TECHNICAL ANALYSIS 101(zz)

oldfairy

Written by Chip Anderson


Chart Analysis - Support and ResistancePrices are driven by two of humanity’s strongest emotions: Fear and Greed.  When more investors are fearful that a stock will fall, it does!  It will continue to decline until the balance between Fear and Greed is re-established.  The same is true for greed and rising prices.  This phenomenon is referred to as “Market Psychology.”
Support is the price level where “greedy” buyers enter the market to prevent prices from declining further.  Support can develop at a specific price or more commonly in a price zone.  Areas of support can exist for many months at a time.

The diagram above illustrates how market psychology causes the previous area of price support to turn into resistance.   After breaking support, traders who bought in the zone of support are now holding losses and want to sell as soon as prices approach their original purchase prices in order to break even.   


The Volume by Price overlay (volume traded in incremental price ranges) in the following SharpChart of Dover Corp illustrates how strong support at 46 later became significant resistance as greed turned into fear.

The concept of resistance is opposite of the support as discussed above.  Resistance is the price level where “fearful” sellers suddenly come into the market and prevent prices from advancing further.  Like support, resistance can develop at a specific price or in a price zone and can be held for months at a time.

If resistance is broken, market psychology causes the previous area of price resistance to turn into support.  The diagram above illustrates this market behavior.  Stock holders who sold in the zone of resistance are now regretting selling and want to buy as soon as prices approach the level they sold at earlier.  Prices that seemed too high before now look like a bargain.  The following SharpChart of Parker Hannifin Corp. illustrates resistance later becoming support.  Notice how Volume by Price indicates the potential number of previous sellers willing to buy again if given the opportunity.

oldfairy

Line ChartsLine charts are created by plotting a line between the closing prices for each period set on the chart.  On a daily chart, a line is plotted between the daily closing prices.  Line charts are useful to help visualize the direction of prices.  The extent of rallies and reactions in trends can also be quickly deduced.  

  

A five month price SharpChart of Apple, Inc. (AAPL) is plotted above in a line format.  Higher highs and lows are annotated with green dashes and lower highs and lows with red dashes.  Between March and mid-May 2008, the direction of prices is readily apparent with higher highs and lows.  After mid-May 2008, prices began to make lower highs and lows.
A line chart is plotted by default when only end-of-day (closing) prices are available for a symbol.  Examples of such symbols include all mutual funds and some market indices.  However, weekly and monthly price bars can be charted for ticker symbols with only end-of-day (EOD) quotes.
OHLC ChartsOpen-High-Low-Close (OHLC) bar charts provide volatility information that line charts lack.  The attributes of an OHLC bar are shown below.  The chartist can evaluate volatility by the height of the bars and the conviction of the buyers and sellers by the price range between the open and close marks.  

For the left price bar, the CLOSE mark is above the OPEN mark indicating price ended higher for the day, known as an up day.  This price bar is considered bullish.  Bullish sentiment is present when greed for gain exceeds fear of loss and prices move higher.
With the price bar on the right, the OPEN is higher than the CLOSE indicating price ended lower for the day, known as a down day.   This is a bearish price bar.  Bearish sentiment is present when fear of loss is greater than greed for gain and prices move lower.

The SharpChart of AAPL above illustrates the OHLC format.
Notice how intraday price swings pass through the red and green reference marks made at the closing price levels on the previous Line chart.  This illustrates why line charts are useful for visualizing price direction.
OHLC Bar Colors

When the ‘Color Prices’ option is selected on the Chart Attributes workbench, the price bars will be colored black or red, depending on how a price bar’s closing price relates to the previous day’s closing price.  If the closing price is higher than the previous day’s closing price, the price bar will be black.  If the closing price is lower than the previous day’s, the price bar will be red.  With this convention, it is possible to have a black price bar with the close being lower than the open.

  

Colored OHLC price bars are shown in the AAPL SharpChart above.  As discussed earlier, the color of the price bar is only based on the previous day’s closing price, not the current day’s opening price.  ‘Up day’ and ‘down day’ price bars are usually black and red respectively, but that is not always the case as shown in the chart above.

oldfairy

Candlestick ChartsCompared to traditional OHLC bar charts, many traders consider candlestick charts more visually appealing and easier to interpret.  Each candlestick provides an easy-to-decipher picture of price action.  An analyst can quickly see compare the relationship between the opening and closing price as well as the high and low price.  

