TRADING TOOL COMPATIBILITY Part II by Daryl Guppy

This article is in two parts. Click here for Part 1

The next most important issue is indicator compatibility. Determining this starts with a visual chart inspection and is based on the first step in analysis shown above. The chart example shows a rising trend from March through July. In this sense it meets the trending criteria we look for in the first question. However, this stock does not meet the indicator compatibility criteria.
Our reader suggested three methods of managing the trend. They were the count back line, the straight edge trend line and the 2xATR indicator. In assessing the trend we would apply only the first two of these. Our preference is to use the 2xATR as a trailing protect profit stop loss only if the trend develops unexpected momentum. The diagram shows the application.



In a steadily developing trend, shown as A, where volatility, or price changes, remain much the same, we apply the count back line and straight edge trend line. These techniques are used to protect capital in the early stages of the developing trade. They are then quite satisfactorily applied to protect profits as the trade develops.

Some trends, shown as B, the price behaviour changes dramatically. The underlying trend remains intact, as shown by the straight edge trend line. However prices bubble upwards in an explosion of unsustainable momentum. The bubble signals significant changes in volatility. Prices behave differently. The collapse from this bubble is often dramatic, and can also cause a collapse of the underlying trend. For traders who own the stock and who have been managing this as a trend trade, this bubble presents an opportunity to take extra profits. The problem to resolve is how to best protect profits. In some circumstances the 2xATR does this most effectively. This is when we apply this indicator. We do not generally use it to manage trades during a stable trend. In a bubble situation we use a combination of CBL and 2xATR to develop the best solution for protecting profits.

The 2xATR approach is used by Chris Tate for general tend management. This is covered in detail in The Art Of Trading.



Indicator compatibility simply means that our preferred indicator has provided an effective solution to managing the trend in this stock in recent past. The chart shows an example of indicator incompatibility. Our preferred trend management tools are a straight edge trend line and a count back line. On the chart extract shown we show the count back line failure points because we want to highlight how indicator compatibility is assessed.

A close below the count back line, shown as the thick black line, signals an end of the trend and a trade exit. Each time a new high is made, the count back line is recalculated. A close below the CBL line triggers an exit from this trade on the grounds that the trend has an increased chance of failure. The balance of probability favouring a continuation of the trend has shifted.

The problem is that subsequent price action showed the trend did continue upwards. The exit signals defined by the count back line were false. We could not know this at the time. Traders have no choice but to exit the trade because the indicator suggests the up trend has ended.

If we were interested in trading this stock using our preferred combination of the count back line and a straight edge trend line then this chart tells us that this stock is incompatible with these techniques. Here is a most important point and it is relevant to any indicator combination we use. The price behaviour of this stock is not compatible with or responsive to our indicator. This does not mean the indicator fails. It simply means it is the wrong tool for this particular job.

Indicator compatibility is about finding the right tool for the job at hand. Home mechanics who use an SAE spanner on a Metric bolt understand the problem clearly. The tool – the spanner – is an excellent tool, but it doesn’t quite fit the job at hand – tightening a metric bolt. In this chart, the price behaviour does not fit the tools we prefer to use – the count back line. If this tool has been incompatible in the past it is unlikely to be compatible in the future.

There is a trend trade with this stock, but it cannot be effectively managed with our chosen tools.



The chart shows how indicator and trade compatibility are bought together in an effective trading solution. The tools we want to use are a straight edge trend line and a count back line. The objective is to join an established trend so this means that we must be able to plot a straight edge trend line with a good level of confidence. We look for a minimum of three rebound points.

Once this condition is established we then apply the count back line to establish if this has been compatible with trend management to date. The answer is yes and this suggests that this technique will continue to be useful in the coming weeks or months. A selection of previous CBL calculation points is shown by the red lines with red * at the calculation starting point.

Once a stock has been selected based on these compatibility factors the traders attention then turns to other factors such as price leverage, volume and the best entry point. Most times traders have to choose between a number of almost identical trading opportunities. The trader’s objective is to maximise the profits for any trade and this is helped by selecting stocks which offer better price leverage. Stocks trading at lower price levels have the capacity to boost profits more easily than stocks trading at $20 or higher.

