Technical analysis is the method of predicting future stock price movements based on observation of historical stock price movements. It is an essential tool in the armamentarium of covered call writers, and critical in achieving maximum success. We use technical analysis in our stock selection process, buy/sell decisions, strike price selections and exit strategy determinations.
There are a myriad of technical indicators, and the ones you choose may differ from those that I have incorporated into my system. In this article, I will briefly discuss the four technical indicators that are part of the BCI system (Moving Averages, MACD Histogram, Stochastics and Volume) and how to set them up in a technical chart.
Brief overview of the 4 technical parameters
Exponential Moving averages (20-d ema and 100-d ema) – An indicator frequently used in technical analysis showing the average value of a security’s price over a set period. Moving averages are generally used to identify trends and define areas of possible support and resistance. These are lagging indicators that are NOT predictive of future price movement.
MACD Histogram – A common technical indicator that illustrates the difference between two moving averages and its own moving average. This difference is then plotted on a chart in the form of a histogram (bar chart) to make it easy for a trader to determine a specific asset’s momentum. This is both a trend-identifying and momentum indicator that does have a predictive component to it.
Stochastic Oscillator – A momentum indicator that measures the price of a security relative to the high/low range over a set period of time. The indicator oscillates between 0 and 100. Readings below 20 are considered oversold. Readings above 80 are considered overbought.
Volume – The number of trades in a security over a period of time. On a chart, volume is usually represented as a histogram (vertical bars) below the price chart. It is used to confirm the significance of the other indicators and volume divergence can indicate a change in trends (for example if price is going up but volume is declining).
A chart showing all four indicators will be discussed later in this article.
Constructing a technical chart
First go to this FREE website: www.stockcharts.com
I- Create a chart now:
A- Style- Sharp Chart
B- Enter ticker symbol
C- Hit “Go”
*****see Figure below for II, III and IV:
II- Chart Attributes:
A- Periods- Daily
B- Range- 1 year
C- Type OHLC Bars
D- Size- 700 or landscape
E- Volume- Off
III- Overlays
A- Exp Moving Average- 20
B- Exp Moving Average- 100
IV- Indicators
A- MACD- 12, 26, 9- Below
B- Slow Stochastics- 14, 3- Below
C- Volume- Below
Once information is entered, click on “update”.
Setting up a technical chart on stockcharts.com
Setting up a technical chart
What to look for: An ideal chart
Bullish technical chart
There is so much information gleaned from this chart. Here are some highlights:
Ascending (bullish) moving averages
Positive MACD histogram (bullish)
Uptrending stochastic oscillator but in “overbought” territory (neutral to bullish)
Volume weakening slightly indicating a possible trend reversal.
Overall this is a bullish technical chart.
Conclusion:
There are numerous technical indicators and each investor must decide which are the best for his (her) needs. I’m happy to share with you the parameters I have used successfully for decades as they relate to covered call writing but respect those who choose others. Whichever indicators you ultimately use, my belief is that the important factors are:
- Use the same paranmeters for every security being evaluated technically
- Use a trend identifying indicator
- Use at least two momentum indicators
- Use volume for confirmation
- A system should be in place where a chart can be evaluated in a matter of seconds
For more detailed information on how technicval analysis is used in our BCI methodology see pages 35 – 84 in Alan Ellman’s Encyclopedia for Covered Call Writing.
Recently added seminars:
*August 16, 2013
The Money Show San Francisco: Two Presentations
Workshop 1: 9 – 9:30 AM
Workshop 2: 6- 7 PM
*April, 2014
Phoenix, Arizona: April, 2014: POINT Options Group
*January 10, 2015
Phoenix Chapter, American Association of Individual Investors (AAII)
Interesting article showing why we Blue Collar Investors must be able to make our own decisions and why the BCI team is motivated to do what it does:
http://www.zerohedge.com/news/2013-06-05/truth-about-wall-street-analysts-why-you-need-independence
Market tone:
A rough start to the week ended on a positive note:
- Non-farm payrolls in May increased by 175,000, higher than anticipated
- The unemployment rate in May ticked up to 7.6% due to more people ntering the work force. The Fed’s threshold for maintaining policy tightening remains @ 6.5%
- New orders for manufactured goods rose 1% in April after falling 4.7% in March
- According to the US Department of Commerce, construction spending rose by 0.4% in April, lower than the 0.8% expected, but 18.3% higher than April, 2012
- The ISM manufacturing index in May declined for the 3rd straight month to 49%
- The ISM non-manufacturing index rose by 0.6% to 53.7%
- According to the Beige Book 11 of the 12 Federal Reserve districts showed moderate growth since the last report
- The international trade deficit in April was up 8.5% since March to $40.3 billion but less than consensus estimate of $41 billion and 8% less than 2012’s deficit
For the week, the S&P 500 rose by 0.8% for a year-to-date return of 16%, including dividends.
