Financial Markets Technical Analysis

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Software

TD Ameritrade's thinkorswim is a very quick to respond application, as opposed to Fidelity's ATP, which is sluggish.

Links

Great articles

Videos I've found useful

Bartosiak: Trading Netflix (NFLX) Earnings with Options

Current Favorite Setup in thinkorswim

  • Chart w/ volume overlapped, MovAvgExp, SMA(50), SMA(200), VWAP for Intraday
  • MACD (12, 26, 9, EXPONENTIAL, no)
  • MACD (12, 26, 26, EXPONENTIAL, no)
  • ADX/DMI(14, WILDERS) DI+(Green) DI-(Red) ADX(Orange)
  • RSI(14, 70, 30, CLOSE, WILDERS, no) 30/70

Still working on using the following:

  • CCI() - Focuses on normal deviations from moving average price to spot divergences from normal trend cycles
  • OnBalanceVolume() - Volume
  • ChaikinMoneyFlow() - Volume
  • KlingerOscillator() - Volume

Time Frames

[2]

  • Short: The intra-day trader
  • Medium: The swing trader
  • Long: The position trader

Indicators and Oscillators

Table

Name Type (I/O) Tracks Useful Periods Notes
Simple Moving Average (SMA) Indicator Price SMA(50), SMA(100), SMA(200)
Exponential Moving Averages (EMA) Indicator Weighted price
  • Short: EMA(12), EMA(26)
  • Long: EMA(50), EMA(200)
Moving Average Convergence Divergence (MACD) Oscillator Price MACD(12,26,9,EXP), MACD(12,26,26,EXP)
Relative Strength Index (RSI) Oscillator Speed of price change RSI()
  • Indicates overbought and oversold conditions.
  • Overbought is above 70 - Due for correction.
  • Oversold is below 30 - Due for correction.
Average Directional Index (ADX) Indicator Strength of trend ADX()

DMI(14)

Consists of three lines: ADX, DI+, DI-
On-Balance Volume (OBV) Indicator Buying/selling pressure; Volume
  • If OBV is rising and price isn't, price is likely to follow OBV and start rising.
  • If OBV is flat-lining or falling, the price may be near a top.
  • If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom.
Commodity Channel Index (CCI) Oscillator Deviations from price moving average
Klinger Oscillator Oscillator Long-term trend of money flow
Chaikin Money Flow Oscillator Accumulation-distribution line of MACD
Money Flow Index

Simple Moving Averages

SMA Indicator

  • SMA(50), SMA(100), SMA(200)
    • These can provide support or resistance to a the price.
    • Crossovers can be used to indicate buy/sell signals, although you should seek confirmation from additional indicators
      • SMA(50) crossing ABOVE SMA(200) -> BUY
      • SMA(50) crossing BELOW SMA(200) -> SELL
      • Price crossing can also be used, although be aware price is more volatile, and prone to more false signals.

Exponential Moving Averages

EMA Indicator. Places a greater weight and significance on the most recent data points.

  • EMA(12), EMA(26) most often used for short-term trends
  • EMA(50), EMA(200) most often used for long-term trends
  • EMA(50) on one-hour chart commonly used for short term stock/forex trading
  • Crossovers can be used just like SMA.

Moving Average Convergence Divergence

MACD Oscillator

  • MACD is calculated by subtracting the 26-period EMA from the 12-period EMA.
  • MACD triggers technical signals when it crosses above (to buy) or below (to sell) its signal line.
  • The speed of crossovers is also taken as a signal of a market being overbought or oversold.
  • MACD helps investors understand whether bullish or bearish movement in the price is strengthening or weakening.

MACD Crossover Signals

  • MACD ABOVE Zero Line Crossover - Buy
  • MACD ABOVE Signal Line Crossover - Early buy subject to false positives
  • MACD BELOW Signal Line Crossover - Sell, although should be confirmed with other indicators
    • If MACD is high this could be a false sell
  • MACD BELOW Zero Line Crossover - SELL!!! You should have seen this coming already!

Relative Strength Index

RSI Oscillator. Tracks speed of price change to watch for overbought and oversold conditions.

Signals

  • Overbought is above 70 - Due for correction
  • Oversold is below 30 - Due for correction

Trends

  • Long-term trend of a stock is up. A buy signal occurs when the RSI moves below 50 and then back above it. This means pullback has occurred, appears to have ended, and is trending back up.
  • A possible trend reversal is signaled by going below 30 or above 70

On-Balance Volume

OBV Indicator. Measures cumulative buying/selling pressure.

  • If OBV is rising and price isn't, price is likely to follow OBV and start rising
  • If OBV is flat-lining or falling, the price may be near a top
  • If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom.