Although it is human nature to hunt for a bargain, this is not always a good idea in the market. We have selected this stock because we believe it is in a strong trend. We bet against ourselves if we then wait for a price pullback – for weakness in the trend - before buying the stock. If the opportunity arises our preference is to buy the stock as close to the trend line, or the count back line as possible. We certainly do not want to pay the high price of a short term up trend, but nor do we want to miss out on this stock by waiting for a price collapse. The objective is to buy the stock at a reasonable price that is consistent with its recent trading range.


To read more articles and commentaries from Daryl Guppy, click HERE

***

Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.

CLASSIC AND CONTINUATION CHARTS by DARYL GUPPY

In the newsletter we use several varieties of chart displays. This includes two colour candle stick charts produced with GTE charting. The standard candle display with Metastock and many other US derived programs is to give a four colour candle chart. This, along with our recent articles on candle stick trading methods, has prompted many questions from readers so we look at the differences again.

We also use two colour bar charts. These are different from the two colour bar charts in Metastock and some other US based charting programs and this has left some readers confused. What they see on their screen is not the same as they see on our chart extracts.
The reason is the same as the reason for the difference in the candle charts. Some bar chart displays show Gann continuation charts. This is not quite as important with bar charts because traders do not use a collection of specific bar relationship patterns for trading. However it does impact on the way you see the chart.

INDICATOR – CLASSIC AND CONTINUATION PRICE DISPLAYS

The price bar and the candlestick are the basic ways of displaying price action. They show the open, high, low and close prices. The classic, or original, display examines the relationships between the open and the close on a single price bar or candle stick.

A Gann continuation chart examines the relationships between the prices of today and the prices of yesterday. This type of chart display is also called a swing chart display. The difference in display is very important because it has significant impact on the way we use charts for analysis.

APPLICATION
The classic bar chart display uses today’s open and close to determine the colour of the bar. When today’s close is higher than today’s open, the bar is shown as an up day – usually blue. When today’s close is lower than today’s open, the bar is shown as a down day – usually red. A classic candlestick display only has two colours, usually green and red, or blue and red.



The continuation bar chart display is an adaptation of Gann analysis techniques. In this display the definition of an up or down day depends on the relationship between today and yesterday. An up day is when the close of today is higher than the close of yesterday – usually shown as a blue bar. A down day is when the close of today is lower than the close of yesterday. Other price relationship combinations are shown as filled or unfilled candle sticks.



This means that a day where price opens today at $1.00 and closes today at $1.50 can still be shown as a DOWN day using a Gann continuation chart display. It is very important to know what type of bar chart display you are using so you can decide if it is appropriate for your analysis.

The two chart displays shown above use exactly the same price information for each display. The classic charts are shown on the left. The continuation charts are shown on the right. The analysis messages delivered by the different displays are quite different, even though the price information is exactly the same.

Many default candle stick displays are also Gann continuation displays. This is very dangerous for analysis. Candlestick chart pattern analysis is based on the classic candle stick display that uses intraday-day price relationships. GTE Charting allows users to select Classic or continuation chart displays.



TACTICS
• Use classic bar chart display for pattern analysis and understanding trend behaviour
• Use classic candle stick display charts for the effective application of candlestick analysis.
• Use Gann continuation chart displays for swing trading analysis.

RULES
• Use the correct chart display for the trading analysis technique you are applying
• Select one style of display and stick with it. Do not frequently change display styles. This will create analysis confusion.
• Use classic candle stick charts for candle stick pattern analysis.
• Do not use candle stick continuation charts for candlestick pattern analysis
• Swing trading analysis uses continuation charts
• Classic candlestick display only uses two colours, traditionally black and white candles.
• Continuation candlestick display uses a mixture of two colours and filled and unfilled candles.

