Number
9
Please
note that we have used historical data.
These examples are for educational purposes
only.
Using
a Combination of Technical Indicators
Whenever
you see an analysis of a particular market,
take a look at the indicators being used.
One of the most common mistakes is to
put all of your faith in one indicator
alone, when you should be using several
to confirm buy and sell indications.
In
this issue of ChartFilter newsletter,
we'll take a look at the benefits of using
several indicators in combination, and
some of the possible combinations.
CURRENT
TRENDS - Learning from Nortel
Nortel
(Reuters) Lingering effects from
a massive selloff of Nortel earlier
this week continued on Friday, October
27th as investors appeared leery
of holding the stock over the weekend.
Nortel, the world's second largest
telecom equipment supplier, closed
down C$4.30 at C$65.50.
We've
seen Nortel (NT:TSE, NYSE) take a big
dive in the last week of trading. If
you live in Canada, you've no doubt
been interested in the latest market
roller coaster, particularly since this
one stock makes up almost 30% of the
weighting on the TSE. What can we learn
from examining this market? If we take
a look at the chart, along with several
indicators, we can see that the indications
of a trend reversal have been quite
clear. Short-term or momentum investors
have had plenty of warning to exit this
particular market for several weeks.
Yes, that's weeks, not days...
let's take a look.
Here's
a daily price chart of Nortel showing
the price activity for the past year,
along with its 20 and 50-day Moving Averages.
I've also shown the Money Flow Indicator
(MFI), MACD, and DMI/ADX. As we saw in
the last issue of ChartFilter, MFI attempts
to measure the amount of money buying
a stock vs. the amount of money selling
a stock.. MACD is an oscillator that uses
a formula based on Moving Averages. DMI/ADX
are two indicators developed by Welles
Wilder Jr. that provide a good indication
of the trend and the overall strength
of the market.
I've
drawn trendlines to make price trends
more apparent...
We've
had several indications of a possible
trend reversal for Nortel over the past
few weeks.
Take
a look at the point I've labelled "Pt
A" on the chart above, which occurred
at the beginning of September. We had
three indications of a possible trend
reversal at that point (with the price
at the $75-$80 level):
- The price
broke down through the 20 day MA and
within a couple of days broke down
through the 50 day MA (you'll see
that this is a significant event on
almost any price chart); <
- The price
broke down through a well established
long-term trendline; and,
- + DMI
(blue) broke down through - DMI (red)
(with ADX below 20).
About
a week later, in early September, at "Pt.
B" on the price chart, MACD broke
down through its Zero line (with the MACD
histogram in negative territory). MFI
also plunged relatively suddenly to its
Zero line and even made a brief foray
below this line. Nortel was at about the
$65-$70 level.
In
late September, at "Pt. C" MFI
crossed below its Zero line a second time
and stayed there. This represented the
first time in the past year that MFI had
given such a strong negative signal. The
price was at the $60-$65 level.
You'll
say that hindsight is always easy and
I agree full heartedly! The point is,
however, that several indicators have
provided significant warnings to the alert
investor over the past two months.
If
you were invested in Nortel and were looking
for a good point to sell, these indicators
have offered three excellent opportunities
to make your move. (If you are a long-term
investor using a "Buy and Hold" approach,
you may be inclined to ignore these signals
- but at least you'll understand what
they are telling you). Given what we've
seen here, I hope you can see the value
of tracking several indicators at the
same time to gain the benefit of confirming
signals.
TIPS
& TECHNIQUES - Using Several Indicators
There
are over 40 indicators featured on ChartFilter.com.
Where do you begin? I would recommend
starting with the following approach to
using a combination of indicators in your
analysis.
Start
with moving averages and draw trendlines
to give you an idea of mid to long-term
trends.
Use one or
two oscillators, such as MACD, stochastics,
RSI, etc. Pick one or two that you feel
most comfortable with and go with them.
