Those who cannot remember the past are condemned to repeat it.

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Scot Fowler
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Only I d tweak it to say, Those who do remember the past are likely to profit from it. THAT S TECHNICAL ANALYSIS IN A NUTSHELL.

2 WITH THESE 4 EXPERT-LEVEL TECHNICAL INDICATORS Those who cannot remember the past are condemned to repeat it. This oft-quoted warning also forms the basis for technical analysis. Only I d tweak it to say, Those who do remember the past are likely to profit from it. THAT S TECHNICAL ANALYSIS IN A NUTSHELL. After all, technical analysis is based on the idea that all the information is represented in price and volume. So by comparing what s happening in the market today to what s happened in the past, you can tell what will (most likely) occur in the future. 2

3 In other words, while fundamental analysis involves screening businesses balance sheets, earnings reports, and economic conditions to try to predict stock returns, technical analysis relies on the participants in the market to distill all that information into meaningful data. And by watching price and volume, you can interpret the emotions driving the market. Some believe that technical analysis is simply about drawing lines on a chart and that it s essentially the equivalent of financial astrology. Hogwash! Granted, some methods have failed to produce real returns. And I agree that not all technical indicators are worthy of your attention. That s why it s important to focus only on the key indicators that have proven successful time after time. Lucky for you, we ve found the top three, best of breed, technical indicators that you can use to maximize your profits. Here s a brief rundown of each INDICATOR #1: FIBONACCI RETRACEMENTS If there s one constant in the stock market you need to remember, it s that the stock market never moves up or down in a straight line. But when you re trying to predict a stock s most likely trajectory, look no further than Fibonacci retracements They re easily one of my favorite and most reliable technical indicators. 3

4 For centuries, the Fibonacci sequence has been observed in nature, from sunflower buds to the proportions of the human body. No one quite knows why this pattern is so prevalent in nature. But its proportions are just as useful when applied to stock charts. By simply adding Fibonacci lines from a high point to a low point on a stock, you can see several potential areas of support or resistance. The strongest Fibonacci ratios are 23.6%, 38.2%, and 61.8%. Most trading platforms include a Fibonacci retracement tool for charts free of charge. Let s use a five-year chart of Apple Inc. (AAPL) as an example. Fibonacci Delivers Killer Entry Points Using Fibonacci Retracement to Time Apple (AAPL) Trades 00.00% % % % % % Jun '14 Jul '14 Aug '14 Sep '14 Oct '14 Nov '14 Dec '14 Jan '15 Feb '15 Mar '15 Apr '15 May '15 $136 $132 $128 $124 $120 $116 $112 $108 $104 $100 $96 $92 Price (USD) Source: RightWayCharts.com 4

5 By using a low point around September 2010 to the October 2012 high point for our retracement, we see the stock price pause at these golden levels. Use these pauses to make your buys. You could have bought Apple shares around $56 dollars at the 61.8% retracement point in July In just over a year, the shares retraced back to the 2012 high, where you could have sold them for a gain of 40%. Or you could have held them for even greater profits. Now, Fibonacci retracements aren t the only indicator you should use when timing your buys. But when confirmed by other trend reversal signals, you can set reliable entry points and rake in profits. INDICATOR #2: MOVING AVERAGE CONVERGENCE/ DIVERGENCE (OR MACD) The MACD indicator is a great introduction to technical analysis because it s based on one of the easiest, most powerful concepts: the moving average. Calculating and drawing a moving average line is simple. It s just the average price of a stock over a number of days, usually 50 or 200. A stock trading above this line is a strong bullish indicator by itself. But you can take a moving average to the next level by tracking when 5

6 moving averages of different lengths of time cross paths. Take a look at the chart for Under Armour (UA) to see what I mean. Under Armour and Moving Averages Under Armour (UA) 50-day moving average 200-day moving average $60 $55 $50 $45 $40 $35 $30 $25 $20 $15 $10 $0 Price (USD) Source: RightWayCharts.com When the 50-day moving average crosses above the 200-day moving average, it means the stock is likely going to see a big move higher. Basically, MACD takes moving averages, fine tunes them and combines them into a single indicator. It just takes a few more steps 1) First, instead of a 50- or 200-day moving average, MACD uses 12 and 26 days. It also focuses specifically on the exponential moving average, which means more weight (and importance) is given to the most recent stock prices. 2) The next step is creating the MACD line, which is simply the difference between the 12- and 26-day exponential moving averages from step one. 6

