Technical Analysis serves to Step 3: Get your Timing Right

determine "when to buy or

when to sell" shares. It is
concerned with the use of
graphs to study historical price
and volume patterns in order to
predict the future course of
share prices. It determines the
'optimum time to buy and sell
shares' as opposed to the
"intrinsic value' of shares.

With technical analysis, timing is the critical success factor.

• Technical Analysis discounts fundamental factors and these fundamentals are
reflected in the price and volume.
• Price is determined by supply and demand, while volume is determined by
commitment to supply and demand.
• Price and volume form trends and these trends form patterns.
• The analyst's job is to identify these patterns for future buying and selling
opportunities.
• The key assumption upon which technical analysis is based is that the sum of
everything that everyone knows or feels about a share, sector or market is
reflected in the price and volume.
• Prices move when there is a change in the feeling or when new knowledge
becomes available.
• Technical analysis is the study of the share's price and volume chart to search for
historical patterns which may help to predict the future price patterns.
 Share prices move in a series of peaks and troughs. The direction of those peaks
and troughs determine the direction or "trend" of the market. There are three
kinds of trend, namely:

An up-trend - there are more buyers than

sellers (i.e. demand exceeds supply);
A down-trend - there are more sellers
than buyers (i.e. supply exceeds demand);
A sideways trend - there is a battle for
supremacy between the buyers and sellers
(i.e. supply and demand are equal).
 USEFUL TIPS
Over the years, technicians have devised
• It must be remembered that no indicator should be used a number of different ways of physically
alone.
• Always put a 10-day moving average on all your representing market data on charts.
technical indicators as further confirmation. The most popular charts are the closing
• We suggest that you start by using these few technical line chart an the bar chart.
indicators discussed below as a starting point.
 High
Close

Open
Low
 Moving Averages - Moving averages are probably the most
widely used method of identifying trend reversals, since
they do a good job of smoothing out these random
Once you have established fluctuations. The moving average serves two functions,
namely:
whether the current market is a • To smooth out the daily fluctuations in the share's price so
'trending' or 'trading market' and that the basic underlying trend and cycle can be seen;
where the market is now compared • It can also give you "buy" and "sell" signals. A buy or bullish
to the primary, secondary cycles signal is given when the price crosses above the average. A
and short-term daily fluctuations, sell or bearish signal occurs when it moves below.
then you consider getting your Use two different moving average time periods - the longer
timing right. Moving averages are period for the trend, while the shorter period as a trigger.
very basic tools and they are your For example, start with a 21& 40-day Simple Moving Average
starting point when it comes to (SMA).
technical indicators.
The OB/OS indicator - The OB/OS indicator is an The Momentum indicator - The Momentum
oscillator (i.e. it moves above and below a zero line) indicator is also and oscillator and measures
has been developed to calculate the percentage the rate of change in price as opposed to
change between the moving average and the price itself.
price. • Early watch signals occur when the
• Early watch signals occur when the OB/OS Momentum indicator crosses above or below
indicator crosses above or below its 10-day its 10-day moving average
moving average. • Buy signals occur when the Momentum
indicator crosses above oscillator line into
– Buy signals occur when the OB/OS indicator overbought territory.
crosses above zero line into overbought territory. • Sell signals occur when the Momentum
indicator crosses below oscillator line into
• Sell signals occur when the OB/OS indicator oversold territory.
crosses below zero line into oversold territory.
 • Early watch signals occur when the
MACD indicator crosses above or below
its trigger line.
The MACD indicator – is the • Buy signals occur when the MACD indicator crosses
difference between a 26-day above oscillator line into overbought territory.

