Monday, March 31, 2008

Technical Analysis


Market analysis, in the simplest term, is the study to determine price direction. Whether that movement is up, down or sideways. Timing the price direction has been the trick for most analysts. The two critical events for traders is where and when. From Wall Street to LaSalle Street the country is full of ex-traders who were right on calling a market move but dead wrong on timing. Looking at the most popular market in history, namely the stock market, I want to point out two reliable tools that have so far been uncanny in helping to pinpoint both time and price with a small degree of error in determining important market bottoms this year.
The first tool is the study of cyclical analysis. The study of cycles, or the reoccurrence of events, like predicting tops and bottoms of market prices, is a fascinating tool. Cycles like timing the sunset or tide changes can be useful in determining turning points for those events. It is also an important trader's tool for predicting price points. According to some traders due to the unpredictability of future market behavior derived from past performance, it is not a consistently accurate trading tool.
However, I wish to point out the coincident factor of recent Equity market price behavior and show you how it has been an incredible tool in determining the major short term bottoms in the Dow futures contracts so far this year.
The other traders tool is using Pivot Point analysis from different time frames, to help calculate the corresponding support numbers when these cyclical lows have occurred.
To better understand the methodology behind cycles let's first examine the foundation of the basics behind the principles. First, I want to review the four important topics or principles of cycle analysis.
1. The first is Summation, which is the addition or measurement of two or more cycle lengths.
2. The next is Harmonically interacting cycles. This is where the price will react with a cycle within a cycle.
3. The concept of Synchronicity relates to the market price having a strong tendency to repeat at the same time.
4. The last principle is for Proportionality. This has to deal with the time interval of corresponding price behavior (tops or bottoms) and the price movement or market reaction from that point.
Fibonacci Pivot Point Analysisis a famous technique that is used as a price forecasting method for day traders and professional traders as well. It is very popular among professionals. Let me point out one more issue on time. In every given month there are usually four business weeks and twenty-two business days. In some instances, if you break it down, one day of one week in a given month a high and or a low will be established, thus creating the range for that month. How can we, as traders break it down to help determine what the high or low for that time period will be? Well trend lines or prior price targets help, but the aid of using Pivot point analysis for all time periods is essential. The benefits to you may help improve your timing of entry and exit points of the market.
Most novice individual investors and even brokers are not familiar with this formula. I believe that most inexperienced investors have a hard time with incorporating this technique in their trading "tool box" due to the time it takes to calculate the numbers. But make no mistake the professionals' look at it and so should you.
First here is the mathematical formula where P= Pivot point; C= Close: H= High: and L= Low.
The Pivot point number is the high, low, close added up and then divided by three. P=(H+L+C)/3= pivot point
Now for the first resistance level take the pivot point number times two and then subtract the low. (Px2)-L= Resistance 1
For the second resistance, take the pivot point number add the high and then subtract the low. P+H-L= Resistance 2
For the first support take the pivot point number times two and then subtract the high. (Px2)-H = Support 1
For the second support, take the pivot point number subtract the high and then add the low. P-H+L= Support 2
All right, now that we have that established you can see it is a detailed formula. So let's try to simplify it. Consider the actual Pivot Point as the average of the previous sessions trading range combined with the closing price. Based on the past weight of the markets strength or weakness, which is derived from the calculations of the high, low and distance from the close of those points.
One method for using these support and resistance numbers is to consider them as the potential range for the next trading session's time frame. The previous sessions trading range could be based and calculated for an hour, a day, a week or a month.
Another method that Pivot Point analysis is used for is identifying breakout points from the support and resistance calculations from the R-1, R-2, S-1 and the S-2 numbers.
