CITISECONLINE

STOCKBROKERS

Presents
“Technical Analysis – Part 2
Technical Indicators & Market Cycles”

Presented by:
Juan G. Barredo
Vice President
Chief Technical Analyst
CitisecOnline.com Inc.
 Outline
• Review of Part 1
• Technical Indicators
– Moving Averages
– MACD
– DMI
– RSI
• Market Cycles
– Bull and Bear
– Elliot Wave
– 4 Market Modes
• Building the plan
 Part 1 Review
Looking into Trends
1. Identify your Trend (check support/resistance)
UP – Higher Highs and Higher Lows
DOWN – Lower Highs and Lower Lows
SIDEWAYS (Consolidations) – Not any of the above

2. Sketch out appropriate Trendlines;

readjust when necessary then follow its cue.
Up Trendlines – must be drawn by connecting higher
lows or bottoms to determine the rising demand base
Down Trendlines – must be drawn by connecting lower
highs or tops to outline the presence of exiting supply
Support and Resistance

Resistance

Reversal of Roles
Resistance now
Support acting as Support
 Trends & Trendlines

Up Trendline

Down Trendline
 Magnitude & Duration
This principle states:
“It takes time for price to move towards its intended target.”
… any exaggeration must eventually be paid for in time and/or price.

50
(1) Correction in Time 45
40
(Magnitude)

35
30
(2) Correction in Price
Price

25
20
Time
15
(Duration)
Technical Indicators
 Technical Indicators
• A technical indicator is a study of price data
derived from various statistical formula
plotted onto a graph
• It serves three basic functions:
– To Alert
– To Confirm Consequential Price Movements
– To Predict

• Generally TI study two aspects of markets:

– Trend Momentum (ability to move)
– Trend Quality (durability)
 Momentum Indicators
• Momentum studies trend durability. It attempts
to discern the speed and durability of a Trend
move – just as if you were gauging the speed of
a car by looking at it’s speedometer

• Drawback:
• Does not work well in Consolidations
• Four indicators:
• Moving Averages
• The MACD
• Directional Movement Indicator (DMI)
• Relative Strength Indicator (RSI)
 Moving Averages
• A price-average line plotted
onto a chart in direct reference
to market price.
• Its use is of great importance
as it illustrates where price
concentrations are, given a set
period of study. In this light the
MA can act as support or
resistance.
• A 10-day Moving Average will
be computed as follows: Ave.
Price = (Price of day 1 + day 2 +
day 3 +… price of day 10) / 10
We use three period
Moving Averages:
 65-day =1/4 a year
(trending MA)
 130-day = ½ a year
 260-day = 1 year
You can also use 32 & 16
day MAs to decipher
faster (shorter) trends.
 Moving Averages
32-day MA
65-day MA Crossover

Sell

Sell

Buy
Sell

•How to use: Buy above the line or stay long; sell or stay out below it
• Crossover of smaller MAs over/below bigger MAs reinforce the trend
 Moving Averages
Lopez Holdings
16-day MA
R
32-day MA S
65-day MA R R
130-day MA R
S
260-day MA
R
S

• After a breach the next MA becomes the next support or resistance;

crossovers by smaller averages enforce the indicated trend
 MACD (Moving Average Convergence Divergence)
• A lagging but effective momentum tool that
uses a crossover system to justify changes in
periodic trends.
• It has three component lines:

• MACD
• Signal line
• Zero line
 MACD (Moving Average Convergence Divergence)
• The MACD being above or below the Signal Line will
call either a Buy or Sell read:
•MACD crossover above the Signal line = BUY
•MACD crossdown below the Signal Line = SELL

• The MACD being above or below the Zero Line will

call the effective trend bias:
•If the MACD is above the Zero Line = Up Trend
•If the MACD is below the Zero Line = Down Trend

•Note: Move in only on stocks showing an MACD BUY

in an UP TREND; take profits when a SELL is shown
 MACD (Moving Average Convergence Divergence)

Momentum Momentum
Sell

Positive
Buy Sell

Negative
Buy Buy
 Moving Averages
Lopez Holdings

Buy Sell Buy Sell Buy Sell

• Remember: Buy only when MACD shows positive

crossovers and not MACD crossovers below zero
 DMI (Direction Movement Indicator)
• The DM Indicator reviews trend quality
• It also has three component lines:
• DMI+
• DMI-
• ADX (average directional index)
 DMI (Direction Movement Indicator)
• The DMI+ and DMI- being above or below each other
gives an action call:
•DMI+ crossover above the DMI- = BUY
•DMI+ crossdown below the DMI- = SELL

• The ADX line tells us if the market is moving directionally

or not:
•If the ADX is rising (30 >) = strengthening trend
•If the ADX is falling (close to 20<) = weakening trend
•A shakedown from 40+ may show a weakening trend;
while a rally from <20 shows a range moving to trend

