Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. In its purest form, technical analysis considers only the actual price behavior of the market or instrument, based on the premise that price reflects all relevant factors before an investor becomes aware of them through other channels. Technicians say that a market's price reflects all relevant information, so their analysis looks more at "internals" than at "externals" such as news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior - hence technicians' focus on identifiable trends and conditions.
Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's technology will revolutionize its industry, therefore this stock will skyrocket" – these are all examples of investor sentiment repeating itself. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.
Technical analysis is not limited to charting, but it always considers price trends. For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. Surveys that show overwhelming bullishness, for example, are evidence that an uptrend may reverse – the premise being that if most investors are bullish they have already bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.
Traders generally share the view that trading in the direction of the trend is the most effective means to be profitable in financial or commodities markets. John W. Henry, Larry Hite, Ed Seykota, Richard Dennis, William Eckhardt, Victor Sperandeo, Michael Marcus and Paul Tudor Jones (some of the so-called Market Wizards in the popular book of the same name by Jack D. Schwager) have each amassed massive fortunes via the use of technical analysis and its concepts. George Lane, a technical analyst, coined one of the most popular phrases on Wall Street, "The trend is your friend!"
There are a lot of different indicators or charts available, however, on Stock Analyzer we focus on those, that recommended by Phil Town in his book Rule#1. Phil Town calls it "The Three Tools": Moving Average, Stochastics and MACD.
Technical Indicator Alerts
Stock2Own' Technical Indicator Alerts are following "general interpretation" of indicators used. For example, if current market price is below moving average, it is usually considered as a "negative" or "sell" signal and vice versa - if the price is above moving average, this is usually a good signal. Stock2own is also catching "crossing" events and signal considered a "buy" or a "sell" signal on a day when the price line is crossing the moving average line. If the price stays above moving average, that would be considered a "hold" and so on. You can read more on how to interpret technical indicator signals in the articles listed below.
Technical Indicators Cumulative Alert meaning
- All charts moved to the "positive" area.
- Almost Buy
- Some of the charts moved to the "positive" area.
- All charts moved to the "negative" area.
- Almost Sell
- Some of the charts moved to the "negative" area.
- No indicator changed direction. If you have an open long position, you would better keep it, there is no reason to sell.
- Stay Away
- No indicator changed direction. However, technical indicators recommend that you should not have an open long position.
- Alert is unknown: some indicators suggest buy, others suggest sell. So, be ready to act.
Number of shares of a security that investors have sold short divided by average daily volume of the security (measured over 30 days or 90 days). There are various interpretations of this ratio. When people short, it is usually (but not always) because they are pessimistic about the security's future performance. Shorting involves buying at at some point however. Hence, some would interpret a high short ratio as an indicator that there will be some buying pressure on the security that would increase its price.
Read more: on nasdaq.com.
It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. Read more »
In statistics, a moving average or rolling average is one of a family of similar techniques used to analyze time series data. It is applied in finance and especially in technical analysis. It can also be used as a generic smoothing operation, in which case the raw data need not be a time series. Read more »
Exponential Moving Average
An exponential moving average (EMA), sometimes also called an exponentially weighted moving average (EWMA), applies weighting factors which decrease exponentially. The weighting for each older data point decreases exponentially, giving much more importance to recent observations while still not discarding older observations entirely. Read more »
The idea behind this indicator is the prices tend to close near their past highs in bull markets, and near their lows in bear markets. Transaction signals can be spotted when the stochastic oscillator crosses its moving average. Read more »
MACD, which stands for Moving Average Convergence / Divergence, is a technical analysis indicator created by Gerald Appel in the 1960s. It shows the difference between a fast and slow exponential moving average (EMA) of closing prices. Read more »
The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. Read more »