Average Directional Index

ADX Indicator. AKA Wilder's DMI. Used to determine the strength of a trend.

Consists of trend strength line and two directional indicator lines, DI+ and DI-.

  • Designed by Welles Wilder for commodity daily charts, but can be used in other markets or other timeframes.
  • The price is moving up when +DI is above -DI, and the price is moving down when -DI is above +DI.
  • Crosses between +DI and -DI are potential trading signals as bears or bulls gain the upper hand.
  • The trend has strength when ADX is above 25. The trend is weak or the price is trendless when ADX is below 20, according to Wilder.
  • Non-trending doesn't mean the price isn't moving. It may not be, but the price could also be making a trend change or is too volatile for a clear direction to be present.
  • DI Crossovers: Traders could enter a long position when the DI+ line crosses above the DI- line and set a stop-loss order under the current day’s low. When the DI- line crosses above the DI+ line, traders could place a short position with a stop above the high of the current day. Traders could use a trailing stop if the trade moves in their favor to help lock in profits.
  • ADX should be over 25 when the crossover occurs to confirm the trend’s strength. When the ADX is below 20, traders should use trading strategies that exploit range bound conditions.
  • DI Contractions and Expansions: The DI+ and DI- line move away from each other when price volatility increases and converge toward each other when volatility decreases. Short-term traders could enter trades when the two lines move apart to take advantage of increasing volatility. Swing traders might accumulate into a position when the lines contact in anticipation of a breakout.

DMI Points the Way to Profits

Commodity Channel Index

CCI Oscillator. Similar to RSI. Used to determine when an investement vehicle is reaching a condition of being overbought or oversold. Also used to assess price trend direction and strength. Focuses on normal deviations from an asset's moving average price to spot divergences from normal trend cycles.

Differences between RSI & CCI

  • The CCI measures the difference between the current price and the historical average price.
  • When the CCI is above zero it indicates the price is above the historic average. When CCI is below zero, the price is below the hsitoric average.
  • High readings of 100 or above, for example, indicate the price is well above the historic average and the trend has been strong to the upside.
  • Low readings below -100, for example, indicate the price is well below the historic average and the trend has been strong to the downside.
  • Going from negative or near-zero readings to +100 can be used as a signal to watch for an emerging uptrend.
  • Going from positive or near-zero readings to -100 may indicate an emerging downtrend.
  • CCI is an unbounded indicator meaning it can go higher or lower indefinitely. For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from.

Klinger Oscillator

Klinger Oscillator determines the long-term trend of money flow while remaining sensitive enough to detect short-term fluctuations. Made up of two lines. Looking for divergence on the indicator to signal potential price reversals.

  • The Klinger oscillator is based on a complex formula which is then averaged over a shorter exponential moving average (EMA) and a longer EMA. When the shorter EMA is above the longer EMA, the oscillator is above zero. When the shorter EMA is below the longer EMA the oscillator will be below zero.
  • Common EMA lengths are 34 and 55. If a signal line is applied, it is typically a 13-period EMA of the Klinger oscillator.
  • Signal line crossovers and divergence are two of the main ways to use to the Klinger oscillator.

ETFs

20190613 Webinar Notes

  • Stick with a single ETF provider so you don't get overlap in your capitalization coverage, unless you want to overweight by design
  • Net Expense Ratio
  • Tax Cost Ratio

Options

The big secret

As I was researching options trading, things didn't quite click until I really understood the following concepts:

  • Intrinsic Value
  • Time Value (Time Premium)
  • Time Decay
  • Extrinsic Value

Everything fell into place once I understood that the option value changed over time based on the volatility of the underlying asset. You can chart the value of an option just as you can chart the value of a stock over time. When you open an option position (Buy to Open) you are buying that contract at the current option value (premium). As time continues the movement of the stock price will determine if the option value rises or falls. If you don't want to exercise the option, you call Sell to Close the contract back to the market for the current option value (current market premium). [I am in the process of verifying this information.]

Basic Formulas

  • Intrinsic Value = Stock Price - Strike Price
    • Stipulation: This only holds true for options that are In-The-Money (ITM). At-The-Money (ATM) and Out-Of-The-Money (OTM) options have an IV=0.
  • Extrinsic Value = Option Premium - Intrinsic Value
  • Profit/Loss = Option Current Value - Option Purchase Price
    • This does not include the cost of fees. That PL formula would be PL = ((OCV - OPP) * 100) - fees.

Sell to Close

Sell to Close

Every introduction to options I've come across completely glazes over the concept of Selling to Close an option. In my opinion this is one of the most important aspects of buying calls for income generation, yet it is rarely discussed.

This is the true magic of options as far as I can tell.

SEC Forms

  • 13D - 5% or more; active investor
  • 13G - 5% or more; passive investor