Technical Analysis: General Steps

Technical Analysis: General Steps

Many technicians apply a top-down approach that begins with broad-based market analysis, then narrows down to specific sectors/industries, and ultimately analyzes individual stocks.

The beauty of technical analysis lies in its versatility. Because technical analysis principles are ubiquitous, all of these levels of analysis can be conducted using the same theoretical underpinnings. Doing analysis on a market index chart does not require an economics degree. It is not necessary to be a qualified public accountant to analyze a stock chart. Charts are just that—charts. It makes no difference if the timeframe is two days or two years. Whether you are looking at a stock, market index, or commodity makes no difference. Using technical principles like trend, trading range, support, resistance, and others can help any chart. Despite its apparent simplicity, technical analysis is quite intricate. Success requires dedication, a keen mind, and serious study.

Chart Analysis Basics

Technical analysis can be either simple or complicated.,How you use it will determine this.Some fundamental concepts of chart analysis are  demonstrated in the example below. The emphasis will be on identifying bullish scenarios in this chart because you are most likely interested in  purchasing stocks.

Overall Trend. Finding the general trend is the first step. Trend lines, moving averages, and peak/trough analysis can all be used for this. For instance, the trend is upward as long as the price stays above certain moving averages or its upward-sloping trend line. Likewise, as long as higher highs develop on advances and higher lows form on pullbacks, the trend is upward.

Support. Congestion areas and previous lows below the current price mark the support levels. A break below support would be considered bearish and detrimental to the overall trend.

Resistance. regions of congestion and past highs above the resistance levels of the present price mark. It would be deemed bullish and favorable for the trend as a whole if resistance were broken.

Momentum. Momentum is usually measured with an oscillator such as MACD. If MACD is above its 9-day EMA (exponential moving average) or positive, momentum will be considered bullish or at least improving.

Buying/Selling Pressure. For stocks and indices with volume figures available, an indicator that uses volume is used to measure buying or selling pressure. When the Chaikin Money Flow is above zero, buying pressure is dominant. Selling pressure is dominant when it is below zero.

Relative Strength. regions of congestion and past highs above the resistance levels of the present price mark. It would be deemed bullish and favorable for the trend as a whole if resistance were broken.

The final step is to synthesize the above analysis to ascertain the following:

• Strength of the current trend.
• Maturity or stage of the current trend.
• Reward-to-risk ratio of a new position.
• Potential entry levels for a new long position.

The example above analyzed the chart for an individual stock, but these techniques can be applied to sectors or broad market indexes.

Top-Down Technical Analysis

Many technicians employ a top-down approach to technical analysis, starting with broad-based macro analysis and ending with a more focused/micro perspective:

1. Broad market analysis using major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite.
2. Sector analysis to identify the strongest and weakest groups within the broader market.
3. Individual stock analysis to identify the strongest and weakest stocks within select groups.

An investor would examine both short-term and long-term charts for each segment (market, sector, and stock) to identify those that fit particular standards. First, the market as a whole—possibly the S&P 500—will be examined. Analyses would move on to a variety of sector charts if the overall market were thought to be in a bullish state.sector charts.

Those sectors that show the most promise would be singled out for individual stock analysis. Once the sector list is narrowed to 3-4 industry groups, individual stock selection can begin.

Three to four of the most promising stocks in each group might be chosen from a selection of ten to twenty stock charts from each industry. The stringency of the established criteria will determine how many stocks or industry associations make the final cut. In this case, we would only have nine or twelve equities to select from. The 3–4 stocks that are the strongest of the strong could be identified by further dissecting these equities.

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