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Georgia Bard

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Alias Born 08/30/2000

Georgia Bard

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Sunday, 12/17/2000 11:39:30 AM

Sunday, December 17, 2000 11:39:30 AM

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Charting: The Newest Bubble? Part 2

Regardless of the approach (Fundamental or Technical) to the markets, it is ultimately important to be familiar with why markets exist in the first place. The primary function of any market is to provide a vessel for price results. Understand that investors and traders determine the prices of stock. Any stock’s market is merely a consideration of the investors and traders response to fundamental information and yes, even technical. Also the stock price and volume are susceptible to the two ever-present emotional influences, fear and greed.

The bottom line is that each investor or trader if they are going to day trade or chart must evaluate a chart analysis independently and draw their own personal conclusions. An understanding of charting concepts is basically a prerequisite for developing profitable technical trading system.

Charts provide a concise historical price, volume and behavior of the security, thus they assist in establishing a good feeling of the market's volatility. This is a key component when taking into consideration and assessing the risk factor or tolerance. Charts reflect market behavior that is subject to certain repetitive patterns, given sufficient experience and thus can be used as a vital tool to define meaningful and realistic stop points. Even fundamentalists can use charting as a timing tool.

Basically, charting has something to offer everyone, from skeptics to believers. Many market participants use a combination of fundamental and technical analysis. I, myself, have been and present am in the process of determining what works best for me. Most know I started out as a strict fundamentalist, subscribing to the theory that solid fundamentals are what keeps a ship a float.

However with the market correction, I quickly realized that I was ignoring a very large (and growing) segment of traders, all of whom had an impact on market movement. Day traders or rather chartist, of which there are so many gurus, I had to shift some of my focus to the technical approach to see if it offered any credence to these gurus. The main reason was because when I read the technical postings I did not have a clue what they were saying.

Also Chartist are like Democrats and lawyers, put 15 of them in a room and you will get 20 different readings. The main reason is all 15 probably do have the many different variables set the same. Each chartist uses some or all of the various indicators and each one has a separate set point so each one can be adjusted to fit the chartist experience of what works best for them. I am going to try and provide some basic definitions for those who aren't familiar with the technical terminology.

Remember that I am not a chartist or technical analysis, I am a fundamentalist so I will do my best on these key indicators. Also this is just some of the terminology. The settings used are just recommendations from chart sites, please note the experienced chartist never gives out their historical set points they are comfortable with and have set to their charts. Thus different readings by difference chartists.

Oversold - merely infers that the security has fallen too far too fast and may be due for a reaction rally

Overbrought - merely infers that the stock has risen too far too fast and might be due for a pullback.

RSI - Relative Strength Index – Momentum Indicator A ratio of close-up intervals vs. close-down intervals over n-intervals (14 days typically). This charting indicator was developed by J. Welles Wilder Jr. to measure the velocity of directional movement. RSI is often used to identify price tops and bottoms by designating specific levels, usually 30 for oversold by investors/traders and 70 for overbought by investors/traders on a chart, which is scaled from 0 to 100. Somewhere I saw where it was recommended to use 14 days to calculate a securities’ RSI but due to the wide range in volatility from one stock too another. Thus the charter using this oscillator (fluctuation indicator) should experiment with various numbers to find the appropriate setting for a given security. Divergence or difference between the RSI and stock price often indicates a possible correction.

Stochastics – Momentum Indicator – A ratio that determines where the most recent closing price is in relation to the price range for an n-interval period (9 –20 days typically). Two lines are plotted, a "fast" dotted line (%K) and a "slow" solid line (%D). Whereas the %D “slow line” is a 3-period moving average of %K “fast’ line. Stochastic was developed by Dr. George Lane whose theory behind the Stochastic indicator is that when a stock is rising it tends to close near the high and a falling stock closes near it's low thus this is plotted as two lines. So a bullish signal (buy) occurs when the %K “fastr” dotted line rises through the %D solid line when it is below say 20. A bearish signal (Sell) occurs when the %K dotted line goes under the % D above say 80. Dr. Lane believes the most important signal occurs when the %D “slow” solid line and stock price diverge. This is often seen when a stock makes a new high and the %D clearly fails to reach or better it's old high. Conversely, a stock is publicly oversold and ready to reverse when the stock price makes a new low however, the %D “slow” line fails to confirm that low.

