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How to Get It Right With Charts

Tuesday, 15 May 2012 | 11:39 PM ET

A basic knowledge of technical analysis and charting is essential for trading success, particularly in these market conditions as indexes show signs of weakness. It’s also essential for evaluating the information produced by others so you can distinguish between good analysis and analysis which is dangerous to your wallet.

The chart (left) came with this analysis.

“The recent decline was halted by a combination of support factors. These are the moving average and the horizontal support at $2.34. The market has rebounded from this support level and the other indicators are showing bullish buy signals. Upside target is $2.71.” Lets examine these analysis claims one by one.

Support is provided by the moving average.

A moving average line does not create a support or resistance level. Support and resistance features are created when the market moves away from previously established price points.
A moving average is a mathematical calculation of an average price. Change the calculation period for the moving average and the position of the support level also changes. A moving average gives a variable figure and this is not a support level. We can speak of price returning to the moving average, but we cannot use the variable value of a moving average calculation as a support feature.

Horizontal support is at $2.34.

A support/resistance level is created when price consistently rebounds from this value. On the chart extract there is a single rebound point at $2.34. Extend the line to the left and the line does not define any rebound or retreat points. The price activity ignores the line, moving above and below it. The placement of this line at $2.34 is just a figment of imagination.

The longer-term one year chart shows a support/ resistance line is more accurately placed at $2.44 This has acted as a support point three times in the 12-month period. It has acted as a resistance level three times in the 12-month period.

Indicators are bullish - stochastic

The stochastic indicator is showing a bullish crossover signal. It follows the four bullish crossover signals in the six-month period shown on the chart. Of the four previous bullish signals 50 percent were incorrect! There is a 50 percent probability this bullish stochastic signal will fail. The validity of an indicator signal must be assessed against its past performance and reliability on this particular stock.

Indicators are bullish – MACD

This uses the MACD Histogram crossover as the signal. For the buy signal this indicator is correct 60 percent of the time in the time period shown. For the sell signal it is correct 50 percent of the time. Using a combination of the MACD and the MACD-H the buy signal is correct in two out of three buy signals.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

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