Technical Analysis

What is Technical Analysis?

If you like charts, then this is your type of investment method. Technical analysis is a very interesting type of way to look at a company, it is a method by looking at previous market data mainly on price and volume, and putting it together to form a forecast on the direction of the price of the stock.

There is a lot of information to this type of analysis, support and resistance, volume, chart types. I will go over Chart Patterns and indicators and oscillators in a separate post, because I do not want to bombard you with information. I won't go too in depth because I do not want to confuse anyone. I will cover most of this with basic brief knowledge. I will also use photographs from Bank of America stock using Fidelity Advanced Chart.

Lets begin with support and resistance. This is the support and resistance of $BAC or Bank of America Corporation over a 6 month period. Support is the price level that the stock falls to, resistance is the price level at which a stock surpasses.

Now as you can see, the support line of Bank of America is around $15.30 over these past 6  months and the resistance is approximately $17.44. Support is usually where investors buy the stock, hoping that when it goes back up they can sell it past a resistance point and make profit off of it. Technical analysis like this is used in swing trading, which I will talk about in another post in the future. Many people don't believe in this type of trading, but the fact is it works most of the time. Type in your favorite company on Yahoo! Finance, and I am sure you will be able to tell in multiple areas where the support and resistance is.


Now lets look at volume, providing you have read my previous posts you understand what the term volume is. To refresh your memory volume is the number of shares, or contract, that are traded over a certain time period, usually a day. When the volume is higher, that means there is more activity on the security. To determine what the volume is, you can look at the bars usually at the bottom of the chart. In the picture posted above, it is the green and red bars. Green meaning there is high volume that day, and red meaning there is low volume. Volume is very valuable because it can tell you different trends and stock chart patterns of a company. Here is a picture of the volume closer up.

Lets move onto a few types of chart types, after reading the book Swing Trading for Dummies, I have been able to understand certain chart patterns a lot more than I did before. Here is some basic information.

First type of chart is a Line Chart. You all remember what this looks like from 8th grade math right? This is pretty much the most basic chart there is. The line chart only shows CLOSING prices over the time period you select, then it connects the dots with a line, therefore you have a line chart. This is an important chart because closing prices are very important.

Next you have the Bar Chart. A little different than the Bar Chart you learned in 8th grade, right? The vertical lines show the high and low for the period you select, and the closing price, whether it be three months, six months, or 10 years. Closing and opening prices are shown by a dash through the vertical line, opening is on the left side of the bar, and closing is on the right side of the bar.

Next you have the Candlestick Chart. This is the standard type, there are hollow and filled Candlestick types also. Sort of looks the same as the bar chart, but it tells you a few different things. It has the vertical line, which is showing the trading range. The difference between this and the bar chart is the candlestick has a box somewhere on the line. Candlestick chart rely on the color to tell you what is going on. Two colors, it varies on what website or brokerage you use, these are run through Fidelity Advanced Chart, using clear boxes that are green, and solid red boxes. The green boxes represent when the price of the stock is up and closes beyond the opening trade. Red represents if the stock traded down for the period. Lastly, if it is colored black (or free) this means the stock price closed higher than the previous days closing price, but below the days open.

Lastly you have a Point and Figure chart, now personally, I don't use this chart as much as the others. It may help you, what works for me doesn't always work for others! Anyway, this chart basically shows price movements. The investors who use this type of chart are not looking at volume or time.

The charts are in order from which I think are most important, you decide which ones you think are more important. Make sure you understand them fully before preparing a technical analysis on a stock!

The photos in the post had to be made X-LARGE so they were big enough to see when published, but when it is published it is too big for the actually space give. Anyway, enjoy.


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Chris Barto