Financial Zip

For those of you interested in stocks and trading stocks be aware there are a number of ways to analyze a stock. You have a fundamental side which really is understanding the basic business and how strong the company is. The earnings, the numbers. But there is another side which I like to call the technical side.

The Technical Side

This is all about learning charts and for me I am a very visual person so I like looking at something that I can see. I am a nut about looking at these things because they are able to reveal patterns that you can’t see with just numbers. Stocks have a very psychological side to them. Greed, fear, enthusiasm all have apart in the market place and it reveals it’s self in a chart. So what I really want to do here is illustrate some very straight forward ways to interpret a chart and what it means so that you can look at it as a picture and say well this looks like a good time to get in, or maybe I should wait.

The Basics

Some of the basic things that we have to go over first are the idea of trends, support/resistance, moving averages and volume.

Trends

Trends indicate something that has a pattern of doing something. In the case of stocks you like to see stocks climbing. So day after day month after month the stock continues to go climb upward. The other side of things is when the trend is down. The stock keeps dropping. Generally the rule with trends is never trade against the trend. If you have a stock continuing to climb you want to trade in that direction. The psychological aspect of a trend is that most people if it is in an uptrend tend to be positive about the stock so they like to see the price go up and will continue to buy it..

Support/Resistance

Stocks tend to settle into price ranges and bounce of what is called support and resistance. A support line is when the stock drops to a certain price and moves upward off that price. Resistance as you guessed it is when the stock can’t seem to break through that price. The funny thing about support or resistance is that a support can become resistance for a stock and resistance can become support once it breaks through.

Moving Averages

A moving average is just that an average. The biggest 2 I like to use is the 50 day moving average and the 200 day. These are big ones that a lot of traders use. The 50 day just averages out 50 days of prices and give you an average price, and they represent that with a line Same with the 200 day moving average. Add up 200 days of prices and then take the average. 3 things you need to know about a moving average when a 50 day crosses down below a 200 day average it is a very bearish sign. The other way around is bullish the 50 day moving above the 200 day. Also a good rule on a upward trending stock is to buy when it bounces of the 50 day. Because it can act like kind of support for the stock to move higher.

Volume

Volume plays a key role in defining if the stock is in a good area to buy. If you see a stock move up on strong volume and the trend is up, the moving average is moving up and it is breaking through a resistance it can mean that the stock is ready to make a big move. Volume tells us how interested people are in trading that stock in that particular day.

The Indicators

People want to know when to buy and when to sell. There is no magic equation that tells you when to buy and when to sell. But with technical analyses you can get a good picture with the basics above and then 3 indicators that are heavily used. The RSI or the Relative Strength Index, The MACD The Moving average Convergence/Divergence, and the Slow Stochastic’s.

RSI

The Relative Strength index is a indication of momentum. It takes all the up days and the low days for the stock over 14 days and gives you a number. Now the RSI is measured form 0 to 100. But the key numbers are 30, 50, and 70, If a stock is at 30 and starts to move up it is considered a bullish move, the 70 if it is above and moves below is considered bearish and you might consider selling. The 50 is the middle if you see a move above the 50 it indicates some good upward momentum if it moves below 50 then its considered a bearish move.

Considered Buy points for the RSI 30 and moving up and moving above the 50.
Considered sell points for the RSI 70 and moving down and moving down below the 50.

MACD

The guy that created the MACD won a noble prize for it because it is so reliable. A lot of traders use it because of that reason. All you need to know for this indicator is that when the black line crosses up it is a buy signal. If it crosses below sell. The MACD has a 0 line if you see that that line being crossed up it can be very bullish sign crossing below at 0 a bearish sign.

Slo Stochastic’s.

Again the math behind this thing is complex and I don’t like math. So what you need to know with this indicator is that it represents when the stock is oversold and when it is over bought. It has 2 numbers that are important 80 and 20. What you are looking for on this indicator is when the black line crosses up or down. If the line is at 80 and moves down it means that people in the market feel it is time to start selling the stock so it might be a great time to get out of the stock. If you see it move above 20 it means that the stock has been sold enough and people are willing to start buying it again. That might indicate a buy point.

Putting it Together

Like I said in the beginning using all these things the trends, moving average, the indicators is all about painting a picture. With the indicators you want to see them line up fairly close it doesn’t have to be exact but close is good. Then look at the the other things. Is it in an uptrend what is the volume doing where is the price in relation to it moving average. So we will go over a stock that we can analyze.

So lets Analyze this stock. This stock is Potash and agricultural company that makes a product called potash used in fertilizer and so it has been a very good strong stock

• The first thing to ask is what is the trend the trend as we can see is has been moving up steadily over the last 80 months.
• Where is the current support/resistance since the April it has found that support line at about $190 it has move below and then above that number on 2 occasions.
• The moving average it is currently moving upward and we can see it has bounce of its 50day moving average a good time to buy generally.
• Volume. It had strong volume the day before so people seem to be interested in it.
• The Indicators.
• RSI The RSI is at 50 and it has curved upward and is looking like the momentum is strong and can indicate a good buy opportunity.
• MACD The MACD has not crossed, but you see a curve up which is a good sign.
• Slow Stochastic’s. The slow stochastic’s has crossed up at 30 so this indicates a good buy signal.
• Overall. With all the indicators and trends showing some very positive signs this is a stock technically which is at a very good point to buy.

Conclusion

Technical Analysis is an art and it takes some time to develop so if you have just started trading a good idea is to practice by going to www.stockcharts.com and practice drawing on the charts. Under the chart is annotate click on that and you should be able to draw on the chart. Also practice paper trading in conjunction with your analysis. You can set paper trade accounts up at Investopedia and Options Express. Then start to practice trading and your technical analysis.




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