Technical Analysis for Investors

11/29/2011 1:30 pm EST

Focus: STRATEGIES

Toni Turner

Author, Short-Term Trading in the New Stock Market

Simply learning some very basic technical analysis skills can keep investors from buying or selling at the wrong time, explains Toni Turner, reviewing some valuable technical indicators.

I’m talking with Toni Turner about the importance of technical analysis. Toni, it’s important not just for traders, but investors as well, right?

It really is Karen. You know, the almost sad thing is that so many investors get into the market and they have no idea if a certain stock they’re choosing is trading on the high side of the cycle and if it’s getting what we call in technical analysis overbought or oversold. 

If it’s overbought, that can be the exact wrong time to buy a stock because then you have to wait possibly until it pulls back and moves down to support and hopefully starts up again in order to get the momentum to go higher.  That could take a matter of days, weeks, or years if the investor doesn’t get in at the right price. 

So know how to read a chart, even in the most basic form, which would be a line chart—and that’s totally valid to do that. We use more complicated formulas, but in the line chart, you can just look at a line and say “Has that line gone up for a long, long time? Has it gone up for months and months?” If it’s going straight up, at some point, it’s going to come down.

So that may not be the proper entry point if you want to buy low and sell high, which is certainly everybody’s goal that I know of.

Yes. What indicators do you use to determine overbought or oversold conditions?

There are particular indicators called momentum indicators that traders use. We can use momentum indicators like the Moving Average Convergence Divergence (MACD) oscillator. It took me a long time to learn how to say that! 

See related: Demystifying the MACD

We can use the RSI, the Relative Strength Index. We can use what I call the “Drama Queen,” that’s stochastics. There are just many, many dozens of indicators that we can use. 

I like to use a more simplified method. I use a basic moving average on a daily chart, perhaps the 20- or the 50-day moving average.

If price is trading way high above that line, then it’s in an area where at some point—like everything—it’s going to have to come back down and find that support of that moving average, or perhaps price support. So that’s how I can tell an overbought stock.

And with a 50-day moving average, it’s nice and slow rolling, so it gives you maybe less chance of being wrong?

Well, yes, and a 50-day moving average is a good one because it’s watched by many institutions. We call it an intermediate-term moving average, and so we can almost call that an intermediate-trend moving average. 

It’s not real, real fast, and many times institutional traders who move the markets, if a stock is trading above that 50-day moving average, if it moves down to a rising 50-day moving average and bounces up off of it, many times institutional buyers will be buying there. That’s actually a good entry point as long as the entire market is in an uptrend.

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