Volume

Volume, which is another factor for a person to analyze and be aware of prior to future stock purchases. People tend to think in the herd mentality; therefore, if a move occurs with heavy volume (i.e. heavy trading taking place whether it is up or down) this would serve as a clue that it (i.e. the herd) knows something or thinks something is about to occur, or has just occurred. Paying attention to volume lets you confirm your stock trading decision on whether you should be buying or whether you should be watching and waiting for further decline in price in the security you are looking to purchase. It should be noted that there are two types of volume: positive volume and negative volume. Also keep in mind that the names are misleading. According to tradingsolutions.com, the Negative Volume Index is based on the theory that informed investors are trading on days of lower volume, while the uninformed crowd is participating on days of higher volume. This theory coincides with the Positive Volume Index, which tracks changes on higher volume days. The positive Volume Index follows the “less informed” crowd, and the Negative Volume Index follows the "smart money" crowd. Keep in mind that these two indicators are not completely polar indices. Just because the Negative Volume Index is up, does not mean the Positive Volume Index will be down; they are just designed to theoretically track dissimilar segments of the trading community.

The question might arise, “How do I use this information to make money?” According to tradingsolutions.com, The Negative Volume Index is typically compared against a one-year exponential moving average of its value. When the index increases above the Exponential Moving Average (EMA), informed investors have typically been buying this security, indicating the prices should continue to increase. When the index decreases below this value, informed investors have typically been selling, indicating a possible decline. Therefore, when studying a chart of a particular stock, if the Negative Volume Index rises above the one year Exponential Moving Average (EMA), this would be considered a buy signal opportunity; case in point, “smart money” has just entered the arena and “less informed” money chases “smart money”, possibly leading the way for an increase in stock value. One does not have to take my word for it. According to Norman G. Fosback, in "Stock Market Logic" based on back-testing against broad-market indices, a bull market (optimistic stock rally) was in progress during an upward crossing of the Negative Volume Index with the Exponential Moving Average (EMA) 96% of the time. Magee states, “The fundamental premise of technical analysis is that it is possible to identify and predict the continuations and turning points in market trends, to evaluate relative strength or weakness in the market, and to profit from the application of that analysis” (pg.4).

Stochastics

Stochastic, according to Magee, is “the relating of the closing price to the range in prices for a prior time period, usually 21 days.” Magee goes on further to say that the idea of stochastic is based on the observation or belief that in rising markets, closing prices have a tendency to cluster near the top of the range, and the reverse being true in down trending markets as well; in sinking markets, closing prices tend to cluster near the bottom. The 21- day stochastic relates today’s close to the price range from the previous 21- day period. The price range is the difference between the highest price and the lowest price. Stochastic is expressed as a percentage, and the point is plotted on a scale from 0 to 100. Above 80% is considered as overbought, and below 20% is believed to be oversold (95).

Moving Average Convergence Divergence (MACD)

MACD which stands for Moving Average Convergence/ Divergence is a tool designed to help an investor follow the trend of a stock’s price. Before we get into the technicals of MACD, one must first understand the convergence and divergence aspect of the tool.
First, convergence relates to a particular thing coming together, or joining; divergence refers to a particular thing separating and going in opposite directions. Understanding this theory is the key to successfully and effectively using the tool.
According to online trading concepts.com (2007) this tool is made up of three components: 1.) MACD, which is the 12-period exponential moving average (EMA) minus the 26-period EMA; 2.) MACD signal line which is a 9-period EMA of the MACD; 3.) MACD histogram which is the MACD minus the MACD Signal Line. You can virtually disregard all of this if you are not a big mathematician and do not comprehend the statistics involved; however this is a powerful tool and it helps the investor confirm the trend and momentum of the market, whether up or down, of a particular stock. This provides the buyer or seller an opportunity to confirm his or her decision with accuracy and confidence.


