TD AMERITRADE Technical Analysis Night School Week 2

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TD AMERITRADE Technical Analysis Night School Week 2 Hosted By Derek Moore Director, National Education For the audio portion of today s webcast, please enable your computer speakers.

1 TD AMERITRADE Technical Analysis Night School Week 2 Hosted By Derek Moore Director, National Education For the audio portion of today s webcast, please enable your computer speakers. Past performance of a security does not guarantee future results or success. Content is provided for illustrative and educational use only and is not a recommendation or solicitation to purchase any specific security. TD AMERITRADE is not responsible for information, opinions or services provided by third parties. TD AMERITRADE, Division of TD AMERITRADE, Inc., member FINRA/SIPC. TD AMERITRADE is a trademark jointly owned by TD AMERITRADE IP Company, Inc. and The Toronto-Dominion Bank TD AMERITRADE IP Company, Inc. All rights reserved. Used with permission.

2 Important Information Past performance does not guarantee future results or success. Short sales: The risk of loss on a short sale is potentially unlimited since there is no limit to the price increase of a security. There is no guarantee the brokerage firm can continue to maintain a short position for an unlimited time period. Your position may be closed out by the firm without regard to your profit or loss. Short sales can only be made in a margin account. Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels. Margin is not available in all account types. Carefully review the Margin Handbook and Margin Disclosure Document for more details. Please see our Web site or contact TD AMERITRADE at for copies of these documents. Examples presented today use actual securities and prices. They are for educational and illustrative purposes only and should not be considered endorsements, solicitations, or recommendations to buy or sell these securities. For simplicity, examples ignore dividends and transaction costs (commissions). Both are important factors should be considered when evaluating any potential trade.

3 Derek Moore The host of the Market and Option Huddle Webcasts, has shared his knowledge of risk management, technical analysis, options trading and other subjects for more than a decade. The founder of TD AMERITRADE's national seminar series, Derek has created and delivered workshops that have helped investors across the country gain confidence in their trading. Derek is considered an expert in his field and has served as a featured contributor for both local and national media outlets. He is also the primary source for the Technical Advantage column in TD AMERITRADE's Enlightened Investor Newsletter.

4 Accessing Strategy Desk Platform StrategyDesk is a trademark of TD AMERITRADE IP Company, Inc. Used with permission.

5 Oscillating Indicators Oscillators are mathematical calculations on previous prices that result in a value that swings between a maximum and a minimum When the indicator approaches the maximum or minimum extremes, Technicians may interpret it to be overbought or oversold. When overbought, prices are perceived more likely to decline When oversold, prices are perceived more likely to rise Oscillators can be applied differently during trending periods. During strong up/down trends, prices can remain over bought/sold for considerable time Dozens of such indicators exist, we will review a couple.

6 MACD: Moving Average Convergence/Divergence Creates an oscillator from two moving averages The fast or MACD line is the difference between the 12 and 26-day exponential moving average. The slow or signal line is a 9-period exponential average of the MACD line. Some technicians interpret a cross by the MACD line above or below the signal line as a potential trading signal Traders also look for a cross of the MACD above or below the zero or center line for signals. This is considered an oscillator.

7 More on MACD When the MACD line is further above or below the center line, it is considered moving into overbought or oversold territory. The more above or below the center line, the more oversold or overbought a security may be. Traders also look for trends within the MACD study as well as divergence in the relationship between MACD lines and price. MACD Histogram represents the spread between the two lines. Bars are above the center line when MACD has crossed above signal line and below when it has crossed down.

8 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. MACD Example Price Moving Above/Below Moving 50 Period Moving Average MACD Crosses Below Signal Line MACD Line (Blue) Crossing Center Line MACD Line Crosses Above Signal Line

9 Divergence - Convergence When Price and Indicators are acting the same, confirmation exists. When indicators and price are moving differently, divergence exists. Some traders holding positions use divergence as a signal to watch closer, or tighten stops should a reversal happen. Traders watching for entry signals may add a position showing positive divergence to their watch list. Price is the main thing technicians look at first.

