Analyzing the Stock Market (Part 2) By Arkaitz Arteaga At Isnare.com Ezine Articles

Stock Analysis (Patterns)

Cup & Handle
The cup and handle is a charting analysis where traders look for of course “cups and handles”. This is where prices begin high then dip then rise again. This pattern will resemble a cup. It will then steady out for a period of time (this will resemble a handle) before breaking out again and finally shooting to a new high. The goal of the investor is to buy “at the handle” and this would be the most profitable time to enter.

Head & Shoulders
This is another pattern that looks like a head and shoulder. It is formed by a peak and dip followed by a higher peak and then another dip and rise. The first and last peaks are the shoulders and the middle highest peak is the head. This indicates a downward trend and the big drop will come soon after the second shoulder.

Stock Analysis (Indicators)

Bollinger Bands
These are sets of 3 lines. The two outer lines show market volatility. As the distance between the outer lines increase it indicates a more volatile market. As the distance between the lines decrease it indicates a less volatile market. The middle line is the moving average of the two outer lines. The distance of the middle line to either the upper or lower line indicates whether the stock is oversold or overbought. If it’s closer to the lower line it signals an oversold stock. As it closes to the upper line it signals that it is oversold and the price should rise soon. Bollinger bands are usually used along with other indicators to support a suspected trend or change.

Relative Strength Index (RSI)
The RSI takes the ratio of days the stock has finished up against the number of days it has finished down. The time period is around nine to fifteen days. An RSI below 30 indicates an oversold stock, meaning that its price is due for a rise and now is a good time for traders to go in. An RSI above 70 on the other hand indicates an overbought stock meaning that it is due for a price fall and traders should sell off. This shouldn’t be exhaustive in your research indicators. In a bullish market many stocks will seem overbought but may still be due for a rise. A more accurate way of analysing the stock is to see historical charts of how the stock prices moved with the RSI.

Money Flow Index (MFI)
The MFI looks at the volume of shares and price. It is similar to the RSI in that it gives a score of 1 to 100, and an MFI of 70 and above is a sell signal and 30 and below is a buy signal. Long term charting of MFI is more accurate then short term

The key to being accurate in your analysis is to use a mix of these technical analysis indicators and patterns together. This along side fundamentally analysis is a sure bet to picking the right times to enter or leave securities.

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