Technical Analysis

Jack Ma: If You're Poor At 35, You Deserve It.... An inspiring Jack Ma, now the richest man in China.

2014-09-24T21:58:00.000-07:00

Just to share the write-up by Zach Ho as given below:-

You are poor because you have no ambition.

Jack Ma: Before I founded Alibaba, I invited 24 friends to my house to discuss the business opportunity. After discussing for a full two hours, they were still confused — I have to say that I may not have put myself across in a clear manner manner then. The verdict: 23 out of the 24 people in the room told me to drop the idea, for a multitude of reasons, such as: ‘you do not know anything about the internet, and more prominently, you do not have the start-up capital for this’ etc etc.

There was only one friend (who was working in a bank then) who told me, “If you want to do it, just try it. If things don’t work out the way you expected it to, you can always revert back to what you were doing before.” I pondered upon this for one night, and by the next morning, I decided I would do it anyway, even if all of the 24 people opposed the idea.

When I first started Alibaba, I was immediately met with strong opposition from family and friends. Looking back, I realised that the biggest driving force for me then was not my confidence in the Internet and the potential it held, but more of this: “No matter what one does, regardless of failure or success, the experience is a form of success in itself.” You have got to keep trying, and if it doesn’t work, you always can revert back to what you were doing before.

As with this quote by T.E. Lawrence – “All men dream: but not equally. Those who dream in the dark recesses of the night awake in the day to find all was vanity. But the dreamers of day are dangerous men, for they may act their dreams with open eyes, and make it possible.”

Jack Ma: People lose out in life because of these 4 reasons:

Being myopic to opportunity
Looking down on opportunities
Lacking understanding
Failing to act quickly enough

You are poor, because you have no ambition.

Ambition is living a life of great ideals; a magnificent goal in life that must be realised.

In this world, there are things that are deemed unfathomable, but there is nothing in this world that cannot be done. The depth of one’s ambition determines the potential of one’ future.

By way of example:

The Story of Juliet Wu Shihong – one of China’s first-generation professional managers, who gained success by working her way up the ranks from a cleaner, a nurse, a marketing executive, through self-education and learning on the job.

She had been the general manager for the world’s most famous multinational IT groups’ Chinese branches (Microsoft 1985-1998; IBM 1998-1999). She is also China’s first successful international corporate executive to join the executive team of a domestic private firm. Wu was seen as a symbol of the new generation of business executives that China has produced in its economic reform and opening-up.

When Wu started off in a big company working from the lowest ranks, her daily job was to pour tea and sweep floors. Once, because she forgot her staff pass, the company’s guard stopped her at the door and denied her entry. She explained to the guard that she was indeed one of the company’s employees, and that she had merely left the building for a short while to purchase office supplies.

Despite her pleas, the guard still did not allow to enter. As she stood at the gate, she watched as those of similar age to her, but smartly dressed in business attire walking through without having to show their passes.

She asked the guard, “Why are these people allowed through without producing a pass?” The guard dismissed her coldly nonetheless.

That was the turning point for Wu – she felt great shame, her self-esteem trampled on.

She looked at herself, dressed in shabby clothes and pushing a dirty push cart. Looking back at those dressed in smart attire, her heart felt a deep ache from the sudden realization of the sorrow and grief from being discriminated. From that moment, she vowed never to allow herself to be shamed like this again, and to become world-famous.

Since then, she used every opportunity to enrich herself. Every day, she was the first to arrive at work, and the last one to leave. She made every second count, spending her time learning the ropes. Her efforts soon paid off; she was made a sales representative, and quickly progressed to being the regional general manager of this multinational company in China. Wu did not possess strong academic qualifications, and was revered as the ‘Queen of Part-timers’. Subsequently, she assumed the position of GM of IBM China. This is the Wu Shihong, the heroine in China’s business circle.

If not for the incident, Wu Shihong would not have had the ambition to become rich, and her life would have taken a very different path then.

Moving Average Convergence/Divergence Indicator; MACD

2013-11-15T18:40:00.003-08:00

"Moving Average Convergence/Divergence Indicator

This popular indicator was developed in the late 70s by Gerald Appel. It is a trend-following, momentum indicator that shows the relationship between two moving averages. Traders can use Signal line crossovers, centerline crossovers, and positive and negative divergences to generate signals and spot changes in trend direction, strength and momentum of a market.
The indicator consists of a MACD line, a Signal line, and a Histogram. The MACD line is typically calculated as a 12-day Exponential Moving Average (EMA) minus a 26-day Exponential Moving Average (EMA). The Signal line is typically calculated as a 9-day EMA of the MACD line. The difference between the MACD line and the Signal line is represented by the Histogram.

Signal Line Crossovers

Signal line crossovers are the most common usage of the MACD indicator. When the MACD line crosses above the Signal line, it could be viewed as a bullish crossover and suggests the trend has turned up. When the MACD line falls below the Signal line, it could be viewed as a bearish crossover and suggests the trend has turned down.
Since the Histogram shows the difference between the MACD line and the Signal line, a trader can see the crossover represented by zero on the Histogram. It can also help identify when the two lines are approaching a crossover. When the Histogram narrows, a crossover could be approaching and when the Histogram widens, the current trend could be gaining strength.

Centerline Crossovers

Centerline crossovers can indicate to traders that the direction of the trend has changed. When the MACD line moves above centerline (zero) and the values are positive, it could mean upside momentum is increasing. This happens when the 12-day EMA moves above the 26-day EMA. When the MACD line falls below centerline (zero) and the values are negative, it could mean downside momentum is increasing. This happens when the 12-day EMA moves below the 26-day EMA.

Positive and Negative Divergences

Divergences occur when the MACD diverges from the security’s price action and can signal the end of the current trend. A negative divergence takes place when the price of a security reaches a higher high in an uptrend, but the MACD weakens and records a lower high, suggesting less upside momentum. A positive divergence takes place when the price of a security reaches a lower low in a downtrend, but the MACD strengthens and records a higher low, suggesting less downside momentum."

The article above is a good lesson for me and the visual is found at the link below.

http://www.ino.com/blog/how-to-use-macd/?ampm111513macd

Use Parabolic SAR generate buy/sell signal and to set stop loss points.

2012-11-11T00:28:00.001-08:00

A technical indicator created by Welles Wilder, the Parabolic Stop and Reverse (SAR) is a simple enough buy/sell indicator that is a combination of price and time components to generate buy and sell signals. The Parabolic SAR is also effective as a tool to determine where to place stop loss orders.

In the chart below, the little blue circles form the Parabolic SAR.

Buy Signal: When the price closes above the upper Parabolic SAR, this is a buy signal.
Sell Signal: When the price closes below the lower Parabolic SAR, this is a sell signal.

The Parabolic Stop and Reverse (SAR) indicator combines price and time components to generate buy and sell signals. The Parabolic SAR is also effective as a tool to determine where to place stop loss orders.

This tool is useful for traders who want to prevent losses and protect profits with a stop loss order. A stop loss order is placed below the purchase price or above a selling price to minimize losses or protect profits should the price movement not turn out as expected/projected.

Once a position is entered, the preceding dot on the Parabolic SAR serves as the stop loss order.

