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Trading Using Technical Analysis is a Mug’s Game! Here’s Why

Editor — Sun, 05 Feb 2012 20:59:55 +0000

The Web is crawling with technical analysis (TA)…[and,] given its popularity, [begs the questions as to whether or not there] really is something to it. [Based on our research,] the short answer is no, not really, at least not in developed markets like the US or the UK… Furthermore, most of the popular TA indicators that are bandied around are nonsense jargon and should be ignored as useless noise. [Let us explain our position.] Words: 2143

So says Stockopedia (www.stockopedia.co.uk) in edited excerpts from his original article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say, in part:

What is Technical Analysis?

Technical analysis is the forecasting of market prices by means of analysis of data and charts generated by the process of trading. Its origins can be traced to the seminal articles published by Charles H. Dow in the Wall Street Journal between 1900 and 1902. Technicians believe that certain chart formations and patterns will indicate market psychology about either an individual stock or the market as a whole at key turning points. This is based on three key assumptions:

Market action discounts everything – A fundamental principle is that a market’s price already reflects all relevant information (including external drivers such as economic, fundamental and news events), so you just need to know the history of a security’s trading pattern to predict its future pattern.
Prices move in trends – Technical analysts believe that prices trend directionally, i.e., up, down, sideways or some combination.
History tends to repeat itself – Technical analysts believe that price action also tends to repeat itself because investors collectively tend toward patterned behaviour. Because investors collectively repeat the behaviour of the investors that preceded them, technicians believe that recognisable (and predictable) price patterns will develop on a chart.

With those assumptions under their belt, technicians use charts to search for archetypal price chart patterns (e.g. the well-known head and shoulders or double top/bottom reversal patterns) and look for forms such as lines of support, resistance, channels, and more obscure formations such as cup and handle patterns. The idea is to try to find and profit from these patterns. Technical analysts also use market indicators, including up and down volume, and advance/decline data to assess whether an asset is trending, and if it is, the probability of its continuation.

5 Reasons Not to Believe in Charts

1: TA is a Moving Target

One of the issues we have with TA is its highly subjective nature. Practitioners tend to define and use it according to their own beliefs. Different technical analysts can make contradictory predictions from the same data. The presence of certain shapes in historical price charts is often in the eye of the beholder. Coupled with that, the range of indicators is almost limitless and methods vary greatly. This makes it difficult to refute TA because once one indicator has been shown not to be predictive, it’s always possible for the technician to argue that, in current market circumstances, you should be looking at an entirely different indicator. As Karl Popper said, for a theory to be scientific, it must be falsifiable (i.e. it must make consistent predictions) and the vagueness around the meaning of the term ‘technical analysis’ isn’t helpful in this respect. This also creates massive scope for “revisionism”, selectively highlighting successes while ignoring failures.

2: Empirical Evidence for TA is Negligible

Much of the faith in TA hinges on anecdotal experience, not any kind of long-term statistical evidence, unlike value investing or other quantitative/fundamental methodologies we discuss on this site. Most of the statistical work done by academics to determine whether the chart patterns are actually predictive has been inconclusive at best. Indeed, a recent study by finance professors at Massey University in New Zealand examined 49 developed and emerging markets to see if TA added value. They looked at more than 5,000 technical trading rules across four rule families :

Filter Rules - These rules involve opening long (short) positions after price increases (decreases) by x% and closing these positions when price decreases (increases) by x% from a subsequent high (low).
Moving Average Rules - These rules generate buy (sell) signals when the price or a short moving average moves above (below) a long moving average.
Channel Break-outs - These rules involve opening long (short) positions when the closing price moves above (below) a channel. A channel (sometimes referred to as a trading range) can be said to occur when the high over the previous n days is within x percent of the low over the previous n days, not including the current price.
Support and Resistance Rules - These “Trading Range Break” rules involve opening a long (short) position when the closing price breaches the maximum (minimum) price over the previous n periods.

The result? Using statistical methods to adjust for data snooping bias, the authors concluded that there was no evidence that the profits [attributed] to the technical trading rules considered were greater than those that might be expected due to random data variation.

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The paper looked at whether technical trading rules add more value in less developed (or efficient) markets [and] the authors found that technical analysis may work better in emerging markets than developed markets, but it was “not a strong result.”

3: Support for TA Based on Data-mining

While very early academic studies did show limited evidence for TA, and the odd study now pops up here and there, as Sullivan et al point out, this is likely to be survivorship bias in action. After all, over time, investors must have experimented with technical trading rules drawn from a very wide universe – in principle, thousands of parameterizations of a variety of types of rules. As time progresses, the rules that happened to perform well historically receive more attention and are considered ‘serious contenders’ by the investment community, while unsuccessful trading rules are more likely to be forgotten. After a long sample period, only a small set of trading rules may be left for consideration, and these rules’ historical track record will be cited as evidence of their merits.

“If enough trading rules are considered over time, some rules are bound by pure luck, even in a very large sample, to produce superior performance even if they do not genuinely possess predictive power over asset returns. Of course, inference based solely on the subset of surviving trading rules may be misleading in this context since it does not account for the full set of initial trading rules, most of which are likely to have under-performed”

In short, TA seems to be right up there with ghosts and UFOs on the evidence front.

4: NO Comparison Between TA and Quantitative Analysis

It is true that certain technical trading rules share a resemblance to momentum trading strategies, and academics have found some good evidence for momentum as a predictor. Does that mean there’s secondary evidence for TA? Not really, the momentum effect is best explained by the findings of behavioural finance, none of which involves the other assumptions relied on by technical analysts. You may be able to make money from certain types of momentum investing, but this is a far cry from saying that it’s generally possible to outperform based on the kind of naive short-term technical trading packages being advertised on the Web.

