is a continuation pattern that

slopes up or down and is bound by an upper slopes up or down and is bound by an upper and lower trend line. The upper trend line and lower trend line. The upper trend line marks resistance and the lower trend line marks resistance and the lower trend line marks support. marks support.

Price Channels:Price Channels: Main Trend Line:Main Trend Line: It takes at least two points to draw the main trend It takes at least two points to draw the main trend

line. This line sets the tone for the trend and the slope.line. This line sets the tone for the trend and the slope.

Channel Line:Channel Line: The line drawn parallel to the main trend line is called The line drawn parallel to the main trend line is called the channel line. Ideally, the channel line will be based off of two the channel line. Ideally, the channel line will be based off of two reaction highs or lows. reaction highs or lows.

Charting PatternsCharting Patterns

Falling Wedge:Falling Wedge: The falling wedge is a bullish pattern that begins The falling wedge is a bullish pattern that begins

wide at the top and contracts as prices move wide at the top and contracts as prices move lower. This price action forms a cone that slopes lower. This price action forms a cone that slopes down as the reaction highs and reaction lows down as the reaction highs and reaction lows converge. converge.

Rising Wedge:Rising Wedge: The rising wedge is a bearish pattern that The rising wedge is a bearish pattern that

begins wide at the bottom and contracts as begins wide at the bottom and contracts as prices move higher and the trading range prices move higher and the trading range narrows. narrows.

Flag/Pennant:Flag/Pennant: Flags and Pennants are short-term Flags and Pennants are short-term

continuation patterns that mark a small continuation patterns that mark a small consolidation before the previous move consolidation before the previous move resumes. These patterns are usually resumes. These patterns are usually preceded by a sharp advance or decline preceded by a sharp advance or decline with heavy volume, and mark a mid-point of with heavy volume, and mark a mid-point of the move the move

Double Top:Double Top: The Double Top Reversal is a bearish The Double Top Reversal is a bearish

reversal pattern.reversal pattern.

Double Bottom:Double Bottom: The Double Bottom Reversal is a bullish The Double Bottom Reversal is a bullish

reversal pattern.reversal pattern.

Head & Shoulders Top:Head & Shoulders Top: A Head and Shoulders reversal pattern forms after A Head and Shoulders reversal pattern forms after

an uptrend, and its completion marks a trend an uptrend, and its completion marks a trend reversal. The pattern contains three successive reversal. The pattern contains three successive peaks with the middle peak (head) being the peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of being low and roughly equal. The reaction lows of each peak can be connected to form support, or a each peak can be connected to form support, or a neckline. neckline.

Head & Shoulders Bottom:Head & Shoulders Bottom: As a major reversal pattern, the Head and As a major reversal pattern, the Head and

Shoulders Bottom forms after a downtrend, and its Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern completion marks a change in trend. The pattern contains three successive troughs with the middle contains three successive troughs with the middle trough (head) being the deepest and the two trough (head) being the deepest and the two outside troughs (shoulders) being shallower. outside troughs (shoulders) being shallower. Ideally, the two shoulders would be equal in height Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a pattern can be connected to form resistance, or a neckline. neckline.

Ascending Traingle:Ascending Traingle: The ascending triangle is a bullish formation that The ascending triangle is a bullish formation that

usually forms during an uptrend as a continuation usually forms during an uptrend as a continuation pattern. pattern.

Descending TriangleDescending Triangle The descending triangle is a bearish formation that The descending triangle is a bearish formation that

usually forms during a downtrend as a usually forms during a downtrend as a continuation pattern. continuation pattern.

Moving Averages:Moving Averages: Moving averages smooth the price data to form a trend Moving averages smooth the price data to form a trend

following indicator. They do not predict price direction, but following indicator. They do not predict price direction, but rather define the current direction with a lag. Moving rather define the current direction with a lag. Moving averages lag because they are based on past prices. averages lag because they are based on past prices. Despite this lag, moving averages help smooth price action Despite this lag, moving averages help smooth price action and filter out the noise. They also form the building blocks and filter out the noise. They also form the building blocks for many other technical indicators and overlays, such as for many other technical indicators and overlays, such as Bollinger Bands and MACD. The two most popular types of Bollinger Bands and MACD. The two most popular types of moving averages are the moving averages are the Simple Moving Average (SMA)Simple Moving Average (SMA) and the and the Exponential Moving Average (EMA)Exponential Moving Average (EMA). These . These moving averages can be used to identify the direction of moving averages can be used to identify the direction of the trend or define potential support and resistance levels. the trend or define potential support and resistance levels.

