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
A- Exp Moving Average- 20
B- Exp Moving Average- 100
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.
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
Workshop 1: 9 – 9:30 AM
Workshop 2: 6- 7 PM
*January 10, 2015
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:
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.
IBD: Uptrend under pressure
BCI: Cautiously bullish slightly favoring out-of-the-money strikes
Wishing you well from the beautiful city of Baltimore,
Alan ([email protected])