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The fact that someone is trading using trendlines and a few mathematical formulae doesn’t mean that they are trading using a quantitative strategy. A quant is someone who applies an empirically-tested and rules-based approach to exploit perceived market inefficiencies (e.g. by exploiting various systematic biases present in human behaviour, such as herding and overconfidence). Some technical indicators like MACD and Bollinger Bands do resemble statistical measures used by quants today (mean and standard deviation) and may even involve some statistical modelling. However, technicians mostly trade the market using relatively discretionary strategies and the techniques used are on a completely different plane of sophistication.

The relationship between Technical and Quantitative analysis can perhaps be likened to Astrology and Astronomy. One is close to superstition while the other is a science. Astrology came about due to the lack of sophisticated tools and theories, and it’s the same with Technical Analysis! People relied on charts because it was easier to analyse them than crunching data but, with the advent of faster and more powerful computers, this is no longer the case..

5: TA is for Short-term Traders with a PhD

For the most part, TA is a short- to very short- term trading strategy. Most technical traders won’t like to admit it, but the best PhDs in the world have been hired by the most sophisticated institutions to squeeze every pound they can out of short term price discrepancies in the market. Over the last 20 years, hedge funds and investment bank trading desks have invested massively in high frequency algorithmic trading designed to prey on the weaker hands in the market.

It’s madness to think individual investors can beat the City’s [and wall Street's] finest, armed with a laptop and a 30 day course on technical analysis. Hedge funds have all of these trades and more completely covered with complex algorithms and artificial intelligence that are well beyond a private investor’s ken. They are the ones taking the other side of the trade and, in doing so, are ensuring that the majority of short term traders go broke as those trades hit stops or margin calls.

The truth is that, while it is not the case that the market is always efficient, there are very few short term inefficiencies in the market, and that if you want to play that game, you are up against the best in the world. Would you tee up against Tiger Woods?

Due to high frequency trading, the average length of time that a fund holds a stock before selling has fallen dramatically in recent years, and now stands at less than six months. The truth is that if you want to beat the market, you need to lengthen your investment timeframe and look beyond the immediate term that the hedge funds have so well covered (and that’s where value investing comes in).

But wait – it’s not all bad….

As you can tell, trading purely on the basis of TA is a mug’s game. However, despite inconsistencies in predictive value,

1. TA may be a useful tool as part of a broader strategy for managing holdings (e.g. to help you time any investments that are decided on other, hopefully fundamentally-focused, criteria).

The fact is that many (misguided) market participants use TA to drive their investment decisions. These collective actions result in tangible changes in asset values, so they need to be understood even by less mis-guided investors. A fundamental investor need not agree that a stock should be moving but it’s worth understand why a stock is nevertheless moving. As Birinyi, a research and money-management firm, noted in a research note:

2. “technical approaches can and should be a useful adjunct to every investor’s — amateur and professional — arsenal, if and only if used properly and with understanding… Technicals detail and hopefully illuminate, but do not predict.”

3. TA may be particularly useful on the sell-side where it is deemed (according to William O’Neill) prudent to sell based on “unusual market action such as price and volume movement”…

4. Good investing is about managing your losses too, and here TA can be a useful tool to determine where best to place a stop-loss (given the number of TA practitioners out there that are likely to be anchoring around certain price points).

For these reasons, we’ll be reviewing a number of key technical indicators in a subsequent piece, along with the (mostly sparse to non-existent) evidence as to their predictive value.

* http://www.stockopedia.co.uk/content/technical-analysis-debunked-5-reasons-why-we-dont-believe-in-charting-63806/

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Examples of Recent TA Articles:

1. Understanding the Patterns, Trends, Indicators and Formations of Technical Analysis

Technical analysis is the discipline of finding reliable patterns, trends, indicators and formations, mainly in price, for buying and selling assets…To a large degree, technical analysis is a self-fulfilling prophesy [in that] it is effectively an unofficial agreement amongst market participants to impose more order on what would otherwise be more random. The key is to understand which patterns, formations and indicators are widely adhered to, so as to become useful predictors of price action [and this article does just that. Let me explain.] Words: 470

2. Ride the Market Waves With These 6 Momentum Indicators

It is hard to know what to buy or sell let alone just when to prudently do so. Thank goodness there are indicators available that provide information of stock and index movement of a more immediate nature to help you make such important decisions. This article describes the 6 most popular Momentum Indicators. If ever there was a “cut and save” investment advisory this is it! Words: 1234

3. Here’s How to Time the Market!

There are many indicators available that provide information on stock and index movement to help you time the market and make money. Market strength and volatility are two such categories of indicators and a description of six of them are described in this “cut and save” article. Read on! Words: 974

4. Fractal Analysis Suggests Dow Could Drop to 6,000 in 2012 and Gold Take Off Like It In 1979

[While] I do not prescribe to the 2012 end of the world or end of an era phenomenon, my recent fractal (pattern) analysis of the Dow suggests that it is forming a similar pattern to that which was formed in the late 60s to early 70s and if this pattern continues in a similar manner…the Dow could indeed have an annus horribilis (horrible year) in 2012. Let me explain. Words: 1416

5. S&P 500 Should Continue Climbing Until October and Then Decline 15-30%! – Here’s Why

At the end of November 2011 the U.S. behavioral indicator for the U.S. stock market, based on insights on investor psychology, touched the crisis threshold for the fifth time (1971,1979, 1986, 2006) since 1970. If the current case follows the four prior cases, we expect a similar positive return from November 2011 to the end of October 2012 as in the four prior periods followed by a decline somewhere between 15% and 30%. [Let me explain.] Words: 317

6. High Alert! These Charts Suggest Panic Selling May Be Coming in the Markets – Here’s Why

Stocks and commodities are under pressure from the rising dollar. We have already seen a sizable pullback but there may be more to come in the next few trading sessions. While my negative view on stocks and precious metals will rub the gold and silver bugs the wrong way, I just want to point out what is unfolding so everyone sees both sides of the trade. Let’s take a look at some charts and dig right in. Words: 222

