Thursday, December 30, 2010
Wednesday, December 29, 2010
PART II: CHART PATTERNS
PART II: CHART PATTERNS
9 - SUPPORT AND RESISTANCE
Introduction:
In the financial markets, prices are driven down by excessive supply and up by excessive demand for a particular stock. Supply is synonymous with bears and selling. Demand is synonymous with bulls and buying.
Support and resistance represent the point where the forces of supply and demand are equal. As demand increases, prices advance and as supply increases, prices decline.
Support:
Support is the price level at which demand will overcome supply and prevent the price from falling further below. A breakdown below the support indicates the appearance of fresh sellers for a lesser price and lack of buyers at higher price. Once support is broken, another support level will be established at a lower level.
At times when price movements are highly volatile there may be a dip below the support level briefly and then the price will revert back to the support level.
Support can be established with the previous lowest price levels of the stock.
RESISTANCE:
As the price of the stock advances, sellers become more and buyers become less. Resistance is the price level at which selling is strong enough to prevent the price from rising further. When the price reaches the resistance level, the supply will overcome demand and prevent the price from rising above resistance.
Resistance does not always remain static and a break above resistance signals the appearance of new buyers willing to buy at a higher price and a lack of sellers to sell at a lower price. Once resistance is broken, another resistance level will be established at a higher level.
Price fluctuations can be volatile and rise above resistance briefly and shortly revert back to the original resistance level.
Resistance can be established by using the previous highest price level of the stock.
Mirror Image:
Support and resistance are like mirror images. Support can turn into resistance and resistance can turn into Support. Once the price breaks below a support level, the broken support level can turn into resistance. As the price advances above resistance the resistance level will turn into support.
Operators in the stock market use support and resistance lines to predict a possible trading direction of any particular stock. Support and resistance lines identify possible points where the market may change direction. The support line may connect all the lowest trading prices of a stock, while the resistance line does the same for all the highest trading prices of a stock. Once these lines are identified, investor may use them as a basis of buying or selling stocks.
Blow off tops or panic sell offs result in tops and bottoms in markets and they mark important support or resistance levels for a stock.
* To enlarge the chart Double click by keeping the cursor above the chart.
PUNJLLOYD SUPPORT AND RESISTANCE AT DIFFERENT LEVELS
Technique’s used to identify support and resistance levels:
An increasingly used popular technique for determining support and resistance are Fibonacci levels. These levels are imaginary levels based on Fibonacci number sequence and its ratios. Due to its widespread use, it is almost a magic ratio which causes prices to stop and reverse at these levels.
Many traders also use trend lines and other technical indicators such as the RSI, Slow Stochastic, Moving Averages, and CCI (Commodity Channel Index) to derive logical levels of support and resistance in a stock.
Gaps often act as powerful magnets for prices. It is a common observation in charts that all price gaps are most likely filled at some later point. The end of the bar prior to the gap is considered to be support on gap ups and resistance on gap downs.
Apart from this many traders, use whole numbers such as 10, 20, 50,100, and 200 to anticipate support and resistance levels.
Conclusion:
The art of making money in the market ultimately boils down to the identification of support and resistance levels well ahead of others. Though it still remains as an elusive horizon, in the forth coming chapters let us see how the above mentioned techniques will be of help to an ordinary investor.
Catching the top and bottom is next to impossibility while trading in stocks. You will be a very successful trader if you can trade somewhere near the top and bottom.
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Dr.Felisleo
30.12.2010
Sunday, December 26, 2010
Part II : Asset Building Through Equity
Part II : Asset Building Through Equity
CHAPTER 9: BUSINESS CYCLE AND STOCKMARKET
“THE UNSEEN FORCE THAT MOVES THE MARKET”
The wise never undertake an enterprise
Which rashly risks existing capital to reach for potential profits.
THIRUKKURAL Verse 463
INTRODUCTION:
Business cycles started with industrialization. They are not regular and are not all alike. They are not identical twins, but they are recognizable as belonging to the same family. Each cycle has different lengths and the turning points are hard to predict.
The financial markets and the real economy interact between themselves and in doing so they display cause and effect relationships. The outcome is business and financial cycles which last for about 5 to 7 years.
