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Yola Edwards

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Yola Edwards

 

In the late 1970's, early '80's technical analysis was rarely employed by equity brokers, but it was the commodity trader's bible then and still is today. Although I was a licensed equities and commodities broker in 1979, technical analysis was not part of the licensing course then and I quite literally stumbled onto it when I joined a brokerage firm in London as my colleagues religiously employed technical analysis. Now it's my bible for investing as well.

There isn't one definitive all-encompassing book on technical analysis and each investor will find his/her own comfort level with different technical techniques. The reading material may seem overwhelming but don't get discouraged. You will need to constantly study and review material and each time you do you'll find new insights which previously escaped you.

The following is a recommended reading list:

My comfort level rests in employing a few different techniques together. I begin with the basic building blocks of moving average crossovers, trendlines and channels, support and resistance levels, price pattern recognition such as, pennants, flags, head and shoulders and then apply Elliott Wave theory and Japanese candlesticks to the mix. There will be times however when utilizing these techniques yields little clarity so I just wait until the picture clears.

Here are some very basic tips which I employ religiously and they should start you off and improve your success rate.

  1. Use Bollinger bands to assess the security's overbought/oversold position. Bollinger bands are technical tools measuring volatility and relative price levels over a specified period of time and the bands indicate overbought and oversold levels relative to a moving average.
  2. Moving Average Crossovers will give you an early indication that a security is either about to rally or decline. I use the 10 and 20 day moving averages and as the 10-day moves above (below) the 20-day it indicates a buy (sell).
  3. The moving average convergence/divergence oscillator (MACD) is a trend-deviation technical study whereby two exponentially smoothed moving averages revolve around a zero line revealing a buy or sell trend signal. A signal is confirmed once it crosses above or below the zero line. If the faster moving average crosses up (down) over the slower average then a buy (sell) signal is revealed. If this occurs below the zero line it is a preliminary indicator and may give an initial false signal, but it should prepare you to be on alert for a trend change.

These three simple steps may keep you out of trouble or may give you pause for thought before you commit your hard earned money to an investment idea. Keeping it simple is the key. Once you've mastered these applying other techniques such as pattern recognition, Candlesticks or Elliott Wave Theory will further help refine your investment choices.

The Merrill Lynch chart below helps illustrate these simple rules.

Merrill Lynch

Look closely at what the indicators reveal and never force a trade as you're sure to make a bad judgement call. Employing these little tips will help you manage your risk.

The chart above reveals several buy/sell moving average crossover and MACD points. As of December 10th, the share price was trading up at the overbought Bollinger band and even though a buy signal is indicated by the moving averages crossover and a preliminary buy signal is indicated by the MACD, the stock has struggled for 2 trading sessions at the overbought Bollinger band suggesting a short-term pullback may be ahead. However, higher prices appear to be on the horizon with the stock poised to rally to about $71.26 (U.S.) over the next two months.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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