[9.6] Dominion (D) - nice looking chart

Take a look at this chart:

Nice uptrend with a strong support around 48.95 (the base line)

There were big volumes on 11/Aug,  15/Aug, 23/Aug  and the GMMA is opening up showing a strong uptrend direction. If price can stay above 9 day line, there should be continuation.

What  looked like an evening star reversal candlestick pattern is cancelled by a strong close last night of 29/Sep @ 51.25
 
Watch the stock.
The call option should be on Jan'12 @ strike 50.00

Disclaimer: This article is for education only and not a proposal, invitation or advice to buy or sell shares.

[9.5] Technical analysis with Ichimoku cloud and RSI

Maybe you are still unsure or find the methods and technical analysis still a bit confusing. There is a simple indicator called Ichimoku Cloud that gives clear buy/sell signals. This indicator is comprised of 2 lines and a patch which looks like cloud and drawn over the price chart.

Before, we proceed further,

Disclaimer: This article is for education only and not a proposal, invitation or advice to buy or sell shares.

In this Ichimoku, when the prices are above the cloud, it is bullish and the trend continues up until the prices drop below the cloud. The cloud is a bit lagging so there are 2 lines for the shorter term. As long as the prices are above these 2 lines, the trend is still up. Once the shorter line crosses below the base line (which actually is the 26 day moving average), it is a signal to take profits. However, if you are looking at the longer term, you may hold the trade until the prices drop below the cloud. So the cloud also acts like a resistance and support zone.

Here are a few examples of strong up trending stocks that we can use this indicator. Usually people who uses Ichimoku Cloud also uses RSI (Relative Strength Indicator) or the MACD Histogram to double confirm change of trend.

Chart of ABT

From the chart above, there is an oversold situation way back in early August (see purple circle inside RSI). Sure enough, price closed above the base line (26 day) which gave a buy signal. The uptrend was confirmed by end August when the faster (conversion) line crossed above the base line. 

Until the last 2 days (23rd Sept), prices were way above the cloud and also well supported by the base line.

Chart of MCD

This is by far a strong bullish trend till today. There was a buy-sell round from mid June until end July.  A next opportunity started from early August when the RSI hit the oversold line and reversed upwards which signal a trend reversal. By second week of August, the stock closed above the base line for a buy.

One may opt to close the trade in early September when it closed below the conversion line. If you are a stronger risk adverse person, you can still hold it until it fall below the base line. In this example, the stock was well supported by the cloud and did not fall below. So, the longer term trader may hold on if he uses the cloud as a final support.

Chart of PPL

This stock had an oversold situation in early August and a buy signal came in about mid August.

Until today, there is no sell signal yet amidst all the global bearish sentiments.

This chart is extracted from Stockcharts.com. The difference is the cloud turns from green to red when market is down. At time of posting, this stock is still green (uptrend) and well supported by the base line. RSI is still above the zero line so I guess there should be more room to run above.

 Chart of SO

In this stock (extracted from freestockcharts,com) the buy signal actually came in end of second week August. A box is drawn here to show the top resistance. Even this top was broken a week later and the trend is still strongly riding higher. Notice also the cloud is very much below which is sign of strong uptrend.

Further education

If you like to learn more on technical analysis, go to these sites.

STOCKCHARTS.COM

CHART PATTERNS Try this: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns CANDLESTICK Refer to: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_cand TECHNICAL INDICATORS Try stockcharts.com chart school. It is free education.  http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators

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[9.4] How to buy options with aid of charts and technical indicators

In the last article, I shown a technic named Darvas Box and used 2 indicators – the GMMA and Momentum(10). These are useful tools to check entry and exit signals but only for trending stocks. If the market is in a sideway phase, or some called it the accumulation or distribution phases, then these indicators may be difficult to confirm an affirmative signal.

Anyway, we will continue to use the same example – ALTR. But first,

Disclaimer: This article is for education only and not a proposal, invitation or advice to buy or sell shares.

Base on the chart of ALTR, there were 2 buy signals and the momentum of the chart is still above the zero level. However, as the global market is not in a strong bullish trend yet, this stock is still bouncing inside the box.