7. Update: S&P 500′s “Three-Peaks and a Domed House” Pattern Continuing Climb from “Basement” to “First Floor”

The S&P 500 index is…forming a “Three-Peaks and a Domed House” pattern and is currently in a phase transition from the “Basement” phase to the “First Floor” phase. [Take a look at these 2 chart and see what the implications could well mean.] Words: 1146

8. Dr. Nu Yu’s View: 2012 (The Year of the Water Dragon) Bears Watching Closely! Here’s Why

The stock markets in the West are stealthily forming bullish ascending triangle patterns and looking for breakouts while those in the East are all in a downward spiral. The U.S. dollar is also in an ascending triangle offset by gold which is transitioning from a bump phase to a run phase and could possibly fall as low as $1,420 per troy ounce in this correction. Silver is already in the run phase and could drop down to as low as $26. Analyses of these markets suggest that the Year of the Water Dragon may be full of surprises. Let me explain my determinations with a number of graphs. Words: 1122

9. David Nichols: Expect to See $2,750 – $3,000 Gold By June 2013 – Here’s Why

The interim peaks in gold have been spaced 21 months apart over the past 6 years and have seen gains from 80.2% to 97.3%. As such, given the fact that the low of this last correction came in at $1,524 four months ago, we can expect gold to reach a new peak price of $2,750 to $3,000 in 17 months time (i.e. June/July 2013). [Let me explain in more detail.] Words: 976

10. Alf Field Sees Silver Reaching $158.34 Based on His $4,500 Gold Projection!

This article was prompted by a question enquiring what the silver price might be if my gold forecast of $4,500 proved to be correct [see my article entitled "Alf Field: Correction in Gold is OVER and On Way to $4,500+!" and I have settled on] a target price of $158.34 for silver. [Let me explain how I came to that specific price.] Words: 850

11. Silver Will Go to $50 and Then Explode Dramatically Higher! Here’s Why

There is a massive amount of energy underlying the silver market, and when it is ready to unleash, we will see price/value increases that will stun even the most ardent silverbugs…The real power of this expected move is likely to be released only some time after the price of silver has surpassed the $50/ozt. level. [Let me explain.] Words: 685

12. Alf Field: Correction in Gold is OVER and on Way to $4,500+!

There is a strong probability that the correction in the price of gold [down to $1,523] has been completed. The up move just starting should be…the longest and strongest portion of the bull market…at least a 200% gain… [to] a price over $4,500. The largest corrections on the way to this target, of which there should be two, should be in the 12% to 14% range. [Let me explain how I came to the above conclusions.] Words: 760

13. Goldrunner Called $1,920 Gold High Exactly; Now Expects $3,000 – $3,500 by Mid-Year

Short-term volatile moves in Gold, as we have seen over the past few months, do not affect our projections for the future price of Gold based on our fractal (pattern) “model” off the late 70′s Gold Bull. Just as we correctly projected the $1,920 high in our April article entitled Goldrunner: Gold on track to Reach $1860 to $,920 by Mid-year (gold reached $1,917.20 in late August and $1,923.70 in early September, 2011), our current analysis indicates that Gold will enter a range between $3,000 and $3,500 by mid-year 2012. Words: 975

14. Contracting Fibonacci Spiral Puts Gold Near $4,000 by 2013 and $7-10,000 by 2020

Gold is operating on a smaller Contracting Fibonacci Spiral Cycle that is in synch with the larger Contracting Fibonacci Spiral the markets are in. Adding together the sum of parts… the price of gold will move up in price in 2013, 2016, 2018, 2019 and 2020, with each subsequent leg moving less in percentage terms than the prior move. Gold advanced 4 foldish from 1999 until 2008 ($252/ounce to $1046/ounce) suggesting that gold should top out below $4000/troy ounce by the end of January, 2013…[on its way] to $7,000 and $10,000 per troy ounce by 2020. [Let me explain.] Words: 834

15. Gold Bounce Confirms Bull Market Intact on Its Way to $3,000 – $10,000

With what is happening in the price of gold these past few weeks/months it is imperative to take a look at the big picture and in doing so it shows that we are still very much in a long-term bull market. Let’s take a look at some charts that clearly outline where we are currently and where we could well be going. Words: 925

16. New Analysis Suggests a Parabolic Rise in Price of Gold to $4,380/ozt.

According to my 2000 calculations, if interest rates and inflation stay constant over the next 2 years, we could expect to see (with 95.2% certainty) a parabolic peak price for gold of $4,380 per troy ounce by then! Let me explain what assumptions I made and the methods I undertook to arrive at that number and you can decide just how realistic it is. Words: 740

17. SILVER is Ready for Take Off! These 7 Charts Show Why

After a very turbulent year, silver now looks set to take off again. The best entry point of the last 5 years was in 2008… and currently we are in a similar situation, which means that silver…is ready for take-off. In this article I will tell you why I think [that is the case illustrating my views with the use of 7 charts. Words: 1200

SILVER is Ready for Take Off! These 7 Charts Show Why

Editor — Sat, 26 Nov 2011 07:28:35 +0000

So says Willem Weytjens (www.profitimes.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Weytjens goes on to say, in part:

Chart #1: Commitment Of Traders Report and the Price Movement of Silver

Commercials have yet again reduced their net short position in silver, which is now close to the low of 2003 at the beginning of the bull market. Commercials are generally seen as the “smart money”, so if they reduce their net short position, they expect price to rise (or at least not drop substantially).

The reason why Commercials are the “smart money” is that – unlike the millions of small investors who burn their hands by buying high and selling low – they tend to “buy” low (reduce short positions as price declines) and “sell” high (increase short positions as price rises).