Let’s take a look at how it’s used in the charts below:

Ichimoku Clouds or Ichimoku Kinko Hyo

2011-09-11T18:59:00.000-07:00

(This article is adopted from StockCharts.com for my own reference only)
Introduction:-
The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a versatile indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals. Ichimoku Kinko Hyo translates into "one look equilibrium chart". With one look, chartists can identify the trend and look for potential signals within that trend. The indicator was developed by Goichi Hosada, a journalist, and published in his 1969 book. Even though the Ichimoku Cloud may seem complicated when viewed on the price chart, it is really a straight forward indicator that is very usable. It was, after all, created by a journalist, not a rocket scientist! Moreover, the concepts are easy to understand and the signals are well-defined.

Calculations:-
Four of the five plots within the Ichimoku Cloud are based on the average of the high and low over a given period of time. For example, the first plot is simply an average of the 9-day high and 9-day low. Before computers were widely available, it would have been easier to calculate this high-low average rather than a 9-day moving average. The Ichimoku Cloud consists of five plots:

Tenkan-sen (Conversion Line): (9-period high + 9-period low)/2)) 
The default setting is 9 periods and can be adjusted. On a daily 
chart, this line is the mid point of the 9 day high-low range, 
which is almost two weeks.  

Kijun-sen (Base Line): (26-period high + 26-period low)/2)) 
The default setting is 26 periods and can be adjusted. On a daily 
chart, this line is the mid point of the 26 day high-low range, 
which is almost one month).  

Senkou Span A (Leading Span A): (Conversion Line + Base Line)/2)) 
This is the midpoint between the Conversion Line and the Base Line. 
The Leading Span A forms one of the two Cloud boundaries. It is 
referred to as "Leading" because it is plotted 26 periods in the future
and forms the faster Cloud boundary. 

Senkou Span B (Leading Span B): (52-period high + 52-period low)/2)) 
On the daily chart, this line is the mid point of the 52 day high-low range, 
which is a little less than 3 months. The default calculation setting is 
52 periods, but can be adjusted. This value is plotted 26 periods in the future 
and forms the slower Cloud boundary.

Chikou Span (Lagging Span): Close plotted 26 days in the past
The default setting is 26 periods, but can be adjusted.

This tutorial will use the English equivalents when explaining the various plots. The chart below shows the Dow Industrials with the Ichimoku Cloud plots. The Conversion Line (blue) is the fastest and most sensitive line. Notice that it follows price action the closest. The Base Line (red) trails the faster Conversion Line, but follows price action pretty well. The relationship between the Conversion Line and Base Line is similar to the relationship between a 9-day moving average and 26-day moving average. The 9-day is faster and follows the price plot closer. The 26-day is slower and lags behind the 9-day. Incidentally, notice that 9 and 26 are the same periods used to calculate MACD.

Analyzing the Cloud

The Cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots. The Leading Span A (green) and Leading Span B (red) form the Cloud. The Leading Span A is the average of the Conversion Line and the Base Line. Because the Conversion Line and Base Line are calculated with 9 and 26 periods, respectively, the green Cloud boundary moves faster than the red Cloud boundary, which is the average of the 52-day high and the 52-day low. It is the same principle with moving averages. Shorter moving averages are more sensitive and faster than longer moving averages.
There are two ways to identify the overall trend using the Cloud. First, the trend is up when prices are above the Cloud, down when prices are below the Cloud and flat when prices are in the Cloud. Second, the uptrend is strengthened when the Leading Span A (green cloud line) is rising and above the Leading Span B (red cloud line). This situation produces a green Cloud. Conversely, a downtrend is reinforced when the Leading Span A (green cloud line) is falling and below the Leading Span B (red cloud line). This situation produces a red Cloud. Because the Cloud is shifted forward 26 days, it also provides a glimpse of future support or resistance.
Chart 2 shows IBM with a focus on the uptrend and the Cloud. First, notice that IBM was in an uptrend from June to January as it traded above the Cloud. Second, notice how the Cloud offered support in July, early October and early November. Third, notice how the Cloud provides a glimpse of future resistance. Remember, the entire Cloud is shifted forward 26 days. This means it is plotted 26 days ahead of the last price point to indicate future support or resistance.

Chart 3 shows Boeing (BA) with a focus on the downtrend and the cloud. The trend changed when Boeing broke below Cloud support in June. The Cloud changed from green to red when the Leading Span A (green) moved below the Leading Span B (red) in July. The cloud break represented the first trend change signal, while the color change represented the second trend change signal. Notice how the Cloud then acted as resistance in August and January.

Trend and Signals

Price, the Conversion Line and the Base Line are used to identify faster, and more frequent, signals. It is important to remember that bullish signals are reinforced when prices are above the cloud and the cloud is green. Bearish signals are reinforced when prices are below the cloud and the cloud is red. In other words, bullish signals are preferred when the bigger trend is up (prices above green cloud), while bearish signals are preferred when the bigger trend is down (prices are below red cloud). This is the essence of trading in the direction of the bigger trend. Signals that are counter to the existing trend are deemed weaker. Short-term bullish signals within a long-term downtrend trend and short-term bearish signals within a long-term uptrend are less robust.

Conversion-Base Line Signals

Chart 4 shows Kimberly Clark (KMB) producing two bullish signals within an uptrend. First, the trend was up because the stock was trading above the Cloud and the Cloud was green. The Conversion Line dipped below the Base Line for a few days in late June to enable the setup. A bullish crossover signal triggered when the Conversion Line moved back above the Base Line in July. The second signal occurred as the stock moved towards Cloud support. The Conversion Line moved below the Base Line in September to enable the setup. Another bullish crossover signal triggered when the Conversion Line moved back above the Base Line in October. Sometimes it is hard to determine exact Conversion Line and Base Line levels on the price chart. For reference, these numbers are displayed in the upper left hand corner of each Sharpchart. As of the January 8 close, the Conversion Line was 62.62 (blue) and the Base Line was 63.71 (red).

Chart 5 shows AT&T (T) producing a bearish signal within a downtrend. First, the trend was down as the stock was trading below the Cloud and the Cloud was red. After a sideways bounce in August, the Conversion Line moved above the Base Line to enable the setup. This did not last long as the Conversion Line moved back below the Base Line to trigger a bearish signal on September 15th.

Price-Base Line Signals

Chart 6 shows Disney producing two bullish signals within an uptrend. With the stock trading above the green cloud, prices moved below the Base Line (red) to enable the setup. This move represented a short-term oversold situation within a bigger uptrend. The pullback ended when prices moved back above the Base Line to trigger the bullish signal.

Chart 7 shows DR Horton (DHI) producing two bearish signals within a downtrend. With the stock trading below the red cloud, prices bounced above the Base Line (red) to enable the setup. This move created a short-term overbought situation within a bigger downtrend. The bounce ended when prices moved back below the Base Line to trigger the bearish signal.