ADVANTAGES
• Using the correct display for the selected analysis method enhances success
• Treat with suspicion candle stick ‘experts’ who use candle stick continuation charts
• Treat with suspicion swing trading ‘experts’ who use classic chart displays
• Some people find it easier to understand price activity using a bar chart. Others prefer a candlestick chart. This is a matter of personal preference and has no indicant trading advantage

DISADVANTAGES
• Using Gann continuation candlestick display will lead to incorrect candlestick pattern analysis.
If you want to use 2 colour candle displays in Metastock please refer to our June 6 article in the newsletter that explains how to do this.

To read more articles and commentaries from Daryl Guppy, click HERE

***

Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.

CNBC – FOLLOW THE DRAGON TRAIL by DARYL GUPPY

Who follows and who leads in markets? The answer is surprisingly different to the answer most people assume is correct. Intermarket technical analysis is a useful strategy tool for asset allocation. It’s also a useful tool for working out what may happen in the future. It’s too easy to look at markets in isolation, or to use outdated assumptions about market relationships. This is lazy thinking and in a changing market environment it can cost a fortune.

We publish hundreds of charts each year in our financial newsletter publications and in columns for international and Chinese financial media. The chart below is the probably the single most important chart you will see in 2009. You will need to put aside lazy thinking and assumptions to fully understand it.

This is not a technical chart. It’s a combination of 3 indexes, each displayed as a single line. Unlike many comparative charts the indexes have not been rescaled to a single starting point so we can see relative performance in percentage terms. This is not significant.

The charts have been time adjusted so it is easier to compare the behavioural characteristics of the three markets. We use the Dow Index and the Australian ASX S&P 200 XJO index as representative of markets outside the US. The DOW and XJO charts have been time shifted to the left so the absolute market lows of March 2009, match the time of the absolute market low in the Shanghai Index in October 2008. This type of time shifted display clearly shows which market is a leader and which markets are followers.

This chart display confirms that 2009 has seen the most profound change in market dynamics in more than half a century. Put simply, China leads and the DOW follows.

The blue line shows the performance of the DOW index.
The black line shows the performance of the Australian ASX S&P 200 XJO index.
The red line show the performance of the Shanghai Index.

The DOW is now at 10,000 but how important is this in terms of global market behaviour? The DOW is following the behavioural leadership of the China market. The 10,000 equivalent for the Shanghai Index is 3,000. The Shanghai market reached this level and briefly powered above it before developing a trend correction. The Shanghai Index remains in trend correction mode and is using price and time corrections. The price trend correction is the sudden index fall of between 15% to 20% from 3480 to 2750. The time correction for the trend is the extended sideways movement over the past 10 weeks. The important relationship is not the comparative percentage returns, but the comparative behaviour.

We need to watch carefully because there is a high probability our markets and the US market will follow this China market leadership behaviour with a lag of several months. This suggests a trend price correction in the order of 10% to 15% followed by a period of sideways trading as the market applies a further trend correction using time.

Analysing and understanding China market behaviour is absolutely critical to any market strategy. China leads, the DOW follows the behaviour and other markets tag along further behind. Watching China gives investors a glimpse of the potential future. It is absolutely essential to developing any long term portfolio investment or planning.

To read more articles and commentaries from Daryl Guppy, click HERE

***

Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.

USING THE CHAIKEN A_D OSCILLATOR By DARYL GUPPY

This is a market about momentum. – finding it and setting stops. We have been looking at momentum stocks and exploring the relationship between volume and price activity. The key observation with these stocks is that price increases dramatically on high volume and that the price retreats are accompanies by much lower volume. The change in this mirror activity where a fall in price is matched by higher volume suggests a weakness in the trend. This relationship between price and volume can also be explored with a Chaiken Oscillator. This oscillator is built around three assumptions.

• The first is that if a stock closes above its median value for the day, then the stock is being accumulated. The closer the stock closes to its high for the day, the more accumulation takes place. Accumulation means, that buyers are confident that the price is likely to continue to increase.

