Technical side: Chart Patters what are they?

source: http://www.chartpatterns.com/

Here is what Investopedia.com has to say about patterns:

In technical analysis, the distinctive formation created by the movement of security prices on a chart. It is identified by a line connecting common price points (closing prices, highs, lows) over a period of time. Chartists try to identify patterns to try to anticipate the future price direction. Also known as "trading pattern".

So generally chart patterns are formations made by connecting some points of the stock's movement for a period of time. With this definition one chartist may see a different chart pattern from another chartist if they have different time period and different movements as a connecting point.

Chart patterns can be made whether one uses a Candlestick chart, a Bar Chart, or a simple Closing Price Chart. These patterns are not exact and accurate answer to everyone's question if a stock is a buy or a sell but mainly it guides one to at least know what is the probable price action of the stock in the next couple of days base on historical price movement.

Patterns can be classified as Bullish pr Bearish chart patterns. 

source:http://www.torycapital.com

Bullish chart patterns are patterns that signify an upward trend meaning price action is predicted to go up because sellers are pushing the price up and buyers are willing to buy at a higher price believing that stock price are still going up due to an expected market recovery or boom in the economy.

Bearish chart patterns are the opposite of a bullish market. A bearish pattern signify an expected decline in prices brought about by fear of economic downfall or an expected poor economy. Such fear spur panic to investors thus sellers sell down to grab as much profit they can take before market gets stuck. Buyers on the other hand bargain hunt thus they bid for lower prices.

Patterns as well can be viewed as a Reversal or Continuation.

Source: http://tradegartleypattern.blogspot.com/

Reversal patterns indicate a opposite action from what has already been happening in the stock's price. If the stock has been on a downtrend for sometime a reversal pattern will indicate an expected upward thus investors anticipate such reversal and thus buy more of the stock to capitalize on the stocks lower price.

Continuation pattern on the other hand indicates that the stock price will be expected to go up further. With this expectation investors will buy more to ride with the stocks seemingly continuing rise.

Cup and handle: Technical side

source: http://ammegan.tblog.com

Ever heard some friends who say they are seeing a cup and handle formation?

Weird huh? But what is that cup and handle they talk about?

I am not a full Technical guy but let me enlighten you about this wonder most Technicians and Chartist call CUP AND HANDLE formation. Below is a graph of FPH(First Philippine Holdings)

Here is what our friendly Investopedia.com say  about CUP AND HANDLE:

A cup-and-handle pattern resembles the shape of a tea cup on a chart. This is a bullish continuation pattern where the upward trend has paused, and traded down, but will continue in an upward direction upon the completion of the pattern. This pattern can range from several months to a year, but its general form remains the same. 

Note that a cup and handle pattern is a pattern in which the stock is generally on the uptrend and due to correction or consolidation it dipped down forming a cup. Though there is a deep correction investors who believe in the stock hold onto it thus after the dip it rises back to form the cup part of the pattern.

In our example FPH enjoyed a brief comeback from the cup and handle formation due to the correction that the market is in right now. But if you noticed it there was a small downtrend after the cup formation thus completing the cup and handle.

But lots of chartist have various interpretations and view on a cup and handle formation. Also such formation may take a short period or a long period lasting to months and even years.

Not all cup and handle pattern go to the expected reversals thus I warn anyone who reads the chart to do check it and do some calculations. As always check volume if it confirms it. When a formation is forseen and the volume picks up there is a great likelihood that such pattern will lead to reversal.

Revisiting the DOW Theory

2011 is coming and with full optimism we look forward on having a bull run for the PSE.


Let me revisit the DOW theory as I quote some words from our very friendly Wikipedia.org (some personal explanations in parenthesis and in red)

Charles H. Dow

source: http://blogs.wsj.com

Six basic tenets of Dow Theory

1. The market has three movements
   

   (1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

   

    source: http://www.aboutcurrency.com

   (Trend can vary thus an investor or trader should look at a stock's primary trend to have an idea of the stock's general direction.Is it going up for the  past years of is it going down or has it been stagnant for 3-5 years)



2. Market trends have three phases
   

   Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

   (stock trading/investment has a basic cycle that is accumulation-participation-distribution. In other terms buying at low price-holding or trading sideways-profit taking)



3. The stock market discounts all news
   

   Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow Theory agrees with one of the premises of the efficient market hypothesis.

   ( a stock price reflects current events in a corporation. When there is a news or rumor of upcoming dividends distribution, good Quarter reports and the likes it would likely affect the stock's price. Same as well for bad news thus bad news can pull down a stock's price when it is out in the open)



4. Stock market averages must confirm each other
   

   In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.

   Both Barron's Magazine and the Wall Street Journal still publish the daily performance of the Dow Jones Transportation Index in chart form. The index contains major railroads, shipping companies, and air freight carriers in the US.

   

    source: http://t3.gstatic.com

   (this is the concept of stock index and understanding the correlation of indexes. Also it tells us about the correlation of a major stock market like the Dow to the PSE thus we have the joke "Bumahing lang ang Dow trangkaso na sa PSE")



5. Trends are confirmed by volume
   

   Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the "true" market view. If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing.

   (a stock's price increase should be validated with an increase  of volume. If the stock's price surge without a confirmation of a higher volume it could mean so many things or it could also mean that the stock is being played by the jockeys)



6. Trends exist until definitive signals prove that they have ended
   

   Dow believed that trends existed despite "market noise". Markets might temporarily move in the direction opposite to the trend, but they will soon resume the prior move. The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Technical analysis tools attempt to clarify this but they can be interpreted differently by different investors.