Signal Summary

This article features four bullish and four bearish signals derived from the Ichimoku Cloud plots. The trend-following signals focus on the Cloud, while the momentum signals focus on the Turning and Base Lines. In general, movements above or below the cloud define the overall trend. Within that trend, the Cloud changes color as the trend ebbs and flows. Once the trend is identified, the Conversion Line and Base Line act similar to MACD for signal generation. And finally, simple price movements above or below the Base Line can be used to generate signals.
Bullish Signals:

Price moves above Cloud (trend)
Cloud turns from red to green (ebb-flow within trend)
Price Moves above the Base Line (momentum)
Conversion Line moves above Base Line (momentum)

Bearish Signals:

Price moves below Cloud (trend)
Cloud turns from green to red (ebb-flow within trend)
Price Moves below Base Line (momentum)
Conversion Line moves below Base Line (momentum)

Conclusions

The Ichimoku Cloud is a comprehensive indicator designed to produce clear signals. Chartists can first determine the trend by using the Cloud. Once the trend is established, appropriate signals can be determined using the price plot, Conversion Line and Base Line. The classic signal is to look for the Conversion Line to cross the Base Line. While this signal can be effective, it can also be rare in a strong trend. More signals can be found by looking for price to cross the Base Line (of even the Conversion Line).
It is important to look for signals in the direction of the bigger trend. With the Cloud offering support in an uptrend, traders should also be on alert for bullish signals when prices approach the Cloud on a pullback or consolidation. Conversely, in a bigger downtrend, traders should be on alert for bearish signals when prices approach the Cloud on an oversold bounce or consolidation.
The Ichimoku Cloud can also be used in conjunction with other indicators. Traders can identify the trend using the Cloud and then use classic momentum oscillators to identify overbought or oversold conditions. Click here for a live example using the Ichimoku Cloud.

Petronas Chemical == Just off the starting block

2011-02-14T19:42:00.000-08:00

The chart above is for Petronas Chemical, which is just listed in BursaMalayisa on 26th November 2010.
This counter attracts institutional investors and has so far displayed great resilience when it is traded above the institutional IPO price of RM5.20. The weaker institutional investors would have sold off at least part of their holding and the resilience may be due to the stronger institutional investors still willing to accumulate on weakness. This counter is very liquid as it has eight (8) billion shares issued. coupled with the recent IPO there is ample free floating shares ready to find stronger hands.
From the chart above there is a possibility of a temporary double top at RM6.39 and a support at RM 5.93.
Also to be noted is that it is trading within an uptrend channel. Since it is now near the lower side of the uptrend channel and near to the support of RM5.93 it maybe good and possible to buy at below RM 6 so that a profit can be made if it goes up and away from the lower channel.It may move up to challenge the double top at RM6.39. If it fails to break through RM6.39 then it should be sold, otherwise if RM6.39 is successfully penetrated it can go higher and the wisdom is to let the profit run.
Another possibility is that it may go below the support line. If this happens a stop out will have to be executed say at RM5.80
The above is just my guess.

Phases of market

2011-02-07T23:45:00.000-08:00

Market Phases
All markets, and certainly the share market go through phases that can be identified.
You will find the four central phases of the share market to be accumulation,
distribution, expansion and contraction. I have included an example of each below:
Accumulation
Accumulation generally takes place in a low sideways trending market and also
during an uptrend. Accumulation often develops when a stock has finished a down
trend and the market has found equilibrium (similar number of buyers an sellers) At
this point there are often institutional and long term value investors that have interest
in the stock as it would often be undervalued at this time based on fundamentals.
Distribution
Distribution generally takes place in a high sideways market and also during a
downtrend. And converse to accumulation, distribution occurs when a stock has
finished an uptrend and is beginning or is now perceived to be over valued by the
institutional and long term value investors based on its fundamentals.
Often distribution happens when the stock is still in favour with the general
public/media etc which means there are still plenty of willing buyers in the market.
However the distribution phase is the worst time to be buying a stock as a downtrend
often follows.

Note: Accumulation and expansion phases on Union Pacific weekly chart.
Expansion
Expansion occurs during an uptrend when there is disequilibrium in the market and
there are many more buyers than sellers. The share price often increases
dramatically and quickly. I have included below an example of a share during an
expansion phase. In order to profit from the expansion phase we use analysis and
theories like trend lines, Dow and Elliot wave theory.

Contraction
Contraction occurs during a downtrend when there is also disequilibrium in the
market and there are many more sellers than buyers. The share price often
decreases dramatically and quickly. I have included below an example of a share during a contraction phase

Kuala Lumpur Kepong (KLK) deserves a hard look, now

2011-01-06T16:57:00.000-08:00

Crude palm oil (CPO) price is rising in tandem with Crude Oil price. Arising from there, KLK has a good revaluation by investors recently. KLK is well managed and is at the moment in the right sector of rubber and CPO, which both enjoy buoyant commodity price currently.
From the chart above, the initial climb is more gradual following the long term support line of S1S2.
Recently, it went over-drive to form a steeper uptrend channel C1C2, with a small hook down now.
With this chart formation, it will be an opportunity to enter a buy order around RM21.90, shown by the horizontal support line.

Bursa Malaysia looks good for an up turn

2011-01-01T07:12:00.000-08:00

Bursa Malaysia Chart on 30th December 2011

The chart shows that Bursa has a good chance to at least turn up in the short term fom here.

This counter is co-related to the volume of the market. As the market is having good volume lately there is a good chance for this counter to turn up at least for the short term.

The three (3) arrows show in the MACD, RSI and Stochastic chart seem to confirm that what I observe is true. MACD is about to form the golden cross and both RSI and Stochastic are in the lower area.

So it will be a good strategy to buy on weakness from now and sell it off when it hit the resistance shown by the upper parallel line.

Bullish Divergence... A lesson from hind sight with CBIP

2010-11-06T06:31:00.000-07:00

This case study is based on the chart for CBIP, a counter listed on the Bursamalaysia.

The point of focus is bullish divergence.
This phenomenal of bullish divergence does not occur very frequently but once it appears it can be a good opportunity to act on it for profitable trade.

Look at the chart above, which is captured on 4th November 2010.
I have drawn two vertical lines to show the bullish divergence between price of CBIP and MACD
Bullish divergence here means that when the price of CBIP decline or make lower low the MACD forms higher low. Similarly there is also a bullish divergence between price of CBIP and its RSI.

Of course, on 4th November 2010 it is already too late to use this information because from the occurrence of the divergence, which is around 22nd May 2010 , to the price level on 4th November 2010 there is a price increase of about RM1.00. Just imagine you were looking at CBIP chart on 22nd May 2010 and a few days later you are convinced that bullish divergence has occurred and bought some CBIP shares and just hold on and wait,you would have made a handsome gain. Never mind we (including me) miss this opportunity but we should not miss the opportunity to learn the lesson of how to use the bullish divergence to trade profitably.

Any comment can be addressed to the writer, Lee Huong Sing

Lessons on balance sheet by investopedia

2010-08-27T16:31:00.000-07:00

A balance sheet, also known as a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

The main formula behind balance sheets is: Assets = Liabilities + Shareholders' Equity
This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings. The total assets must equal the liabilities plus the equity of the company.

Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets classes include cash and cash equivalents, accounts receivable and inventory. Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks. Cash equivalents are very safe assets that can be readily converted into cash; U.S. Treasuries are one such example. Accounts receivables consist of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit; these obligations are held in the current assets account until they are paid off by the clientsAdd caption

Non-current assets are assets that are not turned into cash easily, are expected to be turned into cash within a year and/or have a life-span of more than a year. They can refer to tangible assets such as machinery, computers, buildings and land. Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company - the value of a brand name, for instance, should not be underestimated. Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life

On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet. Current liabilities are the company’s liabilities which will come due, or must be paid, within one year. This is includes both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan

Shareholders' equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder’s equity account. This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other

Financial ratio analysis uses formulas to gain insight into the company and its operations. For the balance sheet, using financial ratios (like the debt-to-equity ratio) can show you a better idea of the company’s financial condition along with its operational efficiency. It is important to note that some ratios will need information from more than one financial statement, such as from the balance sheet and the income statement.

