Chart Analysis in Technical Analysis of stocks and commodity

Technical analysis of securities could be as complex or as simple as we make it. The below said example will explain it in a simplified version. If our interest is in buying stocks, than our focus should be on spotting bullish situations. • Overall Trend: Our first step is to identify the overall trend. This can be accomplished with trend lines, moving averages or peak/trough analysis. As long as the price remains above its uptrend line, selected moving averages or previous lows, the trend will be considered bullish. • Support: Areas of congestion or previous lows below the current price of a security mark support levels. A break below support would be considered bearish in security. • Resistance: Areas of congestion and previous highs above the current price mark the resistance levels. A break above resistance would be considered bullish. • Momentum: Momentum is usually measured with an oscillator such as MACD. If MACD is above its 9-day EMA (exponential moving average) or positive, then momentum will be considered bullish, or at least improving. • Buying/Selling Pressure: For stocks and indices with volume figures available, an indicator that uses volume is used to measure buying or selling pressure. Relative Strength: The price relative is a line formed by dividing the security by a benchmark. For stocks it is usually the price of the stock divided by the Nifty. The plot of this  line over a period of time will tell us if the stock is outperforming (rising) or under performing (falling) the major index. The final step is to synthesize the above analysis to ascertain the following: • Strength of the current trend. • Maturity or stage of current trend. • Reward to risk ratio of a new position. • Potential entry levels for new long position. Top-Down Technical Analysis For each segment (market, sector and stock), an investor would analyze long-term and short-term charts to find those that meet specific criteria. Analysis will first consider the market in general, perhaps the Nifty or CNX 100. If the broader market were considered to be in bullish mode, analysis would proceed to a selection of sector charts. Those sectors that show the most promise would be singled out for individual stock analysis. Once the sector list is narrowed to 3- 4 industry groups, individual stock selection can begin. With a selection of 10-20 stock charts from each industry, a selection of 3-4 of the most promising stocks in each group can be made. How many stocks or industry groups make the final cut will depend on the strictness of the criteria set forth. Under this scenario, we would be left with 9-12 stocks from which to choose. These stocks could even be broken down further to find the 3-4 of the strongest of the strong.