Monday, August 31, 2009

Where To Start With Stock Market Technical Analysis

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I'm going to start today's article about where to start with stock market technical analysis. I think if you have never looked at stock market charts before and even if you have, like I have, you might not know exactly what to do with the data that's presented. I know that when I look at charts, it's easy to see what happened in the past, but not exactly easy to see what might happen in the future. I've talked in previous posts about CANSLIM and using the IBD. It's William O'Neil's suggestion in a book called The Successful Investor, that the very first thing you want to do is figure out what the general market conditions are. Is the market going up or down?

The reason he says this is so important is because in a market that's going down will pull 3 out 4 stock down. That means that there is a 75% chance you'll pick the wrong stock right off that bat if the market is in a downward trend. How do you tell? He says that what you need to do is look at three market indexes. Those are: 

  1. The Standard & Poors 500 otherwise know as the S&P 500 
  2. The Nasdaq Composite Index 
  3. The Dow Jones Industrial Average 
In fact, he devotes a whole column to the technical analysis of stock market investing called the Big Picture and places it prominently on the front page of the Investor's Business Daily and a whole page to the general market. Getting a handle on overall market direction is key because you want to be investing in a market that is going up.

OK. So we know what indexes to look at, how can we tell whats going on.
Stock Market Volume

The first place is with each indexes overall volume. You want to ask yourself two questions about the indexes volume. 
  1. Has the daily volume increased or decreased from the day before. 
  2. You also want to know if the above or below the average daily volume. 
In analyzing the overall trading volume for the day, you can't look at it alone. You have to compare it to the previous levels of volume. In addition, it took me a while to figure out exactly which "volume" to look at. I also experimented with BigCharts, Yahoo Finance and IBD to try and figure out where I should look for this data every day.

As it turns out volume is reported differently every where and it wasn't until I really got to looking at it that I noticed this:
  • For the Dow Jones Industrial Average, look at NYSE Composite Volume . 
  • For the S&P 500, look at NYSE Composite Volume. 
  • For the Nasdaq Composite look at the Nasdaq Composite Volume. 
And trying to track down the right volume and putting it on a chart seemed difficult because I had a tough time getting it on a chart together. I am a subscriber to the IBD and I was trying to put together a way for you to look at it even if you were not a subscriber. Fortunately, for everyone involved the general market data charts are free.


Stock Market Index Values

After that you want to look at what the actual index value did. Did it go up or down? If the index went up on higher volume, then this is what is called accumulation. If the index went down on higher volume, this is distribution. Right now, we are not concerned with technical analysis and stock market profits, just how the indexes compare to volume. And, because of that I'm not going to get into how to figure the trend either up or down. But just figure out what that particular day told us.

You can see in the free chart from IBD to the left that the S&P 500 is above a volume chart for the NYSE.

You'll notice to that the index decreased today on volume that was higher than the previous day and higher than the average daily volume. Both of these indicate this was a possible distribution day.

So what you want to do is get a feel for how the market is doing using this technique first and then we will get into the accumulation/distribution and whether or not it constitutes and up or down market. An additional tool that's free is the IBDtv's market wrap which I suggest that you watch every day. So, for this type of analysis, you don't need any stock market technical analysis software or anything. Just those charts. Until next time, I hope to see you again at Stock Market Investing Today.

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