Moving Averages notes:Moving Averages notes: Used to smooth out price actionUsed to smooth out price action The longer the average timeline used the slower the The longer the average timeline used the slower the

response time to trend change, thus there is a trade-offresponse time to trend change, thus there is a trade-off Used to identify trend direction, support and resistanceUsed to identify trend direction, support and resistance SimpleSimple moving average weights all time data points equally moving average weights all time data points equally ExponentialExponential moving average givers higher weight to latest moving average givers higher weight to latest

data points, thus it is slightly more sensitivedata points, thus it is slightly more sensitive

Bull:Bull: DMA = SupportDMA = SupportBear:Bear: DMA = ResistanceDMA = Resistance

Moving Averages: Advance/Decline Line (A/D Line):Moving Averages: Advance/Decline Line (A/D Line):

The Advance Decline Line (AD Line) is a breadth indicator based on The Advance Decline Line (AD Line) is a breadth indicator based on Net Advances, which is the number of advancing stocks less the Net Advances, which is the number of advancing stocks less the number of declining stocks. number of declining stocks.

A/D Line behaviour in action:A/D Line behaviour in action:

1.1. 2000 Tech Crash2000 Tech Crash

2.2. 2003 Iraq War Rally2003 Iraq War Rally

3.3. 2007 Sub-Prime Bust2007 Sub-Prime Bust

Indicators: MACDIndicators: MACD Developed by Gerald Appel in the late seventies, Moving Average Developed by Gerald Appel in the late seventies, Moving Average

Convergence-Divergence (MACD) is one of the simplest and most Convergence-Divergence (MACD) is one of the simplest and most effective momentum indicators available. MACD turns two trend-effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving subtracting the longer moving average from the shorter moving average. As a result, MACD offers the best of both worlds: trend average. As a result, MACD offers the best of both worlds: trend following and momentum. following and momentum.

Settings: 12 – 26 – 9Settings: 12 – 26 – 9

Format: HistogramFormat: Histogram

Indicators: Stochastics OscillatorIndicators: Stochastics Oscillator

Developed by George C. Lane in the late 1950s, the Stochastic Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesn't follow to an interview with Lane, the Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction or the momentum of price. As a rule, the momentum changes direction before price." before price."

Settings: 14-3-3 and 28-7-7Settings: 14-3-3 and 28-7-7

The major insight that Lane had with stochastics The major insight that Lane had with stochastics was that in a bull move prices tend to close to the was that in a bull move prices tend to close to the top of the range and in bear moves prices tend to top of the range and in bear moves prices tend to close near the bottom of the price rangeclose near the bottom of the price range

He also observed that momentum tends to change He also observed that momentum tends to change before price.before price.

Indicators: Bollinger BandsIndicators: Bollinger Bands Developed by John Bollinger, Bollinger Bands are volatility Developed by John Bollinger, Bollinger Bands are volatility

bands placed above and below a moving average. Volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes a is based on the standard deviation, which changes a volatility increase and decreases. The bands automatically volatility increase and decreases. The bands automatically widen when volatility increases and narrow when volatility widen when volatility increases and narrow when volatility decreases. decreases.

Setting: Normally use the 20 DMA as the centre lineSetting: Normally use the 20 DMA as the centre line

Bollinger Bands consist of a middle band with two Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple average that is usually set at 20 periods. A simple moving average is used because a simple moving moving average is used because a simple moving average is also used in the standard deviation average is also used in the standard deviation formula. The look-back period for the standard formula. The look-back period for the standard deviation is the same as for the simple moving deviation is the same as for the simple moving average. The outer bands are usually set 2 average. The outer bands are usually set 2 standard deviations above and below the middle standard deviations above and below the middle band. band.

Wide Bollinger Bands indicate markets with Wide Bollinger Bands indicate markets with high volatility and strong trendhigh volatility and strong trend

Narrow contracted Bollinger Bands indicate Narrow contracted Bollinger Bands indicate low volatility and range bound markets low volatility and range bound markets

Bollinger Bands work well in conjunction Bollinger Bands work well in conjunction with momentum indicators like Wilder’s with momentum indicators like Wilder’s Stochastics and MACD.Stochastics and MACD.

Trading Triggers would be multi tops, multi Trading Triggers would be multi tops, multi bottoms and line breakouts.bottoms and line breakouts.

McClellan Oscillator

Developed by Sherman and Marian McClellan, the McClellan Oscillator is a breadth indicator derived from Net Advances, which is the number of advancing issues less the number of declining issues.

Subtracting the 39-day exponential moving average of Net Advances from the 19-day exponential moving average of Net Advances forms the oscillator. As the formula reveals, the McClellan Oscillator is a momentum indicator that works similar to MACD. McClellan Oscillator signals can be generated with breadth thrusts, centerline crossovers and divergences.

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_convergence_divergence_macd

McClennan Oscillator: Interpretation

Think of the McClellan Oscillator as the MACD for the AD Line, which is a cumulative measure of Net Advances. Just as MACD puts momentum into the price plot of a stock, the McClellan Oscillator puts momentum into the AD Line. The McClellan Oscillator is positive when the 19-day EMA (shorter moving average) is above the 39-day (longer moving average) EMA. This signals that advances are gaining the upper hand. Conversely, the indicator is negative when the 19-day EMA is below the 39-day EMA.