Case study .. Bollinger Band buy signal

2010-03-23T16:12:00.000-07:00

The above chart is showing a buy signal.

1. Bollinger band widens

2. Candle sticks hugs the lower envelop as it declines

3. The buy signal is the doji and confirm by the RSI cutting above the oversold line

4. Sell signal is triggered by the price hitting the upper envelop and confirm by the RSI hitting the overbought line.

Using Technical Patterns to Spot Money-Doubling Trades

2010-03-03T23:48:00.000-08:00

Here are a few of the classic chart patterns and technical analysis tools that lead us to triple-digit winners over and over again:

Bear Flag: A sharp, strong volume decline on a negative fundamental development and several days of sideways-to-higher price action on much weaker volume followed by a second, sharp decline to new lows on strong volume. The vertical downtrend that precedes a flag may occur because of buyers' reactions to an unfavorable company announcement, such as a court case, or a sudden and unexpected departure of a CEO. The sharp price decrease is sometimes referred to as the “flagpole” or “mast.”
Bearish Pennant: A sharp, strong volume decline on a negative fundamental development and several days of narrowing price consolidation on much weaker volume followed by a second, sharp decline to new lows on strong volume.
Breakout: A period where a stock's value increases. Typically immediately follows a consolidation.
Bull Flag: A sharp, strong volume rally on a positive fundamental development, and several days of sideways-to-lower price action. The vertical uptrend that precedes a flag may occur because of buyers' reactions to a favorable company earnings announcement, or a new product launch. The sharp price increase is sometimes referred to as the “flagpole” or “mast.”
Bullish Continuation Wedge: A bullish Continuation Wedge consists of two converging trend lines. The trend lines are slanted downward. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted downwards at an angle. This is because prices edge steadily lower in a converging pattern i.e. there are lower highs and lower lows. A bullish signal occurs when prices break above the upper trend line.
Over the weeks or months that this pattern forms, the trend appears downward, but the long-term range is still upward. Volume should diminish as the pattern forms.
Bullish Pennant: A sharp, strong volume rally on a positive fundamental development, and several days of narrowing price consolidation on much weaker volume, followed by a second sharp rally to new highs on strong volume.
Candlestick: A charting method used to display open, high, low and closing prices for a security, it uses the top and bottom of its bar to indicate high and low prices of the time frame indicated.
Consolidation: A period where a stock's value declines.
Cup and Handle: Similar in appearance to Rounded Bottoms, this pattern includes an elongated U-shape. However, the pattern also includes a short period of consolidation of 1–2 weeks in duration, which tends to be down-trending. The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.
Diamond Patterns: These patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern.
Diamond Bottom: This pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward until they break upward through the diamond formation.
Head and Shoulders Top: An extremely popular pattern among investors because it's one of the most reliable of all formations. It also appears to be an easy one to spot. Novice investors often make the mistake of seeing Head and Shoulders everywhere. Seasoned technical analysts will tell you that it is tough to spot the real occurrences.
The classic Head and Shoulders Top looks like a human head with shoulders on either side of the head. A perfect example of the pattern has three sharp high points, created by three successive rallies in the price of the financial instrument.
The first point—the left shoulder—occurs as the price of the financial instrument in a rising market hits a high and then falls back. The second point—the head—happens when prices rise to an even higher high and then fall back again. The third point—the right shoulder—occurs when prices rise again but don't hit the high of the head. Prices then fall back again once they have hit the high of the right shoulder. The shoulders are definitely lower than the head and, in a classic formation, are often roughly equal to one another.
A key element of the pattern is the neckline. The neckline is formed by drawing a line connecting two low price points of the formation. The pattern is complete when the support provided by the neckline is broken to the downside on a closing basis.
Megaphone Bottom: Also known as a Broadening Bottom, it is considered a bullish signal, indicating that the current downtrend may reverse to form a new uptrend. This rare formation can be recognized by the successively higher highs and lower lows, which form after a downward move. Usually, two higher highs between three lower lows form the pattern, which is completed when prices break above the second higher high and do not fall below it.
Moving Average: The average price of a security over a specified time period (the most common being 20, 30, 50, 100 and 200 days), used to find pricing trends by flattening out large fluctuations.
Moving Average Convergence/Divergence: A technical analysis tool that shows the relationship between two moving averages of prices.
Resistance: Price levels where sellers have shown a better-than-average willingness to sell.
Reversal Patterns: These patterns break out in a direction opposite to the previous trend. They mark a change in direction of the price of the stock. After pausing to consider their investment strategies, investors decide to reverse an existing trend in a stock's price. Examples of this type of pattern include head-and-shoulders tops and bottoms, double-bottoms or -tops, triple-bottoms or -tops, ascending triangles, descending triangles and symmetrical triangles.
Rounded Top: This is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend. A Rounded Top is dome-shaped, and is sometimes referred to as an inverted bowl or a saucer top. The pattern is confirmed when the price breaks down below its moving average.
Support: Price levels where buyers have shown a better-than-average willingness to buy.
Trendline: A line constructed by connecting a series of descending peaks or ascending troughs. The more times a trendline has been touched increases the significance of a break in the trendline. A trendline can act as either a support line or a resistance line.

Using Chart patterns for profitable trades

2010-03-03T15:27:00.000-08:00

Let’s Take a Look at a Few “Classic” Patterns

Technical analysis is based on historical pricing patterns, so how far back do technical analysts look for patterns?

That all depends.
Some patterns can be traced back to a market's inception, some go back a number of years, some are seasonal and some chart patterns can even be seen happening by the minute or second. Because technical analysis focuses on historical prices, patterns can emerge in the pricing during any time period.
“Classic” refers to a group of patterns that typically have a longer-term horizon (greater than 12 days) and that have distinct price movements that form distinctive patterns.
In technical analysis, the names of classic patterns generally describe the shape of the formation such as the double-top, double-bottom, head-and-shoulders top, ascending triangle, etc.
But, as I stated at the beginning, there are really only two trends to technical analysis: continuations and reversals. If we can remember that trends tell us direction, then we've got the important parts down.

Ascending Triangle

You may also hear this called an ascending right triangle. It's a bullish indicator.
Technically speaking, what happens is that an ascending triangle is a rally to a new high, followed by a pullback to an intermediate support level, then a second rally to test the first peak, followed by a second decline to a level higher than the intermediate-term support level and, finally, a rally to fresh new highs on strong volume.

Descending Triangle

A descending triangle is a decline to a new low on news that's followed by a rally to an intermediate resistance level, then a second decline to test the recent low, followed by a second rally toward (but not through) intermediate resistance. Then, finally, there's a decline to new lows on strong volume.
This happens when The Street becomes extremely bearish and, subsequently, a stock looks like it's done for.
Most analysts consider descending triangles to be the most reliable of all chart patterns because it's easy to define the supply-and-demand relationship.

Technical Analysis Takes Shape

In addition to triangles, technical analysis is full of other patterns, most aptly named for the type of shape they make.
Below, I'll describe a few of the more common ones for you that are considered classic longer-term patterns.

