Category: Your Money

Technical Analysis of the Financial Markets: Ch 4

Continuation of the review of the 4th chapter of John J. Murphy’s Technical Analysis of the Financial Markets (prev.)

Trendlines

imageThe simplest trendlines are the up trendline: a straight line drawn upward along successive reaction lows. A tentative trendline is initially drawn under the first two consecutively higher lows (points 1 & 3) and then confirmed at the 3rd test (ponit 5). A down trendline is similarly constructed over consecutively lower rally highs.

To draw a trendline:

  • The peak at 2 should be penetrated
  • 50% retracement of wave 2-3
  • Prices approach the top of 2
  • Confirmed once prices bounce off the line the third time (point 5)

As long as the trendlines are not violated, it can be used as buying and selling areas. A violation, however, is one of the best early warning of a change in trend. The longer the trend and the number of times it has been tested, the more its importance. Once a reversal occurs, what was once an up trendline, now acts as a resistance barrier for subsequent rallies. And what was once a down trendline, acts as support.

Up Next: The Fan Principle

Central bank gold buying at 40-year high

This is something that should perk up the ears of gold bugs out there: Central Banks purchased 148.4 tons in July-September, the largest since 2002. This is a huge reversal since the days when Central Banks sold gold all the way down to $300. Could this be a huge contrarian call that gold has peaked?

What caught my eye in this FT.com article is that China overtook India to become the largest consumer of gold jewelry in the third quarter. Chinese jewelry consumption rose 13% from a year earlier to 138.6 tons, while buying from India – traditionally the world’s top consumer – fell 26%.

It looks like the world’s most steadfast gold bugs are actually shying away from the yellow metal. Has gold become all that it can be?

Here are some Indian Gold ETFs you can places your bets on: GOLDBEES, KOTAKGOLD, RELGOLD.

Sunder’s List

Off to the races!

You can always be right if you say Yes and No at the same time: Which Morgan Stanley Should We Listen To?

For the technical analysis out there: the importance of Volume What the market’s light volume tells us Mark Hulbert

Hayward 5000 anyone? Anheuser-Busch Stays Classy With Bud Light Platinum

This time its different. I promise! Buyers and developers face some harsh home truths

Reminds me of when “CDO Managers” were being paid this kind of dough: The $200,000-a-Year Mine Worker

More technical analysis goodness: S&P Forms Potentially Super-Bullish Triangle Pattern

Are we set for a ‘Santa Claus’ rally? Related: Does India love Christmas?

Follow me on twitter @SunderStockViz

Santa Claus loves India (too)

The last couple of months are usually good for Indian markets. On an average, they have been up 2% in November and 6% in December. However, it looks like most of the gains are given up in January (down 5%, on average). With the Nifty down nearly 5% so far this month, it has a lot of catching up to do for the rest of November to get to the average.

Average Performance Month
-5% Jan
-1% Feb
2% Mar
1% Apr
-1% May
-1% Jun
4% Jul
2% Aug
3% Sept
-2% Oct
2% Nov
6% Dec

Light up the Christmas tree boys!

Technical Analysis of the Financial Markets: Ch 4

This is a review of the fourth chapter of John J. Murphy’s Technical Analysis of the Financial Markets.

What is a trend?

A trend is simply the direction of the market. Markets don’t move in straight lines, they zigzags through different levels forming peaks and troughs. The direction of these peaks and troughs constitutes a market trend.

imageAn uptrend is a series of successively higher peaks and troughs.

A downtrend is a series of successively lower peaks and troughs.image

A trendless/horizontal trend is a series of horizontal peaks and troughs.

Based on the trend, the trader could go long an uptrend, go short a downtrend and most importantly, do nothing in a trendless market.

Support and Resistance

The troughs are called supports. It is a level under the imagemarket where buying interest is sufficiently strong to overcome selling pressure. It is in this area that the decline is halted and and prices turn back up.

Resistance is the opposite of support; it is a level over the market where selling pressure overcomes buying pressure and prices decline.

In an uptrend, resistance levels represent pauses in price appreciation and are usually penetrated at some point. In a downtrend, support levels check the decline temporarily. For an uptrend to continue, each successive low (support) must be higher than the last one. Each rally high (resistance) should be higher than the previous one. If the corrective dip in an uptrend comes all the way down to the previous low (support), then a trend reversal might be in the offing.

imageThe longer the time (and higher the volume) that prices trade in a support or resistance area, the more significant the area becomes.

Whenever the support or resistance level is penetrated by a significant amount (3%), they reverse their roles and become opposites.

 

Up Next: Trendlines!