Chart of ALTR

As long as it does not break below the box, there is no worry to sell yet. So, say we decided to buy the call option instead of the mother stock; we could have entered on 14^th Sept.

The highest price below the top of the box was $37.50 (since 15^th Aug.)

ALTR call option criteria:-

Period: about or > 90 days so we choose DEC’11

Strike: 37.00 (in the money)

Qualifying criteria:

(1) Open interest > 300. As the O/I in the range of strikes 34 to 38 are all over 500, this option passes our test.

(2) implied volatility < 60% and all passed as the range of strikes have I/V less than 50%

Chart of ALTR call Dec’11 @ 37.00

The premium to buy call was about 2.90 which went as high as 4.00 when mother share peak at 38.97 on 16 Sept.

For stop loss or sell order, we can place it about 2.10 or 2.20 (which is about 25% down from entry premium price of 2.90).

Note: the current strike is out of money as the mother share price dropped to $35.58

However, for example purpose we can consider that if we had chose to buy call at strike 35.00 on Sept.14

Chart of ALTR call Dec’11 @ 35.00

From the chart above, we could have entered and bought call at 4.37and last closed was 4.87 as the strike 35 is in the money compared to mother stock price close of 35.58

But then, if the stock has not dropped from 37.00 zone, we can make more profits at strike 37.00 instead.

The above is a simple buy call option base on mother share movement and use of a few easy to read indicators.

How to read the option chart?

 

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[9.3] Technical Analysis – use of Darvas Box, trend indicators & chart analysis

In the last post, I discussed some common indicators in use by many traders. Basically, a trend trader will like to know the market direction and also signals to buy (or sell). Trend trading is easier as it does not require time to check price movements in the day. Trend trading rely on end-of-day price results.

Disclaimer: This is for education only and not a proposal to buy or sell shares.

In this post, I share with you a set of simple methods that a beginner to stock trading can use easily. This is the Darvas Box. We draw a box from the last pivot high to the last pivot low (see blue box in chart). The box indicates to us the last resistance and the last support. Any price bar violates the top is a signal to buy. Of course it must also qualify the trend indicator.

• Indicator to check bullish or bearish move – Momentum (10)
• Buy/sell signal – Darvas Box

In the example, ALTR, the stock has been down since July 7. Though 6 months down trend, it has shown signs of reversals.

First sign of trend reversal – August 9, a hammer formed. Volume high. Price opened higher than previous day, then forced downwards but closed higher. Sign of selling diminishing.

On August 23, price bounced up strongly after another flush of selling to kick out weak traders. The day ended higher on high volume. Momentum(10) indicator moved up 0, green line point up.

 ALTR Aug 23

August 30 signal to buy.

GMMA indicator showing red lines converged and pointing up.

Momentum indicator above 0 and point up. Signs of trending up.

Last 3 bars have higher lows.

Buy when price bar hit above top of box. Protect loss at bottom of box.

ALTR August 30

Another box formed (black) overlap on the blue box. Loss protection moved up to bottom of black box.

Strong buying volumes follow up. Bullish engulfing bar on Sep 12 (3 days prior to this).

Price hit above black box on Sep 15, signal to add positions.

Buy when price bar above black box.

ALTR Sep 15

 

 

In the example above, we have a few basic criteria:-

Is the trend up or down? – we use Momentum and GMMA as indicators to show us the direction.

What is the price-volume action? – we need to confirm break higher of prices must be on higher volumes. Volume indicates the interest of other traders to join in or stay out.

What is the signal to buy? – We use Darvas Box. Breakout is a sign of breaking resistance.

How do we protect our trade? – we use low of the box as a guide to stop loss.

 

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[9.2] Chart analysis and technical indicators

There so many indicators invented over the years that, so often, a beginner is confused of which to choose. Here are some common ones that may assist you in your trading.

Here are a few indicators used in the sample charts:-

Candlestick

Candlestick charts were first used by the Japanese. These patterns are quite useful in identifying reversals. Using candlestick charts instead of bar charts helps to anticipate market sentiment for short term, say the next few days for instance (for a daily price candlestick chart).