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Charts #2/3: Commercial Net Shorts vs. Sentiment and the Price Movement of Silver

There seems to be a very high correlation between sentiment…and the net short positions of commercials [as seen in the chart below]:

The best way to invest is to “buy low” and “sell high”.

As sentiment and/or commercial net short positions climb into the orange area [of the chart above], it is time to become cautious…
The standard deviation bands [in the chart above] show how extreme the current reading is compared to its recent history so if sentiment rises above the red standard deviation band it is an unsustainable situation, and that sentiment has to reverse (decline) over time.
Conversely, when sentiment drops below the green standard deviation band…[that too is] an unsustainable situation, and sentiment has to reverse (rise) over time.
The red circles on the chart below show that good exit points occured when sentiment was above the red standard deviation bands.
The green circles on the chart below shows that good entry points occured when sentiment was below the green standard deviation bands.

The best entry point of the last 5 years was in 2008. This was a time when both Sentiment and Commercials Net Short positions reached extreme lows. Currently, we are in a similar situation, which could mean that silver is at or at least very close to a bottom, and that it could take off pretty soon…

Chart #4: The Situation in 2008

Looking back at 2008, as long as the price was below the 50EMA, [as seen in the chart below] you should not have bought. The best time to [have bought] in my opinion was early December 2008, when the price broke above this 50EMA and both the RSI and MACD broke out above the red resistance lines. At that point you had a BUY point. You would not have bought at the extreme lows, but taking this 50EMA as a stop-loss it would have minimized your losses…[and] you could have let your profits run. In fact, this 50EMA was at that point at the same level as the horizontal resistance line underneath the lows of 2006 and September 2008. A breakout above that level was extremely important going forward.

As price declined in 2008, the Accumulation/Distribution index declined as well [see above, but here in 2011] the Accumulation/Distribution index has made brand new highs despite the fact that silver is off about 35% from its all-time high…Another bullish factor now is that, as price declined, volume declined as well, which was not the case in 2008.

Chart #5: The Situation in December, 2011

It looks like the massive drop a couple of weeks ago – which took silver down to $26 – was the “perfect” entry point, price wise. However, in my opinion, there are “better” entry points at levels slightly higher than today. Let me explain why. If you would have bought when silver hit $26, you would have done an amazing job, however, if you did, you were catching a falling knife. There was a huge risk that silver would drop even lower, maybe as low as $20, which is about the breakout point of the autumn of 2010…Looking at risk to potential reward, at $26, the risk of silver dropping another $6.50 was too high for the potential $6.50 [ profit to be realized. The risk-reward ratio would have been] 1-1 since you could have lost just as much [if you were] wrong as [if you were] right. I [prefer] those kind of situations where you get a risk-reward ratio of 2 -3 (i.e. where you can gain 2 or 3 times as much as you can loose), [or, better yet, where] I don’t have to think twice when…[I get] a risk-reward ratio of 5.

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[As can be seen in the chart below] we are currently in a similar position [as we were in 2008], as there is resistance at $34 which acted as support in the first half of 2011. The 50EMA is now at the same level as this red resistance line, and both the MACD and RSI look set to brake out above their red resistance lines…Combine that with the severely depressed sentiment in silver and the low net short positions of commercials, and we have the ideal cocktail for a nice rally in silver prices…

Chart #6: Sentiment in Gold

Silver tends to follow gold [and a] look at the sentiment in gold [in the chart below shows]… that the standard deviation bands provide good entry and exit points. Sentiment in gold is now pretty bearish, and is close to the green standard deviation band.

Chart #7: Gold:Silver Ratio

When we look at the Gold:Silver ratio, we can see that the ratio is now facing strong resistance at the 38.20% Fibonacci Level. IF the ratio takes out this resistance, it looks headed towards 60, which is the 50% Fibonacci Retracement level. However,IF that were to happen, both the RSI and MACD would most likely make a lower high, causing negative divergence, meaning this “rally” should be “sold” (which means one should BUY silver in favor of Gold in my opinion). The MACD looks set to roll over, which means the ratio looks ready to drop.

Silver is ready for take-off. The question is, ARE YOU?

*http://profitimes.com/free-articles/silver-ready-for-take-off/

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Gold to Repeat?

Editor — Fri, 01 Jul 2011 07:05:03 +0000

I believe that sooner or later Dr. Bernanke and the Feds will have to resort to another round of quantitative easing which will cause investors to run back to the safe haven of precious metals but, until that happens, I conclude that gold will continue to weaken… [Here's why.] Words: 461

So says George Maniere (http://investingadvicebygeorge.blogspot.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Maniere goes on to say:

The chart below shows that the latest gold price action is strikingly similar to the pattern that unfolded at precisely this time last year….[and] if this pattern holds true again it will provide traders with a good roadmap and price targets for trading gold in July…

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The chart clearly shows a broad picture of a repeating pattern of price swings. Notice how in April of 2010 we had a move up (1) followed by a small correction (2). We then had a substantial move to the upside (3) followed by a correction of about one half of the previous move up (4). This was followed by another nice move up (5) followed by a substantial correction back to the level of the first correction (6).

A look at the chart below of the exact same time period in 2011 shows that an eerily familiar pattern has developed. The only X factor will be the final leg downward. If this final leg corrects back to the 150 day moving average, as it did in 2010, we will have a good indication of what to expect from GLD.

Conclusion

Look at the chart above. The signs are all there. If leg 6 pulls back to the 150 day moving average the RSI, the MACD and the slow stochastics will all be exactly where they were in 2010. Trust your charts! [The time is fast approaching to get back into the PM market and ride the bull market in precious metals once again.]