The graphic above shows how candlesticks are constructed.
Candlesticks with hollow bodies indicate buying pressure and filled bodies indicate selling pressure.  Long upper or lower shadows form when the market moves significantly in a particular direction during the day and then reverses before the end of the day.  As a result, long lower shadows can infer bullishness while long upper shadows can infer a bearish market.

Candlestick Colors

When the ‘Color Prices’ option is selected on the Chart Attributes workbench, the Candlestick’s outline and  body be colored black or red, depending on the candlestick’s opening and closing prices and the previous day’s closing price.  
If the closing price is higher than the opening price, the body will be displayed hollow.  If the closing price is lower than the opening price, the body will be filled red with the following exception; if the closing price is higher than the previous day’s closing price, the body will then be filled black.
The candlestick’s shadows and body outline are colored black or red depending on the closing price compared to the previous day’s closing price.  If the closing price is higher than the previous day’s, the candlestick’s shadows and body outline will be colored black.  And the candlestick’s shadows and body outline will be red if the closing price is lower than the previous day’s closing price.
Market psychology is reflected in each of these candlestick formations in the following ways.
Up Day, Higher Close; typically results from expectations of higher prices (greed) out weighing expectations of lower prices (fear).  The length of the candlestick body shown indicates especially strong buying.
Down Day, Lower Close; expectations of lower prices (fear) are stronger than those of higher prices (greed).  As with the first candlestick, a longer candlestick body infers greater urgency of investors to sell their shares.
Down Day, Higher Close; a rare candlestick, this one begins with an opening gap up in price from the previous day’s closing price but closes down for the day.  A gap is defined as a price range where no trading takes place and is the result of a significant change in demand (gap up) or supply (gap down) before trading begins for the day.  In this case, heavy buying at the beginning of the day reversed but still closed higher than the previous day.  This is a bearish sign when it occurs well into an upward price move.
Up Day, Lower Close: another rare candlestick, this one begins with an opening gap down in price from the previous day’s closing price but closes up for the day.  This price action can be considered bullish during a downward price move since initial strong selling in the day becomes exhausted and buyers push the price higher at close.

The SharpChart AAPL above illustrates the candlestick format.  The up and down days are readily apparent with the use of candlestick charting.  When the balance between buyers and sellers change, candlesticks often form recognizable patterns signaling the change.  These candlestick patterns will be discussed in a later article.
Below, you can see how the three types of charts compare visually:

oldfairy

Chart ScalingCharts are created with one of two different kinds of vertical price scales.  An arithmetic scale evenly spaces price along the right side of the chart.  Arithmetic chart spacing between $10 and $20 is half as tall as the spacing between $20 and $40.  A log scale evenly spaces price in percentage terms.  Chart spacing between $10 and $20 has the exact same chart spacing as between $20 and $40 since they represent the same percentage increase.  

The SharpCharts above illustrate the differences between the two scaling methods.  On the arithmetic scale, three different trend lines were required to keep pace with the price advance.  On the log scale, the trend line fits the price trend during the entire rally.  Log scaling should be the first scaling choice when using trend lines, especially over long time frames.


VolumeStockCharts.com provides several ways to plot volume data on a chart.  The following price and volume SharpChart of AAPL illustrates how volume is typically plotted.
Volume can be plotted in an ‘indicator panel’ above or below the ‘price plot area’ or in the price plot area as an ‘overlay’.

  

   
When the ‘Color Volume’ option is used, the volume bars are shown as black for up days and red for down days.  Color volume bars allow the chartist to quickly see where heavy or weak buying and selling activity is happening.


CandleVolume ChartsCandleVolume charts are similar to candlestick charts except that each candle's width is proportional to its corresponding volume value.  This charting style allows one to visualize the volume activity ‘in’ rather than ‘below’ price moves.  Depending on the style of analysis, volume bars could be omitted to simplify the chart.

The time axis for these charts is not uniformly spaced since the candlestick bar widths vary with volume values.  As a result, trendline analysis using CandleVolume charts should always be confirmed with a standard candlestick or OHLC chart.  The SharpChart above of AAPL shows how volume bars correlate to the candlestick widths.

icc

sofa?

Thanks!

gege88

给小青蛙我上课喽， 谢谢

derf

thanks