Since most technical analysis is derived from mathematical calculations the common denominators that are used are the high, low, close and the open. This is what is used for plotting a bar chart. More notarized techniques like Moving averages, Relative Strength Index, Stochastics, and Fibonacci numbers are all calculated using mathematics based on those points of interest. It is also what is published in the Newspapers. It is there for a reason. The concept is this, as technical analysts we are trying to use past price behavior to help us indicate future price direction. I am not trying to predict the future I just want an Idea of where prices can go in a given time period based on where they have been. After all isn't that similar to the concept of drawing trend lines?
Verify, verify and verify. What it means to me is this, before deciding to invest or make a trade, if I understand the underlying fundamentals, I would want to look at a chart to confirm the trend and then I would look at varying technical indicators to help confirm my beliefs.
By incorporating different techniques like cycle studies and pivot point analysis, the figures help me speed up my analytical process. With these numbers I can take my charts and draw lines with the support and resistance numbers on them to see if they help clear the "visual" picture. This is one technique that traders should try. Verifying the validity of cycles is a relatively easy task. One can back test with a software program or manually by visualizing with charts by a ruler and a calendar.
I want to also introduce the basic theory of Fibonacci, as it is an important element in the price behavior of this study. Thirteenth century Italian mathematician Leonardo Fibonacci concluded that a number sequence reflected human nature and that patterns repeated themselves in a certain order. The Fibonacci Series, as it is called, is an infinite series of numbers that adds each number to the previous. An example is 1,1,2,3,5,8,13,21,34,55,89,144… These numbers are used to help cycle analysts time market turns, lengths of price moves. Major tops or bottoms are often calculated by starting with the event of a high or low and then calculating out in time by price increments that correspond to the Fibonacci series. Fibonacci is also famous for the ratios derived from the number series. For example .382%, .50% and .616% are the most popular of numbers. More detailed numbers include .786%, 1.00%, 1.272% and 1.618%. Some programmers and sophisticated analysts will multiply or subtract from either a time series or a price level to help them calculate a price extension or correction as well as a time event on the axis of a chart. Taking a number from the Fibonacci series and applying it to the time axis of a chart, one can look for the repetitive, or coincident sequence of highs and lows. This will assist a trader to project or anticipate the next time series of events in the future.
The importance of the cycle of the five-month market low is, the number five is a Fibonacci Series number. What about the 11-week cycle what is the relationship there? Harmonically, it is extremely relevant as 11 weeks represents nearly half or .50% of the value of five months. The next intricate study is when we dissect the 11 week cycle you will conclude that it represents 55 trading days and there is the exact tie in from a Fibonacci sequence number of 55. This is what I would consider a strong confluence of sequence numbers
Fibonacci Pivot Point Analysisis a famous technique that is used as a price forecasting method for day traders and professional traders as well. It is very popular among professionals. Let me point out one more issue on time. In every given month there are usually four business weeks and twenty-two business days. In some instances, if you break it down, one day of one week in a given month a high and or a low will be established, thus creating the range for that month. How can we, as traders break it down to help determine what the high or low for that time period will be? Well trend lines or prior price targets help, but the aid of using Pivot point analysis for all time periods is essential. The benefits to you may help improve your timing of entry and exit points of the market.
Most novice individual investors and even brokers are not familiar with this formula. I believe that most inexperienced investors have a hard time with incorporating this technique in their trading "tool box" due to the time it takes to calculate the numbers. But make no mistake the professionals' look at it and so should you.
First here is the mathematical formula where P= Pivot point; C= Close: H= High: and L= Low.
The Pivot point number is the high, low, close added up and then divided by three. P=(H+L+C)/3= pivot point
Now for the first resistance level take the pivot point number times two and then subtract the low. (Px2)-L= Resistance 1
For the second resistance, take the pivot point number add the high and then subtract the low. P+H-L= Resistance 2
For the first support take the pivot point number times two and then subtract the high. (Px2)-H = Support 1