*http://investingadvicebygeorge.blogspot.com/2011/06/gold-etf-gld-shows-eerily-familiar.html

Related Articles:

Gold’s Recent Price Action Suggests Ultimate Top of $5,000/ozt. http://www.munknee.com/2011/06/golds-recent-price-action-suggests-ultimate-top-of-5000ozt/
Why Silver Could Drop Below $30/ozt. http://www.munknee.com/2011/06/why-silver-could-drop-below-30ozt/
It’s Not Time to Buy the Gold Miners – Yet http://www.munknee.com/2011/06/its-not-time-to-buy-the-gold-miners-yet/

Editor’s Note:

The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

Gold

Yes, You Can Time the Market – Use These Trend Indicators

Editor — Thu, 02 Jun 2011 07:53:24 +0000

The trend is your friend and this article reviews the 7 most popular trend indicators to help you make an extensive and in-depth assessment of whether you should be buying or selling. If ever there was a “cut and save” investment advisory this article is it. Words: 1579

So says Lorimer Wilson (www.FinancialArticleSummariesToday.com) and editor of www.munKNEE.com. Please note that this paragraph must be included in any article reposting with a link* to the article source to avoid copyright infringement. Wilson goes on to say:

There are over 80 market indicators divided into 6 categories (trend, momentum, volatility, market strength, support/resistance and cycle). That being said some are very technical, some are infrequently used and some are more effective than others. The most popular indicators, and also available for use free at online charting service such as stockcharts.com and/or bigcharts.com, are those regarding:

market trends
market momentum (see here for a description of use of these indicators) and
market strength and volatility (see here)

(Also, to even further understand the Patterns, Trends, Indicators and Formations of Technical Analysis read this article and for some insight into the merits of fundamental analysis go here.)

It is always hard to know what to buy or sell let alone just when to do so. Thank goodness there are indicators available that provide such information. Below are descriptions of the 7 most popular trend indicators: Crossovers; Moving Average Convergence Divergence; Percentage Price Oscillator; Keltner Channels; Parabolic SAR; Traders’ Index; and Advance/Decline Line.

Trend Indicators
The price movement of a security over time is most easily analyzed by observing how its moving averages are trending. Either a simple moving average (where the movement during a specific time period is divided by the days of that time period) or an exponential moving average (where a mathematical formula gives greater emphasis to the more recent price movement) can be used and any period of time (up to 360 days on the various fine charting sites) can be studied.

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The most common short-term time period is 20- or 21-days using an exponential moving average (ema), while the most popular medium-term periods are the 39- or 40- and 50-day using a simple moving average (ma).

To observe the long-term trend of the price movement of a security a 200-day ma is usually used and occasionally a 100-day ma. That being said, a large number of variations have been developed to satisfy particular needs and situations.

Seven of the most popular trend indicators are as follows:

1. Crossovers
- used to forecast the future movements in the price of a stock such as when a stock or index moves above (bullish) or below (bearish) its 20-day moving average.

When a security’s long-term moving average (e.g. 50-day ma or ema) moves above its short-term moving average (e.g. 20-day ma or ema) it is referred to as a Death Cross and indicates a bear market on the immediate horizon, especially when it is reinforced by high trading volumes. Conversely, when a security’s short-term moving average moves above its long-term moving average, coupled with high trading volumes, it is referred to as a Golden Cross and indicates a bull market on the immediate horizon.

2. Moving Average Convergence Divergence (MACD)
- a trend-following momentum indicator of the exponential moving average (ema) of a stock or index which is used to identify short-term momentum. Specifically, the 26-day ema of a stock or index is subtracted from the 12-day ema to show an intermediate trend line. A 9-day ema, the ‘signal line,’ is then plotted over that intermediate term line to identify when to buy or sell the stock or index. When the resultant MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell.

Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before buying or selling to avoid doing so too early and thereby avoid being ‘faked out’.

Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the intermediate-term average. When the MACD is above zero, the short-term average is above the intermediate-term average, which signals upward momentum. The opposite is true when the MACD is below zero. The zero line often acts as an area of support and resistance for the indicator.

3. Percentage Price Oscillator (PPO)
- similar to the MACD but while the MACD shows the simple difference between the 2 exponential moving averages the PPO expresses this difference as a percentage which allows a trader to compare stocks with different prices more easily.

For example, regardless of the stock’s price, a PPO result of 10 means the short-term average is 10% above the intermediate-term average. That makes it much easier to choose one stock over another should the need arise.

4. Keltner Channels
- moving average bands/channels where the upper line represents the average high of a security over a 10-day period; the lower band the average low of a security over a 10-day period and the centre line the closing price of a security over the same 10-day period.

The trader is to sell the security when the closing price exceeds the upper band and to buy the security when the closing price falls outside the lower band. Like the other indicators mentioned it is best to add two or three other indicators to one’s charts to confirm any buy/sell signal.

5. Parabolic SAR
- used to determine the direction of a security’s momentum and the point in time when this momentum has a higher-than-normal probability of switching directions.

The parabolic SAR is shown as a series of dots placed either below a security’s price on a chart (a bullish signal causing traders to expect the momentum to remain in the upward direction) or above (a signal that the bears are in control and that the momentum is likely to remain downward).

As the price of the security rises, the dots will rise as well, first slowly (i.e. spaced well apart) and then picking up speed (i.e. getting closer and closer together) and accelerating with the trend. This accelerating system allows the investor to watch the trend develop and establish itself. The SAR starts to move a little faster as the trend develops and the dots soon catch up to the price line and that is when it is time to buy the security. A sell signal is triggered when the price line moves below the lower dot enabling an investor to position a stop-loss order.

The ability for the parabolic SAR to respond to changing conditions removes all human emotion and allows the trader to be disciplined. On the other hand, while the SAR works extremely well when a security is trending, it can lead to many false signals when the price moves sideways or is trading in a choppy market. That being the case, it is paramount that other indicators such as the stochastic oscillator, moving averages, etc. be used to ensure that all information is being considered.

