Chart Analysis

January 29, 2016


What is this $SPY chart telling traders?

Many traders believe that chart analysis, also called technical analysis (TA), is just tea leaf reading. An imaginary technique where the chartist is seeing what they want to. After a few of years of being a chartist myself I can report there is a science behind chart reading. Various indicators tell you whether a chart, and ultimately the pps, shows buyer or seller sentiment.

This post will give basic links to some starts in TA. You should pick an indicator a day or once a week to become familiar with and then test it on your favorite ticker charts. Given the time and effort to study how to use TA I feel you will start to see trends that other traders do not. A whole new perspective developed and your view of trading won’t be the same.

My goal is to find and bring to you free TA resources. There are many paid options that I’ll leave to you to invest in. I feel testing and learning on your own with free resources can be just as valuable as spending money to learn.

of free and paid technical analysis (TA) services including:

+ Charting

+ Technical Overlays, Indicators and Oscillators

+ Technical Scans

+ Technical Blogging

+ Overviews of Financial (FA) and Technical (TA) Analysis

Read these before using ChartSchool:

Here are my favorite free services:

TA Cheat Sheet

I’m going to add a quick cheat sheet of momentum and other indicators and the values I expect. First, you need to know what oversold and overbought mean. Oversold means chart indicators are pointing to too many traders have sold and the trend will reverse soon. Overbought means the opposite with too many buyers having bought making the pps uptrend unsustainable with correction expected soon. Some use only 1 or 2 indicators solely, while I like to use many for a “stars align” feeling.

I mainly utilize PSAR, DMI with ADX, and CCI TA indicators to save time.

Candlestick pps presentation shows the opening and closing pps info as well as the day’s pps range.

Volume. It is said volume proceeds price, unless everyone is selling…

MA = Moving average. You want a smaller day MA to be crossing or over a larger day MA. Such as the 8MA over the 32MA.

BBs = Bollinger Bands. The tighter the bands the more it is expected a pps uptrend will occur. Pps candles trading above the dotted neutral line is bullish (buy) while riding below is bearish (sell). Pps candles riding above the upper BB means overbought. Pps candles riding below the lower BB means oversold.

PSAR = Parabolic SAR. A PSAR dot below a pps candle signals buy while a dot above signals sell.

Ichimoku Cloud = pps estimated movement. Pps candles above clouds signals buy, below clouds signals sell, and riding in clouds signal flat trading estimation. Green clouds are based on 26 and 9 MAs and move faster than red clouds which are based on 52 week MAs. Cloud movements of green (support) and red (resistance) can note trend reversals. This is a complex overlay that a trader could devote trades solely off of.

ADX/DMI = Average Directional Index with Directional Movement Indicator. A more sophisticated indicator, ADX tells a chartist if a trend is weak (below 30) or strong (above 30) while making sure the +DM is on an uptrend and above the -DM to signal a buy trend.

CCI = Commodity Channel Index. Values above 0 signal buy. Oversold is a value below -100 while overbought is signaled with values above +100.

RSI = Relative Strength Index. Values above 50 mean buy. Values above 70 mean overbought while values below 30 signal oversold.

CMF = Chaiken Money Flow. Bars above the neutral line signal buyer pressure while bars below signal seller pressure.

MACD = Moving Average Divergence/Convergence. Looking for the MACD line to be above the MA line and rising above the threshold bars signals a strong uptrend.

Acc/Dist = Accumulation and Distribution Line. This indicator should be uptrending to signal many buyers are holding versus selling occurring. A dipping Acc/Dist signals sellers are in control.

MFI = Money Flow Index. Values above 50 mean buy. Values above 80 mean overbought while values below 20 signal oversold.

OBV = On Balance Volume. Said to indicate large buying volume. This indicator should be uptrending to signal many buyers are holding versus selling occurring. Similar to Acc/Dist.

ROC = Rate of change. Basically, an uptrend above 0% signals buyer pressure.

The general rule I use with all of these indicators is to see an UPtrend in the lines or trend lines, except PSAR. You will want to look at charts from 3-Month and 6-Month to see how strong the trends have been in the past with a chart to isolate those indicators that haven’t been reliable in the past periods.

I recommend becoming very familiar with each chart indicator one at a time. As you become familiar with each you can utilize more or less according to historical trends, your comfort level, and various situations such as news springing from the company. A few situations will render chart reading obsolete for a day or week: A large group is alerted to enter a ticker; the company issues positive business news; a major contract is signed; a large shareholder decides to exit; and etc.

Here are a series of 6-Month charts on $MNTR, an OTC QB at the time, with my TA from the cheat sheet above.

This first chart shows a 200 and 50 MA with PSAR overlay over a candlestick chart. RSI, MACD, CMF, and volume are included. On 1/21/14 you can see the 50 MA crossed above the 200 MA, and the pps went on a strong uptrend.

The PSAR has been a good indicator of buy over the mid-term despite mini pps corrections along the uptrend from 1/21 to 3/14/14. The PSAR can lag a day or two as evidenced by the PSAR dots above the candles 3/14 when the downtrend really started 3/17, but when PSAR moved up the candles the sell signal was right.

