The first step in technical analysis is determining the overall trend for the market.
Take a look at the 3 year weekly candlestick chart (each candlestick shows the price range for the week) and the 1 year daily candlestick chart (each candlestick shows the price range for each day) for the Canadian stock market. The overall trend is up on both these charts. Since September, the 50-day moving average has defined the trend.
2 Month Daily Chart - TSX
Yesterday, the index broke 13,500 which is the white candlestick in the yellow circle on the chart snippet to the right. The red candlestick in the circle is today’s negative move — opened above 13,500 and closed below 13, 500. The two candlestick pattern in the yellow circle is a bearish engulfing pattern where the market opens — the red candlestick — above the previous white candlestick and then closes below the white candlestick: it has negative implications. The bearish engulfing pattern is in the broad category of reversal patterns.
More analysis to come on this post — candlestick combination highlighted in the circle and the moving averages.
13,500 is an area of major resistance for TSX.
TSX At Midday on Jan 18, 2011
It broke this level at midday. Will it hold above this level today, and how will it react tomorrow at the open? These are important questions as one decides to commit more money to the market.
The chart at the right is a snippet of the daily candlestick chart for the TSX. The red line is the 40-day moving average, the blue line is the 20-day moving average and the yellow line is the 10-day moving average. I use these three averages on the 6-month and 1-year charts with daily candlesticks. Each candlestick represents a day of price action.
Update: Market Close
The TSX is in good shape at this stage as the market closed at 13,559 near the high of the day:
- The price is above all three short-term moving averages — 10-day, 20-day and 40-day.
- The 10-day moving average has not crossed below the 20-day average.
- The market closed on a nice white candlestick — opened low and closed on a high.
An important aspect of support and resistance is whenever resistance is penetrated — 13,500 in this case — it reverses its role and now becomes support. So, is 13,500 a new support level for the TSX? Yes, it is now support but the level has not been tested and the level has only been broken for one day.
Where will the market open tomorrow?
What is the major trend for the TSX?
That is the first point in technical analysis: you cannot invest against the trend. Take a look at the current 3-year weekly chart for the TSX.
It is evident that the major trend — being in effect for at least six months — is up. Over the last five months (August – January), the 50-day moving average has defined the trend.
TSX Weekly Chart - Jan 14.11
This week, the 50-day average acted as support on a pullback. Another point to note on the 3-year chart is the area of major resistance which is currently 13,500. Major support on this chart would be 13,000.
The snippet of the chart at the right highlights the trend line and the areas of major support and major resistance. Trend line, support and resistance are important concepts in technical analysis. Future posts will explain these concepts in detail.
The next post will focus on the one-year chart with daily candlesticks (the price action for one day). This will give us a better picture of the intermediate (three weeks to three months) and near-term (less than two or three weeks) trends.
What are the appropriate trading strategies based on this 3-year chart:
- The TSX is in a consolidation phase. Do not add to long positions
- A close above 13,500 would would be a signal to add to long positions.
- A close below 13,000 would be a signal to liquidate some long positions.
- A close below 13,000 may also be a signal for some experienced traders to take short positions.
Note: Each candlestick on the chart represents one week of price action.
Note: The above analysis is for educational purposes. You should conduct your own analysis or contact your financial advisor before making trading decisions.
This is a major coal mining company in the US. Coal stocks are moving up due to the projected demand in China for metallurgical coal.
Take a look at the 3 year chart. This is the start of a classic chart pattern with a break at $25 which is major resistance. Now the stock must hold above $25. An important concept in technical analysis is support and resistance. Once a stock breaks resistance; the price point becomes support. In the case of Patriot Coal, $25 is now major support; and I will sell the stock if it does not hold this price point.
You can see the momentum in the 1 year chart.
Disclosure: I have a long position in this company at a purchase price of $20.60
Alcoa ($16.49) has kicked off earnings season with the tone many analysts expected: Big, bright numbers that impress investors and add fuel to already bullish stock markets. But after this quarter, those eye-popping earnings gains may become harder to find.
Also, customize BigCharts and look at the weekly chart for Alcoa.
Adobe Systems raised to Buy from Neutral at BofA Merrill.
Take a look at the 3 year chart. The 50 day moving average is set to cross the 200 day moving average. I like the candlestick pattern and would set the stop loss at $30 and target $38 to sell the stock.
GE raised to Buy from Neutral at UBS.
Take a look at the the 3 year chart. This is not a spectacular chart but the stock is moving up. I would like to see this chart break $20 which is major resistance.
Pfizer Inc., the world’s largest drugmaker, is one of Barron’s top 10 stock picks for 2011 — even though the company’s shares fell nearly 4% last year.
Notice on the 1 year chart ( as of January 10, 2011) that the stock is consolidating in the $18.00 to $18.50 range. Look for a break at $18.50 to add to your position.