6. Traders’ Index (TRIN)
- a short-term breadth indicator which measures the ratio of advancing stocks to declining stocks and compares it to the ratio of advancing volume to declining volume.

When advancing volume exhibits discordance with the raw number of advancing stocks, the all-important sell signal is given. Conversely, when volume on the downside increases out of proportion with the number of declining stocks, an upside reversal is said to be imminent.

It is important to note that TRIN is handled differently in each of the different market conditions. In a bull market, the overbought line is placed at 0.65 or 0.70 but in a bear market at 0.70 or 0.75. The oversold line is placed at 0.90 or 0.95 in a bull market and at 1.00 or 1.10 in bear markets. Assuming the market has been correctly identified as a bull or a bear and the overbought and oversold lines have been correctly placed you should buy when the current TRIN crosses above its oversold line and sell when TRIN sinks below its upper overbought line.

When interpreted properly, TRIN can be one of the most powerful and accurate means of assessing the psychology of the market.

7. Advance/Decline Line (A/D)
- used to confirm the strength of a current trend and its likelihood of reversing. If the markets are up but the A/D line is sloping downwards, it’s usually a sign that the markets are losing their breadth and may be setting up to head in the other direction. If the slope of the A/D line is up and the market is trending upward then the market is said to be healthy.

Remember, the trend is your friend and now you have an arsenal of such indicators to make an extensive and in-depth assessment of whether you should be buying or selling. If ever there was a “cut and save” investment advisory this article is it.

*Original Source: http://www.munknee.com/2011/05/timing-the-market-using-trend-indicators/

Editor’s Note:

The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

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Technical

What Are Technical Indicators Saying About the Near-term for Gold, Silver & Oil?

Editor — Mon, 23 May 2011 07:26:33 +0000

Now that we are at a crossroads in both commodity and equity markets heavy technical analysis, in addition to astandard fundamental outlook, may prove useful in identifying the next big swings – before they occur – for gold, silver), and crude oil… [and answer the prevailing question of those looking to establish, or re-establish, commodity positions: "Is now the time to jump into one or more of these markets or should I] sit on the sidelines a bit longer. [Let's take a look.] Words: 2012

So says Brian L. Wilson in an article* which Lorimer Wilson, editor of www.munKNEE.com, has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Wilson goes on to say:

A: Gold

Fund: SPDR Gold Trust (GLD)

Gold has been the primary go-to commodity for inflation hedging for years now. As the primary store of wealth throughout history, its recent appeal as a safe haven against currency debasement has driven the price up significantly in addition to its increasing demand. Despite the commodities selloff which has crushed silver and oil spot prices, gold has been more resilient. Looking at its price history, this makes sense as gold has had steady appreciation for years. If a bigger correction ever did come, gold investors may have more time to exit their positions.

With a recent turnaround in the value of the U.S. dollar, whether gold still remains an attractive asset at the… 1500$/oz. [see this article (1) for the correct designation of ozt. not oz.] level is largely up to speculation rather than any easily understandble economics. [While] some will argue that gold has reached the bubble stage – and the widespread popularity of the yellow metal does add to this argument – [gold is, nevertheless,]… the most popular hedge against impending inflation.

[The graph below shows the MACD and the RSI for gold over the past year

The MACD Trend for Gold

MACD measures how the 12 and 26 day exponential moving averages behave relative to each other. [For a more detailed description of this indicator and others in the trend category read this article (2) entitled "Yes, You Can Time the Market – Use These Trend Indicators."] Positive MACD will indicate upward price acceleration for instance.

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In the case of GLD, one can see that there is accelerating downward pressure in the gold market. The 12 day EMA (exponential moving average) is dropping faster than the 26 day can keep up, signaling that:

The selling [in gold] is going to stay and possibly accelerate in the near future. The declining 12 day EMA is a strong bearish signal, but this kind of downward pressure isn’t sustainable for very long.

The RSI Momentum for Gold

The RSI measures momentum through an equation which factors in gains and losses made in 14 periods (days in this case). In layman’s terms, it describes what the market is doing. High is buy, low is sell. [For a more detailed description of this indicator and others in the momentum category read this article (3) entitled "Ride the Market Waves With These 6 Momentum Indicators."]

One can see that the gold market became overbought at the end of April, before dropping to a more even territory in just a week.

Right now gold is neither overbought nor oversold, so RSI suggests sideways trading for now.

The Volatility Indicator for Gold

GLD’s chart [above], with some key moving averages and bollinger bands [For a more detailed description of this volatility indicator read this article (4) entitled "Here’s How to Time the Market!"] added in provides another view which suggests that:

Gold will remain somewhat immune to the volatility of the commodity markets in the near future...

While the 10 day moving average is in a steady decline (approaching the 50 day average and crossing the 20 day), the drop is not steep enough to signal any drastic changes in the foreseeable future and paints:

A neutral, albeit slightly bearish, picture for the short term price action of gold.

A steadily increasing 200 day moving average signals that gold is retaining its overall strength as an asset class for the long term. In addition, the 50 day line is oscillating well above it. This is a somewhat bullish signal for the long term, as the slow momentum is still upwards using moving average analysis.

Overall, weighing all technical data:

Gold is showing immunity to drastic price changes and will likely trade steadily downwards in the near future but should reverse as selling dissipates…

As such, this provides a good opportunity for gold bulls to add to their position in the coming weeks, assuming that the trend can reverse in June.

B: Silver

Fund: iShares Silver Trust (SLV)

The latest hot commodity to hit the market, Silver, has only recently enjoyed the enthusiastic demand that has propelled gold’s price for the last few years. Becoming unstable in late April, it suffered a massive crash– not too dissimilar to its cliff-drop in the 1980′s. Now that the correction is slowing down, can technical indicators point to a reversal, or at least a price floor?