I often use MACD because it provides
such clear signals and one other. MACD
compliments, but does not replace, some
of the others which are better suited
as overbought/oversold
Use
a volume indicator, such as OBV, MFI,
etc. (see the last issue of ChartFilter
newsletter for examples of their value)
You
might want to check if one of the
bands or channels gives you any additional
information (Bollinger bands, price
channels, MA envelopes, etc).
You
may also want to use a more advanced
indicator. I recommend Wilder's indicators;
DMI, ADX and the Parabolic SAR. These
are in themselves complimentary indicators
and provide extremely useful buy and
sell signals.
In
addition, you may be interested or have
experience with some of the more sophisticated
charting approaches, including point
& figure and candlestick charts, as
well as some of the more complex systems,
including Elliot Wave, Fibonacci and
Gann analysis. These will certainly
add a very useful dimension to your
trading abilities, IF you have the time
and inclination to do them justice.
I wouldn't recommend them for the casual
investor, however.
For
detailed information see the ChartFilter.com
reports on moving
averages, trendlines,
MACD,
OBV,
MFI,
Bollinger
bands, Price
Channels, DMI/ADX
and Parabolic
SAR.
PROFIT
POTENTIAL - Teleglobe Inc (TGO: TSE)
Have
you ever read or heard something about
a stock that caught your interest? Dumb
question! We're surrounded by hot tips
and potential opportunities. For example,
here's a recent news item on Teleglobe
that caught my attention:
Stockhouse
News Desk -- On Tuesday,
October 31, Teleglobe [TGO] will
hold a shareholder meeting to
seek approval of its acquisition
by BCE [BCE]. A positive outcome
may spark action in the stock.
How
would you go about evaluating this
stock? (please remember I'm speaking
strictly from the technical analysis
perspective for the purpose of this
article - don't forget to do your
due diligence in terms of the financials
and other fundamental criteria) Let's
take a look at some charts for Teleglobe
using several indicators to see what
kind of light they might shed --
These
charts are telling us a different
story from the Nortel charts. Here
are my observations:
- Trendlines
-- the price appears to have
formed a bottom in September
and has been in a relatively
narrow uptrend since then. The
price recently broke out from
the narrow channel - a bullish
signal (see trendlines in ChartFilter.com).
Using a momentum approach, a
price break above $24 would
be further confirmation of a
continued uptrend.
- Moving
averages - both the 20 day
and 50 day MAs have been penetrated
on the upside - bullish signals.
- DMI/ADX
-- +DMI recently broke upwards
through -DMI, which is bullish.
ADX is below 20, however. This
indicates that the uptrend has
not yet become firmly established.
A cautious investor would likely
wait until ADX broke up through
the 20 level.
- MACD
- both lines broke upwards through
the zero level in mid September.
The histogram is still slightly
negative, so here too a cautious
investor might want to wait
for the histogram to turn positive.
- MFI
- Money Flow has been trending
upwards since mid-February,
showing that there is more money
flowing into the stock than
flowing out - another bullish
signal. .
We
can see that Teleglobe is giving
us some bullish signals and is likely
preparing for a continued uptrend
in the near future. Of course, you
need a trading strategy to take
advantage of a possible move (entry
and exit strategy), but at least
you have a set of bullish indicators
to give you some confidence that
the potential for profit is there.
If
you continued to watch this particular
stock you would probably want to
know when the price broke through
$24, when ADX broke through 20,
and when the MACD histogram crossed
the zero level and turned positive.
This is were an automatic alert
system would come in very handy!
Putting
ChartFilter into Context
ChartFilter
is meant to complement your overall
trading knowledge and decision-making.
This newsletter focuses on applying
technical analysis (TA) methods
to various markets; but this is
not to say that you shouldn't be
considering important fundamental
criteria, such as EPS or revenue,
as well. Think of ChartFilter as
your TA assistant; not as your overall
trading strategist.