For the second support, take the pivot point number subtract the high and then add the low. P-H+L= Support 2
All right, now that we have that established you can see it is a detailed formula. So let's try to simplify it. Consider the actual Pivot Point as the average of the previous sessions trading range combined with the closing price. Based on the past weight of the markets strength or weakness, which is derived from the calculations of the high, low and distance from the close of those points.
One method for using these support and resistance numbers is to consider them as the potential range for the next trading session's time frame. The previous sessions trading range could be based and calculated for an hour, a day, a week or a month.
Another method that Pivot Point analysis is used for is identifying breakout points from the support and resistance calculations from the R-1, R-2, S-1 and the S-2 numbers.
Since most technical analysis is derived from mathematical calculations the common denominators that are used are the high, low, close and the open. This is what is used for plotting a bar chart. More notarized techniques like Moving averages, Relative Strength Index, Stochastics, and Fibonacci numbers are all calculated using mathematics based on those points of interest. It is also what is published in the Newspapers. It is there for a reason. The concept is this, as technical analysts we are trying to use past price behavior to help us indicate future price direction. I am not trying to predict the future I just want an Idea of where prices can go in a given time period based on where they have been. After all isn't that similar to the concept of drawing trend lines?
Verify, verify and verify. What it means to me is this, before deciding to invest or make a trade, if I understand the underlying fundamentals, I would want to look at a chart to confirm the trend and then I would look at varying technical indicators to help confirm my beliefs.
By incorporating different techniques like cycle studies and pivot point analysis, the figures help me speed up my analytical process. With these numbers I can take my charts and draw lines with the support and resistance numbers on them to see if they help clear the "visual" picture. This is one technique that traders should try. Verifying the validity of cycles is a relatively easy task. One can back test with a software program or manually by visualizing with charts by a ruler and a calendar.
I want to also introduce the basic theory of Fibonacci, as it is an important element in the price behavior of this study. Thirteenth century Italian mathematician Leonardo Fibonacci concluded that a number sequence reflected human nature and that patterns repeated themselves in a certain order. The Fibonacci Series, as it is called, is an infinite series of numbers that adds each number to the previous. An example is 1,1,2,3,5,8,13,21,34,55,89,144… These numbers are used to help cycle analysts time market turns, lengths of price moves. Major tops or bottoms are often calculated by starting with the event of a high or low and then calculating out in time by price increments that correspond to the Fibonacci series. Fibonacci is also famous for the ratios derived from the number series. For example .382%, .50% and .616% are the most popular of numbers. More detailed numbers include .786%, 1.00%, 1.272% and 1.618%. Some programmers and sophisticated analysts will multiply or subtract from either a time series or a price level to help them calculate a price extension or correction as well as a time event on the axis of a chart. Taking a number from the Fibonacci series and applying it to the time axis of a chart, one can look for the repetitive, or coincident sequence of highs and lows. This will assist a trader to project or anticipate the next time series of events in the future.
The importance of the cycle of the five-month market low is, the number five is a Fibonacci Series number. What about the 11-week cycle what is the relationship there? Harmonically, it is extremely relevant as 11 weeks represents nearly half or .50% of the value of five months. The next intricate study is when we dissect the 11 week cycle you will conclude that it represents 55 trading days and there is the exact tie in from a Fibonacci sequence number of 55. This is what I would consider a strong confluence of sequence numbers.


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6 comments:

Uma said...

Cheema, you started a blog! Very informative, I will read often.

geniusjaggu said...

oye paji,
a kya likha hai??,ise padte/dekhte hi mujhe phir se bhukhaar aane laga hai :D

keep the good work :)
with love,
jaggu

Uma said...

lol jaggu!!!!!!!!!

Uma said...

where's cheema??

geniusjaggu said...

it looks like cheema has gone on vacation to Switzerland :)

cheemaji,
Happy Holidays :)

geniusjaggu said...

arre mian...aadaab barzhai..

kuch to market ke baare main hume update karo(candlesticks please)..kya ek short story likh ke rakha hai... :)

with love from turkey,
jaggu mian