CITISECONLINE

STOCKBROKERS

Presents

“Technical Analysis –
the Classical Approach”

Presented by:
Juan G. Barredo
Vice President
Chief Technical Analyst
CitisecOnline.com Inc.
 Outline
• Technical Analysis
• Classical Analysis
– Trend Analysis
• Trend Directions and time frames
• Support and Resistance
• Drawing Trendlines
– Corrections and Consolidations
• Principle of Magnitude and Duration
• Fibonacci Retracements
• Area Patterns
• The Trading Routine
• Examine your Market Environment
 The Need for Timing
Investing: invest into stocks for
an indefinite time believing
the prospects for that
company will eventually
boost its value.
Trading: engaging into qualified
short term opportunities that
result into the best risk-
reward potential.

Goal: SAME
Methodology: DIFFERENT
-difference lies in the
essential use of timing and
risk management.
“Trading fundamentally sound companies
potentially offer considerably higher rates of
return than long term investing, but it engenders
more preparatory work”
 Technical Analysis
What is it?
“Technical Analysis is the study of Market Action, primarily through
the use of Charts; for the purpose of forecasting future price Trends.”
-- John J. Murphy ‘Technical Analysis of the Financial Markets’

Price Study Spot

Action Charts Trends
 Groundings of TA
Price discounts everything
• The market price tells you everything you need to know about
a stock‟s expectations. Whether the reason stemmed from
logic or emotion, from careful assessment or speculation – it
has all been factored in.

Prices move in trends

• „An object in motion tends to stay in motion; while an object at
rest tends to stay at rest.‟

History repeats itself

• People will tend to react in similar fashion to certain kinds of
stimuli, thus grooming the repetitive aspect of price activity.
Graphic View of Price
 Volume – the 3rd Dimension
Volume - measures the
intensity participation of
the crowd

• It takes volume for a

stock to rise; but prices
can fall of its own weight
• Advancing prices should
be accompanied by rising
or good volume. Without
it, advances may be
limited in duration Volume Bars
• Volume bursts or dry
ups may lead to swing
highs and swing lows
 Classical Analysis: Trends
• Trends are durable swings in market condition; they last a considerable
amount of time backed up by market forces (Demand & Supply)
• Markets may take one of three general directions or Trends:
Up, Down or Sideways
• Trends are gauged or followed by the use of a Trendline – a break of a
trendline may signal a reversal or pause in trend

UP TREND DOWN TREND SIDEWAYS TREND

Higher-Highs and Higher-Lows Lower-Highs and Lower-Lows Range bound Highs and Lows
also known as ‘Consolidations’
Trendlines drawn by connecting Trendlines drawn by connecting
major lows major highs
 Support and Resistance
R Support – that area under a price market where a
concentrated amount of demand or buying
R interest has come to overpower selling pressure.
R S •This area is usually depicted by price bottoms or
Up Trendlines.
S
S Resistance - frames itself as that area over a
price market where concentrated selling pressure
prevents any further advance in price.
•This area is usually depicted by price tops or
R Down Trendlines.
R
Note:
S R • A break of any of the two should see a
S corresponding move in the direction of the break.
• And sometimes when support or resistance
S break they may change roles… where Support
becomes Resistance or the inverse.
Support and Resistance
Note:
• Up Trends show
support in control of
prices – buy into
pullbacks to this zone

• Down Trends show

resistance in control of
prices – sell in rallies to
this zone

• Sideward Trends
force prices to cascade
between support and
resistance – range
trade this boundary
Volume introduces itself along
with a rise in demand
 Trends in Time
Short Term = 3 Weeks to 3 Months
Medium Term = 3 Months to 9 Months
Long Term = 9-12 Months +
 Drawing Trendlines
Process of action:
1. Start with what you have
This trendline
– connect clear support validated by
or resistance points the breach of
previous high
2. After noticing a trendline
break – Act! (Sell or Buy)
3. If a new trend develops
redraw new opposing
trendline
4. On a false up trendline
break, a new trendline
must be outlined once
prices show higher-highs
(lower-lows in down
trends) New shorter term trends may
5. Try to ignore major highs
start as soon as successful
and lows usually seen off
tops and bottoms – double support tests or
second tops an bottoms higher-lows are made
are better starting points
for trendlines
 Corrections and Consolidations
The principle of Magnitude and Duration
“It takes Time (Duration) to move a Price a certain distance (Magnitude)”
--- Any exaggerated movement in this relationship will be paid for by an adjustment
through Price (Correction) or Time (Consolidation).
50

45
(1) Correction in Time

40
(Magnitude)