Fundamentally, silver has become popular for many of the same reasons as gold [but] this doesn’t explain why silver performed so spectacularly February, March, and April especially. Simply put, bullish sentiment on the white metal has been through the roof all year. With outlandish estimates by some analysts saying that the metal will be worth $200 [ per ozt.] in a few months, [read this article (5) that has used fractal analysis to forecast that silver is going to $52.80 to $56 dollars before the end of June and this article (6) using Elliott Wave analysis sees the price of silver will reach $52.58 within the same period] it’s easy to see why there were so many buyers. Gold had enjoyed a huge run in the last few years, and it was argued that even though silver had gotten significantly more expensive in 2010, it was still very cheap. While this is true on a gold to silver price ratio [read this article (7) for both a historical perspective on the silver:gold ratio and what it might mean for the future price of silver should gold go parabolic to $3,000, $5,000 or even $10,000 per troy ounce in price in the years ahead] the… [major] rise in its price made a short term correction necessary. Fundamentally, after its nasty correction thus far in May:

Silver is close to where it “should” be and may be within buying range for aggressive traders.

The MACD Trend for Silver

The MACD indicator [as shown above] demonstrates just how drastic silver’s decline was. It’s visible from the big chunk of negative MACD one can see for the entire month of May thus far. The 13 day moving average fell right through the $26, dropping like a rock for two weeks straight. MACD suggests that the acceleration in the price drop of silver may have hit a peak already, but is not over yet. Based on this stochastic:

Silver will remain bearish until MACD returns to positive territory and begins a positive acceleration.

The RSI Momentum for Silver

RSI paints a less drastic picture, but remains bearish in looks. The silver hysteria kept the ETF’s RSI in overbought territory for most of April. In hindsight, this crash was inevitable! The kind of buying momentum propelling silver in April was nothing short of mass hysteria.

The picture will stay bearish until RSI heads into buying territory again, as there has been a complete 180 [degree turn] in the silver market which may take some time to dissipate.

SLV’s chart [above] contains some possible clues as to where (and maybe when) silver may settle. While the 10 day moving average has blown right through the 50-day moving average, the 200-day is slowly drifting upwards. The current selling pressure is as unsustainable as its parabolic rise in April.

If silver does drop all the way to the 200-day average (where it should find support from technical traders), SLV will bottom around $30 a share – assuming a smooth deceleration of the drop. This seems more likely than any other alternative.

[The "Bump and Run Pattern" of technical analysis in this article (8) recently suggested that $33 would be the low for silver while this article (9) by Martin Armstrong suggests that silver might go as low as $23.50 to $26.50 with a yearly support level of $28.]

Crude Oil

Fund: US Oil Fund (USO)

Oil has had an interesting year thus far. Mubarak, and later Gaddafi were big drivers in oil’s massive run earlier this year as well as fear of uranium issues. Bearish sentiment on the dollar has also had some impact on oil, as those looking to diversify their inflation hedges chose oil investments alongside the precious metals…

Energy enjoyed the spotlight for the months of February and March. The political uprisings in the Middle East have caused a newfound fear of oil supply shocks, and the Fukushima incident has caused immense amounts of skepticism of the viability of nuclear power. Due to all this and more, oil has increased tremendously in price. Overall, it has been stated many times this year that the oil supply and demand equilibrium never justified the incredibly high $112/bbl that we saw just a few weeks ago. With projections of increasing oil consumption, especially by the BRIC nations, is the current price hovering around $100/bbl going to stay? The short term remains hard to forecast with the volatility of the broader commodities market. This is where technical analysis can be useful.

The MACD Trend for Crude Oil

MACD analysis on USO shows a very strong acceleration in the fund’s downtrend. The initial acceleration enjoyed by oil bulls in March (from geopolitical unrest) seems to have finally corrected with the same level of volatility. This indicator points to:

Short and medium term declines for oil until it reverts to zero, similar to silver. The picture, at least for now, is bearish but the decline is unsustainable at this speed.

The RSI Momentum for Crude Oil

RSI indicates that:

Oil is in selling territory, and may remain so for a while as it looks like it may prod even deeper.

USO’s chart [above] shows just how dramatic the selling in oil assets has been. Based upon modern history, USO has always shown strong support at its 200-day moving average. We will see in the coming days whether this will hold true, as it will be a hard test based on the current momentum. The moving averages are all in decline, with the 10-day blowing through the 50-day in an abnormally steep decline.

If the 200-day moving average holds, the current drop will bottom out close to $37.50. If the price manages to fall through this floor it will likely cause technical traders to consider shorts in the position. With little else to base USO trades on for the time being, psychologically important price levels are crucial to determine direction.

Technicals look bearish on oil for the time being, but watch for a bottom. The selling simply can’t last forever.

Conclusion

Overall, Gold, Silver and Crude Oil show no signs of reversal yet. Those looking to establish commodity positions may want to sit on the sidelines a bit longer.

