Posted by barkand on November 28, 2010 under Candlestick charts | 
The current daily chart of Tesla Motors (TSLA) provides us with two good lessons in technical analysis.
First let’s look at the candles themselves, especially that shooting star on November 15. It was a classic shooting star pattern, which wanted to warn us that the advance in prices from $22 was over. And that was true … for a few days. What happened? Did our shooting star lie to us?
It is important to remember that, as a 1-candle pattern, the shooting star can be less reliable than other patterns which take longer to develop. And it is always a good idea to consider other information on the chart, rather than reflexively reacting to individual signals. This is why many software packages which try to mechanically analyze candles do not work well. On this particular chart, on the days following the shooting star we see some moderately long lower shadows making a series of higher lows. This tells me that there were still bulls out there buying shares whenever prices dipped below $30.
The second lesson here is that it is really a mistake to rely only on the candle patterns. Even experts on the topic do not do that. Here, our shooting star actually closed above the upper Bollinger band, and had been pummeling that band for some time. It is rare to see a sharp reversal in this situation. I note also that if this stock was reaching a euphoric climax we probably would have seen much more volume. The stock was very actively traded on the 15th, but it was actually less than on the previous two “up” days.
And how does it look now, with prices over $35? As TSLA ran up from $30 in the past week, it did so on lower volume. Likewise, the shares were not tagging the upper Bollinger band with the same vigor as they had been. I included ADX on the chart to remind that the trend is now at oxygen-deprived levels. So I would have my finger on the “Sell” button as the new week begins. Maybe we will even get a pretty candlestick pattern to make things easier for us.
Posted by barkand on November 19, 2010 under Bollinger bands, Price trends |
Many people dismiss technical analysis as an investing tool, and there are some valid reasons why they would have that opinion. Sometimes the benefits are overpromised by those selling books or other advisory services, only to leave their readers/clients disappointed. But another reason is that technical analysis is often poorly practiced.
Let’s take this weekly chart of Net 1 UEPS Technologies (UEPS) as an example.
One interpretation by many chart readers is that a price channel has formed (green parallelogram on the chart). And a common tactic would be to buy at the low end of the channel and sell at the high end. There are two problems with this approach:
- It can take a long time for the price channel to reveal itself.
- The trader’s last trade – selling at the upper boundary – will be potentially terribly wrong when the trend is finished.
Relying only on pretty geometric patterns can get a trader in trouble.
In my view, I would like to see two things to tell me the trend is reversing, or at least stopping. I would want to see a low made safely above the lower Bollinger band along with a decline in ADX from a high level – a number above 40 is preferred but 35 might be good enough. These two criteria tell me that selling pressure is abating and serve as an early warning that the downtrend could be over. Those looking to go long might want to start buying shares at this point, with a final green light being two closes above the 20-day moving average.
In early July, the shares did make a low within the Bollinger bands. But ADX was only around 25 — middle-aged for a trend. So the stock rallied about 10% in the coming weeks and then got smacked down again when it reached the 20-day MA.
Posted by barkand on November 7, 2010 under Cash |
The Federal Reserve made their official announcement last week to pump $600 billion into the U.S. banking system over the next half a year or so. Although the plan, affectionately known as “QE2″, was widely anticipated, the stock market nevertheless ran to 2-year highs within days of the announcement.
All that money has to go somewhere. In theory, banks would loan it to businesses and consumers to make and buy things. And in theory there is no difference between theory and reality. But in reality there is. So what happens when banks are sitting on a huge pile of cash? I dug up this New York Times article from 1904, which describes a similar situation back in the day. A sample size of n=1 is not usually very helpful. But it is an interesting example of history repeating itself (or does it rhyme?).
Interestingly, the article points out that excess bank reserves were initially thought to be a positive for the stock market, but more and more people were beginning to focus on the negative aspects. It was a symptom of a weak economy. The NYT article characterized trading as a “cessation of business”. And you can see it on my chart below. The bulls and bears slugged it out for several months before the market finally sprung in July of 1904. By March of 1905, a year after the article was published, the DJIA was 57% higher.
