Reading the Tea Leaves: Talking Technical Analysis (Guest Speaker!)

Today, we had a special guest speaker.  A friend of the group wanted to join us for a meeting and give us a presentation on the basics of technical analysis.  Additionally, he shared a website with the team:  www.finviz.com.

The basic premise of technical analysis is that the price contains all of the information that you need to make decisions about buying and selling of equities.  This focuses on the psychology of other traders and is more of a short-term tool.  Fundamental analysis is what one should use for long-term holdings and that's the primary buying pattern of the group.  Nonetheless, there may be some useful things to gather on the educational side as well as a tip or two that the group can use.

Support and resistance are the first two terms discussed.  The first term refers to a price point at which there are more buyers than sellers.  Like a mattress spring, sometimes it will hold, but sometimes it'll collapse under weight.  This can be seen as a floor for the price.  When you look at variability over time, this is the dollar amount that the equity seems to never drop below.  Resistance is the ceiling in this analogy and follows the opposite logic.  The two of these form a range that the stock price will have trouble leaving due to the psychological barrier that they create.  Again, in this technical analysis, we are paying attention to the minds of all of the traders (or their algorithms).

Next, we moved into trends.  As per usual, the trends can be divided into short, medium, or long-term.  The support and resistance barriers form what is called a channel and provide a barrier that the trends will, more or less, obey.  An analysis technique is to find common geometrical patterns in these price movements, and use historical outcomes to determine what is most likely the best action based on the trend.  These geometrical patterns have all sorts of fun names.  Head and shoulders, double top, falling wedge, flag pattern, triangles, as well as cup and handles.  Each has their own technique that should be applied, but we didn't dive into that during this session.

Next, we moved onto the FinViz.  "For the visually stimulated, it's a wonderful site".  The opening page is full of images, ticker symbols, and charts.  The above is a visualization of sector size as well as company size within each sector for the S&P 500.  It's quite easy to get lost down the rabbit hole.

Of course, we had to check out EWZ.  Our speaker didn't have any big suggestions based on the performance.  You can see the resistance and support trending up through September.  The psychological floor was destroyed by something around the start of October and you can see the price collapse a bit.  We should probably look into why that happened.

The speaker was a fan of upward triangles.  This was one of the shapes mentioned previously.  The resistance has just recently been breached.  For the short term, it may be a good buy since people finally seem to be willing to pay prices above the purple line.  Interesting stuff!

To conclude, our group probably won't utilize these techniques too often.  It'll be worth spending a little more time with them because one of the basic purposes of the team is for education.  One takeaway is that we might be able to use these techniques to find an entry point into our next buy.

Thanks again to our guest speaker!

Profit!