While there are a considerable number of patterns, many of them shorter-term in nature, the following will give you a solid grasp of the basics you need to become a pro at reading the charts.

Double-Bottom

A double-bottom occurs when prices form two distinct lows on a chart. A double-bottom is only complete, however, when prices rise above the high end of the point that formed the second low.
The double-bottom is a reversal pattern of a downward trend in a stock's price. This formation marks a downtrend in the process of becoming an uptrend.
Double-bottoms are among the most common of the patterns. Because they seem to be so easy to identify, the double-bottom should be approached with caution by the investor.
A double-bottom consists of two well-defined lows at approximately the same price level. Prices fall to a support level, rally and pull back up, then fall to the support level again before increasing.

The two lows should be distinct. According to technical analysis experts Robert D. Edwards and John Magee, the second bottom can be rounded while the first should be distinct and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is called the confirmation point.
Traders should pay close attention to volume when analyzing a double-bottom.
Generally, volume in a double-bottom is usually higher on the left bottom than the right. Volume tends to be downward as the pattern forms. However, volume picks up as the pattern hits its lows.
Volume increases again when the pattern completes, breaking through the confirmation point.

Double top

A double-top occurs when prices form two distinct peaks on a chart. A double-top is only complete, however, when prices decline below the lowest low—the “valley floor”—of the pattern.
The double-top is a reversal pattern of an upward trend in a stock's price. The double top marks an uptrend in the process of becoming a downtrend.
Sometimes called an “M” formation because of the pattern it creates on the chart, the double-top is one of the most frequently seen and common of the patterns. Because they seem to be so easy to identify, the double-top should be regarded very carefully.
As illustrated above, a double top consists of two well-defined, sharp peaks at approximately the same price level. A double-top occurs when prices are in an uptrend.
Prices rise to a resistance level, retreat, and return to the resistance level again before declining. The two tops should be distinct and sharp. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is called the confirmation point.
A double-top often forms in active markets that are experiencing heavy trading. A stock's price heads up rapidly on high volume. Demand falls off, and the price falls, often remaining in a trough for weeks or months.
A second run-up in the price occurs, taking the price back up to the level achieved by the first top. This time volume is heavy but not as heavy as during the first run-up. Stock prices fall back a second time, unable to pierce the resistance level.
These two sharp advances with relatively heavy volume have exhausted the buying power in the stock. Without that power behind it, the stock reverses its upward movement and falls into a downward trend.
Generally, trading volume in a double-top is usually higher on the left top than the right. Volume tends to dissipate as the pattern forms. However, it picks up as the pattern hits its peaks.
Volume increases again when the pattern completes, breaking through the confirmation point.

Cup-and-Handle

As the name would suggest, a cup-and-handle pattern includes an elongated U-shape followed by a short period of consolidation of 1–2 weeks in duration, which tends to be downtrending.
The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.

The depth of the cup indicates the potential for a handle and subsequent breakout to develop. The cup should be fairly shallow.
The handle tends to be down-sloping and indicates a period of consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. You can track the down-sloping angle of the handle by drawing trendlines across the upper and lower price limits.
If the price ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond the upper right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a sharp increase in volume.
Volume tends to parallel the price pattern. Consequently, during the cup formation, as price descends, volume tends to decrease. Following a period of relative inactivity (at the bottom of the cup), the price pattern starts an upward turn and volume tends to increase.
During the handle formation, the volume decreases. However, you will notice an increase in volume when the price breaks out beyond the right side of the cup.
Cup-and-handles are long-term patterns that can be observed from about three weeks to several years.

POS Malaysia ... buy opportunity?

2010-02-11T08:20:00.000-08:00

POS Malaysia chart as at 11.2.2010. Observe that price movement has become volatile for the last 10 months or so. At the moment there is a bullish divergence between price, RSI and MACD.(see chart above)
I believe that buying it at RM2.10 or below will have a good chance to make a profit in the time frame of 1 or 2 months. Just my suggestion.

Average Directional Movement Index

2010-02-03T17:03:00.000-08:00

Although the average directional movement index (ADX) isn't used as frequently as some of the popular technical indicators, the ADX line has definite advantages because it filters out a lot of the false oscillator signals which are frequently given early in a move.
A longer-term trader can stay with trending positions longer by following the simple guidelines for the ADX line. According to research by computer trading expert Bruce Babcock, a climb by the ADX line above 40 followed by a downturn signals an imminent end to the current trend (whether up or down). When this signal is given, traders should take profits on existing positions. More aggressive traders can use this signal to consider taking positions for a possible move in the opposite direction.

The charts on this page show how the ADX works. The ADX line on the feeder cattle chart gave two signals during the year. The first downturn accurately marked the top in February, and the second downturn above the 40 level signaled a bottom in late summer. Note that the signal in late July was actually more than a month ahead of the actual bottom in September. The ADX warns you of an end to the trend. In this case, it gave you more than a month's warning.

Like the feeder cattle signals, crude oil's ADX gave two signals during the year, one at the summer low and the second at the winter high. Both signals were given by climbing above 40 and turning down.

The ADX signals by feeder cattle and crude oil signaled the end of one trend and the beginning of a new trend. But the ADX is not designed to signal a trend reversal. It only signals the end of the existing trend. A good example of not signaling a trend reversal is T-Bonds. The end of the strong spring rally was accurately marked by the ADX signal in June. Then T-Bonds consolidated in a coil until the upside breakout in the fall. An ADX climb above 40 and downturn in November signaled another consolidation.
Usually, a commodity gives no more than a couple ADX signals during a year, unless the market has particularly volatile price action. The ADX is less helpful during sideways markets. During extended consolidation periods, the ADX line will slip toward 10. When ADX approaches 10, a major move is usually about to take place. But the ADX line doesn't tell you which direction it will go. You have to rely on other indicators for the probable direction of the next move.
The ADX is part of the direction movement system introduced by J.Welles Wilder in his book, New Concepts in Technical Trading Systems. Wilder introduced a 14-day ADX, and Babcock has not found any good reason to vary this time period.
In summary, if the market is trending (whether up or down), the ADX line should be rising. During an extended consolidation period, the ADX line will slip toward a low number.

The Commodity Futures Trading Commission has asked us to also advise you that trading futures and options is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Market Spotlight authors are not those of INO.com.

Finding A Friend In The Trend

2010-02-01T03:31:00.000-08:00

"The trend is your friend" is an important trading guideline.
Because trends persist for long periods, a position taken with the trend will more likely be successful than one taken randomly or against the trend. Trading with the trend in a bull market means buying on dips; in a bear market, selling on rallies.
On a bar chart, each vertical line connects the day's, week's, or month's high and low. The horizontal tick to the right of the line indicates that time period's closing price.
A trend is easily spotted on a bar chart. An uptrend is a series of higher lows and higher highs. Uptrend lines are drawn under the lows of the market and give support. A downtrend is a series of lower lows and lower highs. Downtrend lines are drawn across the highs and give resistance to the market. The soybean chart shown below has both uptrend lines and a downtrend line.