• The second assumption, is that a healthy rise in price is not only matched with a rise in volume but that that volume also shows accumulation taking place. When volume lags behind price rallies, it shows that less buying power is available to move the stock price higher. This makes for a weaker trend.

• The third basis for the Chaiken Oscillator, is that you can monitor the flow of volume into and out of the market on a comparative basis. Essentially this is done by using two moving averages, 3 day and 10 day, comparing volume changes with changes in the advance or decline of price in relation to the median price for each day.

The oscillator comes with two rules.

• The first is the standard oscillator rule that has traders looking for a divergence between new price peaks and oscillator peaks. Personal observation suggests that this rule is not particularly useful in Australian markets.

• The second rule, is to use the change in the direction of the oscillator as a buy or sell signal. If the oscillator moves up above the zero reference line then a buy signal is generated. This is only acted on if the stock is already in an up trend. The up trend is defined traditionally by a 90 day moving average. This is probably a bit slow, leaving too much room is current volatile markets. We find the 30 day moving average to be a more useful indication of the up trend.

If we apply the Chaiken Oscillator to SEN, we see that it confirms the relationships we noted in previous weeks. First SEN is above the 30 day moving average. This sets the trader up for acting on entry signals above the zero reference line because the trend is up. At point A the Chaiken Oscillator moves above zero just prior the major increase in volume that is an initiating signal that we looked at in previous newsletters. We see the same relationship at B, C and more recently at D. When the value moves above the zero reference line and when it is accompanied by an increase in volume, then a buy signal has been indicated.



What this is allowing the trader to do, is to buy the retracements or pullbacks in a trend with a greater level of confidence. When the SEN price falls from its high of $0.70 and makes a low around $0.60, then the Chaiken Oscillator allows the trader to see this price retreat in the context of a continuing trend. This is always a trader’s dilemma. We want to buy into strong trends but we want to get a bargain price. When the bargain price turns up, were not very confident about buying it because we are worried that the trend might have changed and really be starting to go down. The Chaiken Oscillator is a tool traders can use to confirm the strength of the trend and the validity of these cheaper entry points.

The Chaiken Oscillator is not a stand alone indicator. It is most usefully applied as a confirmation for relationships identified initially by other indicators. In momentum stocks these Chaiken relationships are strong and generate few whipsaws. This is less evident in stocks where volume is less erratic.

The Chaiken Oscillator in Metastock is a standard default formula and appears to be calculated on a different basis to that of Trade Station. In the Trade Station version the plot is inverted and also appears to be less sensitive. In using more complex indicators, it is important to be able to get behind the indicator construction to ensure that its implementation is the same as the author originally intended. The manual should provide this background information.


To read more articles and commentaries from Daryl Guppy, click HERE

****

Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

China: Support Test on Shanghai Index

The Shanghai Index continues to retreat strongly after the very rapid breakout above resistance near 2300. There was a high probability this retreat would develop. There was also a high probability the new up trend line would not provide strong support. This up trend line starts with the low of January 13. It was tested several times around February 20. Recently trend lines have not been reliable so this was a low probability support area. This also suggests that trend line analysis will continue to be unreliable in many stocks.

This strong retreat from 2402 has confirmed the position and importance of fan trend line 6. The fan trend line pattern is a long term market reversal pattern and usually has between 5 and 6 fan trend lines. Each fan trend line acts first as a resistance level and then as a support level.

Fan trend line 6 will now act as a resistance level. An index rebound from support and a move above fan trend line 6 will confirm the beginning of a new long term uptrend. Fan trend line 6 is the final fan trend line in this pattern and confirms the market is developing a new long term uptrend.

The developing pattern of support established the foundation for the up trend continuation. The most significant support area is the old resistance level between 2000 and 2100. This is now a very important long term support area. Strong support in this area has the potential to develop a strong rebound and successful test of fan trend line 6. The rebound from this area could develop very strongly and move quickly above the resistance level created by fan trend line 6. These are not Gann fan lines.

