Chip Anderson

The Three Key Assumptions of Technical Analysis

One of the great aspects of our new Certified ChartWatchers exam is that we get feedback as to which questions people are struggling with.  Clearly, those are the questions that point to aspects of Technical Investing that we need to do a better job educating people about.

For example, one of the questions that many people are struggling with asks about the Key Assumptions of Technical Analysis.  Those are the three things that you must verify are true before you can apply standard chart and/or indicator analysis to a particular chart.  Here they are:

1.) High Liquidity -

Liquity is essentially volume.  It means that shares have the ability to trade quickly without dramatically affecting prices.  If someone buys 100 shares of Microsoft today, that trade by itself will have almost no effect on the price of the stock.  Why?  Because MSFT is extremely liquid with lots of buyers and selling at any given moment.

Low Liquidity is a trap that many amatuer investors can fall into.  When you buy a stock with low liquidity, you probably won't get it at the price you were quoted because there are no sellers at that price.  The broker has to raise the price - often significantly - before a buyer can be found.  Similarly, when you sell a low liquidity stock, the broker will need to lower the price significantly to find a seller.

In addition, low liquidity stocks are often very low priced - often less that 1 cent - and that means that their price can be manipulated by someone with lots of resources (and lots of time).

None of what I just said is illegal or hidden or "wrong" in any way.  It is just that the principles upon which Technical Analysis is based assume that only normal market forces move a stock's price - not the manipulation or issues with trading volumes that low liquidity stocks can have.

2.) No Artificial Price Changes -

Similar to the reason for high liquidity, prices cannot be changed by forces other than the fear and greed that drives the market.  Anything else that changes prices is considered "artificial" and needs to be eliminated before standard technical analysis techniques can be applied.

So what is an example of an "artificial" price change?  Splits, dividends and distributions are the most common "culprits."  When a stock splits, let's say 2-for-1, the market participants don't really care.  They get double the shares at half the price - a net-zero transaction that doesn't change their opinion of the stock one way or the other.

However, consider what happens to the stock's chart.  It now has a huge (50%) gap down on it.  If you didn't know about the split, you'd be very worried about the stock.  And, because technical indicators are dumb, they would all give bearish "sell" signals at that point.

For this reason, the effects of these "artificial" price changes must be removed from the data before standard technical analysis techniques can be used.  Ironicly, this is done by adjusting all of the data prior to the split downwards thus eliminating the gap on the chart.

3.) No Extreme News -

Technical Analysis cannot predict extreme events such as, for example, a company's CEO dying unexpectedly or the huge tragedy of 9/11.  When "extreme news" happens, technicians have to wait patiently until the chart settles down and starts to reflect the "new normal" that results from such news.

 

Now, again, it is important to understand that I'm not saying that charts are useless when one or more of those three things occur.  What I am saying is that the philosophical underpinings of the signals and chart patterns that traditional technical analysis uses are gone on those cases.  Standard technical signals and predictions cannot be accurately used in those circumstances.

For more on the underpinings of Technical Analysis, see our ChartSchool articles on the topic by clicking here.

- Chip

The Inspector Says Goodbye to Flash and Hello to HTML5

Today we are pleased to announce that our "Inspect" tool now uses HTML5 instead of Adobe Flash! The HTML5 version of the Inspector has the following advantages:

  • It loads much faster 
  • It is more responsive, especially on slower devices
  • There is no pause or screen flash while the new Inspector is starting.
  • It doesn't require the Adobe Flash plug-in to be installed
  • It works fine with ad blocking plug-ins that restricting Flash advertisements
  • It works on most mobile devices including iPads and iPhones!

The only downside to this migration is the same downside we've been warning people about for over a year now - HTML5 requires the use of one of the following up-to-date web browsers:

  • Internet Explorer version 9 or higher
  • The latest version of Mozilla Firefox
  • The latest version of Google Chrome
  • The latest version of Apple Safari
  • The latest version of Opera

If you are still using Windows XP, that means that you cannot use IE anymore because Windows XP still only supports IE8.  We recommend using Firefox or Google Chrome instead.  (You'll be amazed at the speed improvement as well.)

And now for the really big news - because the HTML5 version loads so much quicker than the Flash version, we now preserve the "Inspect" setting on the SharpCharts workbench page.  This is something people have been asking for for quite some time.  The setting is now saved in a Cookie for as long as your browser stays open meaning that if you want to use the Inspector with all your charts, you'll only have to turn it on once per session.