Lows and highs vs. closes

A trendline can be drawn when two points are available. The more times a trendline is touched, the more technically significant this support or resistance line becomes.
While some chartists draw trendlines through lows and highs, others may prefer drawing lines through closes in hopes of detecting a change in trend more quickly.
Trendlines may change angles, requiring another line drawn through new high or low points. For example, the sideways trading action in March and April broke the steeper uptrend line connecting the Feb. 13 and March 20 lows. But when the uptrend resumed in early May, a more shallow uptrend line can be drawn connecting the February and late-April lows.
The most reliable trendlines are those near a 45° angle. If about four weeks have elapsed between the two connecting points, this increases the trendline's validity. However, steep trendlines that don't fit these guidelines, like the uptrend line in the early portion of the soybean chart, may be just as useful.
Often, minor uptrends or downtrends will confuse the beginner. It may seem the market has turned around. However, sharp chartists will see these minor trends as small ripples within a major wave. Remember, if the trendline isn't broken, that trend remains intact. Two closes outside the trendline are the criteria for detecting a change in trend. However, very seldom do markets go directly from uptrend to downtrend. At the end of a move, traders become less aggressive and prices may swing in a sideways pattern or consolidation period.
Many times, markets break into an uptrend or downtrend out of a sideways trading pattern or consolidation period. In the soybean chart, prices traded in a 50
Because traders need time to be convinced that they should put their money into the market, sideways patterns are more likely to occur near the bottom of a move. The beginning of a downtrend often will be sharp and sudden as investors pull money out of the market.

False breakouts

Another way beginners might be fooled is seeing false breakouts of tops and bottoms. As prices begin to make their move in switching from a downtrend to an uptrend, traders with short positions will "cover." This buying many times will cause the market to rally above the downtrend line. This short covering rally seldom holds, and prices may drop back to the breakout point. The uptrend is confirmed when prices close above the high of the short rally.
On a topping formation, long liquidation takes prices through the uptrend line on a short break. Before the downtrend begins, the market sometimes rallies back to "test" the uptrend line as shown on the soybean chart in September. As the downtrend unfolds, the second reaction rally could not top the highs of the first rally.
Channel lines are an extension of the trendline theory. The October through January downtrend on the soybean chart shows prices staying in a "channel" between the downtrend line and a line drawn parallel to it, connecting the lows. A channel line in a downtrending market helps identify where support may be found.
Speedlines are another line which show where prices may find support or resistance. Frequently, speedlines and trendlines will overlap, emphasizing that line's importance to the market.
The speedline on the soybean chart starts from the June 29 low. To find the points to connect with the low, divide the range between the low ($6.40) and the high($9.94) into thirds and subtract from the high.
Plot the point obtained by subtracting one-third of the range from the high on the day the high was made. A line drawn between this point ($8.76) and thelow established the 1/3 speedline. The 2/3 speedline is drawn through the point that is two-thirds of the range subtracted from the high ($7.58) plotted on the day the high was made.
Another way to detect a change in trend is by looking for a price from which the market reacts two or three times.

A double bottom, such as the one on the T-Bill chart, indicated the 87.10 to 87.20 area gave support to the market. Although a recovery had begun from the late-May low, prices broke the short-term uptrend in mid-June. The question then became: Will aggressive short-selling and long liquidation overwhelm the short-covering and new buying that come from support at the May low?
The soybean chart displays a triple top, where prices met resistance in approximately the same area three times before falling. Just the inverse of making the double bottom goes through traders' minds as the market makes a top: Will new buying and short-covering be able to overwhelm the new selling and long liquidation coming from the triple-top resistance area?
As with trendlines, the more time that elapses between the tests of support and resistance in double or triple tops or bottoms, the more valid the formation becomes. Also, the greater the reaction between tests of the support or resistance, the more likely the point will hold.
Though these examples are from daily bar charts, technical analysis works just as well on weekly and monthly charts. Because the longer-term charts cover more time, their trendlines are more important in identifying areas of support and resistance to the market.

How do I know?

In identifying the trend in a market, it is wise to start with the longer term charts to identify the long-term trend. The daily charts offer trends for the shorter-run.
Technical analysis is more an art than a science. The answer to your question, "How do I know where to draw the trendlines?" is, "They're your charts, draw them wherever they seem to work best for you."

Stochastics

2010-02-01T01:23:00.000-08:00

Like the Relative Strength Index (RSI), stochastics is another popular oscillator to gauge price momentum and judge the age of a price move. Stochastics is not a new oscillator. The idea was originated by a Czechoslavakian and perfected by Dr. George Lane, editor and publisher of Investment Educators in Skokie, Illinois.
But unlike the RSI, which measures momentum based on the changes in daily settlement prices, stochastics has two lines and the calculations are based on the rate of change in the daily high, low, and close. The concept for stochastics is based on the tendency that as prices move higher, the daily closes will be closer to the high of the daily range. The reverse is true in downtrends. As prices decrease, the daily closes tend to accumulate closer to the lows of the daily trading range. This concept also holds true on daily, weekly and monthly charts.
Stochastics can be calculated for any time period. Choosing the right time period for the stochastics is similar to choosing the right number of days for a moving average. In effect, stochastics is a trend-following method since its lines will cross after tops and bottoms have been made. Choosing too short a time period will make the stochastics so sensitive that it becomes virtually worthless. If the time period is too long, it is too slow to turn and too insensitive to be useful.

Stochastics signals

Both bearish and bullish divergence are shown on the accompanying S&P chart. There's bearish divergence in late February when S&P prices make a new high but the %D line stays far below its winter high. This divergence accurately warned that a top was forming. An equally good signal of a bottom was the bullish divergence during the spring. The S&P was making new lows into early May, but the %D line held above the lows made during March.

Overbought/oversold zones

Markets seldom go straight in one direction without a pause or correction. When prices move up and appear to be ready to correct, the market is called overbought. When prices have been moving down and appear to be ready to rebound, the market is oversold. As a mathematical representation of a market's overbought or oversold condition, stochastics tells you when prices have gone too far in one direction.
Values above 75 (in the shaded area) indicate the overbought zone. Values below 25 (also shaded) indicate the oversold zone. (Some traders prefer using 80 and 20 as the parameters for overbought and oversold markets.) In sustained moves, stochastics values may remain in these shaded areas for extended lengths of time.

Buy/Sell signals

There are at least two popular ways traders use stochastics for buy and sell signals. A conservative approach is to wait for both the %K and %D to come out of the shaded area to issue the signal. For sell signals, a conservative trader waits for both lines to rise into the overbought zone and then fall below 75 again. An opposite pattern is followed for a buy signal. After both lines drop below 25, the buy signal is given when the stochastics lines climb above 25 again. This is a more conservative approach because you will be slower in taking a position, but it may eliminate some false signals.
For more aggressive traders, the buy and sell signals on the stochastics charts are generated when the two lines cross. For most traders the buy and sell signals are flashed when %K crosses %D, as long as both lines have first gone into the overbought or oversold zones. This is similar to the buy and sell signals of two moving averages.
Waiting for the stochastics lines to come out of the shaded area will sometimes prevent false - signals. For example, If you,were watching for a buy signal on the stochastics chart for the NYSE composite index during the August-September period, %K crossed the %D line in early August and at least five more buy signals were given before the trend finally turned up in early October. An aggressive trader who went with the first crossing of the lines would have been stopped out at least a couple times before finally getting on board for a good move up. But the more conservative trader would have been waiting for both lines to climb out of the oversold area before buying, thus avoiding the whipsaw signals in August and September.
Oscillators are notoriously unreliable in signaling trades against the trend. For good stochastics signals, you'll need to trade with the longer-term trend (Giant Footprints) . Follow only the buy signals in uptrends and only the sell signals in bear markets. However, in a trading range market, stochastics will give good buy and sell signals.
Buy and sell signals are shown on S&P 500 chart. With stock indexes in an overall uptrending pattern, the stochastics buy signal would have helped traders establish long positions on the buy signals in November, December and March. The sell signals in February, June and July could have been used to take profits on long positions.
Some traders prefer to see the %K line cross the %D line on the right side. This is called a right-hand crossing. In other words, %K is crossing %D after %D has bottomed or topped. When the %K crosses the %D line before the %D has bottomed or topped, it is referred to as left-hand crossing. Of course, this can only be seen in hindsight because, at the time the two lines intersect, you don't know if the %D has reached its ultimate top or bottom.
Left-hand crossings are not as common as right-hand crossings. You can see a left-hand crossing on the S&P chart in early February. The %K dipped below the %D before the %D had reached its ultimate peak.
Stochastics is a very useful technical indicator which helps you with your timing, especially when it is used in conjunction with the other trading tools.