Moving averages

Moving averages are usually plotted over the price chart. These are used to identify buying and selling signals. Common averages in use by analysts may include the following:-

50 day simple moving average

100 day simple moving average

200 day simple moving average

There are also some who use these:-

5 day simple moving average

20 day simple moving average

Some may like to use exponential moving averages (EMA) instead of simple moving averages (SMA). However, as we need a combination of a few indicators, there should not be much of a difference between simple average or exponential average.

Bollinger band

This indicator is useful to identify trend reversals; that is when the price trend is switching from a bullish uptrend to a bearish downtrend. Normally the experienced trader also uses the MACD as a confirmation.

MACD  or Momentum or GMMA

These are some of the common indicators that analysts use to determine change of trends. I find that the GMMA (Guppy Multiple Moving Averages) is more useful as it has a pattern of 2 trends – one is a set of shorter periods which represent the smaller day traders and the other is a set of longer periods which represent the so called “big boys” or institution investors (funds houses).

There are also many traders who use RSI and Stochastic Oscillator to determine movements from a too high level (or overbought) to that of a too low level (or oversold). RSI or Relative Strength Index  is based on closing prices and not moving enough. When the index touches the upper “overbought” zone, the prices can still move up trend quite a bit. Hence, most of those who use RSI may also include Stochastic. This sounds so confusing so I suggest that as a beginner, try this:-

Money Flow Index (MFI) which is another version of RSI but also includes volume. Since the market is a combination of price and volume, this indicator should be easier to work with.

Example 1 (chartnexus.com)

Combination of indicators:-

• Candlestick chart (easier to look out for change of sentiments)
• 5 day SMA (when 5 SMA crosses over the 12 SMA will be signs of buy/sell opportunities)
• 12 day SMA
• Bollinger bands (to confirm trend direction)
• GMMA (to re-confirm trend direction. In this example, as long as red band of lines do not drop below the green band of lines, the uptrend should still be intact)
• Momentum (either this or GMMA should be enough)

Example 2 (freestochcharts.com)

• Candlestick chart (for change of sentiments)
• 5 day SMA (signs of buy/sell opportunities)
• 12 day SMA
• Bollinger bands (confirm trend direction)
• Momentum (either this or MACD should be enough)\
• MACD (to confirm trend direction, bullish or bearish. Lines above the zero bar are bullish and below it will be bearish)

Example 3 (chartnexus.com)

• Candlestick chart (for change of sentiments)
• 5 day SMA (signs of buy/sell opportunities)
• Bollinger bands (confirm trend direction)
• MFI (to confirm trend direction, bullish or bearish. Above the upper thick line is overbought, or too high. Dotted bar in the centre is the zero line)
• GMMA (to reconfirm trend direction)

Other than the indicators, we can also draw lines on the chart to show up or down trend. We can also draw resistance and support lines. However, you may draw boxes (example of Darvas Box theory) to make it easier to read upper resistance and lower support zones.

Darvas Box is first used by Nicholas Darvas to trade stocks. (Read his book: How I made $2million in the stock market)

Another writer Frank Watkins whose book Darvas Box Trading described how the theory is put to practice in share trading.

The box starts from the last top pivot point to the last low point. Prices move inside the box and any breakout above or below signals buy or sell.

For further free education:-

STOCKCHARTS.COM

CHART PATTERNS Try this: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns CANDLESTICK Refer to: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_cand TECHNICAL INDICATORS Try stockcharts.com chart school. It is free education.  http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators

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[9.1] Lesson 6: stock pick: ETF, stock or basic call option (step 3)

Learn how to pick the right stock, ETF or option to buy in 3 easy steps:-

Step 1 – screen for uptrending stocks that meet basic fundamentals

Step 2 – analyze the watch list from above to qualify for options trading

Step 3 – short list and determine the instrument to buy

Step 1 was explained in Lesson 4 (http://trendtrader-kk.blogspot.com/2011/08/x-lesson-4-stock-pick-etf-stock-or.html) , where uptrending stocks that also meet basic fundamentals can be screened and filtered out into a watchlist. This watchlist can be further analyzed to match a set criteria and qualify for option trading (see Lesson 5, Step 2).

