Top Stock Traders © 2007-2011

Of the 20+ indicators, it is not easy to get started. We suggest the most basic indicators to start your charting skills. Knowing your trading style will help you determine if you are a day trader or a 10 day swing trader. For the investors who are taking the "buy and hold" strategy, our simple 200 day moving average model should steer you clear of the major market meltdowns.

The average trader could only use 2-3 indicators. A combination of candlesticks, volume, Bollinger bands, and chart patterns may be simple enough. Experience to identify what chart patterns are forming is where the learning curve will require several years of chart review.

Stockphase is defined by the 4 market cycles. Bullish stocks trade above the 200 day moving average. Bear Markets in stockphase 4 are stocks trading below the 200 day moving average.

The S&P500 ( chart ) should be viewed on a 3 year weekly graph. Test where we are in the market.

The term stockphase is an attempt to capture a market snapshot of bullish or bearish conditions. Is the market trending up or down ? For the trader, chart patterns and technical analysis will change depending on bullish or bearish trading patterns. Test where we are in the market cycle. Is the tide rising or falling ?

At the final bottoming stages ( phase 1) of the market, fear finally grows and a market capitulation takes hold. News and media reports often have end of the world situations. The market will start to rise 6 months before all of the bad news is released to the public. With fear gripping the markets, few analysts will make buy recommendations fearing their clients will take bigger losses. Stock brokers are not very popular at this stage.

The Top of the Market or the transition from stockphase 3 to stockphase 4 is often characterized by a long economic expansion. The media will tend to discount bad news and investors are feeling good. The market has stopped rising and a top is forming. As profits are cashed in by some traders the greed in others takes over and extreme swings are visible. A sideways trading range will develop. New 52 week stock highs are common.

The fast move lower into stockphase 4 is a result of technical trend lines being broken and lower earnings forecasts. The move down tends to look like stairs, dropping with consolidation formations. It is noticeable that 80% of the analyst coverage are stocks for long positions. Very few stock pickers will come on the market reports and mention the pick for the week is a short position.  Yet when the market drops, 95% of the market forecasters mention we may have a few more days till we see the bottom of the market. A stock analyst announcing an outright "short sell" on a billion dollar company could be black listed from investment banking. It is easier to be politically correct and stay clear of "sell" or "short" recommendations. 

It would be wise to turn down the TV volume and watch the charts for a reversal. Technical analysis does not need discussion and good ideas are found from chart patterns.

Without the volume on the chart, a technical stock pattern is guessing. The market will give away the future direction in most chart patterns with a volume signal. Volumes should be graphed as close to the price as possible for a direct correlation.

Below is the S&P500 with a 200 day moving average, MA, ( red line ) and 50 day MA (blue line) graphed. Volume confirms the direction is down with a peak in October 2008. The last price on the chart ( December 31,2008)  appears to be moving higher - but the volumes are very low. In this case, we can say no volume signal is provided by the data. A close above the 50 day moving average is one positive indicator. A close above the 200 day MA (red line) would be bullish for the entire market. Any rally at this point could take the S&P500 back to the 1200 range or near the 200 day MA before technical resistance resumes.

The 200 day moving average or 30 week moving average defines the bear of bullish nature of the stock or ETF. On a daily chart, the 10,20,50 day moving averages are indicators of short term trends. In our example above we are using a daily chart. On a weekly chart, use the 30 week MA to approximate the 200 day moving average. Start with a weekly chart if you don't follow the stock. Look back in time for old 52 week highs and lows. A stock may be taking off, but on a long term chart it could be just retesting highs 2 years ago.

Bollinger Bands are one of the most simple indicator overlays on a technical stock chart. Bollinger bands are overlaid on the price. The ( upper, SMA, lower ) bands are defined by the standard deviation from the simple moving average SMA. It is a common default in charting software to use a 20 day SMA.  Many traders use 2.0 standard deviations to capture the majority of the stock's price swings. Often the code used for this indicator is = (20,2.0). Smaller the standard deviations like 1.7 will allow faster trading signals.

