COL Financial Group Inc.

Presents

Technical Analysis the Classical Approach

Presented by: Juan G. Barredo Vice President Chief Technical Analyst COL Financial Group Inc

Outline
Technical Analysis Classical Analysis
Trend Analysis
Trend Directions and time frames Support and Resistance Drawing Trendlines

Corrections and Consolidations

Principle of Magnitude and Duration Fibonacci Retracements Area Patterns

The Trading Routine Examine your Market Environment

The Need for Timing

Investing: Riding an investment for the long haul Trading: Engaging into qualified short term opportunities that
result into the best risk-reward potential.

Technical Analysis
What is it?
Technical Analysis is the study of Market Action, primarily through the use of Charts; for the purpose of forecasting future price Trends.
-- John J. Murphy Technical Analysis of the Financial Markets

Price Action

Study Charts

Spot Trends

Groundings of TA
Price discounts everything
The market price tells you everything you need to know about a stocks expectations. Whether the reason stemmed from logic or emotion, it has all been factored in.

Prices move in trends

An object in motion tends to stay in motion; while an object at rest tends to stay at rest.

History repeats itself

People will tend to react in similar fashion to certain kinds of stimuli, thus grooming the repetitive aspect of price activity.

Graphic View of Price

Volume the
Volume - measures the value participation (liquidity) and intensity of the crowd Value traded in a security Volume confirms price more volume more strength in a trend Advancing prices should be accompanied by good volume. Without it, advances may be limited Too much Volume or dry up, may lead to tops or bottoms into a swing trend

rd 3

Dimension

Volume Bars

Classical Analysis: Trends

Trends are durable swings in market condition; they last a considerable amount of time backed up by market forces (Demand & Supply) Trends are gauged or followed by the use of a Trendline a break of a trendline may signal a reversal or pause in trend Markets may take one of three general directions:

UP TREND
Higher-Highs and Higher-Lows

DOWN TREND
Lower-Highs and Lower-Lows

SIDEWAYS TREND
Range bound Highs and Lows also known as Consolidations

Trendlines drawn by connecting major lows Volume levels should be heavier on up days and lighter on down days

Trendlines drawn by connecting Two lines are drawn to lock the range major highs Volume levels should be heavier on Volume will diminish towards its end down days and lighter on up days if not suddenly swell up

Support and Resistance

R R

R
S S

Support that area under a price market where a concentrated amount of demand or buying interest has come to overpower selling pressure. This area is usually depicted by price bottoms or Up Trendlines. Resistance - frames itself as that area over a price market where concentrated selling pressure prevents any further advance in price. This area is usually depicted by price tops or Down Trendlines.

R
S S R

Note: A break of any of the two should see a corresponding move in the direction of the break. Oftentimes when support or resistance break they may change roles where Support becomes Resistance or the inverse.

Support and Resistance

Note: Up Trends show support in control of prices buy into pullbacks to this zone Down Trends show resistance in control of prices sell in rallies to this zone Sideward Trends force prices to cascade between support and resistance range trade this boundary Volume introduces itself along with a rise in demand

Trends in Time
Short Term = 3 Weeks to 3 Months Medium Term = 3 Months to 9 Months Long Term = 9-12 Months +

Drawing Trendlines
Process of action: 1. Start with what you have connect clear support or resistance points 2. After noticing a trendline break Act! (Sell or Buy) 3. If a new trend develops redraw new opposing trendline 4. On a false up trendline break, a new trendline must be outlined once prices show higher-highs (lower-lows in down trends) 5. Try to ignore major highs and lows usually seen off tops and bottoms second tops an bottoms are better starting points for trendlines
This trendline validated by the breach of previous high

New shorter term trends may start as soon as successful double support tests or higher-lows are made

Corrections and Consolidations

The principle of Magnitude and Duration
It takes Time (Duration) to move a Price a certain distance (Magnitude) --- Any exaggerated movement in this relationship will be paid for by an adjustment
through Price (Correction) or Time (Consolidation).