This signals that declining issues are dominating. Signals typical for MACD apply to the McClellan Oscillator. First, the McClellan Oscillator generally favors the bulls when positive and the bears when negative. Second, chartists can look for bullish and bearish divergences to anticipate reversals. Third, chartists can look for breadth thrusts to signal the start of an extended move.

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:advance_decline_indi

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_averages

McClellan Summation Index

Introduction

Developed by Sherman and Marian McClellan, the McClellan Summation Index is a breadth indicator derived the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues).

The Summation Index is simply a running total of the McClellan Oscillator values. Even though it is called a Summation Index, the indicator is really an oscillator that fluctuates above and below the zero line. As such, signals can be derived from bullish/bearish divergences, directional movement and centerline crossovers. A moving average can also be applied to identify upturns and downturns.

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:mcclellan_oscillator

McClennan Summation: Interpretation

The Summation Index rises when the McClellan Oscillator is positive and falls when the McClellan Oscillator is negative. Extended positive numbers in the McClellan Oscillator cause the Summation Index to trend higher. Conversely, extended negative readings cause the Summation Index to trend lower.

Because of its cumulative nature, the Summation Index is a slower version of the McClellan Oscillator. The index crosses the zero line fewer times, forms divergences less often and produces fewer signals in general. Whereas the McClellan Oscillator can be used for short-term and medium-term timing, the Summation Index is generally used for medium-term and long-term timing.

..

Volatility Index (VIX)Volatility Index (VIX)

IntroductionIntroduction The volatility indices measure the implied volatility for a basket of put and call options The volatility indices measure the implied volatility for a basket of put and call options

related to a specific index or ETF. The most popular is the CBOE Volatility Index ($VIX), related to a specific index or ETF. The most popular is the CBOE Volatility Index ($VIX), which measures the implied volatility for a basket of out-of-the-money put and call which measures the implied volatility for a basket of out-of-the-money put and call options for the S&P 500. Specifically, the VIX is designed to measure the expected 30-options for the S&P 500. Specifically, the VIX is designed to measure the expected 30-day volatility for the S&P 500. The Chicago Board Options Exchange (CBOE) calculates day volatility for the S&P 500. The Chicago Board Options Exchange (CBOE) calculates volatility indices for a number of different ETFs and indices. These include the Gold volatility indices for a number of different ETFs and indices. These include the Gold SPDR, the USO Oil Fund, the Euro Currency Trust, the Dow Industrials, the S&P 500 SPDR, the USO Oil Fund, the Euro Currency Trust, the Dow Industrials, the S&P 500 and the Nasdaq 100. This article will focus on using the VIX. Chartists can use the VIX and the Nasdaq 100. This article will focus on using the VIX. Chartists can use the VIX and other volatility indices to measure sentiment and look for sentiment extremes that and other volatility indices to measure sentiment and look for sentiment extremes that can foreshadow reversals. can foreshadow reversals.

VIV: Volatility IndexVIV: Volatility Index

InterpretationInterpretation Typically, the VIX has an inverse relationship to the stock market. VIX advances when Typically, the VIX has an inverse relationship to the stock market. VIX advances when

stocks decline and declines when stocks advance. It seems that volatility would be stocks decline and declines when stocks advance. It seems that volatility would be immune to market direction, but the stock market has a bullish bias overall. A rising stock immune to market direction, but the stock market has a bullish bias overall. A rising stock market is viewed as less risky, while a declining stock market carries more risk. The market is viewed as less risky, while a declining stock market carries more risk. The higher the perceived risk, the higher the implied volatility. Hence, this implied volatility is higher the perceived risk, the higher the implied volatility. Hence, this implied volatility is very susceptible to directional movement. A down swing or extended decline increases very susceptible to directional movement. A down swing or extended decline increases the demand for the demand for put options, which in turn increases put prices and the implied volatility. , which in turn increases put prices and the implied volatility. Puts are bought as a hedge against long positions or as a directional bet. This is why Puts are bought as a hedge against long positions or as a directional bet. This is why many analysts consider the VIX a coincident indicator. It moves when stocks move, not many analysts consider the VIX a coincident indicator. It moves when stocks move, not independently of stocks. In fact, VIX can be used as a trend-confirming indicator because independently of stocks. In fact, VIX can be used as a trend-confirming indicator because it often trends in the opposite direction of the stock market. Despite a tendency to trend, it often trends in the opposite direction of the stock market. Despite a tendency to trend, the VIX can also trade in ranges that mark sentiment extremes. These extremes can be the VIX can also trade in ranges that mark sentiment extremes. These extremes can be identified to anticipate stock marketidentified to anticipate stock market

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