by Louis Basenese

Chief Investment Strategist, Wall Street Daily

THE
3 BEST
TECHNICAL INDICATORS ON EARTH
Tis of-quoted warning also forms the basis for technical
analysis. Only Id tweak it to say, Tose who do remember
the past are likely to proft from it.
THATS TECHNICAL ANALYSIS IN A NUTSHELL.
Afer all, technical analysis is based on the idea that all
the information is represented in price and volume. So by
comparing whats happening in the market today to whats
happened in the past, you can tell what will (most likely)
occur in the future.
Tose who cannot remember the past
are condemned to repeat it.
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
In other words, while fundamental analysis involves screening
businesses balance sheets, earnings reports and economic conditions to
try to predict stock returns, technical analysis relies on the participants
in the market to distill all that information into meaningful data.
And by watching price and volume, you can interpret the emotions
driving the market.
Some believe that technical analysis is simply about drawing lines on a
chart and that its essentially the equivalent of financial astrology.
Hogwash!
Granted, some methods have failed to produce real returns. And I agree
that not all technical indicators are worthy of your attention.
Thats why its important to focus only on the key indicators that have
proven successful time after time.
Lucky for you, weve found the top three, best of breed, technical
indicators that you can use to maximize your profits. Heres a brief
rundown of each
INDICATOR #1:
MOVING AVERAGE CONVERGENCE/
DIVERGENCE (OR MACD)
The MACD indicator is a great introduction to technical analysis
because its based on one of the easiest, most powerful concepts:
the moving average.
Calculating and drawing a moving average line is simple. Its just the
average price of a stock over a number of days, usually 50 or 200.
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
A stock trading above this line is a strong bullish indicator by itself. But
you can take a moving average to the next level by tracking when moving
averages of different lengths of time cross paths.
Take a look at the chart for Under Armour (NYSE: UA) to see what I mean.
When the 50-day moving average crosses above the 200-day moving
average, it means the stock is likely going to see a big move higher.
Basically, MACD takes moving averages, fine tunes them and combines
them into a single indicator. It just takes a few more steps
1)

First, instead of a 50- or 200-day moving average, MACD uses 12 and
26 days. It also focuses specifically on the exponential moving
average, which means more weight (and importance) is given to the
most recent stock prices.
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
2)
The next step is creating the MACD line, which is simply the
difference between the 12- and 26-day exponential moving averages
from step one.
3)
Once thats done, the signal line is created. Thats the nine-day
exponential moving average of the new MACD line.
If this sounds complicated, keep in mind that you dont really need to
know how the lines are created. The important part is how they interact.
Check out the following chart of Bank of America (NYSE: BAC) to see
what I mean.
There are two main things you need to watch for
1)

When the MACD line jumps above zero, it shows that the current
momentum is positive. And when it drops below zero, momentum
is negative.
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
2)

Most important, you can identify when these shifts in trajectory
are likely to occur. Its all about watching when the lines cross
over each other.
When the MACD line crosses above the signal line, momentum is
about to turn positive. And when the signal line jumps higher than
MACD, its a sign that the share price is about to dip.
The chart indicates the bullish points with green arrows and the
bearish patterns in red. Sure enough, the stock movements (mostly)
correspond with the Buy and Sell signals.
The trick is to spot the crossovers as close to the zero line as
possible. Thats where the strongest signals occur.
INDICATOR #2:
PARABOLIC SAR
Dont let the imposing name fool you. Parabolic SAR is dead simple
to interpret.
SAR stands for stop and reverse, meaning that its designed to find
turning points in stock trends.
In short, Parabolic SAR captures momentum.
The indicator is typically drawn as dots that follow a stock chart.
When the dots are below the price, the momentum is positive, like
the dots are pushing the stock up. When the dots are above the
price, momentum is negative.
In simplest terms, when the dots switch from above the stock price
to below, thats a clear Buy signal. On the flip side, when they
switch from below the price to above, its a Sell.
When the MACD
line crosses
above the
signal line,
momentum is
about to turn
positive. And
when the signal
line jumps
higher than
MACD, its a sign
that the share
price is about
to dip.
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
Youll also notice that the dots tend to converge with the stock price right
before they switch sides. So the closer the dots get to the share price line,
the sooner the current share price direction is likely to reverse.
So not only does Parabolic SAR identify the turning point, it shows how
much time you have to invest accordingly.
Simple, right?
Theres one trick to using Parabolic SAR, however. You need to be
selective about your Buy signals.
You see, if a stock is trading within a narrow range, the dots will give off
multiple Buy and Sell signals in rapid succession. Thats not a formula
for making money.
The Symantec (Nasdaq: SYMC) chart below shows what I mean.
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
When the stock traded in a tight range between June and August,
there was a flurry of signals that wouldnt have been profitable. But
between January and March, the signal worked well.
To reconcile this, verify that the overall stock market is trending
in a similar direction, too, and not staying stagnant. Of course, you
could pair the MACD line with Parabolic SAR to double check your
findings.
INDICATOR #3:
MONEY FLOW
We already know there are two sides to every stock trade
the buyer and seller.
But wouldnt it be nice to know whats going on behind the scenes?
That is, whether the buyers or the sellers are more eager to act?
With a stronger grasp of investor sentiment about a particular
stock, you could pick your Buy and Sell levels with more
confidence.
Thats what the Chaikin Money Flow tries to capture. It indicates
buying pressure and selling pressure.
The Chaikin Money Flow takes positive and negative periods for a
stock, then multiplies them by the volume of trading over that time.
This assigns greater weight to days when there was heavy volume.
Then it compares the ratio of positive pressure to negative pressure
and converts that to a value between -100 and 100 (or between -1
and 1 on some software).
At that point, you chart it as an additional line under the stock.
When Money Flow is high, it means the stock has more buying
With a
stronger
grasp
of investor
sentiment
about a
particular stock,
you could pick
your Buy
and Sell
levels with
more condence.
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
pressure than selling pressure and vice versa.
Now, you may be tempted to use this as a trend indicator. So youd buy
when theres a lot of buying pressure.
But Money Flow actually identifies when a stock is overbought or
oversold. As a result, it shows the end of the trend (or a reversal point).
In other words, its more of a contrarian indicator. When the rating is
high, it means there may be too much buying pressure and the stock is
set to collapse.
On such merits, when the Money Flow passes a critical level (25 or -25
is a good rule of thumb) and stays there for a while, its a sign that a
reversal is imminent.
(An indicator called the Money Flow Index is very similar to Chaikin
Money Flow, with only a slight change in the calculations. You can
www.wallstreetdaily.com
Money Flow Pinpoints When Stocks
Are Due for a Reversal
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Source: RightWayCharts.com
Morgan Stanley (NYSE: MS)
Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct
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The Three Best Technical Indicators on Earth
How to Start Killing the Market and Never Look Back
interpret the signals the same way.)
Bottom line: Combining these three simple indicators can create a
powerful system for identifying when stocks are likely to rise or fall.
You dont need a math degree. Heck, you dont even need to
understand the formulas to use these indicators to boost your
investment profits.
You just need to look at a few charts until you can see the patterns
repeating themselves. After all, thats the basis of technical analysis.
The chart says it all.
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