Stock Analysis is the most important first step any trader using Technical Analysis must perform before even considering establishing any type of long or short position. By performing a thorough Technical Stock Analysis Traders can best set themselves up for high probability and money making (profitable) trades.

Step 1: Stock Analysis 101 – The Trend

Before placing any trade, it is important to establish price trend in three distinct areas.

These are:

• Long-Term Trend
• Intermediate-Term Trend
• Short-Term Trend

The Long-Term Trend is established over the time period of months to years. The best way to see this is by setting your charts to show the past five or 10 years.

The Intermediate-Term Trend is established over the time concerned with weeks to months.

While the Short-Term Trend, is established over a period of days to weeks.

For a better illustration of the long, intermediate, and short term trends let’s analyze the S&P 500 chart over the last 10 years.

For the purposes of illustration, we will be looking at the spyder of the S&P 500 with the ticker symbol of SPY.

When performing stock trend analysis for a potential investment or trade it is best to start with the long-term trend and work your way down to the short-term trend. This will help establish potential areas for entering or exiting trades.

The picture below represents the SPY chart of the last 10 years.

As you can see in the chart above there are four multi-year up and down trends.

Long Term Trend Stock Analysis:

By understanding that the definition of an uptrend is higher highs and higher lows and the definition of a downtrend is lower highs and lower lows, there are four distinct trends on this long-term chart.

1. On the far left of the chart you can see a multiyear downtrend that appears to start in 2001 and in the first quarter of 2003.

 

1. Beginning in 2003, a multiyear uptrend was established and persisted until the 2007/2008 housing crisis reversed the long-term Bull Run.

 

1. Late 2007 marked the beginning of the sharp long-term downtrend that bottomed out near the 2002/2003 market lows.

 

1. In the first quarter of 2009, the multiyear downtrend reversed into an uptrend marking the fourth long-term trend on the SPY over the last 10 years.

 

When performing Stock Analysis it is important to always be aware of whether the long-term trend is moving upwards or downwards.

Intermediate Term Trend Stock Analysis:

Now let’s take a look at the SPY with the chart settings set to nine months for an intermediate term trend analysis.

As you can see by looking at this chart, in the past nine months the SPY has been neither up trending nor down trending but has consisted of what looks like two sideways trends separated by a downside breakout in the first part of August.

It is important for any stock trader to note that while the long-term trend is up the intermediate term trend is sideways.

Short Term Trend Stock Analysis:

Shortening up the chart settings to only reveal the last 12 weeks gives traders a good look at what’s been happening in the short term with respect to trend.

As you can see SPY has been in a sideways trend since early August 2011 with what looks like is a breakout to the upside (indicated by the yellow circle) in the latter part of October.

Stock Analysis Trend Summary:

As you can see by looking at the long-term, intermediate term and short term trend of SPY we can establish that while the long-term trend is up, the intermediate trend is sideways and the short-term trend with the upside breakout and subsequent retest is up.

Understanding the direction of these three trends is a very important first step in analyzing whether or not there’s a potential profitable trade set up displaying on stock charts.

Stock Analysis Step 2: Support and Resistance Levels

Price support and resistance levels are one of the cornerstones of Technical Analysis. Each of these levels represents imaginary roadblocks trying to impede price movement.

Quick Support/Resistance Definitions:

Support Levels are price areas or zones were price action has had a difficult time breaking below in the past.

Resistance Levels, on the other hand, are areas, zones, or tops were price action has had a difficult time breaking above in the past.

Now, let’s take a look at the stock chart of SPY and locate both long-term and short-term support and resistance levels.

Long Term Support and Resistance Levels:

As you can see with the chart settings set to 10 years, there are several long-term support and resistance lines.

These long-term lines of support and resistance tend to be much stronger than when compared to short-term lines.

Make sure to include both horizontal and also any diagonal areas of support and resistance.

During the course of your Stock Analysis, marking these long-term levels will be very important when moving to the hard right edge of the chart. It’s important to mark these levels with a color that you will recognize as indicating a long-term level (example picture uses purple) so that you can easily see which timeframe this level represents.

Intermediate Support and Resistance Levels:

To mark the intermediate-term levels, change your chart settings to represent either nine or 12 months of data.

Again, when marking these intermediate term support and resistance levels make sure you choose a color (example picture uses green) that you will recognize when examining the hard right edge of the chart. Notice the purple support/resistance line around the 118 price level is from the long term chart.