MACD - Moving Average Convergence/Divergence – Buy/Sell Signal Indicator – This indicator consists of two lines. The first line, which is the MACD line, is the difference between the long-term moving average and the short-term moving average. The second line is the signal line that is the short term moving average of the MACD line. The MACD is a good medium term indicator developed by George Appel. His primary desire was to see the signals when overbought and oversold conditions were occurring by measuring the intensity of public interest. Thus he use the crossover of the fast moving average through the slower moving average to arrive at buy or sell signals. MACD can be especially valuable when used in conjunction with a momentum indicator such as Stochastic or RSI. The settings are in days so first is the “fast” Exponential Moving Average (expMA), second is the “slow” expMA & the third is the ‘trigger” expMA. Remember, MACD is a sensitive indicator of public interest and some chartist believe 8-17-9 MACD is best for entering long positions and 12-25-9 MACD for exiting them. Of course this has to be adjusted to match what works best for the individual chartist.

OBV - On Balance Volume – Volume Indicator - The concept behind the indicator: volume precedes price. Some chartists typically start with 50,000 and adjust it as they become familiar with the indicator and how it works exactly. Thus the OBV is an accumulation of volume where the current interval's volume is added to the total if the stock closes up, and today's volume is subtracted from the total if the stock closes down. OBV appears to be a very popular indicator developed by Joseph Granville. Basically OBV is a running total of volume that reflects accumulation or distribution. Each day's volume is assigned a positive or negative value depending on whether prices closed higher or lower that day thus a running total is kept by adding or subtracting the volume depending on the direction for the day. The direction of the OBV line is a chartist watches not the actual level. This indicator is so popular because it will often confirm underlying strength or weakness of a price trend. I like this one because I refer to it as smart money vs dumb money indicator. I have always said you want to buy went big money is buying and sell when big money is selling. The OBV will often signal that a top has been reached by declining, while the stock is still rising. Simply dumb money is entering, but could indicate smart money is leaving the stock. Conversely, a rising OBV in the face of a declining price trend or an OBV that refuses to confirm a new stock reaction low could indicate smart money is moving in and a bottom may be at hand where dumb money is still exiting.

Williams %R - Price Extreme Indicator - %R is an index that determines where the most recent closing price is in relation to the price range for an n-interval period (14 days typically). It was created by Larry Williams to identify overbought and oversold conditions based on today's price in relation to past prices. %R has an excellent ability to anticipate price extremes and many times forms a top or bottom and reverses days before the securities does. The chart is read upside down with peaks designates as lows on the %R scale. Oversold readings occur in the 80-100 range and overbought readings in the 0-20 range.

ROC - Rate of Change – Price Indicator - This is used to measure momentum by comparing today's price with the price "X" number of days ago. Basically, some chartist feel 16 days is the optimum for calculating the ROC and 8 for the moving average. What it does is calculates the market's change from the current interval's price vs. price n-intervals ago. The result is a percentage ROC can be a valuable timing tool to aid in adding to or establishing new positions when used with its moving average. Long positions can be entered when the ROC goes up through it's moving average after the moving average has come back to a neutral area. Short positions can be considered when the ROC penetrates on the downside, it's moving average that has come back to a neutral area.

Instead of following a chartist people who are interested should take the time to learn a little about charting. It is not going to happen over night but you can at least paper trade and make a chart say at http://www.clearstation.com or http://www.bigcharts.com to adjust the variables and verify if a chartist is being forthright or is being a shepherd fleecing the flock.

The more edumacated you become the better the chances are you can avoid the scalping shears of a good technical fleecing by an interdomus.

Hey I did my best and I could be wrong.

Gary Swancey


:=) Gary Swancey

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