I was a Dumbie at Technical Analysis 11/24/03

Before you turn away and say "Boring", let me tell you that I thought the same thing, mainly because I didn't understand it. Now, with Sol's help and encouragement, I have a better understanding of what it's all about. Let me share the findings of a novice with you. I will show a chart with non-conventional settings. It’s a 60 day 60 minute chart that is slowed down.

Technical analysis by indicators is all about numbers. Some people have their favourites, like  Jim Sinclair who bases his charts around the number 3, (3 minute, 9 minute and 18 minute charts). Some, like myself, love the natural numbers that Fibonacci discovered. Rather than go into a lot of technical stuff about relationships between numbers I will give you the Fibonacci sequence of 1, 1, 2, 3, 5, 8, 13, 21, 34, and 55 as a sample.  The last number is the sum of the two preceding, so the numbers can get quite large. One of the first things I do when I look at a chart that someone has displayed is look at the settings. There are clues everywhere.

Lesson No.1. Before you can draw a chart that tells the truth, you have to conquer your own bias. That was my hardest lesson. By nature I am a bear, but the market goes in two directions. So in order to make money I had to teach myself about the benefits of going long as well as short. Let me tell you, that took a long time and I still haven't totally completed the process. If the chart tells me something is going to happen and it doesn't, I don't give up, I continue to tweak the numbers so that the error I made is corrected without compromising the valid data.

Lesson No 2.  The market is driven by greed and fear, strong human emotions. Like sheep to the slaughter, we are all "in" or all "out".  So the point of technical analysis is to use those indicators that best measure first people, and secondly, directional pressure. I have found that the most valid indicators are in this order of weighting: Moving averages converging or diverging (MACDs), then stochastics. Those two measure greed and fear. The next two are Williams %R and Momentum. They are only pointers to changes in buying and selling pressure so should only be used after the first two have been mastered!

The market is about "noise”, "ripples" and "waves."  Keep that in mind as I try to explain MACDs.  For this purpose I will use the standard settings of 9, 26, 12. The first number is about “noise”. The average number of the noise units generated by adding up the "marbles" (units of noise) preceding the last one, then dividing it by 9 .The smaller the number the faster the frequency. The number 1, if used, is the absolute fastest measure of noise and to all intents is useless.

The second number is the “wave.” Again, it is the average of the preceding 26 marbles. It is slower to bend and twist with the vagrancies of the first number. Remember, it is the first number that ultimately curves the second number (signal line) into shape, but it the second number that is directional. The signal line is the tell tale of buying or selling. The median average line is the rabbit, darting here and there. It is the first line to turn.

When you look at the chart below, notice how the median average line moves out and in from the signal line. This movement is about generating ripples. These ripples show as the converging, diverging black movements on the zeroline, either above or below. When the signal and ma lines are above zeroline and the ripple is expanding a really stong positive bias is established. As the ripple crests, with signal turning down, the positive movement abates and a negative mood is established. It is responsible for the timing of the cross of the first two numbers and it is also responsible for the depth of the spread when looked at as being above or below the zero line.

The more I look at MACDs, the more I see. They are a wealth of information. They pick sentiment beautifully. Don't be afraid to play with the numbers.  The worst you can do is turning MACDs upside down. Most importantly, make them tell you the truth.

Stochastics are also about “noise”, but they tell the overbought/oversold condition of the entity you are trying to monitor. The thing about stochastics is that they are more subject to volume, so they are an indicator of a signature also. What I do is make stochastics viable, then use the first number as the first MACD number and the last number as the last MACD number. Sounds odd, I know, but it helps if things rhyme.

The standard setting for slow stochastics is 10, 10.(that appears to be one number, but in fact it is the same number used twice). I use a larger Fibonocci number for the first number (For example 34) then smaller Fibonacci numbers, including 34 for the second number. An example is 34,13 or 55,21. I think you will see the pattern so fiddle until it fits. I would end up with a combination like this: MACDs 13, 34, 8 and slow stochastics 13, 8 or MACDs 34,55,21 and stochastics 34,21.

The same applies to Williams %R:  I like 55-144 and 233. William’s %R tells about degrees of pressure, up and down. They confirm stochastics, sometimes earlier. Momentum does the same thing, but it helps if you can think in pictures.

Now the charts, look below.

A. We are in a downtrend chop. When macds are ascending below zeroline, expect chop sideways. This was the second SELL confirmation. The positive divergence went flat and the green median average line  turned down and crossed. The clue here as to interest was the low Williams %R.  Stochastics turned negative.

B. The buy signal. Stochastic turn on huge negative momentum. The negative macd divergence is flat. Williams %R is oversold. In this case a double bottom was made. For those that have nerves waiting for a double bottom is torcherous.

C. We could have exited on 27th Oct, but %R did not really issue the sell. It was only when %R dove to -50 that the sell was confirmed. Stochastics had been reducing as macds climbed higher, a sure sign that something was in the wind.

D. The classic BUY setup.

E. In the frame macds are ascending so the diverging converging is just noise and ripples until we get the crossover. Note the ma line, it never at any stage really turned down, indicating a HOLD. Where we are at the moment is looking is the macd line to turn down and cross, indicating a sell. This chart was generated on the 21st of November 2003.

This chart is a reasonable signature of Royal Gold. If you have got this far all I can do is encourage you to purcivere.

Allie Oop