Modern Business Cycle:
Paul.A.Samuelson has described a modern business cycle as follows: “Business conditions never stand still. Prosperity is followed by a panic or crash. National income, employment and production fall. Prices and profits decline and men are thrown out of work. Eventually the bottom is reached, and revival begins. The recovery may be slow or fast. It may be incomplete, or it may be so strong so as to lead to a new boom. The new prosperity may represent a long sustained plateau of brisk demand, plentiful jobs, buoyant prices, and increased living standards. Or it may represent a quick, inflationary flaring up of prices and speculation, to be followed by another disastrous slump”.
When cycles are unusually long, it is the depression, rather than the prosperity, that is long.
ECONOMIC INDICATORS:
Economic indicators are useful in understanding business cycles.
The great majority of economic indicators fall into one of the following three categories: leading, coincident, and lagging indicators.
The basic thread tying together all the indicators is their lead-lag relationship and the important feedbacks which keep the system under control. These features make the prices move between extremes (over bought and over sold), creating investment opportunities. The reason is that they are quite reliable in anticipating changes in the economy and the financial markets.
Important turning points in the growth of the money supply lead to turning points in the growth of the economy.
For a period extending to over 100 years, ‘The National Bureau of Economic Research’ (N.B.E.R.), New York, has established 26 Business Cycle indicators for the US economy. To mention a few below:
Leading Indicators:
1. Average work week, manufacturing
2. Gross accession rate, manufacturing
3. Housing starts
4. Number of new incorporations
5. Corporate profits after taxes
6. Stock market price index of common stock
7. Industrial raw materials, spot market price index
Coincident Indicators:
1. Employment in non-agricultural establishments
2. Unemployment rate
3. Total industrial production index
4. Gross National Product
5. Personal income
6. Wholesale price index excluding form products
Lagging Indicators:
1. Plant and equipment expenditure, total
2. Wage and salary cost per unit of output,
Manufacturing
3. Consumer installment debt
4. Bank interest rates
The leading indicators provide a clue to the future of economy. Their behavior has forecasting significance. A forecast may be made on their performance and subsequently confirmed by the performance of the other indicators. The ideal indicator does not exist. If it did, then the other indicators would be superfluous.
Monitoring over the decades has proved that the leading indicators have performed remarkably well. In particular the stock market price index has been found equally dependable.
Business Cycle & Stock Performance
Why is this analysis crucial for the investor? The answer is that it tells you about the level of risk in the stock market and about alternative investment opportunities. It provides you with a blueprint of how to manage your investments. As new information becomes available you know the position of the stock market relative to the economy and other markets. But what is even more important for the investors is the understanding of knowledge of the relationship existing between them to know what is to expect.
ECONOMIC CYCLE AND STOCK CYCLE
The above chart shows a typical business cycle and the points at which various economic sectors tend to outperform the broader market. The chart is a historical representation of stock performance movements relative to the business cycle and is not intended to convey any current or future economic outlook.
Conclusion:
“The 28 year record of Indian Stock market (1938 to 1966) shows that the Indian Stock Market price index is cyclical – that is, it has distinct crests and troughs, separated by long intervals of time”. Business Forecasting – G.R.Mansukhani
The trend of stock price index has been a subject of research for the past many decades. Dependable and reliable method of determining the trend has been evolved. The basic principles for determining stock trends were laid down by Charles H.Dow around 1900; popularly known as Dow Theory. Let us have an insight on Dow Theory in the next chapter.
Dr.Felisleo
26.12.2010
Thursday, December 23, 2010
PART II: CHART PATTERNS
PART II: CHART PATTERNS
8 - B: CLASSIFICATION OF CHARTS
5. ‘OPEN HIGH LOW CLOSE’- (Bar) - Chart
An open-high-low-close chart (also OHLC chart or simply Bar chart) is typically used to illustrate movements in the price of a financial instrument over time.
Each vertical line on the chart shows the price range (the highest and lowest prices) over one unit of time, e.g. one day or one hour. Tick marks project from each side of the line indicating the opening price (e.g. for a daily bar chart this would be the starting price for that day) on the left, and the closing price for that time period on the right. The bars may be shown in different colors depending on whether prices rose or fell in that period.
* To enlarge the chart Double click by keeping the cursor above the chart.
The Japanese candlestick chart is another way of displaying market price data, with the opening and closing prices defining a rectangle within the range for each time unit. Both charts show exactly the same data, i.e. the opening, high, low, and closing prices during a particular time frame. Some traders find the candlestick chart easier to read.
