Dow Industrial Average down 700, then up 600, down 500 and then 400 more, and up 500? That's enough to give anyone an upset stomach and reach for the Tums. We wish it would end, just like that spinner machine at the amusement park that went so fast we wanted to toss our cookies. (remember that one?). In this volatile and shaky market we find ourselves reaching for any tools to give it some clarity. It is the best way to help keep the emotions in check.
Fundamental analysis works well for us in the long term (as well as the charts), but volatile markets are short term in nature and don't last for too long. Yet, the constant swings up and down can make some of us quite nervous and worried.
Looking at the charts and technicals can put some reasoning and even rationale behind the violent moves, but we have to understand and interpret the indicators to get a good read. There are many tools out there to use and many are just different forms of the same analysis. I like to use momentum indicators to help me find the best trends.
My favorites include the MACD and relative strength index. These powerful tools show me not only when a trend change is about to occur, but also the power of the move. Other strong indicators include the average directional movement (strength of the trend), rate of change (power of the change at the turn) and on balance volume.
Oscillators are a good way to read whether a stock is moving within a range or is breaking free. I like to use Williams %R as my key oscillator, but stochastics are often a favorite of technicians. Oscillators can be leading or lagging indicators, depending upon which you prefer. The accumulation/distribution line is a solid indicator telling where money is flowing, but my favorite here is the chaikin moneyflow index.
Sentiment analysis is important as well. Behavior and habits are constant, we see money move in/out as fear and greed take over. History is our guide here, as sentiment shifts to extreme are often the time to go against the tide. Too much bearishness likely means the markets are ready to turn upward, while too much bullish sentiment indicates giddiness and complacency, a time to take money off the table or short the markets for a bit. Some of the better sentiment data can be seen with aaii, Institutional Investor, fear/greed (cnn), Barron's and TD Ameritrade's investor movement index.
Finally, moving averages and bands are a great way to overlay indicators over the actual price action. I prefer to use Bollinger bands, two standard deviations around a 20 ma. This captures 95% of the price action at all times, with 5% outliers. Some of the strongest trends can be identified when the bands expand from a contraction, as an options player that is what I'm looking for. Other very good tools include the Ichimoku cloud analysis, moving average envelopes and the Aroon indicator.
When the markets deal you some conflicting signals, it's time to reach for the charts for some clarity and potentially some answers. Technical analysis gives you some reference points to work from, hopefully without emotional attachment. The market will always tell you the right answers, just view it objectively.
