Technical Analysis and Charts

Good morning.


One question that's thrown around the internet a lot is: "To what extent can technical analysis (TA) predict the next few day's price action?"


In cases where no abnormal price action has been seen in the global markets or within the underlying equity, technical analysis often does a very good job of indicating future price action. Obviously, it falls back in accuracy when the underlying fundamentals of the company change.


Therefore, we shall use Lloyds as short case study:


1. Lloyds bank is reasonably high beta compared to the FTSE 100 and therefore would be a popular share amongst day traders using CFDs and spread bets.


2. Although Lloyds shares are subject to changes in the wider banking sector, for the best part they don't change very suddenly from a fundamental perspective.


How we can use ''chartology'' and TA:


1. In my opinion, when trying to predict the next few day's price action you would be better off looking at the thirty minute graph settings and when trying to predict the next couple of week's price action you're better off using a daily chart.

2. My chart set up for Lloyds (thirty minute chart):

https://www.google.co.uk/finance?chdnp=1&chdd=0&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1402826707143&chddm=61320&chddi=86400&chls=CandleStick&q=LON%3ALLOY&ntsp=0&fct=big&ei=0m-dU5DCBOr2wAOyr4EY


3. This chart set up has a few advantages to merely looking at simple price signals, as it has three longer term indicators (MACD, RSI and CCI) and one short term indicator (KDJ).


In the case of Lloyds over the time period shown on the graph (Monday 2nd to Friday 13th of June) you could have made approximately  two and a half to three pence per share profit having bought based on the bullish TA shown on late Tuesday or Early Wednesday with a sell point on late Friday or early Monday.


4. The signal you would have looked for:

- The cross over of the MACD line over the EMA on late Tuesday.

- The RSI line crossing fifty on Wednesday morning.

- The CCI moving over zero on Wednesday morning.

- The sharp KDJ change on late Tuesday.


If you were more cautious, than you would have waited for all of these to confirm a bullish signal, however you could have gone with merely the KDJ change on late Tuesday and then used the confirmation or denial of a bullish sign on the other indicators to make a decision to hold that position of sell it.


The strong buying into the close on Tuesday would have also been a bullish signal for the opening on Wednesday.


Good luck,

The Masked AIM Trader.