Note how the candles were just touching the 200 MA on 4/10/14, and this bounce off the 200 MA on 4/11 is a very bullish indicator.

The RSI signaled oversold with a value below 30 on 4/10/14. Notice the large candle on 4/11 with RSI uptrend starting. Historically, the RSI has been a good indicator of oversold as the pps corrects temporarily each time it hits 70 along the pps uptrend from 1/21 to 3/14.

MACD came alive 1/21/14 with a large pps spike shown in the large candle body. You can see MACD was signaling overbought around the time the pps corrected on 3/14 as the MACD line hit 1.5. Note the sharp MACD line dip below the red MA line on 3/17 which indicated a strong sell signal. MACD just starts to spike upward on 4/11 but caution of a sustained pps uptrend until MACD is above the threshold bars.

CMF has been below the neutral line since 3/17/14. Notice how CMF is starting to return to the 0 line on 4/11. A cross above the 0 line would be bullish.

The second chart keeps the 200 and 50 MA overlay but BBs, Acc/Dist, MFI, and OBV have been added.

The BBs have been wide mainly, even before the pps jumped above $1. A switch to the Nov 13‘ through mid Jan 14‘ would show BBs wider than including in a chart with large change in pps. Between 2/10–2/24 you can see the BBs were at the tightest and the result was a nice pps breakout from 2/24–3/17. The candles never dropped below the lower BB to signal oversold before the 4/11 pop.

Acc/Dist has been following the pps trend. Notice the sharp decline on 3/17/14 however. This could have been telling in regards to the pps downtrend from 3/17 to 4/10.

OBV has followed the pps trend as well, though not as sharply. This is inherent in the averaging used in the OBV line plotting. Large volume changes would effect OBV more drastically such as on 2/24 and 4/11. Notice how Acc/Dist predicted the pps correction before OBV, but both predict the downtrend nonetheless.

MFI has been a good predictor of overbought on this 6-Month chart, but not of oversold. Notice on 4/1 and 4/7 how the MFI was below 20 yet the pps just traded sideways instead of uptrending. This is one reason I check the historical trending of an indicator before relying heavily on it.

The third chart adds the 8 and 32 MA as well as the Ochimoku Cloud overlay, ADX/DMI, CCI, and more clear volume bar set.

Notice how the pps candles cross below the 8 MA on 3/17/14 before majorly correcting for a few weeks. This was a major bearish signal. It’s not until 3/30 that the 8 MA drops below the 32 MA, and if a trader wasn’t out by then it was definately signaling get out then. Like the 50 and 200 MA, the 8 and 32 MA signaled buy on 1/20.

The Ochimoku Cloud was predicting support between 4/4–4/7, but the candles break below the cloud triggered a sell signal. I feel in this chart the Ochimoku Cloud loses it’s estimation ability until the next correction on 4/11 plays out longer.

The ADX/DMI had signaled by on 1/21 when the ADX began a strong uptrend and the +DM crossed above the -DM. Between 1/21 to 3/17 the +DM stays above the -DM with a pretty consistent 30 ADX line signaling a strong trend. By 3/17 the +DM dips below the -DM and the ADX line dips signaling trend reversal (sell). On 4/11 the ADX/DMI signal are attempting to become clearer but it is too soon to read exactly what signal will prevail- buy or sell is confused due to lines meeting.

The CCI has been a fairly good indicator of overbought and oversold. Notice more extreme values past 100 and -100 have predicted pps changes. CCI has followed closely with pps movements. Between 4/9 to 4/11 the CCI signaled oversold and the 4/11 bounce wasn’t surprising.

The clearer volume bars show what was described earlier- strong interest has been in this ticker since the $1 crossing.

The final fourth chart adds the 10 and 50 MAs, price change, ROC, and Williams R.

Just like the other MAs noted before, the 10 MA crossed above the 50 MA on 1/21/14 and fell below on 3/17. The candles fell below both MAs 4/1 which was a very bearish signal.

ROC was sporadic in the first pps spike around 1/21/14. Since, it has moved slightly with the pps uptrend, downtrend, and then spike on 4/11. You generally want to see ROC above 0% for a buy signal.

The other two indicators I place as filler indicators.

I haven’t touched on support and resistance yet, so here it is quickly. Support is the general pps where a downtrend can be halted, as chart history or MAs show. Resistance is the pps needed to be broken to allow an uptrend to continue. MNTR’s support appears to be $1.40-$1.50 and resistance at $3.91. Breaking above MAs at this point would be other resistances.

If you’re short on time to create and analyze charts there are two other options I have tested to be fairly accurate in the short-term: Barchart and American Bulls.

Barchart offers free trader resources, TA, financial analysis (FA) and other features and scanners. A mobile app is also available.

Here’s MNTR’s analysis:

16% Buy overall; 0% hold short-term; 25% buy mid-term; and 67% buy long-term</a>.

American Bulls use strictly candlestick analysis and offers candlestick training. The current fee is $50/month to join and view site content.

Thank you for reading. I hope this post introduces you to TA concepts and sparks your interest to learn more and start analyzing charts. Happy trading!

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