35
Price

(2) Correction in Price 30

25
Time
20
(Duration)
 Corrections in Action
Corrections in price

Corrections in time
 Fibonacci Retracements
The Golden Ratio of 61.8%
• Leonardo Pisano (1200), more
popularly know as Fibonacci
• Natural relationship of expansion
and contraction to maintain balance
• Fibonacci series of numbers
(0,1,1,2,3,5,8,13, 21,34,55…,)
% ∆ Down % ∆ Up
38.2% 34 61.8%
38.2% 55 61.8%
38.2% 89 61.8%
38.2% 144 61.8%
38.2% 233 61.8%

Phi = 1.618
 Fibonacci in Action
“Corrections within up trends
that find support after making
pullbacks of 38.2% to 61.8%
may be bought”

Note: It isn‟t as important to buy as

cheap as possible as it is to buy at
the right time…
 Area Pattern Consolidations
• Consolidations are depicted by sideways
moving markets
• They enter into a „meditative pause‟ to fix
price swing exaggeration by winding up
between support and resistance

Market Exaggeration:
„Overbought‟ – an upward swing moving too
fast too soon; offering ripeness for profit
taking (reaction)
„Oversold‟ – a downward swing moving too
fast too soon; offering grounds for bargain
hunting (rally)

Push out of a consolidation/pattern:

„Breakout‟ – a condition where prices shove
themselves above a pattern‟s Resistance
„Breakdown‟ if prices slip below Support
 Studying Patterns
Examine a patterns…

•SHAPE
Can give clues to its eventual
directional bias. Watch actions
of demand versus supply and
look for partiality.

•SIZE
Can measure likely price
targets after a breakout
scenario.

Note:
•Vertical size of pattern =
Minimum size of potential move
•Longer the horizontal width =
the greater the durability of the
swing
 Area Patterns: Continuations
Ascending Symmetrical Wedges

Descending Rectangle Flags & Pennants

 Area Patterns: Reversals
Double Tops Head & Shoulders One Day Reversals (ODR)

Broadening Rounding Tops Cup and Handle

Sample Patterns
 Breakout Targets
TRIANGLE
230- 80 = 150
Breakout point: 170
Thus: 170 + 150 = 320

RECTANGLE
325 - 210 = 115
Breakout point: 325
Thus: 325 + 115 = 440
 The Trading Routine
Creating a Trading Plan
When choosing a potential stock candidate (after screening it
fundamentally), it is always good practice to technically
evaluate how much upside one would have compared with its
downside.

1) Looking for a Justified Entry

2) Establishing your Exit
3) Estimating your Technical Risk-Reward
A Justified Entry (for up trends)
Breakout swings from Support rebounds from Up
Consolidations Trendlines or Range lows

Breakout Moves Support Bounce

 A Justified Entry
Looking for Price Targets
In order to choose the more promising alternative it is always
good practice to technically evaluate how much upside one
would have

1) Trendline Projection
2) Range in a Price Channel
3) Height of its current Area Pattern
4) Distance to its next major Resistance / Support
Looking for Price Targets

B D

C
 Establish your Exit Strategy
Breakdown from Consolidations A break below Trendlines

Breakdown Conditions Up Trendline Break

 Establish your Exit Strategy
Price Targets and Triggered
You must develop the ability to patiently stay with winning
trades to allow them to create the profits you expected if not
more… take some profits or sell on these circumstances:

1) Once price targets are hit

2) Take windfall profits on Overbought rushes
when momentum runs dry
3) Once „price stops‟ are hit
Establish your Exit Strategy
 Establish your Exit Strategy
Price Stops
When holding a position through a trend it would be prudent to
follow it with a protective tool called a „Price Stop‟. Once this
price is violated, one must liquidate or lighten current positions
to safeguard the value of positions.

1) Trendline (or Moving Average) breaks

2) Consolidation/ Pattern lows
3) Trailing stops
• Last reaction lows
• For runners – previous day lows or 10-day MA
Establish your Exit Strategy
 Establish your Exit Strategy
Price Stop for runners:
• Day Lows (for super fast moves)
•16-day Moving Average
 Assessing your Risk-Reward
Evaluate your prospects
A key component in being a successful trader is to determine
your risk versus reward level and use that optimum ratio to
guide your investment decisions.

1) Estimate your upsides and downsides then

pick out Risk-Reward opportunities of 1:3+
2) Remember selling too soon may inhibit your
ratio – keep yourself with the trend
3) You now have a trade plan – be disciplined
enough to follow it!
Examine your Market
 Examine your Market
20-day MA Short Term Trend | 50-Period MA Medium Term Trend

www.stockcharts.com Candleglance Group

 What we have learned
1. Technical Analysis
2. Spotting and following trends
3. Corrections and
Consolidations are necessary
breathing spots
4. Establish a trading plan by
knowing your upsides and
downsides
5. Examine your market “Knowledge born from actual
experience is the answer to why
surroundings and retool your one profits; lack of it is the reason
one loses…”
strategy - Gerald M. Loeb