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Berkeley ECON 98 - Technical Analysis III: Using Charts to Time Selling

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Technical Analysis III: Using Charts to Time SellingCurrent Events / Stock DiscussionCurrent Rally’s FTD (Dow Jones)Slide 4Lecture ContentSummary of last lectureSlide 7Slide 8Slide 9Today’s lectureSlide 11Slide 12Slide 13Fundamentals can look great at the topSell Decisions#1 Selling Rule: Cutting losses early#1 Selling Rule: Cut Losses EarlyWhy cutting your losses is importantSlide 19Slide 20Market Analysis: Timing TOPs / DowntrendsMarket Direction: Downtrends / TopsLet’s look at the NASDAQ during the 2000 Bubble as it happened Many distribution days within short time: more selling than buying. Furthermore, many leaders were peaking as well. Clearly, institutions were getting rid of shares. It went from good to bad to ugly2000 Market Top2000 Bubble: Leaders Breaking DownSlide 26Slide 27Slide 28Profit-loss planProfit & Loss PlanException…INDIVIDUAL STOCK CHART ANALYSIS: SELLINGGeneral Signs of WeaknessChange of TrendExample 1 50DMA ViolationExample 1 50DMA ViolationExample 2Slide 38Example 3Slide 40Example 4 Weekly Trendline BrokenSlide 42Climax TopsExample 1Slide 45Slide 46Slide 47Other Signs of Weakness (secondary indicators)Slide 49Rally on light volumeSlide 51ChurningSlide 53Other pointsEXAMPLESExampleSlide 57Slide 58Slide 59Slide 60Slide 61Slide 62SummaryNext week’s lectureHomeworkTechnical Analysis III:Using Charts to Time SellingEconomics 98 / 198 DecalSpring 2008CURRENT EVENTS / STOCK DISCUSSIONUsing Charts to Time SellingCurrent Rally’s FTD (Dow Jones)S&P500 (Recent Activity)LECTURE CONTENTUsing Charts to Time SellingSummary of last lecture•Technical Analysis•Using stock charts to time market bottoms•Rally, follow-through, counting days•Using stock charts to time buy points•Stock formations / bases•Cup with handle / double bottom / flat base•Strong characteristics of bases•Additional buy point: 50 Day moving averageRally AttemptDay 1Follow-throughDay 5(+1.75% on on high volume)S&P 500 (Early 2007 Follow-through)Failed Rally AttemptDay 1Prior DowntrendROLL – Pullback to 50 DMA PullbackBounces off 50DMA on above average volumeSPARSPARSPAR – Ascending TriangleVolume perks up on breakoutToday’s lecture•General principles for selling stocks whether for a loss or for a profit•Key Selling Indicators•Market direction•Cutting losses short•Individual stock chart analysis•Signs of weakness (churning, breaking support, resistance)•climax tops•changes of trendWhy knowing when to sell is so importantNasdaq (2000)Let’s say you bought an index fund or ETF here @ 3,500Why knowing when to sell is so importantNasdaq (2000)Within a year and a half, you would have lost your profits plus more!Why knowing when to sell is so importantYahoo! (1997 – 2006)Peak of $120Bottom of $4.5096% loss hereTo recover from bottom, YHOO would have to increase 2600%Fundamentals can look great at the topSell Decisions•Sell decisions should be based largely on technical analysis•Don’t wait for fundamentals to deteriorate•Market Conditions•Climax Tops•Signs of Weakness•Change of trend#1 Selling Rule: Cutting losses early•Set yourself a maximum sell rule•How much you set depends on your risk tolerance (5 – 10% a good #)•Why do it?•Use stop-loss orders if you don’t have time or control with emotions#1 Selling Rule: Cut Losses EarlySource: “How to Sell Stocks to Limit Losses.” IBD Online | Learning CenterWhy cutting your losses is importantChicago Board of Trade (CBOT)-Great fundamentals (strong earnings, sales growth, ROE, etc.)-Cup with handle base-Strong accumulation in base-Break out on strong volumeBuy here @ $128Why cutting your losses is importantChicago Board of Trade (CBOT)-Action of the stock doesn’t go according to plan and eventually, reverses to below breakout point-What do you do here?Cut your losses earlySell when 7% (or less) below buy pointI might be wrong and I should be cutting my losses here at @ $119Why cutting your losses is importantChicago Board of Trade (BOT)Now I don’t know what to do with a 34% loss!!!! #$!@#$!Bought here @ $128MARKET ANALYSIS:TIMING TOPS / DOWNTRENDSUsing Charts to Time SellingMarket Direction: Downtrends / Tops•Always preceded by signs of weakness (heavy selling) in major market indexes•Distribution Day (4 or 5 within 4 weeks) raises red flags•Other market weakness signs•Days when market starts strong, but ends very weak (low on the intra-day)•Leading stocks start to deteriorateLet’s look at the NASDAQ during the 2000 Bubble as it happenedMany distribution days within short time: more selling than buying. Furthermore, many leaders were peaking as well. Clearly, institutions were getting rid of shares.It went from good to bad to uglyMarket Direction: Downtrends / Tops2000 Market Top4/5 distribution days can tip a market over, so 7 within 4 weeks screams out that the market is heading for the gutters2000 Bubble: Leaders Breaking DownThe 2000 bubble went down in history as having the most climax tops at a market top (we’ll discuss this later). Essentially, this means GET OUT!!!!!The Aftermath2000 BubbleYahoo Inc. DOWN 88% in 12 monthsQualcomm Inc. DOWN 88% in 31 months2004 Market DowntrendCSCO. DOWN 38% in 8 monthsLeading stocks of current market uptrend usually fall the hardest when market tops occurMarket Direction: Downtrends / TopsDow Jones 1929PROFIT-LOSS PLANUsing Charts to Time SellingProfit & Loss Plan•Most stocks after bases move up 20-25%, build bases / patterns, and then in some cases, resume advances•If all goes according to plan, take your profit at this 20-25% gain pointthe exception to this is…Exception…•If stock rises 20% in 1-4 weeks on heavy volume, then hold on for at least another 8 eight weeks•Why do this? Quick, strong advance shows unusual strength in the stock. Potential to be a great winner.•After that, re-evaluate to see if stock should be held for longer term“Bulls make money and bears make money, but pigs get slaughtered.”INDIVIDUAL STOCK CHART ANALYSIS: SELLINGUsing Charts to Time SellingGeneral Signs of Weakness•Downward Reversals•Stock begins to move up, only for a sudden change downwards in price•Even worse, when volume is HIGH•Distribution•Stock closes at a lower price than prior day/week on above-average volume•In general words, big sellingChange of Trend•Long-term uptrend line is broken on overwhelming volume•Greatest one-day price drop•200-day moving average line turns down•Living below 10-week


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Berkeley ECON 98 - Technical Analysis III: Using Charts to Time Selling

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