Technical analysis, using candlestick charts, allows you to gain a quick snapshot of the price action without bogging down in the details.
Today (Tuesday), the TSX opened above Monday’s close and high for that day. The high is indicated by the shadow on Monday’s candlestick. So, we had a very nice opening to start Tuesday trading: the opening is the rudder for the trading day.
Then the market continued to trade higher and closed at 13,712 which was very close to the high of 13,714. Anytime a stock or index closes near the high of the day, that is a very good closing. It is called a shaven head white candlestick because there is no shadow.
Another important principle to discuss regarding technical analysis is the reversal of resistance to support. Yes, when resistance is penetrated with a close above that level, that resistance level (13,500) reverses rolls and now becomes support.
Today’s chart snippet for the Toronto Stock Exchange S&P/TSX Composite Index shows the bullish white candlestick which closed at 13,551. This was a close above the resistance level of 13,500. View the this full size customized chart which is provided by BigCharts.
Now, for the rally to continue, the tsx should open at or above the close of today and end higher tomorrow: in other words, another white candlestick. Bulls like tall white candlesticks with small shadows or none at all.
Talking about shadows, a candlestick with no lower shadow is said to have a shaven bottom. And you guessed it, a candlestick with no upper shadow is said to have a shaven head. In a white candlestick, this is a very bullish pattern depending on the height. And in a dark candlestick, it is considered very negative.
All the market news is reflected in today’s candlestick: Egyptian protests, price of crude, copper at a all time high and the list goes on. How the market indexes or individual equities react to both good and bad news is an important observation in technical analysis. One guideline, if a stock does not sell-off on bad news then it is going up.
The most important point of technical analysis is to determine the trend for an index or equity.
This post will summarize the price action for the TSX over the past week. You can trade online using the graphical representation of candlestick charts.
The snippet of the first chart to the right, taken from this 3-year weekly chart of the TSX, reveals that the major trend (over six months) is up. You can draw a trend line under the lows to define the trend, but in this case the 50-day moving average is a good trend line. The snippet also shows two congestion areas on the weekly candlestick chart for the TSX: prices never go straight up but advance like the steps in a staircase.
Now, I will focus the analysis on the daily candlestick chart to determine the intermediate trend (three weeks to three months) and the near-term trend (less than two or three weeks) for the TSX.
TSX Daily Chart - Jan 28, 2011
The snippet of the second chart taken from this 6-month customized daily chart of the index focuses on the January congestion zone which is highlighted in the yellow box on the first chart.
Trend can go three ways: up, down and sideways. And, any index or equity can spend a lot of time trading sideways in a lateral trading range. The near-term trend for the index is sideways with support at 13,200 and resistance at 13,500.
Let’s focus on the price action for the TSX over the past week of January 24-28. You can review posts for some notes on the daily action.
Daily Chart - TSX
On Tuesday, the shadow of the spinning top bounced off support at 13,200. On Wednesday, the bullish candlestick was very encouraging. On Thursday, there was no follow through on the bullish candlestick and the spinning top spelled indecision with a feeble attempt to break 13, 500: this was not encouraging. Then, on Friday, the shooting star flamed out on its attempt at 13, 500.
This congestion zone must be monitored carefully as the rally that started in August looks a little extended. A close below 13,200 would be taken very seriously by most traders.
Technical analysis can be adapted to any time frame. Today, we continue our analysis of the near-term trend (less than two or three weeks) for the TSX.
The index is still in a consolidation phase with resistance at 13,500 and support at 13,200. If the index breaks 13,200 on the downside, the major support level is then 13,000.
What did today’s candlestick reveal?
It was a small red candlestick with no major negative implications when viewed on its own. When viewed in relation to the previous day’s tall white candlestick, it is classed as a harami cross ( inside day) formation. In other words, the price movement was within the range of the previous day’s action. It just confirms the consolidation phase (sideways) for the TSX and was not a positive pattern after a tall white candlestick.
The index must break and hold above 13,500 to confirm a new upleg in the market.
The TSX looks a little tired at this stage . Be cautious about adding to long positions.
The chart snippet above was snipped from this 6-month live chart. This large chart will give you a better overall view of the trend and includes other customized indicators.
Yes, it is definitely up. Defining the tend is the most important concept in technical analysis. You must always trade in the direction of the trend and jump aboard for the ride. Use candlesticks and other confirming indicators — moving averages, on balance volume and momentum indicators — to determine when it is time to exit the trade. All the indicators will be reviewed in future posts using real time examples. And, the objective of the site is to keep-it-simple: anyone can complicate a topic.
BCE 3-Year Weekly Chart
See the article in the National Post on the analyst upgrade for BCE.
Technical analysis provides a graphical picture of the market and one of the most colorful components is the mighty candlestick: a light to illuminate the darkness at the end of the tunnel.
The January snippet to the right — showing the bullish candlestick for today — was snipped from this 6-month daily candlestick chart . This is a live chart that changes daily. Refer to this live 6-month chart for a better overall view of the trend and the chart pattern.
So what are the components of a white bullish candlestick?
It should be a relatively tall compared to other candlesticks in the chart pattern. This indicates a nice price move for the day: the TSX closed at 13,465.75, up 206.12 points, or 1.6 per cent.
It should open close to the low of the day and close near the high of the day as indicated by small shadows (wicks). In other words, buyers came in at the open and kept buying right to the top. The price movement was nearly straight up for the day with very little selling pressure.
The energy and materials stocks were the big movers today. Traders saw support developing around the 13,300 level and went for the ride. But, unless there is a break above 13,500; the TSX is still in a consolidation (sideways) trading range. Will there be a follow-through on the buying tomorrow? Or will the day traders start selling at the 13,500 level?
For an investor with a longer term perspective, I would not buy into the market unless there is a confirmed close above 13,500. Then you maybe able to ride another upward leg in the index.
Technical analysis gives you a guidepost to make investment decisions and takes some of the emotions out of those decisions.
TSX Daily Chart - Jan 24, 2011
The snippet of today’s chart is snipped from a customized 6-month daily candlestick chart of the TSX. I use the 6-month and the 1-year daily charts to establish the near-term trend (less than three weeks) of the TSX index. The 40-day, 20-day, and 10-day moving averages are used in conjunction with the candlesticks as confirming indicators: the 40-day average is currently a support level on the chart. The following is a summary of the price action on the chart:
Bearish Engulfing Pattern (highlighted in red) formed last Wednesday which was very negative after the TSX broke 13,500 on Tuesday.
On Thursday, the market gapped down and a spinning top candlestick formed with the shadow touching the 40-day moving average. This candlestick shows indecision in the market with a battle between the bulls and bears. The plus on this day was that the 40-day moving average was not breached.
On Friday, the market sold off on heavy volume but held the 40-day average.
Today, another spinning top candlestick formed. There are two pluses for the day: the market bounced off the 40-day and closed above 13,300.
Conclusion:The major trend (in effect for six months to a year) as seen on the 3-year weekly chart is up as defined by the 50-day simple moving average. The 40-day moving average as seen on the 6-month daily chart and in the snippet is also a good approximation of the the trend. But, as discussed in today’s analysis; the short-term trend is moving in a sideways (consolidation) pattern. The recommended strategy at this stage is to invest no new money in the TSX until there is a confirmed break above 13,500. If the market breaks down through the 40-day moving average on the daily chart, it is time to liquidate some long positions. Major support is at 13,000 and a break through this level could see a retracement to the 12,500 level.
Note: This analysis is for educational purposes. Please conduct your own analysis or consult your financial advisor before making investment decisions
The chart snippets are from BigCharts.com which I recommend and have used for fifteen years.