Summary:
IBD: Uptrend under pressure
BCI: Cautiously bullish slightly favoring out-of-the-money strikes
Wishing you well from the beautiful city of Baltimore,
Alan (alan@thebluecollarinvestor.com)
www.thebluecollarinvestor.com
Alan,
Is there any one of these techical indicators more important then the others? Thanks for another great article.
Jesse
Jesse,
In my personal opinion, the price chart (with moving averages and volume) is the most important. With the price chart you can see price trend (movement and direction), support and resistance, well known patterns, moving average crosses, etc. As Alan always mentions, all important moves, patterns, changes is trend, etc. are confirmed by volume. As stated in Dow Theory, the foundation of modern technical analysis…everything that is known about a stock is reflected in the price. Of course, this assumes that the trader is not trading on inside information.
The other technical indicators, for the most part, confirm what you are seeing in the price chart. In some cases, technical indicators can give you an early earning of an impending change in trend. You need to remember the technical indicators were developed using price, volume, and time.
Best,
Barry
Jesse,
I view the exponential moving averages as primary in my evaluation but will not make an overall technical decision without looking at the other 3 parameters. I view TA as an art as much as a science and the parameters create a mosaic that must be evaluated in its entirety.
Alan
Premium Members,
This week’s Report for 06-07-13 has been uploaded to the Premium Member website and is available for download.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the BCI YouTube Channel link is:
http://www.youtube.com/user/BlueCollarInvestor
Best,
Alan, Barry and The BCI Team
Back from Baltimore:
I really enjoyed my trip to Baltimore and meeting the AAII members of that chapter. A special thanks to BCI members who traveled a distance to attend…it was my pleasure meeting you in person.
I shouild be all caught up with emails by the end of the week. All book and DVD orders will be shipped on Monday.
Below: me in action…(CLICK ON IMAGE TO ENLARGE & USE BACK ARROW TO RETURN TO BLOG)
Alan
More Baltimore:
Not a bad view from hotel:
Take the test:
A financial literacy test was recently given to over 25,000 adults asking the following questions:
1- If you have $100 in a savings account earning 2% per year, after 5 years you would have:
a) More than $102
b) Exactly $102
c) Less than $102
d) Don’t know
2- If your savings interest is 1% per year and inflation is 2% per year, after 1 year would the money in your account buy more than it does today, exactly the same or less than it does today?
3- If interest rates rise, bond prices:
a) Rise
b) Fall
c) Stay the same
d) There is no relationship
4- True or false:
A 15-year mortgae requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
5- True or false:
Buying a single company’s stock usually provides a safer return than a stock mutual fund.
Can you guess?
Which of our 50 states scored the highest on this test and what % of those tested from this state were able to get at least 4 correct answers?
I’ll post the answers later today.
Alan
Quiz answers:
1- a
2- less
3- b
4- true
5- false
Smartest state: UTAH
Percent who achieved at least 4 correct answers: 49%
What’s unbelievable is that even in the best state, only 49% of people could get all four of those questions. Something is really the matter with our education system. Also makes you realize that most people must have no money to worry about because you’d think everyone who spent any amount of time managing any amount of money would know those kinds of things. Scary.
Steve,
I was thinking the same thing but I must admit that I got tripped up by the bond question. Alan, who ran the survey?
Sara
Sara,
This was a FINRA State-by-State Financial Capability Survey.
Steve….very scary indeed.
Alan
Hitting a double with CAB:
I hit a double with CAB today. This is a stock currently on our premium watch list. Here are the trades:
5/20: STO June $70 call @ $3.70
6/3: BTC June $70 @ $0.70
6/10: STO June $70 @ $1.50
This generated an additional $80 per contract (less commissions) and a second income stream for the month into my account. Since I sold 5 contracts the additional profit was $400 (less commissions) for about 4 minutes of effort. A good trade became an even better trade. Take a look at the chart below that demonstrates the 3 trades. Note the classic “V” pattern when we “hit a double” (CLICK ON IMAGE TO ENLARGE & USE BACK ARROW TO RETURN):
Premium members:
This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.
***Due to the market downturn the number of available ETFs is less than usual. We expect the list to return to its typical size in the near
future.
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team
Running list stocks in the news: BIIB:
You may have noticed when we publish our weekly ETF reports that “health care” has been the leading sector (XLV), up 20% year-to-date. Biotechnology has been an outperformer within this sector and BIIB has been one of its stellar performers, up 30% YTD and has been part of our premium stock watch list for 15 consecutive weeks. Biogen is best known for development of MS drugs and has been a long-term growth story up 125% the past 2 years. Our premium “running ;list” shows an industry segment rank of “A” and a beta of 1.04. Analysts have been jumping on board projecting higher and higher earnings forecasts as shown in the screenshot below (CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO THIS BLOG):