[ Pobierz całość w formacie PDF ]
.If the OBV line is rising, it tells you that people are buying.After all, no matter what is happening in the market, if people are pulling moneyout of a stock, its price will go down.Conversely, if people are buying aBecause technical analysis is not an exact science, many traders use OBV to confirm what is happening with a stock.For example, let s say that a stock is up by 3 points but the OBV is dropping.This tellsyou that although the stock is temporarily going up, it s not going to last.Millionsof a security.stock, its price will go up.Figure 12-2 gives an example of OBV.file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (64 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmFor whatever reason, people, most likely institutional investors, are selling.The dropping OBV is a signal that you should immediately sell the stock.In Figure 12-2, the OBV initially rose along with theCater-pillar stock price.In early December, the OBV was slowly dropping along with the Caterpillar stock price.This was a clear signal that, at least for the short term, institutional investors were sellingthis stock.One of the biggest problems with technical analysis is that you sometimes get false signals.OBV helps you determine whether the buying and selling pressure is real or whether a reversal is imminent.Forexample, let s say that the price of a stock is falling but OBV is ris-ing.An alert trader will buy, not sell, because it s possible that the stock price will reverse as more buyers accumulate shares.Relative Strength Indicator: A Measure of Whether Stocks Are Overbought or OversoldThe relative strength indicator (RSI) measures the relative strength or weakness of a stock when it is compared to itself over a specified period.It is an oscillator with an upper and lower band that rangesfrom 0 to 100 on a vertical scale.An example of the RSI is given in Figure 12-3.To understand the RSI, you need to know what is meant by relative strength and relative weakness, two of the most important concepts in technical analysis.Relative strength means that a stock is strongcom-pared to another stock or to an index.For example, if the Nasdaq is falling but Bright Light is rising, then Bright Light is strong relative to the Nasdaq.(From a technical viewpoint, stocks withrelative strength are good buys.) Conversely, if the Nasdaq is going up but Bright Light is dropping in price, then Bright Light has relative weakness.(Gener-ally, you avoid buying stocks with relativeweakness.)When used in conjunction with other technical indicators such as moving averages and OBV, the RSI is a powerful tool that can help to identify whether a stock is overbought or oversold.This allows youto determine which stocks are going to run out of energy and succumb to the bears (overbought).On the other hand, the RSI will also help you to identify stocks that have fallen and are about to reverseand move higher (oversold).file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (65 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmFor example, if the stock price is dropping, but the RSI rises above 70 and then crosses back down, this is a sign that the stock might reverse direction (this price reversal is called divergence).Conversely,if the stock price is rising, but the RSI drops below 30 and crosses back up, the stock might reverse.The idea is that the stock price will eventu-ally move in the direction of the RSI.In Figure 12-3, the RSI dropped as low as 20 twice in the last year, signaling that Caterpillar might be oversold.For example, in August the RSI fell to 20 and crossed back up, and the stock immediatelyreversed direction.Then, in October, the RSI again fell to 20 and crossed back up.Note what happened to Caterpillar the stock reversed its downtrend and began a strong rally that continued for a month.If you are critical of technical analysis, you can argue that the RSI generated a series of short-term signals, some of which were unclear.This is why it s so important to use the RSI in conjunction withother technical indicators.On the other hand, the RSI did work flawlessly in the end, identifying that Caterpillar was oversold and would eventuallyLike the RSI, Bollinger bands are an oscillator that helps traders iden-tify whether a stock is overbought or oversold.Bollinger bands have two lines, an upper and a lower band with a gap between themthat expands or contracts as the stock price moves.You should keep your eye on the third line in the middle.This is called the price indicator, and where it goes signals whether a stock is about to reversedirection.AnTechnicians look for a number of signals when using Bollinger bands.First, if the two outer bands move so close together that they are almost touching (narrow), this is a signal that there could be asudden move in the stock price, either up or down.Second, if the price indicatorMillonsreverse its downtrend.Bollinger Bands: Another Measure of Whether Stocks Are Overbought or Oversoldexample of Bollinger bands is given in Figure 12-4.file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (66 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmis pushed well outside the upper or lower band, this means that there is strong buying or selling activity.Many times, a stock will ride the upper or lower band for minutes or hours and then cross through.Often, if the price indicator begins in one band, it will cross to the other band.This tells you that in the next few minutes, or perhaps hours, the stock price will reverse direction.The good news is that in the hand of an expert, technical indicators like Bollinger bands are extremely useful.The bad news is that the indi-cators change so quickly that they are useful primarily to short-term traders.As always, you should experiment and practice before risking real money on technical indicators or oscillators.ConclusionOne of the problems with technical analysis is that it is extremely diffi-cult to read the signals correctly.If all it took to be successful in the market were sophisticated oscillators and indicators, then mostpeople would use only technical analysis.Although most investors should have a basic understanding of how to read charts and how to use technical indicators like moving averages, this probably won thelp for long-term investments.After all, technical analysis is most useful for short-term decisions.Although charting stocks can be fun and profitable, you must also be careful to keep it simple.Many traders find that the more indicators they use on a chart, the more confused they get.It is what onetrader friend of mine calls analysis paralysis. You spend so much time studying charts that you don t make trades.Keep it simple the less complicated the information on your chart, the better.Speculating on Commodities andFutures Contracts*The futures exchanges were created to provide a market for pork bellies, hogs, cattle, corn, and hundreds of other commodities
[ Pobierz całość w formacie PDF ]