How To Use The Relative Strength Index

2010-01-31T03:37:00.000-08:00

One of the most useful tools employed by many technical commodity traders is a momentum oscillator which measures the velocity of directional price movement.
When prices move up very rapidly, at some point the commodity is considered overbought; when they move down very rapidly, the commodity is considered oversold at some point. In either case, a reaction or reversal is imminent. The slope of the momentum oscillator is directly proportional to the velocity of the move, and the distance traveled up or down by this oscillator is proportional to the magnitude of the move.
The momentum oscillator is usually characterized by a line on a chart drawn in two dimensions. The vertical axis represents magnitude or distance the indicator moves; the horizontal axis represents time. Such a momentum oscillator moves very rapidly at market turning points and then tends to slow down as the market continues the directional move. Suppose we are using closing prices to calculate the oscillator and the price is moving up daily by exactly the same increment from close to close. At some point, the oscillator begins to flatten out and eventually becomes a horizontal line. If the price begins to level out, the oscillator will begin to descend.

Plotting the oscillator

Let's look at this concept using a simple oscillator expressed in terms of the price today minus the price "x" number of days ago — let's say 10 days ago, for example.
The easiest way to illustrate the interaction between price movement and oscillator movement is to take a straight line price relationship and plot the oscillator points used on this relationship, as shown on this page's chart.
In our illustration, we begin on Day 10 when the closing price is 48.50. The price 10 days ago on Day 1 is 50.75. So with a 10-day oscillator, today's price of 48.50 subtracted from the price 10 days ago of 50.75 results in an oscillator value of - 2.25, which is plotted below the zero line. By following this procedure each day, we develop an oscillator curve.
The oscillator curve developed by using this hypothetical situation is very interesting. As the price moves down by the same increment each day between Days 10 and 14, the oscillator curve is a horizontal line. On Day 15, the price turns up by 25 points, yet the oscillator turns up by 50 points. The oscillator is going up twice as fast as the price. The oscillator continues this rate of movement until Day 23 when its value becomes constant, although the price continues to move up at the same rate.
On Day 29, another very interesting thing happens. The price levels out at 51.00, yet the oscillator begins to go down. If the price continues to move horizontally, the oscillator will continue to descend until the 10th day, at which time both the oscillator and the price will be moving horizontally
Note the interaction of the oscillator curve and the price curve. The oscillator appears to be one step ahead of the price. That's because the oscillator, in effect, is measuring the rate of change of price movement. Between Days 14 and 23, the oscillator shows the rate of price change is very fast because the direction of the price is changing from down to up. Once the price has bottomed out and started up, then the rate of change slows down because the increments of change are measured in one direction only.

Three problems

The oscillator can be an excellent technical tool for the trader who understands its inherent characteristics. However, there are three problems encountered in developing a meaningful oscillator:

Erratic movement within the general oscillator configuration. Suppose that 10 days ago the price moved limit down from the previous day.Now, suppose that today the price closed the same as yesterday. When you subtract the price 10 days ago from today's price, you get an erroneously high value for the oscillator today. To overcome this, there must be some way to dampen or smooth out the extreme points used to calculate the oscillator.
The second problem with oscillators is the scale to use on the horizontal axis. How high is high, and how low is low? The scale will change with each commodity. To overcome this problem, there must be some common denominator to apply to all commodities so the amplitude of the oscillator is relative and meaningful.
Calculating enormous amounts of data. This is the least of the three problems.

A solution to these three problems is incorporated in the indicator which we call the Relative Strength Index (RSI):

RSI = 100 – [100 / (1 + RS)]
RS = Average of 14 days' closes UP / Average of 14 days' closes DOWN

For the first calculation of the Relative Strength Index (RSI), we need closing prices for the previous 14 days. From then on, we need only the previous day's data. The initial RSI is calculated as follows:

Obtain the sum of the UP closes for the previous 14 days and divide this sum by 14. This is the average UP close.
Obtain the sum of the DOWN closes for the previous 14 days and divide this sum by 14. This is the average DOWN close.
Divide the average UP close by the average DOWN close. This is the Relative Strength (RS).
Add 1.00 to the RS.
Divide the result obtained in Step 4 into 100.
Subtract the result obtained in Step 5 from 100. This is the first RSI.

Smoothing effect

From this point on, it is necessary to use only the previous average UP close and the previous average DOWN close in calculating the next RSI.
This procedure incorporates the dampening or smoothing factor into the equation:

To obtain the next average UP close, multiply the previous average UP close by 13, add to this amount today's UP close (if any) and divide the total by 14.

Steps 3 to 6 are the same as for the initial RSI.
The RSI approach surmounts the three basic problems of oscillators:

Erroneous erratic movement is eliminated by the averaging technique. However, the RSI is amply responsive to price movement because an increase of the average UP close is automatically coordinated with a decrease in the average DOWN close and vice versa.
The question, "How high is high and how low is low?" is answered because the RSI value must always fall between 0 and 100. Therefore, the daily momentum of any number of commodities can be measured on the same scale for comparison to each other and to previous highs and lows within the same commodity.
The problem of having to keep up with mountains of previous data is also solved. After calculating the initial RSI, only the previous day's data is required for the next calculation.

Just one tool

The Relative Strength Index, used in conjunction with a bar chart, can provide a new dimension of interpretation for the chart reader. No single tool, method, or system is going to produce the right answers 100 of the time. However, the RSI can be a valuable input into this decision-making process.
Commodity Price Charts plots the 14-day RSI, updating the chart through Thursday of each week. Contrary to popular opinion, the choice of the number of market days used in calculating the RSI doesn't really matter because the smoothing nature of the exponential averages reduces the effect of the early days as more data is included.
To help you update the RSI values until the next issue of the charts arrives, we list the "up average" and "down average" as of Thursday on each RSI chart.

Simplified formula

The procedure outlined earlier for beginning and updating RSIs is from J. Welles Wilder's book and his 1978 Futures Magazine story, which made the RSI a popular technical tool. The following is a simpler and faster method of computing the RSI. The results are the same as Wilder's more complicated method.
To begin a new RSI, just list the changes for 14 consecutive trading days and total the changes. Divide these totals by 14, and you will have the new up and down average. Then proceed with this formula:

RSI = 100 x U / (U + D)
U = up average; D = down average.

