[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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