The Guppy Multiple Moving Average (GMMA) relationships show good long term support for the trend. The short term GMMA has compressed and turned down. The long term GMMA continues to move upwards and is showing little evidence of compression. This suggests investors are buyers in this market. They see the index retreat as a buying opportunity. Investors are developing confidence in the market.

The short term GMMA could dip into the long term GMMA as the index tests the 2000-2100 support level. The GMMA relationships show developing trend strength. A successful test of the long term GMMA will confirm the trend breakout and continuation. The GMMA relationship shows there is a low probability the market could fall below support at 2000.

Failure to move above 2300 before the beginning of March shows the trend continuation will be slower and more difficult because the index must rise above resistance from fan trend line 6 and also resistance at 2300.



To read more articles and commentaries from Daryl Guppy, click HERE

****

Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

Come and visit Daryl Guppy at ATIC Kuala Lumpur on the 14th and 15th of March 2009

Price of Gold expected to pull back to $900

Price of gold traded in the futures market has risen 43% in the last 3 months from US$700 per troy ounce in November to US$1,000. the last time I wrote the article on February 3, I have expected the price to pull back from US$899 to US$860 but the correction is sideways with the lowest at US$891 before continuing the up trend. I have mentioned also that the forecast os only valid when it if ti does not break the US$930 resistance level. However, the price broke the resistance and rallied to US$1,000.

Price made a pullback today, this time at price level near US$1,000. Price fell US$30 to close at US$963.20. The price rally upwards has formed an up trend channel defined by two parralel trend lines upwards. The bottom line forms the support level and the top line forms the resistance level.

When price was at $1,000, it was at the resistance level and now the market is reacting to this resistance level. The pull back is expected to last until the price finds support at $900, the trend line support level. The short term 30-day average is also at $900.

However, the pullback may be temporary as the momentum of the up trend is still strong. The Relative Strength Index (RSI) indicator is still in convergence with the up trend.


Daily Gold futures (CBOT) chart as at 24 February 2009 using NextVIEW Advisor. Click on chart for larger view.

****

Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.

SHANGHAI COMPOSITE INDEX - BREAKOUT PATTERN SETS UPSIDE TARGET NEAR 2,600

The Shanghai Index has developed a very strong rally breakout from the resistance area between 2000 and 2100. There is a high probability this rally will retreat from the resistance level near 2300. The market has closed above 2300 on February 13, Friday, but a retreat may develop from this area in the next several days. This rally and retreat behaviour is the normal behaviour for a long term market trend breakout.

The breakout pattern sets upside targets near 2600 and downside targets near 2000. We start with the downside targets for the index because it is important to always remember risk. There are three features to examine.

• The first feature is the up trend line. This line starts with the low of January 13. The second point for the new up trend line is created on February 2. The value of this trend line is currently near 2120. The value of the up trend line on Friday February 27 will be near 2300. The up trend line acts as a support level. Recently trend lines have not been reliable so it will be very bullish if the index successfully uses this trend line as a support level.

• The second feature is the old resistance level between 2000 and 2100. This will become a new support area. The retreat could fall below the up trend line and test and retest this support this area. If this pattern appears then it suggests the market will develop a another consolidation trading band between 2000 and near the 2300 area.

• The third feature is the Guppy Multiple Moving Average (GMMA) relationships. The long term GMMA has turned upwards but it is still compressed. This indicates the up trend remains weak.



Next we look at the upside targets for a continuation of this market breakout activity. These targets are used when there is a successful breakout above the resistance level near 2300.

There are four features.

• The first feature is the resistance level at 2300. This will act as a new support level and the market should test and retest this level. A successful retest shows trend strength.

• The second feature is the new uptrend line. This up trend line can provide continued rising support for the new trend. If this line develops into a reliable line then trend line analysis can be applied to many other securities.

• The third feature is the resistance band between 2500 and 2600. The resistance at 2600 has been a strong resistance and support level in history so it will become a strong barrier to a continuation of the market rise.

• The fourth feature is the GMMA. A good developing separation in the long term GMMA will indicate investors have become strong buyers and this support the rising trend strength.

