Technical analysts forecast future price movements by a reading of the supply and demand for a company's stock and how that affects its price. They use mathematical indicators to forecast the timing of price trends in the market, particularly with charts.

Charts give us insights down the choppy road to investment success. An exciting challenge lies ahead. We need a set of skills to do our work; rolling analysis, fundamental analysis, technical analysis and news.  Charts are important to them all.

Technical analysis uses price and volume data to explain these issues and to perhaps peek behind the curtain to predict an outcome. Predicting future price movement is the goal. Momentum, a principle, is the tendency of a stock price to continue moving in a given direction. The prediction of future stock price changes depends upon this principle. Momentum considers both price and volume changes. For example, rising stock prices with increasing volume are considered very bullish. This increases the likelihood that the price will continue to rise. On the downside, decreasing prices with strong or increasing volume is considered bearish.

Good charting services include many different momentum indicators which are invaluable to the technical analyst. For example, On Balance Volume (OBV) is such an indicator. It shows if volume is flowing into or out of a stock. In TC2000, Worden Brothers include their own proprietary momentum indicators; Time Segmented Volume (TSV), Balance of Power (BOP) and Money Stream (MS).

Other classes of momentum indicators deal with moving averages of the price chart as well as the relationship between the high, low and close price during a trading day. The MACD (Moving Average Convergence/Divergence) shows the relationship between two moving averages of the stock price. The Stochastics indicator compares where a stock price closed relative to the price range during the session.

The purpose of all these indicators is to reduce risk in an attempt to know where the stock price is headed. No one of these indicators is perfect. Exceptions almost always occur when the entire market changes direction. In a stable market, they will often disagree with each other. It becomes our task to assess the totality of the message and make most of our moves when we get agreement among several indicators. Diligent attention to these details is what separates winners from losers.

We include a few of the basic technical indicators on our Pro-fundity page with the chosen stocks. Although we use all information available to us in a structured search for the selections each week, we do not include an exhaustive list of momentum indicators, leaving that task to the reader. There is no substitute for your own study of current techicals on a good charting service.

The stock market is manic-depressive which helps explain why the perfect predictive tool does not exist. However, patterns repeat themselves in ways that help predict price movements. Proper use of these patterns and indicators reduces risk, increasing our chance of making money in the market. We include the following on the Pro-fundity page for the selected stocks.

Important Technical Tools:
 

1. Price: Prices of most stocks fluctuate within a range forming what are called support and resistance lines. Support is the lower level of a stock's trading range where there appears to be a limit on further price declines. Resistance is the upper limit of that range where a stock's price appears to bump against a ceiling.
1. Support and resistance levels have an interesting and important affect on the minds of investors. When the stock price moves up to the ceiling (resistance level), investors see the price less likely to go higher and begin selling the stock. Additionally, an investor who is considering the stock will probably see it as overvalued and delay his investment. Both of these mind games become a self-fulfilling prophecy and indeed, the stock does decline. The same scenario repeats itself when the stock falls to its support level.
2. This channel created by levels of support and resistance remains in effect until some strong market activity causes a breakout on either the upside or the downside. Rolling stocks demonstrate the action of support and resistance quite dramatically and show how we can take advantage of this market phenomenon.

 
2. Trendlines: Price movements in a consistent direction, up or down, form important trendlines. The strength of a trend can stampede a bull market to impressive highs and a bear market to worrisome lows. We can use trendlines to identify support and resistance levels. It is the trend that helps us make intelligent buy and sell decisions. We must know where the stock is relative to its trendline.

 
3. Volume: The level of trading activity is a very important factor. High volume signals increased investor interest. However, we must know what the price is doing to let volume help. For instance, a positive trend is in place when price and volume increase together. However, increasing prices on decreasing volume tells us the trend is weakening. Get ready for a price decline.

On the other side, when price and volume decrease together, look for a continuing slide. Decreased selling volume must take place to slow the decline, which will not start back up until increased buying volume begins.
 

4. Last Day/Daily Average Ratio: The volume indicator on the Pro-fundity page includes not only the last days value but the [Last Day/Daily Average] ratio to tell us if it was a big day or just lackluster. For instance, a ratio of 1 means the last day was equal to the average, a 5 to 10 tells you something big happened, and a 0.2 or lower tells you the volume dried up that day.

 
5. Stochastics:  The “Stochastics” is a very useful indicator with rolling stocks.  It will predict price movements quite reliably and help us determine buy and sell signals.  It uses price velocity, or momentum, as follows.  Notice the price bar chart below.  Each bar represents the price range a stock traded on that particular day.  The top of the bar is the highest price reached that trading day and the bottom of the bar is the lowest price.  The small nub on each bar is where it ended the session, the closing price.

Notice how the closing price moves to the top of the price bar (the daily high) as the trend is moving up.  On the downswing, the closing price moves toward the bottom of the price bar.  The stochastic understands this pattern and shouts, when it sees the closing price move away from the top on the upswing; “Hey, this stock is oversold, get ready for a decline!”  Likewise, as it sees the close back away from the bottom of the price bar as the price moves down; “Hey, get ready for an increase!”

 The stochastics oscillates between a high and a low, from 0% to 100% as shown below:

Stochastics:  A measure of the over-sold and over-bought condition of a stock.

When the stochastics cross above the 80% line, the stock is considered overbought (get ready to sell).  Below the 20% line, an oversold condition exists (get ready to buy).  This is very effective with a rolling stock, as opposed to one with a pronounced trend.  This indicator is the most consistent technical predictor for buy and sell signals on rolling stocks.

On the stochastics chart above, a second dashed curve is shown which is a moving average of the solid curve.  It is an important action signal when the moving average crosses the solid stochastics.  Many technical investors use this crossover point as their signal to buy at the bottom and sell at the top.

This technical indicator works best with solid rollers, less well with what might look like a saw-tooth.  That is, a rapid rise from the bottom to the top, in a few sessions, then a slow return back down in many sessions.  The statistical nature of the indicator finds greatest predictive value when the stock price follows regular price movements.

A caveat; While the stochastics can identify over-bought or over-sold conditions, it can’t tell us how much further the price will go, either up or down.  It can tell us when the market is about to correct, but not tell us exactly where to buy or to sell.  That still requires our best judgment.

Stochastics are shown on most good charting services.  We use TCNet^TM with many useful features, allowing us to update nearly 10,000 stock charts on our PC as required and to conduct our own personal screens and searches, real-time. While we use TCNet for detailed technical analysis, there are charting resources at your fingertips without cost. The price is right! 1. Log onto the web at http://www.yahoo.com. 2. Select the Finance link. 3. Enter the ticker of your choice and hit GO. 4. From this site you can select a Basic chart or Technical Analysis for detailed indicator action. This is a quick and valuable resource with many added features you can enjoy.
 

Trends are indicated (U = up, D = down, F = flat) on the price and stochastics to give you a flavor of the picture, but this represents only a snapshot in time on Friday of the current week. It is essential to look at a current chart before making any investment decisions.

The key to success in the market is knowledge. The more we can learn about the market the more risk-free will be our decisions. Most market observers recognize that about 70% of a stock price movement is tied to the total market. The remaining 30% is due to supply/demand and fundamental factors related to the stock. The Pro-fundity Page provides a leg-up on our understanding of selected stocks that appear to be rolling. Gather all the information available, then make intelligent business/market decisions.