10 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Convergence/Divergence Price Making Higher Highs but MACD Making Lower Highs.

11 What type of market? Technicians main objective is to identify trends and be on the correct side. Stocks can be in an uptrend, down trend, or sideways trend. Other times, the trend is too sloppy to tell. Understanding what phase a stock is in may help traders correctly apply the various tools and indicators at their disposal. How can traders gauge what phase a stock is in?

12 ADX ADX is an oscillating indicator that measures directional movement and is used to identify the strength of trend ADX does not differentiate between bullish and bearish trends Important levels are 20 and 40 Below 20 is considered non-trending Above 40 implies a strong trend Technicians view a move across 20 from below to signal a new trend Some view 25 to 30 readings as more indicative of trend strength Similarly, a move across 40 from above is interpreted by technicians as the onset of a range bound period The slope and direction of the ADX line can also show whether a trend is possibly building or losing steam

ADX and DMI +DI +DI crosses above above -DI -DI ADX ADX above

13 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. ADX and DMI +DI +DI crosses above above -DI -DI ADX ADX above above and and rising rising MACD MACD crosses center center line line

14 DMI (Directional Movement Index) DMI is used in combination with ADX to identify negative and positive directional movement, shown as DI and +DI. Directional Movement (DM) captures whether prices have moved higher, or lower, or remained within the range of a previous period Stocks trading above a previous high would show increased +DI while a move below a previous low would lift DI readings. Generally, technicians view +DI trading above DI as bullish and vice versa; crossovers can be key areas depending on trend strength

15 ADX/DMI Continued or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. ADX Moves Above 20 Line +DI Crosses above -DI

16 RSI: Relative Strength Index A price-following oscillator between that seeks to identify when a stock is overbought or oversold Readings above 70 are generally considered overbought and below 30 are considered oversold. Traders may view a move above or below the center 50 line as a sign of strength or weakness. During trending periods traders may find this helpful. Some technicians look for divergence between the price trend and the RSI trend; if price is rising but RSI is falling, the indication is for a possible reversal of the up trend

17 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Relative Strength Index (RSI) Overbought? 70 Line 70 Line 30 Line 30 Line Oversold?

18 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. RSI During Trending Periods New Price High But Lower High in RSI RSI Move Below Centerline RSI Move Above Centerline

19 Stochastics Oscillators that use a scale, where 80 is perceived as overbought and 20 oversold Based on the belief that in up trends, prices tend to close toward the upper end of a price range and that in down trends prices will close near the lower end of a trading range A fast stochastic uses two lines, called %K and %D %K = 100 [(C-L14) / (H14-L14)] %D is a 3-period moving average of %K Where C = latest close, L = lowest low, and H = highest high for the default time period of 14 bars

20 Stochastics (cont.) Slow stochastics simply use two %D lines, producing a less sensitive study The second %D line is a 3-period average of the first %D line Many traders prefer a slow stochastic Technicians tend to view action within the oscillator while above 80 or below 20 as important, with divergence from price a key signal Bearish divergence occurs when price is rising but the %D line is making lower highs Bullish divergence is evident when price is falling but the oscillator is making higher highs. Some Technicians use Stochastic to gauge possible momentum and view moves above/below the middle as important during trending periods.

21 Comparing Stochastics: Fast vs. Slow The slow stochastic creates a smoothed study or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Overbought Overbought Oversold Oversold

22 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Stochastic Example Stochastic From Above to below Line 80 Line Stochastic Below to above 20

23 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Positive Divergence? Price moving making lower lows and lower highs, but stochastic forming bottom with lows essentially equal?

24 Changing Default Settings Many charting tools allow you to change the default settings for technical indicators and oscillators Using shorter time periods creates indicators that are more sensitive to moves in the security Traders should evaluate how quickly they want signals to occur when adjusting default settings Some technicians will adjust default settings to be less sensitive, preferring fewer signals and better confirmation before order entry

or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. RSI Calculations: 7-period vs.

