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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis

Technical  Analysis Categories

 - Types of Charts
      * Bar Charts
      * Line Charts
      * Candlestick Charts

 - Chart Reading
      * Trendlines
      *  Resistance Levels
      *  Support Levels

 - Moving Average
     * Simple Moving Average
      * Weighted Moving Average
      * Exponential Moving Average
      * Triangular Moving Average

 - Momentum Indicators &
    Oscillators
 - Rate of Change
 - Relative Strength Index
 - Moving Averages
    Convergence /  Divergences
 - Price Oscillator
 - Stochastic
 - Money Flow Index
 - Williams %R
 - Volume + Moving Average

 - Stock Chart Overlays:
 - Bollinger Bands
 - Parabolic SAR

 - Stock Chart Patterns:
     * Head and Shoulders
     * V Formations
     * Double Tops and Bottoms
     * Triple Tops and Bottoms
     * Saucers - Rounded Tops and
         Bottoms
     * Ascending, Descending and
         Symmetrical Triangles
     * Channels - Rectangles
     * Rising and Falling Wedges
     * Bullish and Bearish Flags
     * Pennants
     * Diamonds
     * Cup and Handle
     * Pan and Handle
     * Spikes
     * One-Day Reversals
     * Island Reversal

 - Dow Theory

 - Elliot Wave Theory

 - Spinella Heart Rate Theory

 - Fibonacci

 

 

 


Moving Averages

Moving averages measure the direction and momentum of a security. They are lagging indicators, because they are developed from historical stock prices. Moving averages are especially useful in analyzing upward and downward trends. The longer moving averages are of value in verifying the major trends in a stock. The shorter moving averages are good at identifying new trend movements. As with all statistics, a smaller time frame can show more details, but it can often be misleading, and obscure the larger picture. Moving averages are particularly effective when stock prices are mirroring the general direction of the major trend. However, when prices move against the trend, because of the delayed effect of using averages, they can actually become misleading.

Additionally, any one-day price blip can result in a misleading average. Todayís computer models can measure moving averages for practically any time duration. Typically, 5, 10, 20, 50, 100, and 200-day moving averages are utilized. Before making investment decisions, always analyze the short-term (5 and 10 day), as well as the long-term (50, 100, and 200-day) moving averages.

Because longer-term time periods skew results towards prior historical prices, various statistical averages have been developed to give greater weight to the current stock prices. The four main moving averages that are currently used are:

  • Simple Moving Average Ė It is calculated by adding the sum of the closing stock prices for a selected period of time, then dividing by the number of periods. For example, for a 5 day moving average, one needs to add up the closing stock prices for the past 5 days, then divide by 5. Itís easy to see that an unusual blip in a closing price can distort the trendline.
  • Weighted Moving Average Ė Itís the sum of the daysí weighted averages, assigning a heavier weight to the most recent stock price, and the least weight to the oldest price. For example using a 5-day moving average, the current price would be weighted as 5/15, and the prior dayís price would is 4/15, while the first dayís price would be given a weight of 1/15.
  • Exponential Moving Average ("EMA") Ė This algebraic formula gives more weight to the recent stock prices, and less weight to the prior stock prices. This enables individuals to identify trends early on, and to react quickly.
  • Triangular Moving Average Ė The majority of the weight is placed in the middle part of the time frame, resulting in a smoother representation of the direction of the average.

Pure technical investors look at the direction of the slope of the moving average. If the direction is upwards, itís a signal to buy / long the security. If the moving average is sloping down, itís an indication to sell or short the security. I break from the traditional technical analyst views and evaluate each stock on its own individual merits.

Reproduced with permission of Yahoo! Inc. 2004 by Yahoo! Inc.
YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.

Itís important to realize the relationship of the actual stock price to its moving average. Using the above diagram of Johnson & Johnson as an example, by overlaying the companyís moving average onto its stock chart, one is basically dealing with two trendlines. The actual daily stock price is the fast trendline; the moving average is the slower of the two. The moving average eliminates some the choppiness inherent in the daily fluctuations of stock prices, making it easier to identify trends. Some of the stock momentum indicators also use two trendlines. The first trendline is usually an algebraic formula based on historical prices. The second trendline is often a slower moving average of the faster moving trend.

I used Johnson and Johnson as an example because it is one of the best of the international healthcare conglomerates, and a solid holding for most portfolios.

One can see from the JNJ diagram that while moving averages are a following, rather than future indicator, they can be extremely helpful when timing investment decisions.

 

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