Links to Articles Referenced Above

What’s the Difference Between 1 Gold Karat, 1 Diamond Carat and 1 Troy Ounce? http://www.munknee.com/2011/03/whats-the-difference-between-1-gold-karat-1-diamond-carat-and-1-troy-ounce/
Yes, You Can Time the Market – Use These Trend Indicators http://www.munknee.com/2011/05/timing-the-market-using-trend-indicators/
Ride the Market Waves With These 6 Momentum Indicators http://www.munknee.com/2011/05/ride-the-market-waves-with-these-6-momentum-indicators/
Here’s How to Time the Market! http://www.munknee.com/2011/05/time-the-market-by-using-these-market-strength-and-volatility-indicators/
Goldrunner: “$52 to $56 Silver by Mid-year” Update http://www.munknee.com/2011/04/goldrunner-%e2%80%9c52-to-56-silver-by-mid-year%e2%80%9d-update/
Elliott Wave Analyst Suggests Silver to See $52.58 by Mid -June http://www.munknee.com/2011/05/elliott-wave-analyst-suggests-silver-to-see-52-58-by-mid-june/
Why Silver at $398.52 is a Realistic Parabolic Peak Price http://www.munknee.com/2011/05/silver/
“Three Peaks” Pattern Suggests Gold to Decline 17% into June! http://www.munknee.com/2011/05/%e2%80%9cthree-peaks%e2%80%9d-pattern-suggests-gold-to-decline-17-into-june/
Martin Armstrong Asks: Will Silver Crash in 2011? http://www.munknee.com/2011/05/martin-armstrong-asks-will-silver-crash-in-2011/

*http://seekingalpha.com/article/270525-what-s-in-store-for-gold-silver-and-oil?source=email_macro_view

Editor’s Note:

The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

Technicals

Time the Market Using Momentum Indicators

Editor — Mon, 10 May 2010 07:50:06 +0000

Yes, you can time the market! Assessing the relative levels of greed and fear in the market at a given point in time is an effective way of doing so and this article outlines the 6 most popular momentum indicators and explains how, why and where they should be used. Words: 1113

Securities ebb and flow, surge and retreat, and such action is measured by oscillators which are powerful leading indicators of the security’s immediate direction and its speed and are most useful and issue the most valid trading signals when their readings diverge from prices.

A bullish divergence occurs when prices fall to a new low while an oscillator fails to reach a new low. This situation demonstrates that bears are losing power, and that the bulls are ready to control the market for the stock or index again and such divergence often marks the end of a downtrend.

Bearish divergences signify up-trends, when prices rally to a new high while the oscillator refuses to reach a new peak. In this situation, bulls are losing their grip on the security, prices are rising only as a result of inertia, and the bears are ready to take control again.

There are a number of different approaches to this concept, as follows:

1. Stochastic Oscillator (SO)
- is a momentum indicator that compares a security’s closing price to its price range over a given time.

The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.

There are two components to the SO: the %K which is the main line indicating the number of time periods (usually 14), and the %D which is a three-period moving average of the %K. Buy/sell signals occur when the %K crosses above/below the %D.

A %K result of 70 (or 30), for example, is interpreted to mean that the price of the security closed above 70% (or below 30%) of all prior closing prices that have occurred over the past 14 days and assumes that the security’s price will trade at the top (or at the bottom) of the range in a major uptrend (or downtrend).

A move above 80 suggests that the security is overbought and therefore should be sold while a move below 20 suggests that the stock or index is oversold and, as such, is a buying signal.

The SO, which ignores market jolts, is an ideal companion to the MACD to provide an enhanced and more effective trading experience. Using the two together gives traders an opportunity to hold out for a better entry point on an up-trending security or to be more sure that any down-trend is truly reversing itself when bottom-fishing for long-term holds.

However, on the downside, because the stock or index generally takes a longer time to line up in the best buying position, the actual trading of the security occurs less frequently, so you may need a larger basket of stocks to watch.

2. Relative Strength Index (RSI)
- is a momentum indicator that compares the magnitude of recent gains in price to recent losses in an attempt to determine overbought and oversold conditions of a security.

The RSI, on a scale of 0-100, indicates that a stock is overbought when it is over 70 and oversold when it is below 30.

Because large surges and drops in the price of a security will create false buy or sell signals the RSI works best when it is used in conjunction with short-term moving average crossovers such as the Stochastic Oscillator to confirm a directional shift.

3. StochRSI
- is created by applying the Stochastic Oscillator to the Relative Strength Index values rather than standard price data thereby giving the trader a better idea of whether the current RSI value is overbought or oversold – a measure that becomes specifically useful when the RSI value is confined between its signal levels of 30 and 70.

4. TRIX
- is a momentum indicator that displays the percent rate-of-change of a triple exponentially smoothed moving average of a security’s closing price.

TRIX is designed to filter out stock movements that are insignificant to the larger trend of the security. The user selects a number of periods (such as 15) with which to create the moving average, and those cycles that are shorter than that are filtered out.

TRIX is also a leading indicator and can be used to anticipate turning points in a trend through its divergence with the security’s price.

5. Commodity Channel Index (CCI)
- is an oscillator which quantifies the relationship between the security’s price, a moving average of the security’s price, and normal deviations from that average to determine when a security has been overbought or oversold.

The CCI, when used in conjunction with other oscillators, can be a valuable tool to identify potential peaks and valleys in the security’s price, and thus provide investors with reasonable evidence to estimate changes in the direction of price movement of the security.

6. Price Rate of Change (ROC)
- measures the percentage rate of change, indicating the strength of the momentum, between the most recent price and the price over “x” periods (the narrower the better) thereby identifying bullish or bearish divergences.

The ROC is able to forecasts sooner than almost any other indicator an upcoming reversal of a trend and whether or not a security’s price action is created by those over-buying or over-selling it. A number other than zero (a personal choice) can be used to indicate an increase in upward momentum and a number less than zero to indicate an increase in selling pressure.

So there you have it – an extensive and in-depth assessment of how to evaluate the momentum impacting your securities of interest. The next time you analyze an asset you will be in a better position to determine which direction it is trending (see my article “Timing the Market Using Trend Indicators”), how strong the momentum is and how overbought/oversold and volatile the trading activity is (see my article ”Timing the Market Using Market Strength and Volatility Indicators”), and be better equipped to make astute decisions when to buy and when to sell – all this in a relatively easy, timely and profitable manner.

Never again will you have to rely totally on the ‘advise’ of your broker. With what happened last year to most portfolios it is imperative to do ones own analysis and be in a position to become better informed. If ever there was a “cut and save” investment advisory this article is it.