This article:-

Step 3

 How do we short list and determine which instrument to buy? From the analyzed watchlist in step 2, we have a number of “good” counters, selected sector ETF as well as the related options to buy. The next step is to use charts and technical indicators for buying or selling signals.

There are many schools and chartists on the internet. There are too many claims of success stories but how many of them are friends of yours? Do you trust your friends who made and are still making money from trading stocks or would you listen from a total stranger’s so called success story?

Let me try to help:

1. Make trading simple. Lesser technical indicators the better – candlesticks, Bollinger bands, momentum and moving averages will do.
2. Recognize some popular chart patterns – double tops, double bottoms, resistance and support.
3. Draw trend lines and boxes in your charts to check on your trades.
4. Make all trades mechanical to avoid emotions interfering with your decisions.
5. Practice strict money management rules        
• ⅓ of total capital each trade 
• Use money that you can afford to lose 
•  Leverage (margins or CFD) only to add to winning positions
6. Follow the current trend – i.e. buy call option when market is bullish or buy put option when market is bearish. So far, this is the simplest way for me.

The 6 above are my basic cardinal rules which I follow for my trading. It is important that we set some rules, pin them on your wall and follow them strictly otherwise we may end up losing a lot of money. Thinking of trading rules is more important than thinking of the money to make.

CANDLESTICK

Try this book:

THE SECRET CODE OF JAPANESE CANDLESTICK by Felipe Tudela published by John Wiley & Sons Ltd

You may also refer to: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_cand

TECHNICAL INDICATORS

Use a few indicators. Too many may cause confusion and multiple signals.

Try stockcharts.com chart school. It is free education.

 http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators

For starters who are still hunting around, try this combination:

Bollinger bands (set to 12 day period instead of the standard 20 day) to identify trend reversals and entry or exit opportunities

            Set 5 day simple moving average line for entry or exit signals

            Momentum – to indicate overbought or oversold situation (RSI too slow)

            MACD Histogram at standard setting – to indicate trend continuity (may also use GMMA if available instead of MACD)

CHART PATTERNS

So many of them but I suggest you just try to memorise and quickly recognize a few will do.

Try this:

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns

Recommended read:

TREND TRADING by Daryl Guppy

(Aussie Guppy is also the person who introduced GMMA or Guppy Multiple Moving Average lines in many charts today. This GMMA provide excellent signals for trend continuity where we can decide to hold or close a trade).

EMOTION & MONEY

Best for us is to trade with our own spare money. Money that you do NOT need too urgently for the next one to 2 years will do. I strongly suggest not to trade with borrowed money – e.g. margin account, CFD, back overdraft or loans until one is an expert more or less.

Amount per trade may vary from person to person but I suggest that ⅓ of total capital is the best for starters. Some gurus encourage 10% but I feel that such a small portion can make one too relax and lose focus. Maybe the max up to 20% (split into 5 portions).

STOPS

Setting stops is the most important practice. It takes out the emotion in us when sell signals appear otherwise we may be clouded by emotions and become greedy or rely on hope. When sell signal appears, SELL. Holding on may result in losses. Prices on the Stock Exchange are all perceptions. There are no fair values because the prices are reflection of the people’s feelings. If all of us feel bullish, then the market is bullish!

Make all trades mechanical.

 Recommended read:

How I made $2 million in the stock market by Nicholas Davas (www.kensingtonbooks.com)

(Synopsis: He used a simple box theory which can be used in our charts to show resistance and support easily)

Master the Markets by Tom Williams published by TradeGuider systems

(Synopsis: This book is about volume spread analysis. Price & volume action is the key to our chart reading. By reading volumes, we can identify smart money flow.)

GOTO NEXT LESSON:

How to buy options
Read charts with aid of technical indicators with example on qualifying the criteria for a stock option.

http://trendtrader-kk.blogspot.com/2011/09/94-how-to-buy-options-with-aid-of.html

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