Chart analysis before placing a trade

[kevin546]

I was asked to look at this company for a friend considering taking a position and thought the work I did may benefit others how as one way to tackle this issue. I am not suggesting my view or approach is the only or best way to consider trading but it may offer up ideas to others.

The company is Northgate Information Solutions: NIS and has been in a nice trend.

Start with the long term trend, to do this I needed to go back 10 years when this company came to market so this is a weekly chart. I have drawn in the major downtrend lines showing the 'fan principle' as the rate of the trend begins to slow. I have also included major support and resistence. We can see that at present the price is just into the upper half what appears to be a 9 year range.

charts to follow

 

[kevin546]

I then looked to the 5 year position, sometimes you would not need to go so far back as 10 years but it has been in this case to establish the long term trend.

There is a lot of useful data on the 5 year daily chart. This chart illustrates the last rise to the 90's and subsequent down trend that followed the recent bear market and the break of the long term trend. Again in this chart I have applied the 'fan principle' to illustrate the gradual breaking of the trend. I have included the trend being broken and the current uptrend. In addition I have added support and resistence lines.

I find this chart of particular use because it illustrates price patterns so well. For example look at the major lows formed as the price fell from the start of 2001. When the price is in a downtrend a popular pattern seen towards the end is when the price appears to break the current trend only to move back up but hit a previous level of support that now becomes resistence.

If you look towards the end of 2001 you can see the price moves up from around 23p to break the short term trend but fail at 45p where it had previous resistence in the downtrend a few months before. However this was a hint that the bulls are making more of a stand against the bears.

The bears win and the price continues to fall but more slowly and brings us onto the next stage. When the price bounces from 20p in 2002 it moves up to test the last but one support in the downtrend at 35p in the previous year.

We move onto 2003 and see that the trend is broken, now we get to see the uptrend falter at the previous support level in the downtrend at 45p in the earlier half of 2001.

The trend has since moved up to 60p where again the price falters at a previous support level in an earlier stage of the downtrend at the beginning of 2001.

The relationship between the previous supports as the price fell and the breaching of them in this current trend is important. When the last downtrend began in late 2000 the 1st support is not so clear but would appear to be 75p.

This in my mind would be the next major test rather than the previous tops. However it still has to pass 60p.

 

[kevin546]

Breaking it down further to the 2 year daily position illustrating the various levels in the range leading up to the up trend, and the levels of support and resistence within the new trend as it develops.

 

[kevin546]

The previous chart displayed how the price at 60p had touched an upper channel formed by the tops of the trend for a 3rd time and has so far gained support for the trendline twice.

A quick reference to bollinger bands in the next chart supports the price had moved temporarily to far.

 

[kevin546]

Another method for considering where the price is in relation to the bigger picture is the 'Gap method'. By using a 200 SMA (simple moving average) , you could also employ an EMA. The idea behind this theory is to see how big the gap between the price and the moving average has become. By going back over a reasonable period it may illustrate at what levels the price has moved before the gap is reduced.

I have shown some of the main gaps over the past 5 years on this daily chart.

 

[kevin546]

The next chart breaks the picture down further and makes use of the same feature by applying smaller period moving averages to identify where the price returns to during the trend. This time I have selected the 13, 26, & 200 sma.

I have also displayed price pivots seen during the trend for entering short term trades or just joining the trend.

 

[kevin546]

The 1 year daily chart provides another view of how to apply an impulse value system of trading by joining the trend when the price returns to the sma. I have shown these areas in blue and relate to both the 13 and slower 26 period sma signals. Ideally you should find a setting that works best for you; but as you can see the trend generates faster and slower rates and so 2 moving averages can work well to identify the different levels.

I have also started to look at the individual price movements within the trend to break them down to cycles of 3 and pullbacks (retracements) in cycles of 2 shown as 'A & B'. I am not into wave theory but like to look for these price cycles to establish possible new price movement. It just so happens these features also fit in with wave theory and if you see sequences of 3 rises and 2 falls then it fits in with the Elliott Wave theory and we might as well make use of it.