The example below is for T-bills.
Date	Up	Down
1/28	+41
1/29		-2
2/1		-60
2/2		-7
2/3	+2
2/4	+1
2/5	+6
2/8		-26
2/9	+11
2/10	+14
2/11	0	0
2/12		-11
2/16	+28
2/17		-18
Total	103	124

1.03 / 14 = .074 = Up ave.
1.24 / 14 = .089 = Down ave.
RSI= 100 x (.074 /.163) = 45.39

To calculate the next day's RSI, multiply the up average (.074) by 13. Add the change for the day, if it is up. Divide the total by 14. Do the same for the new down average. Multiply the new down average (.089) by 13. Add the change for the day, if it is down. Divide total by 14.
Then, proceed with the formula:
RSI = 100 x U / (U + D)
For example, if T-Bills closed up 25 points the next day, calculate the new RSI as follows:

New Up ave. = .074(13) + .25/14 = .087
New Down ave. = .089(13) + 0/14 = .083
New RSI = 100 x .087 / (.087 + .083)
RSI = 51.2

Learning to use this index is a lot like learning to read a chart. The more you study the interaction between chart movement and the Relative Strength Index, the more revealing the RSI will become. If used properly, the RSI can be a very valuable tool in interpreting chart movement. Some of its uses
RSI points are plotted daily on a bar chart and, when connected, form the RSI line. Here are some things the index indicates as shown by examples from the silver chart:
Tops and bottoms — These are often indicated when the index goes above 70 or below 30. The index will usually top out or bottom out before the actual market top or bottom, giving an indication a reversal or at least a significant reaction is imminent.
The major bottom of Aug. 15 was accompanied by an RSI value below 30. The major top of Nov. 9 was preceded by an RSI value above 70. The top made on Jan. 24 was preceded by an RSI value of less than 70. This would indicate this top is less significant than the previous one and either a higher top is in the making or the long-term uptrend is running out of steam.
Chart formations — The index will display graphic chart formations which may not be obvious on a corresponding bar chart. For instance, head-and-shoulders, tops or bottoms, pennants or triangles often show up on the index to indicate breakouts and buy and sell points.
A descending triangle was formed on the RSI chart during October and early November that is not evident on the bar chart. A breakout of this triangle indicates and intermediate move in the direction of the breakout. Note also the long-term coil on the RSI chart with the large number of support points.
Failure swings — Failure swings above 70 or below 30 are very strong indications of a market reversal.
After the RSI exceeded 70 during October, the immediate downswing carried to 65. When this low point of 65 was penetrated the following week, the failure swing was completed.
After the low of Aug. 15, the RSI shot up to 41. After two downswings, this point was penetrated on the upside on Aug. 26, completing the failure swing.
Support and resistance — Areas of support and resistance often show up clearly on the index before becoming apparent on the bar chart. Trendlines on the bar chart often show up as support lines on the RSI. The mid-November break penetrated the uptrend line on the bar chart at the same time as the support level on the RSI chart.
Divergence — Divergence between price action and the RSI is a very strong indicator of a market turning point and is the single most indicative characteristic of the Relative Strength Index. Divergence occurs when the RSI is increasing and price movement is either flat or decreasing. Conversely, divergence occurs when the RSI is decreasing and price movement is either flat or increasing. Divergence does not occur at every turning point.
On the silver chart, there was divergence between the bar chart and RSI at every major turning point. The top made in November was "warned" by the RSI exceeding 70, a failure swing and divergence with the RSI turning sideways while prices continued to climb higher.

AEON

2010-01-27T15:59:00.000-08:00

AEON chart as at 27/1/2001. There was a very good opportunity for buying when a bullish divergence occured Febuary 2009. Currently it is trading within a channel. If you have the stock, it will be an opportunity to sell off when it reaches the upper channel or when RSI >70.
Just my suggestion.

Trading with Triangle (7)

2010-01-25T16:29:00.000-08:00

Here is another, and yes, the profit objective was real close to the actual market turn. Using the predetermined profit objective, you were stopped out with 7000 in profits! Had you not used it you would be near breakeven now.
Since most commodity markets are in up trends in 2008, you'll see more of these triangles develop as trends continue.

Trading with Triangle (6)

2010-01-25T16:23:00.000-08:00

Take a look at the lean hogs chart below for another example of this
Even though the lean hog market is in a down trend a small triangle developed and signaled a buy (long) trade entry. You place your entry order just outside the triangle, and project the profit objective higher and bam you made $1200 in four-days.
Had you not used the predetermined profit objective and let greed or hearsay keep you in the trade, you would have been stopped out for a loss.
What I want to show you how to do is learn to take profits, because you can't lose money that way!

Trading with Triangle (5)

2010-01-25T16:17:00.000-08:00

Using the predetermined profit objective determined by measuring the triangle then projecting that amount higher or lower depending on which direction prices take is more powerful than you might think! Just look at the July coffee chart to see how prices reversed just after our profit objective was met!
Don't overlook the power of these chart patterns and their incredible accuracy!
Just like in gold, the coffee market took a break then moved higher once again. We didn't worry about fundamentals or why the market made its move, we just knew that it would because triangle chart patterns always do produce a price move and we were ready to profit from it.

Trading with Triangle (4 )

2010-01-25T16:12:00.000-08:00

Here is another great triangle in April gold. Notice how your stop loss order was never in jeopardy of being touched! In my course I show you exactly how to trade triangles and many other chart patterns.
More importantly, I place these same charts, only full size, in our member's only Ultimate Trader's Resource private web site for all to see as these formations as they develop.
My members know very little about any given market. In fact, you don't need to know about market fundamentals or be a market guru to make money; it's just a few simple rules to follow for trading chart patterns.
The triangle in gold is simply a period of time where prices take a break after moving up. Once the break is over the market moves up to the next level. Once it begins its move you place your order for a long futures contract or purchase a call option.
It's like coiling a spring and when it's released the market moves to the next level. There's nothing secret about it; just common sense!

Trading with Triangle (3)

2010-01-25T15:35:00.001-08:00

Are you beginning to see why we like triangles so much? Here is one in December cotton. Here is what you don't need to make profits from this triangle:

No technical indicators.
No black box software or some fancy named trading system.
None of those 'can't lose' trading recommendations.

It's just not necessary or even recommended that you try to learn everything there is to know up front. Get enough knowledge to start making money and then slowly increase your knowledge of the markets if you like.

One successful trade creates a hunger inside for more and if you grow slowly and not fall victim to greed, you'll increase your knowledge slowly and naturally. And this translates into more profits.

You'll have trades that don't go your way, but by planning for them first with stop loss orders they are easily managed with minimal losses.

Trading with Triangle (2)

2010-01-25T15:31:00.000-08:00

Here is the same type triangle in December corn.

Notice that once prices broke out of the triangle, the stop loss order was never threatened and prices met the profit objective in about three weeks.

Not a big gainer, but when your risk is low and there is no input from you needed after you place your orders, it becomes a low-risk profitable trade.

Here is what you need to make these trades happen:

Red pencil, ruler, free charts from the Internet
Learn how to spot triangles and other chart formations. It's not rocket science!
Learn how to place orders.
A minimum size broker account (no minimum size for some option trading accounts.)

Why would you listen to other's advise or buy expensive software when all you need is right there on your charts?