6. Candlestick Chart
A candlestick chart is a kind of bar-chart used primarily to describe price movements of a security, derivative, or currency over a period of time.
It is a combination of a line-chart and a bar-chart, in which each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns.
Candlesticks are usually composed of the body (black or white), and an upper and a lower shadow (wick). The area between the open and the close is called the real body, price excursions above and below the real body are called shadows.
CANDLESTICK
The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The body illustrates the opening and closing trades. If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top. If the security closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom. A candlestick can have either a body or a wick or both.
To better highlight price movements, modern candlestick charts (especially those displayed digitally) often replace the black or white of the candlestick body with colors such as red (for a lower closing) and blue or green (for a higher closing).
Candlestick charts are a visual aid for decision making in stock, forex, commodity, and options trading. For example, when the bar is white and high relative to other time periods, it means buyers are very bullish. The opposite is true for a black bar.
GOLD CANDLESTICK
TATA STEEL CANDLESTICK
It is not necessary to master all kinds of chart reading. In my opinion mastering the Bar Chart is more than enough. Candle stick chart can be useful for some short term trading.
Hence we will be discussing the chart patterns and its implications using OHLC charts in our next session
Dr.Felisleo
23.12.2010
Sunday, December 19, 2010
Part II : Asset Building through Equity
Part II : Asset Building Through Equity
CHAPTER 8: BUSINESS CYCLE
“THE UNSEEN FORCE THAT MOVES THE MARKET”
Embark upon an action after careful thought. It is folly to say,
"Let us begin the task now and think about it later."
THIRUKKURAL Verse 467
WHAT IS BUSINESS CYCLE?
A business cycle refers to periods of expansion and contraction. A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.
It is a long-term pattern of alternating periods of economic growth (recovery) and decline (recession), characterized by changing employment, industrial productivity, and interest rates. Also called as economic cycle.
A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degree, unpredictable. A business cycle is identified as a sequence of four phases:
“Schumpeter” labeled the "four-phases" of a cycle as:
Boom – Recession – Depression - Recovery.
Depression:
When the economy is characterized by large unemployment rates, a decline in annual income, and overproduction, it is said to be in a state of depression. The point at which the real GDP stops declining and starts expanding is the lowest point. Sooner or later, the recession will reach the bottom of the business cycle. How long the cycle will remain at this low point varies from a matter of weeks to many months. During some depressions, such as the one in the 1930s, the low point has lasted for years.
Peak:
The point at which the real GDP stops increasing and begins its decline signifies the highest point. At the top or peak of the business cycle, business expansion ends its upward climb. Employment, consumer spending, and production hit their highest levels. A peak, like a depression, can last for a short or long period of time. When the peak lasts for a long time, we are in a period of prosperity.
One of the dangers of peak periods is that of inflation. During periods of inflation, prices rise and the value of money declines. Inflation is more of a threat during peak periods because employment and earnings are at high levels With more money in their pockets, people are willing to spend more than before In this way, demand is increased and prices rise.
How we measure business cycle?
The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in Real GDP and other macroeconomic variables.
What are Real GDP and Nominal GDP?
Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. In other words, it also considers the effect of inflation on the value of goods and services.
The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. It does not consider the effect of inflation on the value of goods and services.
Expansion: A speedup in the pace of economic activity, resulting in expansion of production and employment.
Peak: The upper turning of a business cycle is characterized by peak production, highest employment and highest inflationary pressure. Low levels of both unemployment and labour shortage push up wage rates. High levels of consumer borrowing and spending occurs. During peak, Firms work at full capacity, profit levels will be high, and inflation and interest rate will be increasing. There will be a “boom” in housing market.
Contraction: A slowdown in the pace of economic activity. During contraction, Industrial production and employment go down.
Trough: (Recession) Recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation fall during recessions. Bankruptcies and the unemployment rate rises. Production and employment hit the lowest levels.
How the real economy and financial markets interact? We will discuss in the following chapter.
Dr.Felisleo
19.12.2010
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Dear viewers
You can send all your Queries, Suggestions and Opinions to the following ID.
Email: panleoinc@in.com
Whenever the author finds time,
your queries will get reply either in personal mail or in the Blog.
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