 

[kevin546]

The next chart just takes us a bit further along the ' 3 ' sequence as the figure 3 in charting appears very important and is seen in many different charting strategies.

This chart illustrates the larger price moves within this new trend, this time just focusing on the price sequence to show we appear to have completed another series of 3 on the larger picture.

That makes 60p outside the Bollinger Bands, a touching of the upper trendline channel and now a completion of what appears to be a main price wave. This would tend to suggest from my limited understanding of EWave theory that we should see either a 2 or 5 wave correction. Assuming this price cycle is actually complete.

 

[kevin546]

Looking a bit closer to the present position the daily chart of the past month as seen earlier today.

I have applied lines to both the trend of the bars in dark red and to the closing position in blue as the price fell back from 60p. Today's action appears to show support at 54 - 55p seen earlier in the previous charts and the short term trend breaking to the upside.

I have plotted the upside movements before this last move in green and yellow.

 

[kevin546]

Last but not least the intraday position which obviously covers the down move illustrated on the 1 month chart.

As can be seen today there has been a move up from the 54 - 55p level (a previous support seen in the trend) and broken the intraday down trend over the past few days. It would appear the price has to move above 58.5p from this time frame. Of course the main issue will be if 60p can be broken.

Over these charts I have taken you through long term position down to the intraday displaying differing methods of assessment and styles of trading all of which can be applied with an appropriate complete trading plan.

I hope this proves to be of help or at least a little interest that you maybe able to read at your leisure during the festive season.

A merry Christmas and a Happy New Year to all.

 

[kevin546]

Applying similar analysis to the FTSE may suggest in the New Year that it comes up against long term support turning to resistence unless it can jump above 4500.

I have used the 10 year weekly chart and there are similarities with the downtrend seen in the previous NIS charts.

 

[kevin546]

The 5 year view on the daily chart with 200 sma long term trend line broken which at some stage in the future when extended may provide support.

 

[kevin546]

2 year daily chart illustrating the trend change confirmation and the price action in the up trend creating a triangle pattern.

 

[kevin546]

1 year daily chart with short term positive outlook breaking of triangle pattern at 4400. Trendlines shown to illustrate different rates and extensions to show possible support and resistence from main channel and trendlines.

 

[kevin546]

The 6 month view illustrates the ascending triangle more clearly and can produce 2 patterns when using different positions. A number of traders would have recognised the pattern and entered the market on the breakout from 4400 or wait for confirmation with support from price acceptance above this level.

I always feel that when such a pattern develops there is more upside to enter the market with the trend in mind. In this example entering on the breakout, which could prove to be significant and offer somewhere between 180 - 300 points if the pattern completes the expected range. However an earlier entry using the higher lows would put you in an even better position.

 

[kevin546]

Checking the hourly intraday chart or less will help to break down the longer daily chart for entry.

Apply the trendlines, support and resistence provides the information to place our trade in line with the market direction. The bounce back from 4390 into the recent trading range of 4410 - 4430 illustrated the strength for the price to rise again.

 

[Simon]

Good thread Kevsie-boy.

A potentially lower risk/greater reward entry could have been gained from the higher low, on the daily chart, at circa 4,350.

This entry would have allowed a tighter stop, greater reward & a better fill. With sensible money management this would have been a 'winning' trade trade even if the price retreated from resistance at 4,400.

 

[kevin546]

Moving further into intraday analysis with the 15 min 5 day chart illustrates how each of the down moves are smaller than the rising sequences that follow. Here you can also see re-tests orf previous highs or lows.

 

[kevin546]

Down to a 5 min view over 2 days

 

[kevin546]

Simon,

Thank you for your comments. There have been a number of entry points during the rally it just depends on what time frame you trade. I agree with you that on the chart you refer to the early signal was a better one.

What I meant to illustrate was the long bar system trade known in some quarters as a 'Kangaroo tail'. Better when seen on the daily chart and illustrates a strong move in the opposite direction.

Personally I would like to view the hourly chart over a 20 day period but bigcharts only cover 10 and there charts work well on this site re size. My main aim was to provide some assistance to new traders to charting and how they could look at the bigger picture and then reduce it down to the intraday position from a reasonably simplfied format.