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Technical analysis (TA) is the interpretation of data present in stock charts. Although the basic assumption of future price movements being dependent on past price movement is never certain, many traders use TA as their primary means of making tactical buy and sell decisions.
The daily moving average is a popular technical indicator. Many readers wrote in about their use of moving averages. Here is a good example, sent in by Mark T.
For the big picture, I look at earnings momentum as well as sales. If the company looks solid (and I DO rely on the recommendations of major brokerages houses and Briefing.com), I look at its technicals--price more than volume. If a solid company has dropped well below its 50-day moving average (like 20-25%), and it appears to be forming a base there, I buy it. If there is no base evident, then I probably would wait until it breaks above the 50 dma. If a stock is below the 200 dma, I do not buy. For the exact day to buy, I may use stochastics.
This methodology works best for stocks that are stuck in trading ranges. For a stock that is headed straight down, it obviously will not work. This is the reason that Mark T. avoids stocks that are below the 200-day moving average.
Another popular technical analysis method is to look for broken downtrends. There are numerous ways to "see" a broken downtrend, but all are based upon the assumption that the stock has fallen more than it should have. If you can develop a reliable method of determining when the downtrend has truly been broken, this tactic can be very effective.
Michael B. sent in an example of how he uses support lines to determine when to buy.
I always trade on technicals and invest on fundamentals. While sound fundamentals are open for interpretation, technicals are not. My favorite technical strategies:
1: Buying when a downtrend is broken on high volume. This is usually the start of a bigger move. You will also get some great bull flags off of this situation, and that is my favorite pattern.
2: Support/Resistance Lines. I rarely lose when buying against support, or selling when the support is lost. The 2 things to watch when using an S/R Line is a Bull Flag pattern and the 50 DMA. If the 50 dma turns up as the stock moves towards the resistance, then there is a good chance it will break through and go higher. Many times, it will bump its head on the resistance line and form a bull flag pattern. (a few days vertical, followed by a sideways trend) Ideally, the bottom of the flag will touch the rising 50 dma, hold, then blow through resistance. When resistance clearly becomes support, I like to buy more stock. I'll sell if the new support is broken.
Determining when "support is broken" is another technical analysis technique that varies by practitioner.
(Actually, you might get an argument from us about "fundamentals are open for interpretation, but technicals are not," but differing opinions are what make a market.)
Another technical tactic is looking at moving averages of differing duration, and making a buy decision, based upon the interaction of the two lines, as suggested by Steven Groom.
I focus on the best companies in the leading industries and industry groups moving up through the ranks. This information I find from Investor Business Daily and their online service Daily Graphs. I download the databases and filter and sort until I have stocks with RS [Editor note: Relative Strength] and EPS greater than 90 in the top ten industry groups. Then the stocks are further filtered based on EPS and Sales growth rates, Market Caps greater than $500M, average daily volume greater than 100,000 shares. Stocks are placed on watch lists using eSignal with high/low prices and volume alerts placed on each. By this time I have approximately 100 stocks. Trading is completely based upon simple TA indicators, 5/15/50/200 EMA and volume. Buying is based upon the 5 EMA moving up through the 15 and 50 EMA, with at least 25% increase in daily volume. The alerts in eSignal normally indicate these price moves. Selling is based upon the reverse and I always sell a stock if it falls 7% below my purchase price.
Selling a stock that falls 7% is a serious mistake, if buying on an investment premise, but on a trading premise, as above, it's simply "admitting a mistake."
There is no such thing as a "certain" method of making money.
If there were, all the money would migrate to the person who possessed that knowledge.
Nevertheless, it is often worth considering the tactics of your fellow traders, particularly if you are a TA trader, as all of us can always learn something new.
Robert V. Green