Strategy on up Trending Stocks

Bollinger bands (20,1.7) allow a trader to quickly tell if a stock is trending. If a stock is in a trend on the upper or lower Bollinger band it is more probable to remain on this trend unless it crosses the 20 day SMA. If the stock is rising and the price (high, low, and close) touches the 1.7 upper Bollinger band, it's more probable to remain on the uptrend another day. As the stock moves toward the 20 day SMA ( middle band), the more likely a reversal will occur. A high volume signal is needed to confirm a reversal to lower prices.

Buy signals can be found on the upper Bollinger band. Most break-outs will occur as the price rises on the upper Bollinger band with 2X volumes and closes above old resistance points. Sell only after the price crosses and closes below the 20 day moving average. 

Strategy on down trending stocks

A stock in a downtrend will usually display the price action (candlesticks) touching the lower BB ( 20,1.7). After several days of moving lower the stock may become oversold. At this point buyers will move in a the price action will move the stock upward toward the 20 day SMA, away from the lower BB.

A bottom or near term reversal will be more probable in conjunction with a double bottom or reversal chart pattern. When a bottom has formed, the price moves slowly off the lower BB and will cross the 20 day moving average. To confirm the reversal, a 2nd or 3rd day close above the 20 day MA is needed. In many cases, a bear market will have rallies where the stock moves up quickly, touches the 20 day MA, and then heads back down.

When scanning the market for a portfolio's of stocks, write down candidates which look particularly promising. Technical indicators can provide insight but are models of past trends. Traders typically use: slow stochastics, RSI and the moving averages 20,50, and 200 day.  Weekly charts are needed to zoom out and look at the big picture when a company has been doing well for the past few months. Try to correlate all this information and then act on what seem like the most promising trade.

Typically four technical indicators are programmed into a stock scan. The best stock scans combine
the 200 day moving average, Bollinger bands, volume and price. A trader could test multiple scanning codes before converging on 2-3 scans. If the scan is too complex, it will not be able to correctly identify break-out stocks. High volumes frequently predict a rising or falling direction.

Slow stochastics are used to locate price reversals. Breakouts without a previous local high in the past 6 months are good set-ups for 3-4 week trades. Most of the fast money is made on the rapid rise of a stock breakout.

An example scan for excellent results would be based on a break-out over the past 6 months ( a new daily high ). Code volume as a multiple of the 3 month daily average 2X, 3X. If the stock is making all time highs on high volumes, the trend should be on the upper Bollinger band. Code the $price into the scan. Stocks over $5 will avoid a number of penny stocks.

Resources:

StockFetcher.com - free stock scanning examples and charting.

Stockcharts.com - free charting, free scanning under predefined Scans.

• Acceleration
• Accumulation Distribution
• Average True Range
• Balance Of Power
• Bollinger Band, BB
• Bollinger Oscillator
• Chaikin A/D Oscillator
• Chaikin Money Flow
• Chaikin Oscillator
• Chaikin Volatility
• Chande Momentum Oscillator
• Commodity Channel Index
• Detrended Price Oscillator
• Directional Movement Index
• Displaced Moving Average
• Ease of Movement
• Elder-ray Bear Power
• Elder-ray Bull Power
• Exponential Moving Average, EMA
• %D Fast
• %D Slow
• %K Fast
• Force Index
• Intraday Momentum Index
• Mass Index
• MACD, Moving Average Convergence Divergence
• MACD Oscillator
• MACD Histogram
• Momentum 
• Money Flow Index
• Negative Volume Index
• On Balance Volume
• Parabolic SAR
• Pivot Points
• Positive Volume Index
• Percentage Volume Oscillator
• Price Oscillator
• Price and Volume Trend
• QStick Indicator
• Rate of Change
• Relative Strength Index, RSI
• Relative Volatility Index
• Simple Moving Average, SMA , 20, 50, 200
• Standard Deviation
• Stochastic
• Trend Deviation
• TRIX Index
• Ultimate Oscillator
• Volatility Ratio
• Volume Moving Average (exponential)
• Volume Oscillator
• Volume Rate of Change
• Williams Accumulation Distribution
• Williams' %R

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The Editors,
TopStockTraders.com 2007-2011

Top Stock Traders uses technical analysis to pick stocks on the US and Canadian Markets. We research and code technical stock scans. Based on chart patterns, potential set-ups for short-term trading are identified. New traders can use this website to learn the basics of disciplined technical trading. Our intent is to help you become a better trader.

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