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Technical Stock Screener Page 1 Stock Market Winners Technical Stock Screener www.dojispace.com Page 1 Stock Market Winners By: Tim Huang Founder of http://www.dojispace.com http://www.tradermenu.com Technical Stock Screener www.dojispace.com Page 2 Disclaimer The information provided is not to be considered as a recommendation to buy certain stocks and is provided solely as an information resource to help traders make their own decisions. Past performance is no guarantee of future success. It is important to note that no system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using Stock Market Winner will provide information that guarantees profits or ensures freedom from losses. Copyright © 2005-2011. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, without written prior permission from the author. Technical Stock Screener www.dojispace.com Page 3 Part I Introduction to Technical Analysis Technical Stock Screener www.dojispace.com Page 4 What is Technical Analysis? Technical analysis is the study of market action, primarily through the use of charts. The technician believes that anything affecting the price, such as fundamentally or psychologically, will be reflected on charts. Technicians believe that the market discounts everything and that any news about a company is already priced into the stock. Keep in mind that the charts do not cause market action, but rather, they reflect the actions of the marketplace and what has already happened. However, this does not mean you should not study fundamental analysis, since it is just as important. Technical analysis is applied social psychology because when you analyze charts, you are analyzing the behavior of traders. Charts reflect trades by all market participants: buyers, sellers, and even insiders. Each price on the charts reflects the actions or lack of actions by all the traders in the market. Technical indicators help make our analysis more objective as it seeks to recognize trends and changes in crowd behavior so that intelligent trading decisions can be made. Technical analysts study charts to find out whether the bulls or bears are in control. They look at past charts for repetitive price patterns and study to recognize the early stages of uptrends and downtrends. There are 2 main types of technical analysis: classical and computerized. 1. Classical analysis – This is based only on the study of charts, without using anything more complex than a pencil and a ruler. This is mainly the focus on uptrends and downtrends, support and resistance zones, as well as repetitive patterns, such as triangles and rectangles. Its main drawback is its subjectivity: if you are bullish, your ruler will tend to inch up and likewise, if you are bearish, your ruler will tend to inch down. 2. Computerized analysis – This is more of a modern approach whose signals are much more objective. The 2 main types are trend-following indicators and oscillators. Trend- following indicators include moving averages, Directional System, and MACD (moving average convergence-divergence), which all help to identify trends. Oscillators, such as Stochastic and Relative Strength Index (RSI) help identify reversals. Technical Stock Screener www.dojispace.com Page 5 As you can observe, technical analysis is partly a science and partly an art—partly objective and partly subjective. Types of Technical Indicators You can argue about trends but technical indicators are objective. Indicators are derived from prices and the more complicated they are, the more they deviate from prices and reality. Therefore, using simple indicators work the best. The good technical indicators are immune to parameter changes and give useful signals at a broad range of settings. This means that if an indicator you are using gives great signals on a 20-day window for a certain stock but bad ones when you switch to a 15-day window, then the indicator is not too reliable. Technical indicators can be divided into three major groups: 1) Trend-following- These indicators include moving averages, MACD (moving average convergence-divergence), Directional System, among others. These indicators help us stay long in uptrends and short in downtrends. 2) Oscillators – These indicators include Stochastic, Rate of Change, and many more. Oscillators help us identify turning points, or reversals, by displaying when markets are overbought (too high and about to fall) or oversold (too low and about to rise). They work great in trading ranges, catching upturns and downturns. The disadvantage is that they can give premature buy signals in downtrends and sell signals in uptrends. 3) Miscellaneous Indicators – These indicators include Bullish Consensus, Commitments of Traders, and New High-New Lower Index, which measure the current mood of the market. The tricky part is that indicators from different groups often contradict one another. For example, when markets decline, trend-following indicators turn down, signaling us to sell but at the same time, oscillators can become oversold and signal us to buy. Technical Stock Screener www.dojispace.com Page 6 Part II Pattern Trading Technical Stock Screener www.dojispace.com Page 7 What is Support and Resistance? Support and resistance is a concept in technical analysis, which is essential to understand in order to master reading price trends and pattern charts. –> What is Resistance? Example – Assume that Bob has been holding shares in Microsoft for 2 months and notices that, during that time period, its price had failed to pass $25 several times. However, he also notices the price has gotten very close to moving above $25. In this example, the price level near $25 is a level of resistance. If the price were to rise above $25, there would be a break in the resistance. As you can probably assume from the example above, resistance refers to the price at which a stock trades, but not exceed past, for a period of time. The stock stops rising and does not break resistance because sellers start to outnumber buyers. In other words, this resistance price level occurs when selling is sufficient enough to disrupt or reverse an uptrend. It is represented on a chart by a horizontal line that connects several tops, signifying that sellers are overpowering buyers. Resistance is also regarded as a ceiling because its price level prevents the prices from moving up and past it. Technical Stock Screener www.dojispace.com Page 8 When the price reaches the resistance level, supply is believed to be stronger than the demand, which means that it is preventing the price from rising above the resistance. However, resistance does not always hold and when it breaks, it signals that the bulls have beaten the bears in that fight, creating new highs. –> What is Support? The support price level occurs when buying is sufficient enough to disrupt or reverse a downtrend. It is represented on a chart by a horizontal line that connects several bottoms, signifying that buyers are overpowering sellers. Support is also regarded as a floor because its price level prevents the prices from falling below it. When the price reaches the support level, demand is believed to be stronger than the supply, which means that it is preventing the price from falling below the support. However, support does not always hold and when it breaks, it signals that the bears have beaten the bulls in that fight, creating new lows. Technical Stock Screener www.dojispace.com Page 9 –> Strength of Support and Resistance The strength of support and resistance is important because it helps you determine whether the trend is likely to continue or if it is going to reverse. Their significance can be determined by the: - length of time they spend in a support or resistance area (the longer the period of time, the more significant the area is), - volume (if a support or resistance level is formed on heavy volume, the level is regarded as more important than if formed on low volume), - time (the more recent the trading took place, the more important it is) –> False Breakouts But beware of false breakouts. For example, the market might break a price resistance and rally, but then quickly reverses and falls. Likewise, the market can also break support briefly just before it reverses and rallies. Professionals love false breakouts because it provides one of the best trading opportunities. Breakouts are similar to tails except that tails have a single wide bar, but false breakouts can have several bars, none of which are especially tall. Technical Stock Screener www.dojispace.com Page 10 Triangle Patterns There are basically 3 types of triangle patterns in technical analysis: symmetrical, ascending, and descending. They usually represent continuation patterns. Bullish Triangle Pattern There are 2 types of bullish triangle patterns – symmetrical and ascending as demonstrated in the following figures: Type 1 – Bullish Symmetrical Triangle 1. A stock is in an uptrend 2. It forms a symmetrical triangle 3. It breaks out from the triangle and goes higher Technical Stock Screener www.dojispace.com Page 11 Type 2 – Bullish Ascending Triangle 1. A stock is in an uptrend 2. It forms an ascending triangle 3. It breaks out from the triangle and goes higher Technical Stock Screener www.dojispace.com Page 12 Let’s look at some examples: The figure below shows ENTG formed a symmetrical triangle in May. Soon after that, the stock went from 2.0 and peaked at 3.4 with a percentage gain of over 70%. Technical Stock Screener www.dojispace.com Page 13 Here’s another stock (FEED) that formed a symmetrical triangle in April. The stock jumped from $2.5 a share to $8 in less than 3 months.
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