and 12-day exponential moving • Sell signals occur when the MACD indicator crosses
below oscillator line into oversold territory.
average. A 9-day exponential
moving average, called the
"signal" (or "trigger") line, is then
plotted on top of the MACD
to show buy/sell opportunities.
The result is an indicator that
oscillates above and below zero.
 • Early watch signals occur when the RSI indicator
crosses above or below its 10-day moving
average.
The Relative Strength Index
(RSI) indicator – is a method of • Buy signals occur when the RSI indicator
crosses above 30% level.
measuring the relative strength of a
share against itself. This indicator • Sell signals occur when the RSI indicator
works on the principle of what crosses below 70% level.
goes up for a "time“ must come
down and is a simple ratio of how
much the share goes up in
a certain period of time versus how
much it goes down in the same
period. Put another way, imagine an
elastic band. If you stretch it too
far and let one side go, it will snap
back. In the same way, if the
market has risen or fallen too
far, it will 'snap‘ back.
 Early watch signals occur when the Stochastic
indicator crosses above or below its %D-
line.
The Slow Stochastic indicator • Buy signals occur when the Stochastic
– measures the relationship indicator crosses above 20% level.
between the close, high and low • Sell signals occur when the Stochastic
indicator crosses below 80% level.
and is based on the assumption
that closing prices tend to
accumulate near the top of each
period's trading range during
price up-trends, and at the
bottom during price downtrends.
 Volume Indicators - The volume is the number of shares traded within a particular period. This is
recorded using a straightforward histogram (vertical bar graph) at the base of the price chart.
Interpretation of the bar chart is based on the relationship between price and volume. The analyst will
attempt to identify periods of accumulation, which usually precede an upward move, or to establish
trends, which are likely to continue for some time in the same direction .

The On Balance Volume (OBV)

indicator - The OBV indicator is a
running total of volume. It creates a
volume line along the bottom of a
price chart.
If the share price close is positive,
that day's volume is added.
If the days close was lower, the
volume is subtracted.
So on up days, volume is added. And
on down days, the volume is
subtracted.
The result is a fluctuating line.
The Volume Price Trend
Volume Indicators (VPT)
- The indicator
volume -
is the number of shares traded within a particular period. This is
The interpretation
recorded usingofa the VPT indicator
straightforward is
histogram (vertical bar graph) at the base of the price chart.
similar to the interpretation of On
Interpretation of the bar chart is based on the relationship between price and volume. The analyst will
Balance Volume
attempt (OBV)
to identify indicator.
periods of accumulation, which usually precede an upward move, or to establish
trends, which are likely to continue for some time in the same direction .
Many investors feel that the VPT more
accurately illustrates the flow of money
into and out of a share than does OBV.

This is because OBV adds the same

amount of volume to the indicator
regardless of whether the share closes up
a fraction or doubles in price. However,
the VPT adds only a small portion of
volume to the indicator when the price
changes by a small percentage and adds a
large portion of volume to the indicator
when prices change by a large
percentage.
 • Relative Strength analysis is often used to compare a share or sector's
performance with a market index. It is also useful in developing spreads (i.e.,
buy the best performer and sell the weaker issue).

The Relative Strength indicator - Relative

Strength Analysis compares two data
streams to show how the shares are
performing relative to the JSE Overall index.
If the trend of the Relative Strength graph is
upwards, then the share or sector is
outperforming relative to the underlying
share or sector.
If the trend of the Relative Strength graph is
downwards, then the share or sector is
underperforming relative to the underlying
share or sector.
If the trend of the Relative Strength graph is
moving sideways, then the share or sector
is market performing or neutral relative to
the underlying share or sector.
• Establish the trend – Is it upwards, downwards or sideways?
• Establish the cycles – Is it a Bull or Bear market? Or Correction or Rally?
• Moving Averages - Start with a 21 & 40-day moving average
• Establish Overbought and Oversold levels - OB/OS; Momentum; RSI, Slow
Stochastic and MACD.
• Volume Analysis - Volume histogram; On Balance Volume (OBV) and Volume Price
Trend (VPT) indicators.
• Relative Strength Analysis - Compare share or sector relative to the JSE Overall
Index.
Step #3 would have provided you with a more in-depth
understanding of how to use technical analysis indicators to
assist you buying and selling shares at the right time!

Activity: Compile graphs using the technical analysis indicators you have learned to the
shares in your Watchlist.