7 3) Once that s done, the signal line is created. That s the nine-day exponential moving average of the new MACD line. If this sounds complicated, keep in mind that you don t really need to know how the lines are created. The important part is how they interact. Check out the following chart of Bank of America (BAC) to see what I mean. Bank of America (BAC) What MACD Tells Us About a Stock Trajectory MACD line Signal line Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Source: RightWayCharts.com There are two main things you need to watch for 1) When the MACD line jumps above zero, it shows that the current momentum is positive. And when it drops below zero, momentum is negative. 7

8 2) Most important, you can identify when these shifts in trajectory are likely to occur. It s all about watching when the lines cross over each other. When the MACD line crosses above the signal line, momentum is about to turn positive. And when the signal line jumps higher than MACD, it s a sign that the share price is about to dip. The chart indicates the bullish points with green arrows and the bearish patterns in red. Sure enough, the stock movements (mostly) correspond with the Buy and Sell signals. The trick is to spot the crossovers as close to the zero line as possible. That s where the strongest signals occur. When the MACD line crosses above the signal line, momentum is about to turn positive. And when the signal line jumps higher than MACD, it s a sign that the share price is about to dip. INDICATOR #3: PARABOLIC SAR Don t let the imposing name fool you. Parabolic SAR is dead simple to interpret. SAR stands for stop and reverse, meaning that it s designed to find turning points in stock trends. In short, parabolic SAR captures momentum. The indicator is typically drawn as dots that follow a stock chart. When the dots are below the price, the momentum is positive, like the dots are pushing the stock up. When the dots are above the price, momentum is negative. 8

9 In simplest terms, when the dots switch from above the stock price to below, that s a clear Buy signal. On the flip side, when they switch from below the price to above, it s a Sell. You ll also notice that the dots tend to converge with the stock price right before they switch sides. So the closer the dots get to the share price line, the sooner the current share price direction is likely to reverse. So not only does parabolic SAR identify the turning point, it shows how much time you have to invest accordingly. Simple, right? There s one trick to using parabolic SAR, however. You need to be selective about your Buy signals. Parabolic SAR in Action Symantec (SYMC) $20 $19 $18 $17 $16 $15 $14 $13 Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct $12 Source: RightWayCharts.com 9

10 You see, if a stock is trading within a narrow range, the dots will give off multiple Buy and Sell signals in rapid succession. That s not a formula for making money. The Symantec (SYMC) chart on the previous page shows what I mean. When the stock traded in a tight range between June and August, there was a flurry of signals that wouldn t have been profitable. But between January and March, the signal worked well. To reconcile this, verify that the overall stock market is trending in a similar direction, too, and not staying stagnant. Of course, you could pair the MACD line with parabolic SAR to doublecheck your findings. With a stronger grasp of investor sentiment about a particular stock, you could pick your Buy and Sell levels with more confidence. INDICATOR #4: CHAIKIN MONEY FLOW We already know there are two sides to every stock trade the buyer and seller. But wouldn t it be nice to know what s going on behind the scenes? That is, whether the buyers or the sellers are more eager to act? With a stronger grasp of investor sentiment about a particular stock, you could pick your Buy and Sell levels with more confidence. That s what the Chaikin Money Flow indicator tries to capture. It indicates buying pressure and selling pressure. 10

11 Chaikin Money Flow takes positive and negative periods for a stock, then multiplies them by the volume of trading over that time. This assigns greater weight to days when there was heavy volume. Money Flow Pinpoints When Stocks Are Due for a Reversal Morgan Stanley (MS) Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Source: RightWayCharts.com Then it compares the ratio of positive pressure to negative pressure and converts that to a value between -100 and 100 (or between -1 and 1 on some software). At that point, you chart it as an additional line under the stock. When Money Flow is high, it means the stock has more buying pressure than selling pressure and vice versa. Now, you may be tempted to use this as a trend indicator. So you d buy when there s a lot of buying pressure. 11

12 But Money Flow actually identifies when a stock is overbought or oversold. As a result, it shows the end of the trend (or a reversal point). In other words, it s more of a contrarian indicator. When the rating is high, it means there may be too much buying pressure and the stock is set to collapse. On such merits, when the Money Flow passes a critical level (25 or -25 is a good rule of thumb) and stays there for a while, it s a sign that a reversal is imminent. (An indicator called the Money Flow Index is very similar to Chaikin Money Flow, with only a slight change in the calculations. You can interpret the signals the same way.) The chart says it all. Bottom line: Combining these four simple indicators can create a powerful system for identifying when stocks are likely to rise or fall. You don t need a math degree. Heck, you don t even need to understand the formulas to use these indicators to boost your investment profits. You just need to look at a few charts until you can see the patterns repeating themselves. After all, that s the basis of technical analysis. Good investing, Jonathan Rodriguez, Senior Analyst 12

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