Technical Analysis: Turning Points

Here is my open position and portfolio summary for Week 4.

 

This week, I covered my short position on corn for fear it may rise again, and  without any patience with soybean, I finally put a sell stop, given my observation that the soybean price may drop further.

After hearing the Technical Analysis that Andrew gave us on Tuesday, I feel excited and could not wait to give it a try, I will use some of the basic technical analysis tools to analysis the past trend and predict the future!

First, just to familiar yourself with the structure of candlestick

First to show my simple application: Using Inverted Hammer

Here is the description of this pattern:

Indication:This pattern occurs after an extended rally and indicates that the trend is weakening and a possible reversal may be at hand.

What does the candle tell us about the psychology of the traders in this stock? The long wick indicates that the sellers stepped in and dumped a considerable position into the market, most likely because they are taking profits off the table.

We can see from the candle chart, that

In history: as shown in the left red pane, there is a obvious downward trend followed the inverse hammer.

My prediction: as shown in the right red pane, we see a surprisingly similar pattern with the left one, which hints a possible similar downward trend in the soybean price. This signal, coupled with recent news about the increased harvest in soybean gives me more confidence in the prediction.

However, the signals derived from candlestick charts cannot be used on their own, volume is also an important component of the analysis. High volume shown below gives me further confirmation that a top can be put on this candle.

Then, have a look at all these turning points 

It is amazingly clear that almost all of the turning points can be found within one of the patterns shown below:

Here I want to say more about the engulfing patter:

Engulfing pattern is a major reversal sign that is composed of two opposite color real bodies. The basis of this pattern is that the current bars’ real body engulfs the prior bars real body, not necessarily the shadows. The bullish engulfing occurs after a sharp move down while the bearish engulfing occurs after a sharp move higher.

Bullish engulfing formations are most powerful when they are combined with previous support levels. and the larger the candles, the more reliable the signal is. Basically, a rule of thumb is that you can set your stop loss below the lowest low of the two candles involved; a move below this level would negate this pattern.

However, take a closer look, it does not always applies:

As shown above is a beautiful hammer pattern which predict a downward trend, however the price actually soared.

So, technical analysis has weakness:

1.Bias: Just as with fundamental analysis, technical analysis is subjective and our personal biases can be reflected in the analysis. It is important to be aware of these biases when analyzing a chart.

2.Too late: It has been criticized that by the time the trend is identified, a substantial portion of the move has already taken place.

3.Not all technical signals and patterns work: When start to study technical analysis, you will come across an array of patterns and indicators with rules to match. That’s why I was excited at first and when I move further I got frustrated and lost in the numerous choices available and each choice gives a different answer.

Therefore, there is always something happening beyond our prediction, we can never get one-hundred percent for sure of where the future goes, but the tools would help us get closer to the possibilities.

PS.

Thanksgiving is around the corner, “thank god” that I can stay in such a beautiful place in such a nice weather with such colorful leaves out there, but never have chance to enjoy and my plan to hike up the Grouse Mountains has been indefinitely postponed… As for me now, all I want are quite simple:

1, see beautiful scenery

2, meet good people

3, try out fine foods

Hope I can fulfil some of these wishes after the mid-term.

Enjoy your long weekend!