25 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. RSI Calculations: 7-period vs. 14-period Shorter period calculation reaches extremes faster, more often 14-period 14-period RSI RSI fails fails to to cross cross 70-line; 70-line; 7-period 7-period reaches reaches extreme extreme of of 80 80

26 Go to Research & Ideas, Choose Ideas, then Webcasts on left. Choose Webcasts Content is provided for illustrative and educational use only. TD AMERITRADE is not responsible for information, opinions or services provided by third parties.

27 Contact Us Call: Past performance does not guarantee future results or success. Content is provided for illustrative and educational use only and is not a recommendation or solicitation to purchase any specific security.

28 Practice Charts Blank Practice Charts You have 4 blank practice charts to apply what we ve learned today. Instructor Notes and Hints on final 4 charts. Technicians use a variety of methods. Develop YOUR OWN strategies. What did you see?

29 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Practice Chart 1 MACD/Moving Average Circle any areas you believe indicated bullish or bearish signs. Where would your entry and exit been?

30 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Practice Chart 2 ADX/DMI What is the trend during the life of this chart? What does ADX (thick black line) tell us about the trend? How can we tell if it is a bullish or bearish trend?

31 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Practice Chart 3 - RSI What is price doing? Can you spot any divergence between price and RSI? Did RSI go into Overbought or oversold areas? What did it tell you?

32 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Practice Chart 4 - Stochastic Indicate where you notice positive or negative divergence. Draw a line where you see price starting an uptrend. What did stochastic tell us? Where would you exit a position?

33 Teachers Notes Teachers Notes Looking at charts provides a way to visually interpret price data. Marking Up chart print outs is an excellent way to put to work your skills. Technical Analysis is a vast topic. Many technicians continue to practice. Join us for Weeks 3, and 4.

34 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Teachers Edition Chart 1 (MACD/ 50 Moving Average Line) Price moving above/below moving average line. Traders choose the moving average that fits their time frame and style. MACD line moving above/below center line may signal bullish or bearish signals. Have an exit strategy as nothing is 100%

or illustrativepurposes only. Not a recommendation. Past performance no indication of future results or success. Teachers Edition Chart 2 ADX/DMI Non- Trending phase.

35 or illustrativepurposes only. Not a recommendation. Past performance no indication of future results or success. Teachers Edition Chart 2 ADX/DMI Non- Trending phase. See ADX below 25 below. Price trading in a range. Many crosses by price above/below moving average. Price trending up now. See ADX (black) above 25 and Green +DI line having crossed above the red DI and holding.

or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Teachers Edition 3 RSI Example Price in strong uptrend.

36 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Teachers Edition 3 RSI Example Price in strong uptrend. RSI quickly heads into Overbought territory (above 70 line) During strong trends, RSI may go above 70 and stay there. Traders sometimes tighten stops in case of a turn around. Notice price making higher highs and RSI making lower highs. Negative divergence. Traders may have watched closer, but technicians look at price first which maintained its upward trend. Also notice RSI stayed above it d midpoint which is generally bullish. Divergence? Center line

or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Teachers Edition 4 - Stochastic Positive Divergence?

37 or illustrative purposes only. Not a recommendation. Past performance no indication of future results or success. Teachers Edition 4 - Stochastic Positive Divergence? Price making lower lows, stochastic making higher lows? Faster D line crosses (see circle) and holds above slower and rises through center line moving to and staying overbought during uptrend period. Lower lows in stochastic? Time to watch trend line?

Chapter 2.3. Technical Indicators

Chapter 2.3. Technical Indicators 1 Chapter 2.3 Technical Indicators 0 TECHNICAL ANALYSIS: TECHNICAL INDICATORS Charts always have a story to tell. However, sometimes those charts may be speaking a language you do not understand and you