•Note: Move in only on stocks showing an DMI+ crossover

above its DMI- and while its ADX is rising
 DMI (Direction Movement Indicator)

Sell Buy Buy

Buy Sell Sell
 DMI (Direction Movement Indicator)
Lopez Holdings

Buy
Sell
 RSI (Relative Strength Indicator)
• A momentum-oscillator that swings to and fro an
Overbought or Oversold conditions to highlight
extreme ends of a price move.
• It too comes with three component lines:

RSI
80% Line
20% Line
 RSI (Relative Strength Indicator)
A divergence is a
lapse in strength
shown by the RSI
compared with its
Prices.
i.e higher-high in price
compared with a
lower-high in RSI.
This produces bearish
connotations that
could lead to a larger
corrective tug.
Putting it all together
 Preparing your plan/checklist

Looking for a SETUP:

•A SETUP is a condition that presents
concurrent readings by most, if not all,
technical indicators.
• It is the best time to execute a trade.
• A Setup fittingly filters short-term price swings
that are commonly unreliable and unmasks
distinctive trend moves that are less subject to
speculation and supposition.
 Preparing your plan/checklist
Is there a Trend? (Draw trendlines) Yes  Is there a Trend? No 

Check Moving Averages With you?  Lengthy Consolidation Yes 

Above 65, 130, 260? Just Stay out!
Check MACD With You?  Lengthy Consolidation No 
Buy signal above ‘0’? Be watchful of support
Check DMI With You?  and resistance.
Buy DMI w/ ADX Rising Wait for a breakout
Check the RSI With You?  condition.
Overbought? Do not anticipate unless
YOU ARE SURE!
Divergence?
Decision Time
IF 3 or ALL SAY YES… THEN GO!
IF ONE SAYS NO… BEWARE THE
UNDERTOW.
IF TWO SAY NO… YOU SAY NO!
Market Cycles
 Market Cycles
Cyclicality of markets:
A) Most markets are cyclical
B) They follow / precede the
basic business cycle
C) Cycles may not always
be regular in time and
magnitude, but they
usually start off with an
expansion phase then
followed by a contraction
phase
D) Thereafter it begins a
new cycle
 Market Cycles
A) Stock Market swing always
move first than the business
cycle
B) They bottom out while things
still look bleak; they top out
while things still look good
C) This is because markets are
always forward looking and
sensitive to advance
Recession Early Recovery Full Recovery Early Recession
projections and guidance
Market Low Bull Market Market Top Bear Market D) This explains why investors
get caught into tight spots –
because of disbelief in trend
implications
The Bull and Bear Cycle
 The Elliot Wave
EW made up of:
A) Five Advancing or Impulse waves
B) Three declining or Corrective waves
Cycle within a cycle:
A) Longer impulse waves in
Bullish phases
B) Longer corrective waves in
Bearish phases – a 5 wave
correction may herald a
more bearish phase
 Identify your Market Phase

Momentum
Swing or
Trading Bullish Warning
Range Trading

Accumulation Distribution

Swing or Momentum
Range Trading Recovery Bearish Trading
 Identify your Market Phase
UP DOWN
Swing Mode Momentum Mode Swing Mode Momentum Mode
Ranges & Gradual Strong Channels & Ranges & Gradual Strong Channels &
Channels Runaway shifts Channels Runaway shifts
- Range Trading - Buy breakouts - Range Trading - Short breakdowns
- Buy Low Sell High - Buy and Hold - Sell Rallies Buy Dips - Short and hold
- ADX slips above 20 - ADX > 30 - ADX slips below 40 - ADX > 30
- DMI + crossovers - DMI + crossovers - DMI + crossdowns - DMI + crossovers
- MACD buy - MACD buy - MACD sell - MACD sell
- RSI below 40 then - RSI > 50 - RSI over 60 then - RSI < 50
rolling up rolling down
- Price > 65-day MA - Price > 16&32-day - Price < 65-day MA - Price < All MA
MA
Identify your Market Phase
 Preparing our View and Plan
1. Get a broad look at markets
• Macro – Global Markets (indices, currencies,
commodities, bonds)
• Micro – PSEi, Sectors, standouts and fallouts
2. Determine what phase your are in
3. Pick out your watch list
4. Use classical and Technical Indicators to filter
your choices
5. Prepare your trading plan
• Sort out your target ranges
• Identify your stops
• Measure your risk-reward potential
• Act out on qualified trades
What to do?

38.2%

50.0%

61.8%
 What we have learned
1. Technical Analysis
2. Classical Approach
3. Technical Indicators
1. MAs
2. MACD
3. DMI
4. RSI
4. Market Cycles
5. Fostering your market view “Knowledge born from actual
experience is the answer to why
and trading plan one profits; lack of it is the reason
one loses…”
- Gerald M. Loeb