Practical Technical Analysis Seminar by SGX

Last Saturday (2nd Oct'10) I attended SGX Academy Practical Technical Analysis Seminar, I summarized the main ideas as below:


(1) Using SMA8, SMA21 & MA55 to identify the market trend

Moving Average is a trending signal by application of statistical concepts of average. The assumption is once price is above the average price of a certain period, the up trend is likely to maintain, while vice verse.

But MA is lagging indicator, only when market moves a lot, signal could then be spotted. Another weakness of it is when consolidating, MA becomes almost useless, and normally generating more false signals.

In addition, I will also using MA200 to identify the main market direction.

(2) Momentum Indicator Stochastic Oscillator using 20/80

The Stochastic Oscillator Indicator compares where a security’s price closed relative to its price range over a given time period. The Stochastic Oscillator is displayed as two lines. The main line is called %K. The second line, called %D, is a  Moving Average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.

< 20 over sold, >80 over bought

Buy when the Oscillator falls below 20 and then rises above that level;
Sell when the Oscillator rises above 80 and then falls below that level.

(3) Relative Strength Index (RSI) using 40/60

The Relative Strength Index Technical Indicator (RSI) is a price-following oscillator that ranges between 0 and 100.

RSI < 40 probably bear, >60 probably bull

Tops and bottoms
The Relative Strength Index usually tops above 60 and bottoms below 40. It usually forms these tops and bottoms before the underlying price chart;

Divergences
Divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the RSI.

(4) The strength and weakness of Indicators

Indicators are basically the study on price movement, by application of a certain mathematical concepts, especially those from statistics. This type of analysis tool is trying to figure out the principles and regularities behind market move.

Technical indicators are sensitive to price movement, sometimes, are very good reference at reversal or turning point. However, market behavior is in essence human behavior which could not be formulated by statistical formula, every indicator has a unique philosophy behind it, be it cycle, trending, oscillating assumption or others, which has a fatal weakness that market is not statistical in nature, it is fractal and chaotic.

In conclusion, I am still base on strong fundamental factors to picking wining stocks. Technical indicators can only be used as supporting tool to enter / exit the market at the right time.