Technical Analysis

technical analysisDefinitions:

  • Gaps and Break Away Gaps: One place we are already seeing “gaps”, many in fact, are the gold and silver mining stocks. Since the beginning of the year there have been four or five instances where these gaps have occurred. Under “normal” circumstances, almost all gaps get “filled”. Meaning the asset in question will ultimately trade back to the gap levels and “fill” in the chart. We are however in no way living in “normal” times and the current and coming gap openings will be huge and never be filled.  Think of gaps as mini tremors leading to the massive tectonic shift. Gaps will display the coming psychology where demand cannot meet supply in any fashion (or vice versa). The final “gap” will be the closure of the markets for days or even weeks. The reopening of markets in my opinion will be unrecognizable pricing. In other words the “reset” will have occurred! If the reset of asset cross pricing has not gone far enough, another closure will occur and the process continued until supply and demand finally come into balance with a true clearing price. Governments and central banks will be totally overwhelmed in their efforts at “showing” you how things are. It will then become apparent to everyone how things REALLY ARE!

     

  • Point-and-Figure charts probably produce the most boring commentary for non-familiar readers to digest. Even though they are not as exciting as momentum charts which can tell you almost anything you want to hear, the advantage of point-and-figure analyses is that it is the most objective type of technical analysis. One would be well served to consider that more often than not, intermediate term investments that go against the PF analysis lose money. These charts send out “buy” or “sell” signals and there is no room for subjectivity. Although they are objective, as with any other technical analysis method, they can be late or produce whipsaws. It is at times such as this when PF charts are the most useful because they are clear, objective, and unemotional. (While today’s markets are totally emotional.)
  • One of the characteristics of a Point & Figure chart, is that  it shows accumulation and distribution patterns. The larger the distribution pattern, the bigger the subsequent potential move. There are different ways to calculate objectives. One is to measure the MAL (maximum activity line) and multiply it by 2 or 3. This calculated distance is then set out on top or below the MAL line.

  •  A Bear Trap:  a false signal that the rising trend of a stock or index has reversed when it has not.

  • A Bull Trap: a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline.

  • Dead Cat Bounce: a temporary recovery from a prolonged decline or bear market, after which the market continues to fall.

  • Bullish and Bearish Triangles are most of the time very reliable HUGE accumulation or distribution patterns. This is how the bearish triangle looks like for the Euro-Index (Feb 2015). XEU_pf1
  • Backtest: test of Breakout/breakdown  level and confirmation of the breakout of breakdown.
  • Technical Correction: a decrease in the market price of an asset or entire market after extensive price increases. A technical correction occurs even when there is no evidence that the increasing price trend should cease.

  • A slingshot reversal is a reliable trading pattern and is defined as a false breakout + reversal and occurs when a major support or resistance point is broken but the price does not hold below support or above resistance and moves back into it's previous trading range.

  • Shaven Head: applies to candle charts. A bullish pattern during a downtrend & a bearish pattern during an uptrend.

  • Cup and Handle and/or Multiple cup and Handle. A strong reversal signal.

  • RSI (Relative Strength Indicator) and (full) Stochastics can be excellent trend reversal spotters. However, one must take into account that the RSI or Relative Strength Index must be interpreted in a different way depending upon the cycle. In other words, in a SECULAR BULL market, the RSI will seldom break below the 50 level. In a SECULAR BEAR MARKET, the RSI will seldom break above the 50 level. In other words, a RSI below the 50 level in a Bull Market is a Buy signal and a RSI above the 50 level in a Bear Market is a Sell signal. Stochastics show similar characteristics. In interpreting the RSI, we note that bear markets are generally contained between the 60-20 levels on the indicator while bull markets will run generally between 80-40.

    During a bull market, price will run higher on strength, then experience a retracement during which it will usually not exceed 30 on the downside level before moving back higher in the direction of the longer term trend and going on to make new highs. The opposite is true for a bear market. Price will fall as selling pressure amplifies and take the RSI down to near the 20 level only to experience a bout of short covering that takes the RSI back up to near the 60 level before fresh selling takes over and another down leg commences.

  • The Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. MACD centerline crossovers occur when the faster moving average crosses the slower moving average and hereby generate a sell or a buy signal.

  • Divergences between the price evolution and the RSI, Slow and Fast Stochastics are also important additional indicators. There are POSITIVE and NEGATIVE divergences.

  • The Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals.

  • French Curves like Gold. A French curve is a mathematical formula that works rather well on Gold and currencies. It acts as a long term support line and at the same time it shows the (potential) parabolic acceleration.  A penetration of the French curve would light up a caution sign.

  • Falling wedges are more reliable technical patterns. The price tends to break out of the wedge once 2/3rds of the wedge has been built.
     

    top megaphone eGold_pf3 bottom megaphone
  • A Golden Cross-over, or Positive Cross-over is when the 50 Day Moving Average (50D), moves above the 200 Day Moving Average (200D). When the fundamentals are supportive, the most bullish phase in any stock or commodity is when the 50D has made a Golden Cross-Over and the two moving averages (50D and 200D) are rising.  The cross-over has to be in synchronization with the fundamental direction, otherwise the trend will be short-lived.

  • Head and Shoulder patterns can sometimes be tricky. They can fail. However, when the pattern is correct, the price objective is measured as the distance between the top and the neck line.


Buy and Sell formations/signals (click on thumbnail to enlarge)


Market cycle model. (click on thumbnail to enlarge)

Market Cycle Model 

Typical Small Investor's cycle: see investing for dummies.