Joe F. Rocks!
Growth Stock Investor &
Market Strategist
Joe F. Rocks! On Technical Analysis
I hope that another strong suit of this site is to raise the awareness of many to the usefulness of technical analysis. For example, once a buy or sell point occurs a stock almost always trends up for a significant time following a buy point and likewise will trend down after hitting a sell point. Also, many times even when a stock defies gravity and doesn't trend down much after a sell point, technical analysis can reveal insight into why. For example, a stock with a strongly positive MACD, indicating that a very strong uptrend is in place, is much more likely to "defy" a sell point or drop less as a result of a sell point.
I'll try to identify when stocks hit a buy or sell point (technical analysis doesn't work 100% of the time but is a highly useful tool) and if they are oversold or overbought. You obviously want to buy a stock that has just hit a buy point technically and is still either oversold or in "low neutral" territory as indicated by the stochastics and the Relative Strength Index (RSI).
What I mean by a technical buy point is the following typically: When the Relative Strength Index (RSI) breaks above 30 or the fast stochastic breaks above the slow stochastic from an oversold or neutral level (the lower the level this occurs at typically means the rally will have a longer duration and magnitude) or the price rate of change (ROC) breaks above it's moving average a buy point has been hit. A sell point occurs when the fast stochastic breaks below the slow stochastic from above 80 (these levels vary somewhat from stock to stock) or RSI breaks below 70 (varies from stock to stock or from market average to market average) or when the price ROC breaks below it's moving average. Much of the time these three indicators will indicate "buy" or "sell" at about the same time.
The picture is more complex than simply buying at buy points or selling at sell points. Sometimes you will want to wait for key support or resistance levels to be broken before buying or selling a stock. Support/resistance levels are stronger and thus have more significance the more times and the greater the timespan during which they have successfully held.
One of the nuances of technical analysis is that overbought and oversold levels vary from stock to stock. For one stock a Relative Strength Index (RSI ) of 70 might be a typical peak level whereas for another stock 80 might be a typical peak level. Prior RSI peaks provide insight into where a stock is likely to peak. Also, the strength of the move as indicated by the stochastics, price rate of change (ROC) and accompanying volume may provide insight into wether RSI is likely to rise further or peak out near where prior peaks occurred.
The trend of the RSI is a good indicator of a stock's near term
direction.
For example, if the RSI trend turns down and the share price continues
to rise a stock is likely to be near a peak. The RSI breaking below 70
is a typical sign of a sell point.
Please keep in mind that technical analysis is not an exact science.
The buy and sell points seem to work about 70-80% of the time.
Sometimes
however, a stock will reverse course quickly and not act as expected.
No
one has a crystal ball but if you can be correct 70-80% of the time
you're
doing well.
Also, volume patterns are extremely important in predicting future gains or losses for a particular stock. Positive money flow (buying on upticks) over a significant time is a great predictor that a stock will rise and negative money flow (buying on downticks) over a sustained time likewise is a highly accurate predictor that price weakness is at hand (next few weeks to months).
Interestingly, accumulation can occur even though a stock's price falls. For example, an 1000 share downtick trade occurs in which a stock's price falls by a quarter point. Then, a 10,000 share trade follows in which the price rebounds (uptick) by an eighth. The result of this pair of trades is positive money flow yet the stock dropped by an eighth.
Another highly useful set of tools are sentiment indicators such as
advisor sentiment, the Volatility Index VIX and the CBOE put/call
ratio.
For example, when the Investors Intelligence percentage of advisors
bullish
reaches about 60% that is a reliable indication that an intermediate
term
top is near and when the level reaches about 40% bullish that is a good
sign that an intermediate term bottom is near. When the market peaked
early
in the year 2000 Investors Intelligence advisors bullish was near 60%
and
at the market's bottom in the Spring of 2000 it dropped to about 40% of
advisors being bullish.
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