To read more articles and commentaries from Daryl Guppy, click HERE

****

Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

China: Shanghai Index continue to develop strong up trend reversal pattern

The Shanghai Index continue to develop a strong long term up trend reversal pattern. There are three features of this up trend reversal pattern. The first feature is the pattern of three support and resistance levels. The central resistance/support level is near 2000. The index is oscillating around this central resistance support level. The lower support level is near 1750 and this has been tested several times. The upper resistance level is near 2300. This level has not been tested recently.

The second up trend reversal feature is the pattern of fan trend lines. The position of fan trend line 1, 2, 3 and 4 have been confirmed. The recent series of index retreats has confirmed the position of fan trend line 5. All the fan trend lines start from the high point on 2008, January 15. The recent high point near 2015 on 2008 December 22 helps to confirm the position for fan trend line 5. This fan trend line is acting as a resistance trend line. A move above the value of fan trend line 5, currently near 1934, is bullish. A move above the horizontal resistance level near 2000 is also bullish.

The pattern of fan trend lines is a long term trend reversal pattern. This pattern has been developing from 2008, January The pattern will continue to develop with fan trend line 6, and possibly a fan trend line 7. The position of fan trend line 6 cannot be confirmed until a breakout develops above the level of fan trend line 5.

The third up trend reversal feature is the long term rounding bottom or saucer pattern. When a security develops a rounding bottom or a saucer pattern traders use the exact position of the saucer trend line to set the stop loss condition. This exact method cannot be used with the Shanghai Index. For index analysis the long term saucer pattern is used to signal the developing pressure for a trend change. The position of the saucer pattern trend line is adjusted as the market activity develops. The position of the saucer pattern trend line is adjusted to include the lower index activity on December 25, Thursday and December 26 Friday.

The shape of the saucer pattern is continuing to develop. The position of the saucer pattern trend line is adjusted to include new price activity development. The key feature is the development of retreat and rebound points.

The combination of resistance/support, the fan trend lines and the saucer pattern confirms the potential to develop a long term change to an uptrend. There is a high probability the market will continue with a rally and retreat pattern. The rally resistance is near 2100 and the support is near the 1750 area.



This article is a continuation of a previous article. Related previous article here.

To read more articles and commentaries from Daryl Guppy, click HERE

****

Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

PRICE CHART: SAUCER PATTERN DEVELOPMENT

Saucer patterns are long term trend reversal patterns. They take many months to develop. Saucer patterns in a market index may take even longer to fully develop. The saucer pattern is not easy to recognise until it is more than half completed. The Shanghai index has developed a long term saucer trend recovery pattern. The pattern started in 2008 August. The bottom of the saucer curve was confirmed in 2008 October and November. The retreat and rebound in the first week of December helped to verify the correct placement of the saucer trend line.

The saucer pattern confirms an increase probability of a long term trend reversal. This is a high probability pattern, but these patterns can fail. These are the features that show the success of this saucer pattern.

• A successful retest of the saucer pattern trend line. This line is used as a support level. The index can close near 1950 and still remain above the saucer pattern trend line. The index close today is equal to the value of the saucer trend line.

• When the value of the saucer trend line is above the 2000 support level then the saucer trend line becomes the most important support level.

• When the value of the saucer trend line moves above 2300 then the long term trend reversal is confirmed.

The position of the saucer trend line may be adjusted as new index activity develops.

The upper edge, or lip, of the saucer pattern is near 2700. As the trend breakout moves towards this level a handle may develop in the pattern. The handle is created by a short term market retracement. This pattern provides an entry opportunity for a continuation of the uptrend.
A fall below the saucer trend line has support near 1900. This support comes from a straight trend line that starts on 2008 November 7 and uses the low of 2008 December 2. A fall below this trend line has a retest of support near 1700.

The Guppy Multiple Moving Average (GMMA) relationship also show a developing trend strength. The short term GMMA has moved above the long term GMMA for the first time since December 2007. This confirms developing uptrend strength.