   (a stock's trend  may be different from the rest but soon it will follow the general trend with the help of indicators one can predict if the stock is following the trend or if it has shifted to another trend thus ending the current trend)

   

   source: http://www.thehindu.com

   TRADE AT YOUR OWN RISK

Revisiting the DOW Theory

2011 is coming and with full optimism we look forward on having a bull run for the PSE.


Let me revisit the DOW theory as I quote some words from our very friendly Wikipedia.org (some personal explanations in parenthesis and in red)

Charles H. Dow

source: http://blogs.wsj.com

Six basic tenets of Dow Theory

1. The market has three movements
   

   (1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

   

    source: http://www.aboutcurrency.com

   (Trend can vary thus an investor or trader should look at a stock's primary trend to have an idea of the stock's general direction.Is it going up for the  past years of is it going down or has it been stagnant for 3-5 years)



2. Market trends have three phases
   

   Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

   (stock trading/investment has a basic cycle that is accumulation-participation-distribution. In other terms buying at low price-holding or trading sideways-profit taking)



3. The stock market discounts all news
   

   Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow Theory agrees with one of the premises of the efficient market hypothesis.

   ( a stock price reflects current events in a corporation. When there is a news or rumor of upcoming dividends distribution, good Quarter reports and the likes it would likely affect the stock's price. Same as well for bad news thus bad news can pull down a stock's price when it is out in the open)



4. Stock market averages must confirm each other
   

   In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.

   Both Barron's Magazine and the Wall Street Journal still publish the daily performance of the Dow Jones Transportation Index in chart form. The index contains major railroads, shipping companies, and air freight carriers in the US.

   

    source: http://t3.gstatic.com

   (this is the concept of stock index and understanding the correlation of indexes. Also it tells us about the correlation of a major stock market like the Dow to the PSE thus we have the joke "Bumahing lang ang Dow trangkaso na sa PSE")



5. Trends are confirmed by volume
   

   Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the "true" market view. If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing.

   (a stock's price increase should be validated with an increase  of volume. If the stock's price surge without a confirmation of a higher volume it could mean so many things or it could also mean that the stock is being played by the jockeys)



6. Trends exist until definitive signals prove that they have ended
   

   Dow believed that trends existed despite "market noise". Markets might temporarily move in the direction opposite to the trend, but they will soon resume the prior move. The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Technical analysis tools attempt to clarify this but they can be interpreted differently by different investors.

   (a stock's trend  may be different from the rest but soon it will follow the general trend with the help of indicators one can predict if the stock is following the trend or if it has shifted to another trend thus ending the current trend)

   

   source: http://www.thehindu.com

   TRADE AT YOUR OWN RISK

Investing word of the day : Chart

If you go to the PSE website and look up a stock it will lead you to the stock information page of that stock. 

To better understand this section let us define what chart means which in investing is called price chart:

(information taken from http://stockcharts.com/)


A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as time series plots.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right.

While technical analysts use charts almost exclusively, the use of charts is not limited to just technical analysis. Because charts provide an easy-to-read graphical representation of a security's price movement over a specific period of time, they can also be of great benefit to fundamental analysts. A graphical historical record makes it easy to spot the effect of key events on a security's price, its performance over a period of time and whether it's trading near its highs, near its lows, or in between.  


Layman's explanation: 

A chart is a picture that an investor can see how the price of a certain stock move over a period of time. 

This is important because it is where one can see the trend. Also one can use this as basis on how a stock react to certain events in the company. Knowing this information gives you an idea how will the trend be in the next couple of days , weeks or months and thus help you in your investing decisions whether to hold, sell, or buy.

Investing word of the day : Chart

If you go to the PSE website and look up a stock it will lead you to the stock information page of that stock. 

To better understand this section let us define what chart means which in investing is called price chart:

(information taken from http://stockcharts.com/)


A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as time series plots.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right.

While technical analysts use charts almost exclusively, the use of charts is not limited to just technical analysis. Because charts provide an easy-to-read graphical representation of a security's price movement over a specific period of time, they can also be of great benefit to fundamental analysts. A graphical historical record makes it easy to spot the effect of key events on a security's price, its performance over a period of time and whether it's trading near its highs, near its lows, or in between.  


Layman's explanation: 

A chart is a picture that an investor can see how the price of a certain stock move over a period of time. 

This is important because it is where one can see the trend. Also one can use this as basis on how a stock react to certain events in the company. Knowing this information gives you an idea how will the trend be in the next couple of days , weeks or months and thus help you in your investing decisions whether to hold, sell, or buy.

Investing word of the day : Chart

If you go to the PSE website and look up a stock it will lead you to the stock information page of that stock. 

To better understand this section let us define what chart means which in investing is called price chart:

(information taken from http://stockcharts.com/)


A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as time series plots.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right.

While technical analysts use charts almost exclusively, the use of charts is not limited to just technical analysis. Because charts provide an easy-to-read graphical representation of a security's price movement over a specific period of time, they can also be of great benefit to fundamental analysts. A graphical historical record makes it easy to spot the effect of key events on a security's price, its performance over a period of time and whether it's trading near its highs, near its lows, or in between.  


Layman's explanation: 

A chart is a picture that an investor can see how the price of a certain stock move over a period of time. 

This is important because it is where one can see the trend. Also one can use this as basis on how a stock react to certain events in the company. Knowing this information gives you an idea how will the trend be in the next couple of days , weeks or months and thus help you in your investing decisions whether to hold, sell, or buy.