Invest With Confidence

Getting to Know The Numbers

Back to Stock Analysis

Technical Analysis

Moving Averages:

These are important factors in the area of Technical stock analysis. A moving average is the average value of a share of stock computed over a particular period of time. Suppose today is Monday and it's the 10th of the month. A 5-day moving average would be the average closing price from last Monday (the 3rd of the month) through the most recent Friday (the 7th of the month). Tomorrow, on Tuesday the 11th, we would redo the calculation based on a new five-day sample starting on Tuesday the 4th and continuing through Monday the 10th. We call it a "moving" average because the time period used in the calculation shifts every day. The Advanced chart in the Market Guide Report allows you to show up to three moving averages, each calculated based on the period of your choice. Consider the price trend as being favorable if the shorter-period moving average is plotted higher than longer-period average.

Indicators:

Volume: This is the indicator that is automatically selected for you when you first retrieve an Advanced chart. The volume plots you'll see cover whatever chart interval you select. The most interesting part of the volume presentation is the color coding; the bar is green if the stock price rose during that interval and red if the stock declined. This is an important indicator of Wall Street sentiment. A price gain based on strong volume is generally more bullish than a gain that comes about when trading volume is low. Conversely, a decline on big volume is more bearish than a decline accompanied by low volume.

Relative Strength: This trend line traces comparisons between the performance of a stock and the S&P 500. A rising line means the stock is outperforming the S&P 500 while a falling line indicates that the stock is underperforming this widely used market benchmark. Technical analysts maintain that Relative Strength peaks occur before price peaks; this suggests that the line can forecast trend reversals.

Bollinger Bands: These two lines mark the boundaries of a price range that is one standard deviation above and one standard deviation below the stock's 30-day average price. (Note that the period for the moving average reflects the time interval you are using for your chart. For example, if you change your setting to plot your chart in weeks, the Bollinger Bands will be based on 30-week moving averages.) Standard deviation is an important indicator of volatility. For example, the numbers 7, 8, and 9 average out to 8; so too do the numbers -7, 8, and 23. But the second, more volatile sample has a higher Standard Deviation. Within the total 30-day sample, about two-thirds of the prices should fall within the Bollinger Bands. Technical analysts suggest that a narrowing of the bands means a price movement, one way or the other, will soon occur. Also, they believe that tops or bottoms outside the bands, followed by tops or bottoms within the bands signify that the trend is about to change.

MACD (Moving Average Convergence/Divergence): This is an important relationship comparing 10- and 30-day Moving Averages. The horizontal line on the chart depicts the point at which these two averages are equal. The trend line is an indicator of the difference between the 10- and 30-day averages. The stock is deemed to be in an uptrend whenever the trend line is above the horizontal base.

Stochastic: This indicators shows how the recent stock price stands relative to a recent trading range. Plots near the top of the graphic channel indicate that the stock is highly priced relative to the trend and may suggest that it is overbought. Conversely, low plots can be construed as an indication of an oversold stock.

On Balance Volume: This is a measure of supply and demand for a stock that combines price change and volume. Suppose a stock rises by two points on 500,000 shares of volume. We multiply 2 (the price change) by 500,000. Suppose the next day, the stock falls one-half a point on volume of 300,000. We multiply -.5 (the dollar change on day two) by 300,000. To get the cumulative supply/demand for that two day period (the on balance volume), we add the two figures. In this example, that would come out to 850,000, based on 1,000,000 for day one minus 150,000 for day two. (Note: To represent the trend in a more convenient way, we divide the number by 100, so a price chart would show this level as 8,500.) If, on day three, there's a quarter point rise on 90,000 shares, we'd wind up with 225 (.25 times 90,000 divided by 100) and add it to the prior day's OBV to wind up with a new figure of 8,725. Hence the OBV line would rise modestly (from 8,500 to 8,725) over our two-day interval. Technical analysts suggest that an OBV line moving in the opposite direction of the price trend signals a change in the price trend to conform to the OBV.

Percent Rate of Change: For each day, this line plots the stock's percent change over the most recent 20-day period. A rising line indicates that the percentage changes are widening; i.e. that the stock price is accelerating. A rising line is considered bullish while a falling line is deemed bearish.

^ back to top ^