50
(1) Correction in Time

45 40

Price (Magnitude)

35
(2) Correction in Price

30
25

Time (Duration)

20

Corrections in Action
Corrections in price

Corrections in time

Fibonacci Retracements
The Golden Ratio of 61.8% Leonardo Pisano (1200), more popularly know as Fibonacci Natural relationship of expansion and contraction to maintain balance Fibonacci series of numbers (0,1,1,2,3,5,8,13, 21,34,55,)
% Down 38.2% 38.2% 38.2% 38.2% 38.2%

34 55 89 144 233

% Up 61.8% 61.8% 61.8% 61.8% 61.8%

Phi = 1.618

Fibonacci in Action
Corrections within up trends that find support after making pullbacks of 38.2% to 61.8% may be bought

Note: It isnt as important to buy as cheap as possible as it is to buy at the right time

Area Pattern Consolidations

Consolidations are depicted by sideways moving markets They enter into a meditative pause to fix price swing exaggeration by winding up between support and resistance
Market Exaggeration: Overbought an upward swing moving too fast too soon; offering ripeness for profit taking (reaction) Oversold a downward swing moving too fast too soon; offering grounds for bargain hunting (rally) Push out of a consolidation/pattern: Breakout a condition where prices shove themselves above a patterns Resistance Breakdown if prices slip below Support

Studying Patterns
Examine a patterns
SHAPE Can give clues to its eventual directional bias. Watch actions of demand versus supply and look for partiality.

SIZE Can measure likely price targets after a breakout scenario. Note: Vertical size of pattern = Minimum size of potential move Longer the horizontal width = the greater the durability of the swing

Area Patterns: Continuations

Ascending
Symmetrical

Wedges

Descending

Rectangle

Flags & Pennants

Area Patterns: Reversals

Double Tops Head & Shoulders One Day Reversals (ODR)

Broadening

Rounding Tops

Cup and Handle

Sample Patterns

Breakout Targets
TRIANGLE 230- 80 = 150 Breakout point: 170 Thus: 170 + 150 = 320

RECTANGLE 325 - 210 = 115 Breakout point: 325 Thus: 325 + 115 = 440

The Trading Routine

Creating a Trading Plan
When choosing a potential stock candidate (after screening it fundamentally), it is always good practice to technically evaluate how much upside one would have compared with its downside.

1) Looking for a Justified Entry 2) Establishing your Exit 3) Estimating your Technical Risk-Reward

A Justified Entry (for up trends)

Breakout swings from Consolidations Breakout Moves Support rebounds from Up Trendlines or Range lows Support Bounce

A Justified Entry
Looking for Price Targets
In order to choose the more promising alternative it is always good practice to technically evaluate how much upside one would have

1) Trendline Projection 2) Range in a Price Channel 3) Height of its current Area Pattern 4) Distance to its next major Resistance / Support

Looking for Price Targets

Establish your Exit Strategy

Breakdown from Consolidations Breakdown Conditions A break below Trendlines Up Trendline Break

Establish your Exit Strategy

Price Targets and Triggered
You must develop the ability to patiently stay with winning trades to allow them to create the profits you expected if not more take some profits or sell on these circumstances:

1) Once price targets are hit 2) Take windfall profits on Overbought rushes when momentum runs dry

3) Once price stops are hit

Establish your Exit Strategy

Establish your Exit Strategy

Price Stops
When holding a position through a trend it would be prudent to follow it with a protective tool called a Price Stop. Once this price is violated, one must liquidate or lighten current positions to safeguard the value of positions.

1) Trendline (or Moving Average) breaks

2) Consolidation/ Pattern lows

3) Trailing stops

Last reaction lows

For runners previous day lows or 10-day MA

Establish your Exit Strategy

Assessing your Risk-Reward

Evaluate your prospects
A key component in being a successful trader is to determine your risk versus reward level and use that optimum ratio to guide your investment decisions.

1) Estimate your upsides and downsides then pick out Risk-Reward opportunities of 1:3+
2) Remember selling too soon may inhibit your ratio keep yourself with the trend 3) You now have a trade plan be disciplined enough to follow it!

Examine your Market

20-day MA Short Term Trend | 50-Period MA Medium Term Trend

Examine your Market

www.stockcharts.com

Candleglance Group

What we have learned

1. Technical Analysis 2. Spotting and following trends 3. Corrections and Consolidations are necessary breathing spots 4. Establish a trading plan by knowing your upsides and downsides 5. Examine your market surroundings and retool your strategy

Knowledge born from actual experience is the answer to why one profits; lack of it is the reason one loses

- Gerald M. Loeb