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Basic
Technical Analysis is explained in depth at
Equity Alerts and by StockCharts.com
This
is a very brief explanation of how we use technical analysis
to help us determine when a stock we have been following
may have reached an excellent buying opportunity.
In order to take full advantage of the lessons learned there
investors will have to run several charts on the stock ir
stocks in question. The owners of this site use Big Charts
for daily examination of technical analysis. If you would
like to try it you are advised to try going to the following
URL and select bollinger bands, and RSI (relative strength)
as two of your variables using the interactive charting
provided by Big
Charts
Relative
Strength Index - RSI
This explanation can be found as part of a larger Technical
Analysis site provided by Equity Analytics, Ltd.
RSI is a momentum indicator that measures an equity's price
relative to itself. It is relative to its past performance.
It is also front weighted. Therefore, it gives a better
velocity reading than other indicators. RSI is less affected
by sharp rises or drops in an equity's price performance.
Thus, it filters out some of the 'noise' in a security's
trading activity.
RSI's absolute levels are 0 and 100. Traditionally, buy
signals are triggered at 30, and sell signals are triggered
at 70. However, many analysts are now using 20 for buy signals
and 80 for sell signals. I have found some interesting variations
of these buy and sell levels.
Any analysis indicates that the buy and sell level will
vary somewhat depending on the amount of days used in the
calculation. A shorter span of days will result in a more
volatile indicator that reaches further extremes. A longer
amount of days used in the calculation results in a less
volatile reading, which reaches extremes far less often.
We have also found that despite the fact that RSI is designed
to be able to measure multiple equities against each other,
it doesn't quite work out that way. Some securities may
pull back some when their RSI indicator reaches about 68,
others at 70, etc. Different securities seem to have slightly
different levels at which the price changes direction. These
levels are close to each other. But they seem to be particular
to each equity. Basically, the vast majority do seem to
change direction at 30 and 70. My point is that this is
not a hard and fast rule. There are subtle differences.
RSI treats price as a rubberband. The rubberband can be
stretched just so far. After a certain point, unless it
breaks, the rubberband is forced to contract. Keep in mind
that trades are not placed on RSI alone. RSI is a momentum
indicator which usually turns ahead of price. The important
thing to remember is that price is the ultimate determinant.
Bollinger
bands:
Bollinger Bands do not generate buy and sell signals alone.
They should be used with another indicator. I prefer to
use Bollinger Bands with RSI. This is because when price
touches one of the bands, it could indicate one of two things.
It could indicate a continuation of the trend; or it could
indicate a reaction the other way. So Bollinger Bands used
by themselves do not provideall of what technicians need
to know. Which is when to buy and sell. MACD can be substituted
for RSI.
However, when combined with an indicator such as RSI, they
become quite powerful. RSI is an excellent indicator with
respect to overbought and oversold conditions. Generally,
when price touches the upper Bollinger Band, and RSI is
below 70, we have an indication that the trend will continue.
Conversely, when price touches the lower Bollinger Band,
and RSI is above 30, we have an indication that the trend
should continue.
If we run into a situation where price touches the upper
Bollinger Band and RSI is above 70 (possibly approaching
80) we have an indication that the trend may reverse itself
and move downward. On the other hand, if price touches the
lower Bollinger Band and RSI is below 30 (possibly approaching
20) we have an indication that the trend may reverse itself
and move upward.
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