Volume

Volume is very useful in telling how strong the trend is moving. Trend moves like a river current, how strong the current depends on the forces behind pushing the current. That stronger the volume, the stronger the forces are pushing and forming the trend.

Downtrend

When you combine volume, candlestick chart and moving averages, it tells a lot of story.  Imagine, though the stock prices are moving up in low volume, then comes a sudden spike of high volume, that bring down the stock prices in which the red bearish candlestick breaks the moving averages. Then comes the downtrend. One good example below:

Chart courtesy of StockCharts.com

Uptrend

On the other hand, when most of the white bullish candlesticks are supported by stronger volume, and it stays above moving averages, occasional low volume of red bearish candlesticks failed to bring the stock into a downtrend. Another good example below:

Chart courtesy of StockCharts.com

Support & Resistance

Using trend lines to create support & resistance is a straight forward way to establish a buy or sell target. When the prices broke a key resistance level, it might continue in uptrend. When the prices broke a key support level, it might continue in downtrend. Candlestick chart is the best way to represent this, because it clearly displays the lowest close and highest close of each day.

Let’s look at some examples below:

Uptrend – When Stock Prices Are Moving Within The Range Of Support/Resistance Level

 Chart courtesy of StockCharts.com

Breakout -When Stock Prices Break Key Support/Resistance Level

Chart courtesy of StockCharts.com

Relative Strength Index (RSI)

Relative Strength Index (RSI) is technical indicator which is used to detect if the stock price is overbought or oversold. It is calculated based on a period of historical days of gain against loss.

The formula is as follow:

RSI = 100 – 100/(1 + Average Number of Days Gain / Average Number of Days Loss)

Most commonly, the below are the configuration parameters:

Average Number of Days –> 14 days

Overbought zone –> 70 to 100

Oversold zone –> 0 to 30

Neutral zone –> 30 to 70

Trend Reversal or Correction When RSI Signal Overbought or Oversold

Chart courtesy of StockCharts.com

In my opinion, RSI is a powerful indicator when it is used together with other technical indicators such as Moving Averages or MACD. But most importantly, always remember is a absolute MUST to study the fundamental value of the company to gauge the margin of safety.

There is no 100% accurate technical indicators. Technical indicators are the assistant, fundamental analysis is the decision maker.

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is a momentum trend following indicator. Most common configuration is MACD (12, 26, and 9). It consists of three components.

MACD Line – Plot by calculating the differences between 12 and 26 days Exponential Moving Averages (EMA).

Signal Line – Plot by using 9 days Exponential Moving Averages (EMA).

MACD Histogram – Plot by calculating the difference between MACD Line and Signal Line.

MACD can be interpreted as:

Trend reversal when MACD line crosses the signal line

Chart courtesy of StockCharts.com

As you can see the accuracy is not 100%, but it does help to generate buy or sell signal depends on investor’s risk appetite.

Trend reversal when MACD line and stock price creates a divergence

Chart courtesy of StockCharts.com

Continuation trend when MACD line crosses zero and MACD line stays above signal line

Chart courtesy of StockCharts.com

Trend reversal when MACD histogram and stock price creates a Divergence

Chart courtesy of StockCharts.com

Technical Analysis – Moving Average

Ever heard of such saying, “Do not go against the trend” when buying a stock? So, how do you know when is the uptrend so you can confidently open your position, and when is the downtrend so you can consider closing the position by selling the stock?

Moving average is one way to tell if a stock is on a downtrend or uptrend.

How To Calculate Moving Average?

For example, a 30-day moving average is calculated by summing up all the stock closing prices for the last 30 days, and do a division by 30. Looking at the chart by plotting the trend using the moving average, you can tell if the stock is in a uptrend or downtrend.

Classification of moving average can be used as below:

5 – 20 Days (Short Term Trend)
20 – 50 Days (Mid Term Trend)
100 – 200 Days (Long Term Trend)

Let’s look at example below:

 Chart courtesy of StockCharts.com

 Another example:

 Chart courtesy of StockCharts.com

In general, the shorter moving average crosses ABOVE the next longer moving average, the stronger the uptrend. When the stock price is ABOVE the longer moving average, the stronger the uptrend.

On the opposite, the shorter moving average crosses BELOW the next longer moving average, the stronger the downtrend. When the stock price is BELOW the longer moving average, the stronger the downtrend.

What Are The Disadvantages?
1. Moving average is lacking indicator since it is calculated using the past closing prices. No one can predict future stock prices. But it does help to allow investors to set a target buy or sell price.

2. Moving average has nothing to do with the fundamental value of the stock. It is very dangerous to ignore the fundamental value (such as Price/Earning ratio, PEG ratio, Price to Book ratio). It is because even the stock is in a uptrend, it might be very much overvalue. The stock might come crashing down when something unexpected happen.