3. Technical Analysis - Identifying Buy and Sell Signals

Technical analysis is used to identify trading opportunities by analyzing statistical trends such as price movement and volume. Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic value based on financial or economic data, technical analysts focus on patterns of price movements, trading signals, and various other analytical charting tools to evaluate a security’s strength or weakness.

Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis. Technical indicators are commonly used by active traders, since they’re designed to analyze short-term price movements, but long-term investors may also use technical indicators to identify entry and exit points. Some technical indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. Commonly used technical indicators and charting patterns include trendlines, channels, moving averages, and momentum indicators.

The technical indicators fall broadly into two main categories: overlays and oscillators.

Overlays are technical indicators that use the same scale as prices are plotted over the top of the prices on a stock chart. Examples include Moving Averages and Bollinger Bands®.

Oscillators are technical indicators that oscillate between a local minimum and maximum are plotted above or below a price chart. Examples include the Stochastic Oscillator, MACD, RSI or OBV.

To support our trading strategy and improve decision making about the best time to buy or sell a stock, we will take into account the following information in relation to the six technical indicators that will be used.

• Relative Strength Index (RSI)

  • > 70 - Overbought or Overvalued

  • > 50 - Uptrend

  • < 50 - Downtrend

  • < 30 - Oversold or Undervalued

• Stochastic Oscillator

  • > 80 - Overbought

  • < 20 - Oversold

• Moving Average Convergence Divergence (MACD)

  • MACD Line > Signal - Bullish

  • MACD Line < Signal - Bearish

• 9 Exponential Moving Average (EMA)

  • Use the 9 EMA to find dynamic support and resistance and the short-term trend direction

  • The price is above the 9 EMA - look for buying opportunities

  • The price is below the 9 EMA - look for selling opportunities

• On-Balance Volume (OBV)

  • A rising reflects positive volume pressure that can lead to higher prices

  • A falling reflects negative volume pressure that can foreshadow lower prices

• Bollinger Bands®

  • The bands widen when a stock's price becomes more volatile and contract when it is more stable

  • The stock is overbought as its price approaches the upper range

  • The stock is oversold as its price approaches the lower band

Sources:

- Technical Analysis: What It Is and How to Use It in Investing, accessed 23 June 2024, <https://www.investopedia.com/terms/t/technicalanalysis.asp>

- Technical Indicator: Definition, Analyst Uses, Types and Examples, accessed 23 June 2024, <https://www.investopedia.com/terms/t/technicalindicator.asp>