I’ll keep this one short since it’s the weekend and most are probably familiar with this stuff. I am not the biggest fan of technical analysis and charting. I prefer to look at the fundamentals and only use technical analysis for timing. I’ve softened my dislike though since starting in options. For short-term options, technicals are more informative, unless you are expecting earnings or important news items.
I know most people like using trend lines that slant in order to identify support and resistance. I’ve seen this as effective enough, but I prefer to use horizontal high and low lines. The thing about the slanting trend lines is that sometimes they are an identification looking for a pattern. You tilt the lines to fit the chart. Ideally, the price will move in the direction of the line and within them, and breaking the line was a breakout.
I prefer using a line across the local high or local low. I don’t go for just the last high, I look for a definitive turning point. Normally I’d go for a spot where the trend clearly reversed. I’ll admit to using slanted lines to get an idea of the slope and the severity of the downtrend, but in determining price targets I stick to my horizontal lines. The reason is that the price hit these lines and bounced or reversed off of them. Since it was really hit I find them more definitive. This might be more conservative, because it lowers the universe of price points but I am fine with that.
Once a candlestick crosses that line you look for the next definitive level to determine a selling point. This is great for options where you’re just looking to score at much movement in your direction as possible in the shortest amount of time. If you actually own the stock its more complex and many diagonal trend lines might help you.
There is a reason I’m not showing actual charts here. A lot of times I use my gut for interpreting the information. This is just something I consistently use. You have to use what works for you. Using these lines to determine my price targets have proven more effective for me. It could be because I don’t draw the other lines right. Anyway its an important message for my first actual lesson post. You have to use what works for you.
In the recent choppy markets there have been many peaks and troughs made in a short amount of time. There might be an overall trend but its full of false starts and stumbles. A diagonal line would just be forcing the pattern. I just like to note the level that wasn’t beaten last time. The stock price ran into a dead-end and changed direction. Then I find the last time that happened and use that as my next target. As for the trend and channel I let my eyes make the pattern for me, but I don’t want the lines there it confuses the issue, at least for me. Especially in the recent choppy market, thought I had a pattern was wrong. I tried using the trend lines again recently, but reverted back just because I couldn’t use them effectively.
I have the same feelings about using calculated numbers such as the 200 day MA providing support or resistance. That number is just calculated it’s not a price that was ever hit. It was not a level that most investors got in. However, my disdain for these is mostly intellectual and theoretical. These levels as price targets are extremely important, but I will discuss that next time.