Short Term Support and Resistance Levels:

When it comes to establishing short-term support and resistance levels, you should indicate both horizontal and diagonal areas. There are also other advanced technical analysis techniques to find hidden levels of support and resistance for the short-term.

To find the short term levels shorten the chart settings to show the last 12 weeks or so of price action.

As for the long-term and intermediate term levels, make sure to mark the short-term levels with the new color (example picture uses yellow) to help you organize and instantly see which levels represent which timeframe.

Looking at the short term stock analysis trend example you can see that one long term level (purple) and three intermediate term levels (green) are shown on the chart.

By starting with long-term support and resistance levels and honing them in closer to the short-term levels, you will be able to get a better feel for where these levels are and the impact they may have on where you place your trades.

Stock Analysis Step 3: Price Momentum

There are several ways to gauge price momentum when it comes to stock analysis. While trend and support and resistance levels are important for trade setups, understanding price momentum will help traders better time their entries and exits. Let’s start by looking at how to gauge intermediate to short-term momentum.

Intermediate/Short Term Stock Price Momentum:

When it comes to momentum, the definitions for intermediate and short-term are very different than looking at trend or support and resistance levels.

As the name momentum implies, this term is used to help understand how easy or hard it is for price to move up or down and therefore when performing stock analysis you are more interested in price momentum as it is occurring and much less concerned with price momentum with respect to past months or years.

Today, most traders use technical indicators to help see the intermediate and short-term momentum of the stock or market price.

Let’s take a look at three specific technical indicators traders use when performing their stock analysis to gauge price momentum.

3 Common Momentum Indicators:

1. Relative Strength Index (RSI)
2. Rate of Change (ROC)
3. Moving Average Convergence Divergence (MACD)

There are many different technical indicators that can be used to gauge momentum. I encourage you to find one indicator and get comfortable using it on your charts for stock analysis rather than trying to learn multiple indicators in the beginning.

Now let’s take a look at the chart of SPY from August 2011 to November 2011.

As you can see during this time period price action has been in a sideways trend. The three indicators we have selected to look at or underneath the chart in order of Rate of Change, Relative Strength Index, and Moving Average Convergence Divergence.

For those of you already familiar with technical indicators, it is important to note these are the standard settings for each indicator as indicated to the right of each study.

While the relative strength index as indicated either a positive or negative momentum, both the rate of change in moving average convergence divergence indicators have flip-flopped momentum a few times over this three-month period.

Both the rate of change and the moving average convergence divergence indicators are indicating positive price momentum over the past two weeks.

By using momentum indicators during your stock analysis you’ll begin to develop a better feel for which direction price is moving and the strength behind price movement.

Very Short Term Stock Price Momentum:

One of the best ways to gauge momentum in the very short-term is to set your chart to display price action as a candle or candlestick.

Setting your chart to visually display candles and understanding how Candlestick Analysis can help you see the battle occurring between the bulls and the bears as the market moves is the best way to gauge short-term price momentum.

As a Trader, being able to get a feel for price momentum is very important when it comes to executing your Trading Plans entries and exits.

Stock Analysis Step 4:  Volume

Volume is the amount of trades that a stock experiences over a set amount of time and is very important to your stock analysis. Volume can help gauge the health of a trend. A high volume in the direction of a trend can confirm that the trend is strong, while low volume in the direction of the trend can serve as an early indicator that the trend is nearing its final days.

Strong trends usually begin with high volume. When that volume begins to die off, it’s possible that the trend could be approaching a reversal.

Stock Analysis Summary:

As you can see from above, when it comes to trading stocks in the financial market searching for the latest news, reports, or hot stock tips isn’t necessary to figure out which stocks to buy or hold. The key to stock market trading and investing is mastering the four steps to successful stock analysis with the intent of finding a financial edge.

When it Comes to Stock Analysis There Are Four Important Steps:

1. Identify the Trend (long, intermediate, and short)
2. Identify Significant Support and Resistance Levels (long, intermediate, and short)
3. Gauge Price Momentum
4. Look at Trading Volume

If you want to be a successful trader it is essential that you master these Four Steps To Profitable Stock Analysis and use the information gathered from them to implement your trading plan effectively.

I urge you to preview “Chart Pattern Profiteer” to see how you can use Stock Analysis in a predictable way to setup profitable trades.

 

 

 

Other Trading Resources:

For more information on what causes stock prices to move in relation to stock analysis check out this article.