It is normal for the breakout rally to develop a retreat and then a rebound. The retreat can rebound from support near 2000, or from the value of the saucer trend line.

The current index activity is confirming the correct position of fan trend line 4. The fan trend line pattern also confirms the development of a long term trend reversal pattern. The most important development in the next several days is the ability of the market to move above strong resistance near 2000-2100. This level is also near to the value of the upper edge of the long term GMMA.


Click on chart for bigger image

To read more articles and commentaries from Daryl Guppy, click HERE

****

Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

Moving Average Part 2

Here is a continuation (part 2) on the moving average indicator . Click HERE for Part 1.

2. The underlying trend - Support and Resistance

Think of the average as an underlying force that pulls back its objects. Say, a group of bulls walking in a same direction. One or two bulls may stray away from the group, but eventually this strayed bull(s) has a high chance of making its way back to the group.

The group of bulls here is the underlying force and the move into a direction (e.g. up/down or sideways) and they move into a direction (trend). Price can move away from the moving averages, the same manner a bull or a few bulls may stray away from the group. So, when price goes far away from the average, it tends to pull back to the average.

In an up trend, price is normally above the average and when it goes far above the average, it tends to pull back and the average acts as a support level. If this support level is broken then the direction of the up trend may change. (In part 1, I have mentioned that the trend is only changed when the direction of the moving average has changed.

In a down trend, price is normally below the average and when it goes far below the average, it tends to pull back to the average which acts as a resistance level. If this resistance level is broken then the direction of the down trend may change.

In a sideway market, there is no direction, therefore the price cuts easily above or below the moving average. In this case, the moving average does not provide any support or resistance.

Time Frame:

In part 1, I mentioned about the different time frames to determine the different trends (short, medium, long term trends). So it is up to you to determine which underlying force you are trying to identify. Imagine the long term trend is a group of 1000 bulls, while the short term trend is a group of 100 bulls.

Applying the Moving Average on the chart

The best way to apply a moving average is to find a parameter (the period used to calculate the moving average) where the moving average acts as support and resistance as much as possible.


Singapore STI chart with 10-day simple moving average using NextVIEW Advisor. Not a proper moving average to use.


Singapore STI chart with 24-day simple moving average using NextVIEW Advisor. A proper moving average to use.

The application of moving average is made simple using NextVIEW Advisor Professional because you can change the parameter on the fly. The moving average line changes as you change the parameters.

Uses of MACD – Short term trend reversals

The MACD indicator works well in trending markets to provide indication on short term rallies and pullbacks. The challenge is to use them in trading markets where price is choppy and generally moves sideways. When price is volatile in a trading range, it triggers the signal many times and thus providing many false signals because the expected rally did not materialize. We call these whipsaws. Traders and analysts have used various methods and indicators to overcome this whipsaw problem.

One the many signals that can be indicated by the MACD indicator is trend reversal (for the short term). The signal is derived from the relationship between the MACD and its trigger line (The 9 period EMA of the MACD). It is like a relationship between two moving averages.

The signals:

Bullish trend reversal (short term) – When the MACD crosses above the trigger line

Bearish trend reversal (short term) – When the MACD crosses below the trigger line.

Let’s say that the trader decides to make a trading decision when a trend reversal occurs because the trader is anticipating a rally/pullback. The trader makes a buy decision when there is a bullish trend reversal signal and sells when there is a bearish trend reversal signal.
The signals are illustrated in the chart below.

Note that there were whipsaws when price is in a trading range, but works well in a trending market:


Hourly Crude Palm Oil Futures contract price with MACD using NextView Advisor

Identifying trading opportunities using the MACD/EMA crossover.

Trading opportunities can be easily identified using the MACD indicator because the trader just have to wait for the MACD to cross above or below the trigger line to get a buy/sell signal. The chart below shows a chart that provides a buy signal because the MACD crosses above the trigger line.


Daily INTI chart with MACD indicator as at 20 August 2008 using MetaStock.

Can we rely on the buy signal above to make a decision to buy this counter the next day?

