Technical Analysis of Stock Trends

man sitting in front of the MacBook Pro

Charting and Predicting Market Sentiment

Proper technical analysis is at the heart of any good trader. They are able to examine a stock market chart and quickly determine the trend. As well, they may be able to find weaknesses in the trend that can be exploited such as a reversal.

What online methods are there for determining a valid trend?

A Visual Trend for the Artistic Analyst

One method that has been used for many years is the drawing of trend lines on price charts. A trend line will draw a straight line underneath rising prices and on top of falling prices. These lines act like a support and a resistance to the share price of the stock.

Stockcharts.com is an excellent free resource to create a custom trend line on a price chart in either Java or Flash. The chartist merely needs to click the annotate button at the bottom of the chart and start drawing. They also have a free online course on how to draw such trend lines.

Technical Indicators Help Gauge Trend

Others will prefer a technical analysis indicator to do the work for them. There are many such tools available such as:

  • Average Directional Index indicator (ADX)
  • Directional Movement Index (DMI)
  • Aroon indicator
  • Moving Average Convergence Divergence indicator (MACD)
  • Parabolic Stop and Reverse (PSAR)

Some of the above indicators will also indicate when a new trend begins and the strength of a trend. Often, the most money is made at the beginning of a new bull or bear trend. As the trend continues it becomes unstable and at some point reverses.

The ADX is such a useful indicator. When used with Wilder’s Directional Movement Index some profitable entry and exit signals are generated. MACD is a popular tool also. When divergences occur between the technical indicator and the prices on the chart, a trend reversal is often just around the corner.

Using Moving Averages to Notify Technical Trends

A simple method to determine trend is by using moving averages. The longer the moving average used, the bigger the trend. Four popular moving averages to follow are:

  • 350 day
  • 200 day
  • 50 day
  • 20 day

The 350 and 200 day moving averages are for long range trends. Usually the stock will follow one or the other, but generally not both. If stock prices seem to act at these levels much like support and resistance, then that moving average is validated.

The 50 day moving average is one used often by large institutions. If a large amount of institutional activity exists, the stock will bounce off this level predictably. Conversely it may hit the 50 day moving average like resistance if hitting it from the underside.

The 20 day moving average is an extremely short term trend that is valid for very minor price moves only.

A simple method of determining a long or short term trend is to see if stock prices are above or below the specified moving average. A stock above the 200 day moving average is usually in a long term upwards trend, or at least moving up from a bottomed out position.

Trending and Stock Price Movements

Once a trader becomes proficient at analyzing the overall stock market for macro trends, they will be better able to pinpoint buy and sell values that agree with the market sentiment. As long as the market continues to move in cycles, being able to identify these with the trends with either charts or mathematical tools will remain vital.

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