Stockology

Technical analysis is the topic for today. I mentioned in the previous post that it would be impossible to cover every aspect of technical analysis in a blog, not to mention one post in a blog. But I’ll do my best to go over some more common indicators and ones I use on a daily basis.

First of all, a stock chart is a chart that tracks the price of a stock. So if you were to look up Microsoft’s chart on Yahoo! Finance or something, the chart would show Microsoft’s stock price plotted out on a chart. As far as aesthetics are concerned, there are a few chart types: Line chart, Bar chart, and Candlestick chart. I think the default chart on Yahoo! Finance is a Line chart.

Personally, I use the Candlestick chart. (No particular reason, they all display the same information, just from a different perspective.) Aside from the price, there are a bunch of indicators used on a chart to help identify patterns and whatnot. The most common indicator on a stock chart is the volume indicator. That should be pretty self-explanatory. Volume is usually shown as bars. So each day’s trade will have a corresponding volume bar. If a lot of shares were exchanged on a particular day, the volume for that day would be high.

Say Dell came out with earnings that disappointed Wall Street analysts. The stock price plummeted 10% and volume was unusually high. What could you derive from that situation? (Hint: There weren’t a lot of buyers…)

Another indicator that’s widely used is the moving average. I’m not even going to try and define a moving average in my own words, so here’s the definition from Investopedia.com: A moving average is the average stock price over a certain period of time. You calculate it by adding the closing price of the stock for a number of time periods and divide it by the total number of time periods.

So, to get a 5-day moving average for Apple, you’d add up the closing price of Apple for the last 5 days and divide it by 5. I don’t know anyone who uses a 5-day moving average. I use a 20-day, 50-day, and 200-day moving average. Moving averages are good for identifying trends. If the price of a stock today is higher than the average price of the stock for the last 20 days, it’s gone up. Get it? If the price today is higher than the average price for the last 50 days, it’s gone up!

Some more tidbits from Investopedia.com: Traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend.

Think of it this way, if the average price for the last 20 days is higher than the average price for the last 50 days, the price has gone up! Sounds really simple and kind of obvious, right? The truth is, it is! But because so many people use these indicators, stocks have been known to find levels of support at moving averages when they’re going up, and ceilings at moving averages when they’re headed down. In simpler terms: say the stock of a good company has been going up and up and up. It’s bound to take a breather and come down a little bit before going back up. That breather is likely to be at or near a moving average.

You really have to see it in action to get a better idea of how it works.

The last indicator I’m going to cover today is the stochastic oscillator. It’s a momentum indicator that compares a stock’s current price to a price range over a period of time. There’s a crazy formula that’s used to calculate the stochastic, but I’m not going to get into that…

Basically what it does is indicate whether a particular stock has been overbought or oversold. It’s shown on an oscillator so that you can gauge the stochastic against the stock’s chart. The stochastic is plotted on a chart scaled from 0 to 100. The way I use it is this: When the stockastic is below the 20-, it’s oversold. When it’s above the 80-, it’s overbought. I place my ‘buy’ trades just when the stochastic is breaking out above the 20-, and place my ’sell’ trades just when the stochastic is dropping out of the 80-.

It doesn’t always work, because an oversold stock can continue to be oversold, but at least it guarantees you buy it at a relatively low price. And vice versa.

Imagine the days before there was the internet. Researching anything required either a drive or a long-ass hike to your local library, which may or may not have had information on what you were looking for. Back in the day, people got stock quotes by either 1) calling their broker, or 2) waiting for the quotes on the next day’s business section.

Now, we have all the information we need at our fingertips. Sure, some stuff cost money, but there are plenty of great resources available for free. The only thing I would recommend paying for, and incidentally the only thing I pay for myself, is a subscription to The Wall Street Journal. Being an investor without a subscription to The Journal is like being a priest without access to the Bible. What a great analogy. I surprise myself sometimes… Get it in print. Get it online. It doesn’t matter.

If $100 per year (translating to $8.33 per month, significantly lower than my porn subscription) is just too much to ask for, then you have a few options. Share the paper with a roommate or two, reducing your cost by 66% to 50%. Share the online subscription with a few friends (it’s frowned upon, but what the heck, right?). Go to the library and read it there. If none of those work, you’re likely an uptight cheap-ass and maybe shouldn’t be investing in the first place.

Every other resource I’m going to mention is free. Some will have premium content available for a fee, but you can do without those. Know that currently there is enough information out there transcribed every minute to dizzy you. And if you don’t have a set way to sift through, ingest, digest, and analyze and put to use all the information, you’ll be wasting a lot of time.

So here’s how this is going to work. I’ll tell you some of the research resources I use. You can pick and choose from those, and hopefully find some of your own. You mix and match to create a method that best suits your time restraints, interests, preferred-media, etc.

First off is Investopedia.com. I believe I mentioned this a little earlier. It’s an investment encyclopedia. A great place to go and look up terms you don’t know. The reason I put this first is because if you dive right into The Wall Street Journal or some other publication without knowing some of the basic terms you’ll run into. It’ll be like a Chinese guy reading Arabic. So have it bookmarked, put it in your favorites, whatever. You’ll use it a lot when you first start.

In the investing world, The Wall Street Journal is the publication of record. That aside, CNBC, the network station or the website are great resources. They have up-to-the-minute headlines, and great analysis. TheStreet.com is also a good place to get market news, investing advice, and stock picks. And finally, a site that I recently discovered, SeekingAlpha.com. This site is more focused on analysis on certain industries and companies than news. I like it because experts (albeit many are self-proclaimed) break down how news affects the stock prices. And besides, it’s always good to hear it from a fellow investor who is biased toward one company or another.

For researching individual companies, obviously the best place to go is their website. Aside from information on what they do, publicly listed companies all have this “investor relations” section where you can find and download their financial filings with the SEC. That’s the Securities and Exchange Commission, a government commission that regulates the securities markets. For watered-down versions of financial information, including income statements, balance sheets, and cash flow statements, Yahoo! Finance is the place i frequent the most.

I also subscribe to print versions of BusinessWeek, Forbes, Fortune, and The Economist. And no, I don’t really have time to read all that. That’s what tables of contents are for. You find the stories that interest you and just read those. There are online versions of all of those, so they’re definitely worth checking out.

There are also research reports published by analysts who cover particular companies or industries. Your online brokerage should provide access to some of these on their site. I use Charles Schwab where, in addition to its own ratings, it provides outside research from Goldman Sachs, Argus, S&P, and Reuters.

Finally, I have a charting software called TeleChart 2000 by Peter Worden. I have no idea how much it costs because I don’t pay for it, but I imagine it’s not cheap. It’s definitely not necessary. But just thought I’d throw that out there because I’ve been using it for about a decade and a half now.

So all in all, I mentioned about 10 research resources that you should be able to access for free. One of the great things about the internet is hyperlinking. Through your readings, you’ll run across a lot of cross-linking. For example: A Yahoo! Finance story linking to a relating story from Reuters, which mentions something a TheStreet.com reporter says. The Wall Street Journal usually won’t have that. They’ll be telling the story from their reporters’ point of view. That’s why it’s the paper of record.