Historically, the signal proves to be quite remarkable in providing buy and sell signals and if we have followed the signals, we could have made some money in the above time frame.
The expected outcome is whether the price is going to rally, or it is going to go into a trading range. It is up to the trader to use other methods and indicators to confirm this, but at least we are able to identify potential stocks to trade (opportunities) from the many stocks in an exchange.

If you would like to further understand the MACD indicator and how to use it effectively with other indicators to avoid whipsaws, please attend out technical analysis workshop this Saturday (23rd August 2008) by Benny Lee and you will learn how to use MACD and other indicators to identify trading opportunities and make trading decisions. Call (603) 2770 9388 for more information and registration

Chart Analysis tips : Clear your mind before analyzing

Sometimes analysts and traders like myself tend have a bias when reading charts and this can be detrimental when analyzing charts.

For example, if I am holding a buy position on stock A, I tend to be bullish on stock A when analyzing the chart and make recommendations. I'll try to find reasons that price may continue to go higher by using indicators that suggest so and ignoring other indicators that provide weak signals.

Another example is that when analysts hear good news about the market from all sides, they tend to be bullish in their bias. Furthermore... analysts always wanted to be in the safe side. If the analyst is wrong, at least others are wrong as well and they share the blame. If the analysts is the only one who is wrong, then all the blame will be on him/her. Furthermore, people tend to remember mistakes more than good things.

"We sometime want to see things that we only want to see... hear things that we only want to hear".... This quote is not from me but I remembered I learned this somewhere.

To analyze a chart effectively, we need to first of all take our biasness out of our mind. Clear our minds. I know it is hard, but we need to have clear minds, not having any prejudices.

Once you are able to this, you will find improvement in your analysis...

Article by Benny Lee

Moving Average Part 1

Introduction

The Moving Average (MA) is one of the most common technical indicator used on price charts. The MA is simply calculating the average price of a data in a specific time frame. There are different ways /methods to calculate the average. A simple moving average is calculated using the “normal” average calculation. For example, to calculate the 3-day simple moving average, add up the prices for the last 3 days and divide it by three. That should give you the simple moving average. There are other types of moving average such as the Weighted Moving Average, Exponential Mowing Average, etc.

Simple Moving Average

A 3-day simple moving average (SMA) on a daily price chart simply means the average price for the last 3 days, including today. The moving average is normally calculated on the closing price. Some use the moving average on the other price data such as High, Low, Open, Typical Price, Median Price and so on. It is called moving because price changes against time.

For example, yesterday’s 3-day moving average may be different from today’s moving average. Yesterday’s moving average does not take into account today’s price in its calculation. There are many reasons why we use the moving average but average is commonly used to reduce some noise in price fluctuations.

Uses of Moving Average

1. Trend Direction

One of the most important analysis on price chart is to identify the trend. The moving average is used because it reduces the noise in price fluctuations. Price can go up and down aggressively and therefore difficult to identify the price trend.

There are different trends, as describe by Dow Theory and we need to know which trend we are trying to identify. There are short, medium and long term trends. We need to use the correct parameter (time frame used to calculate the moving average) to identify the different trends.

A short term trend is normally identified using parameter less than 30 days. A medium term trend is identified using a moving average between 30 to 60 days while long term trends are identified using a moving average above 60 days.

However, different instruments have different price trend characteristics and it is up to us to determine the moving average parameter used in a particular instrument.













From the charts above;

Identifying Up trend:
i) When price is above and stays above the moving average for some time
ii) When the moving average is increasing.

Identifying Down trend
i) When price is below and stays below the moving average for some time
ii) When the moving average is declining

Identifying Sideway trend
i) When price cuts the moving average frequently in a short period of time
ii) When the moving average is at the same level for some time

Two or more moving averages are normally used in a chart to identify short to long term trend directions.


KL Composite Index chart with 30 and 60 day simple moving average

* Charts are created from NextVIEW Advisor.

Click HERE for PART 2: Uses of Moving Averages