In the chart above, the two lines are the 12- day exponential moving average (EMA) and the 26- day exponential moving average. In this instance, the black solid line is the 12- day moving average and the black dotted line is the 26- day moving average. This tool works exactly the same as the simple moving average; when the short- term line crosses up over (convergence) the long- term line and begins to breakaway (divergence), that is an indication that the underlying stock will move upward in price, and vice versa, when the short- term line crosses down over (convergence) the long- term line and begins a breakaway pattern (divergence) this would indicate that the stock will be moving downward in price. The 0 line is the number to watch on the MACD because it serves as a change in direction or trend indicator. If the 12- day and 26- day exponential moving averages cross above the 0 line and the price of the stock is moving up, this implies that the trend is strong. Therefore, more buyers may be moving into the stock. If the 12- day and 26- day moving averages cross below the 0 line and the stock is trading up, or sideways this would indicate that momentum is moving towards the downside. Therefore, there are more sellers, signifying that the stock will be moving downward in price.

Relative Strength Index

Relative Strength Index, or RSI, is a tool used to measure current price strength in relation to previous prices. Investopedia.com insists that this tool helps determine an overbought, or oversold position, as well as serving as warning signals of potential price reversals, helping an investor to formulate buy and sell signals of a stock. There are two important numbers in relation to RSI: 30 and 70. The number 30 serves as a buy signal; when the RSI crosses below this number, an investor must consider buying because the stock has been oversold. The number 70 serves as a sell signal; when the RSI crosses above this number an investor must consider selling because the stock has been overbought.

Simple Moving Average

An explanation of a Simple Moving Average (SMA) according to stockcharts.com is an average formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example; a 5-day simple moving average is calculated by adding the closing prices for the last 5 days of trading and dividing the total by 5.
Day 1 = $10 closing price + Day 2 = $11 closing price + Day 3 = $12 closing price + Day 4 = $13 closing price + Day 5 = $14 closing price = 60
(60 / 5) = $12
The calculation is repeated for each price bar on the chart. The averages are then joined to form a smooth curving line -- the moving average line. Continuing our example, if the next closing price in the average is $15, then this new period would be added and the oldest day, which is $10, would be dropped. The new 5-day simple moving average would be calculated as follows:
Day 1 = $11 closing price + Day 2 = $12 closing price + Day 3 = $13 closing price + Day 4 = $14 closing price + Day 5 = $15 closing price = 65
(65 / 5) = $13
Over the last 2 days, the simple moving average moved from $12 to $13. As new days are added, the old days will be subtracted and the moving average will continue to move over time. The simplest way to use this information would be to buy shares of a company when the price crossed above its moving average, and to sell shares when the price fell below its moving average. Along with this strategy using more than one simple moving average at a time allows you to recognize momentum in a stocks trend in price. Using the chart below, when the (15 day) simple moving average crosses above the (50 day) simple moving average, that would be classified as a buy signal because short term momentum is outpacing the long term momentum, equating to more people being optimistic about the short term fundamentals and/or technicals of this company’s stock.

Bollinger Bands

Online Trading Concepts suggests that Bollinger Bands consist of three main components, which are in the form of bands, or lines; the upper band, the lower band, and the middle band, also known as the moving average. Playing the bands is used as a buying and selling method. Stock prices tend to move in a pattern, in contrast to the Bollinger bands. When a stock trades above the upper Bollinger band, it is considered to be overbought, and when a stock trades below the lower Bollinger band it is said to be oversold. Simply put, when a stock moves above its upper Bollinger band, one should think about selling the underlining stock, and vice versa. When a stock moves below its lower Bollinger band, one should think about buying the underlining stock.

Dissapointed GM shareholders heading for the exit.

If you have been tracking General Motors Company (GM) at all through recent weeks it seems as if despite all of the bad news shareholders have been holding on in hopes of a turn around. That hope was crushed today with GM shares hitting a new 76 year low. $1.15 a share was the price the company closed at today, equating to a 20% drop in the company's shares today alone. With bankruptcy fears at all time highs, even insiders of the company have resumed heavy selling of their shares in the company in hopes of departing with at least something. I was doing some research when I stumbled upon an article in Yahoo stating that the company is trying to issue 62 billion new shares, 100 times more than the 611 million now offered publicly. Then the question came to mind... What kind of effect will this have on shareholder equity? Well, according to Professor of Economics Gary Moon three words come to mind "dillution of ownership".

Inevitably speaking GM will eventually be bought out (bailed out) by the taxpayers, money will be exchanged for equity in GM and the previous shareholders will be left with pennies on the dollar. An idea that surfaces should be what will happen after the restructuring of the company occurs. According to Moon a reverse stock split will be in order and not until then should an investor be thinking of owning shares of General Motors.