Category: Your Money

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!






Sunder’s List

Breakfast reading

Faster than you can say contagion! Eurozone bonds hit by mass sell-off

The only 20th century companies in his portfolio are IBM, Kraft, and Walmart: Buffett: Aged Companies ‘r’ Us

Long term technical analysis of Walmart: Wal-Mart has Built a Massive Decade-long Base

US postal service  going bankrupt?  USPS Weighs Hiring Restructuring Advisers

Lets raid the piggy bank: EU’s Rehn Backs German Eurobond Proposal

BlackRock chairman/CEO says liquidity is vanishing in Europe: CNBC

Now even your mom knows what the Euro crisis is about: Euro Crisis Breaks Through the ‘Mum Barrier’

For the masochistic: The west is in danger of frittering away its freedom

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When elephants fight…

Morgan Stanley says go short:

Today we entered a short EUR/USD trade at 1.3750. While Italian 10-year bond yields have tightened from the highs reached earlier this week, we believe yields still well above 6% are unsustainable for a debt market of 1.9tr EUR (third largest in the world). This means that Italy will need to spend nearly 10% of its annual GDP on interest payments alone. Meanwhile, political uncertainties add to concerns in the Eurozone, with new regimes in Greece and Italy. We remain fundamentally bearish on EUR, and believe it will retest 1.30 as Italy runs the risk of being “too big to save.”

Goldman Sachs says go long:

The nomination of Lucas Papademos as Greek PM governing with support from all key parties reduces the risks of escalating confrontation between other Eurozone countries and Greece. Indeed, the chance of more structural reforms being implemented in

Greece has risen as well. In Italy the high likelihood of a unity technocrat-led government being put in place over the weekend, led by Mario Monti, is also encouraging.

These two developments suggest that Eurozone fiscal tensions could continue to decline, at least for a period of time. FX markets had started to price extremely negative scenarios again in recent days as visible in risk reversals for example. Given the policy news described above, we think the fiscal risk premium can decline again in the near future and hence we see the potential for a quick EUR/$ move back towards 1.40.

We would go long EUR/$ with a narrow stop at 1.35 for an initial target of 1.40 (currently at 1.3715).

A day later, the EUR is buying $1.3532. I guess Morgan is winning this one!

Technical Analysis of the Financial Markets: Ch 3

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

Chart Construction

The daily bar chart is the most commonly used chart amongst technical analysts. It’s called a bar chart because each each day’s range is represented as a vertical bar. image

StockViz uses a variation of the bar chart called the candlesticks. These charts can be constructed for any time period. For example, one line can represent an entire week’s action with the High Low Open Close representing the week’s price movements instead of a day’s.

We have covered candlesticks before, it would be worth the effort to have a brief look at it before proceeding to the next chapter.


Up next: Trend Spotting

Sunder’s List

Must reads this morning

Investors are losing confidence in the euro and it has all the earmarks of turning into a run – Warren Buffett

Our generation is autonomous. It is impatient. We refuse to pay our dues: Generation Make

Anthony Bolton, one of Britain’s best known fund managers, has been forced to issue a humiliating apology after his fund lost 29% investing in China: Telegraph

Thus, when confronted with someone who has a fervent belief based not on evidence or reason or data or logic, do not waste your time convincing them the earth is not flat; their cognitive facilities simply will not allow them to recognize the world is round. The Cognitive Dissidents

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