As always, please let us know what you think in the comments area below.  If you find a bug with the new version, please let our support team know.

- Chip

P.S. We had to keep the Flash version of the Inspector super small so that it loaded quickly.  Now that we have the faster HTML5 version working, we will be able to add more features to it over time.  Watch for new features to start appearing in the Inspector soon.

Introducing Arms CandleVolume Charts

This week I'm attending the International Federation of Technical Analysts (IFTA) conference in San Francisco.  The conference started with a great presentation from Richard Arms.  Many of you may recognize his name.  Richard is probably most known for inventing the Arms Index (a.k.a. $TRIN).

Richard has made several other important contributions to technical analysis as well however including popularizing EquiVolume charts.  Those are the charts that show price movements as boxes whose height is equal to the stock's daily range and whose width is proportional to the daily volume.  Here's an example of an EquiVolume chart for AAPL:

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(Click the chart for a live version)

In his presentation yesterday, Richard explained that he really likes how the boxes give you a great sense of the "supply and demand" for the stock.  In the chart above, notice how the boxes are generally bigger near bottoms and the generally get smaller towards the tops as the rallies run out of steam.

Richard explained that several of his partners took the concept of EquiVolume charting and then applied it to candlesticks, eventually coming up with what we now call CandleVolume charts.  CandleVolume charts are candlestick charts where the width of the candle is proportional to its volume.  Here is that same AAPL chart using CandleVolume:

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In a statement that was a surprise to me, Richard said that he never liked CandleVolume charts because, by not emphasizing the stock's entire range, they don't fully show the supply and demand characteristics that EquiVolume charts do.  (Remember, candlestick charts emphasize the distance between the open and the close, not the high and the low.)

In the two charts above, you can see what Richard is referring to.  The differences between the bottoms and the tops are much more noticeable on the top chart.  For example, the bottom in late June is preceeded by a very noticeable cluster of small boxes on the EquiVolume chart and then, during the bottom's formation, the boxes are larger and taller.  That price action is much less noticeable on the CandleVolume chart.

Despite that weakness, Richard did say that there were several other aspects of CandleVolume that he liked and so he had been working with his partners to create a new kind of chart with the benefits of both.  He's calling this new type of chart the "Arms CandleVolume" and it, quite literally, is the combination of both styles - a CandleVolume chart with EquiVolume boxes around each candle.

During his presentation, Richard said that this new kind of charting would be available in a couple of weeks or so.  That got me to thinking and, a couple of chat messages later... ta da!

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Aren't our programmers wonderful?  Richard was thrilled when I showed him.

As of today, anyone can now create these charts using our normal SharpCharts workbench.  Simply select "Arms CandleVolume" from the "Type" dropdown on the SharpCharts page.

Everyone should consider this chart type to be "experimental" for now.  Richard himself is still playing with them to see if  they are really as useful as he thinks they should be.

I will say that, in general, these new bars are more useful on larger charts where the boxes can be visually larger and more distinct.  Coloring the bars can also help.  Here's a "Zoomed in" version of that bottom on the AAPL chart I was discussing previously:

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Please spend some time with this and let me know you thoughts in the comments section below.

Want to learn more about these kind of charts?  Check out our ChartSchool articles on them and also check our Richard's book on the topic.

- Chip

Announcing the StockCharts ChartList Framework - A New Way to Organize Your Saved Charts

Today I'm very happy to announce the StockCharts ChartList Framework, a new method for organizing the charts stored in your account.  "The Framework" is free and very easy to install - it is also completely optional, no one is required to use it.

The Framework was created to help Extra, ExtraRT and PRO members that aren't sure how to use our ChartList feature effectively.  If you have a jumbled, confusing collection of saved charts and ChartLists in your account, the Framework is for you.  If you can't find charts that you were sure you saved earlier, the Framework is for you.  If you are still jamming all of your saved charts into one or two huge ChartLists, the Framework is for you.  If you have no idea how to begin to organize your charts... well, you get the picture.

On the other hand, if your ChartLists are working great for you and you have a system that keeps everything organized then you do not need the Framework.  Remember its use is completely optional.

The StockCharts ChartList Framework helps you organize your ChartLists in a way that reinforces the typical workflow of a technical investor.  By that I mean that it groups your personal ChartLists into collections focused on the key phases that technical investors go through every day.  Specifically,

  • Analyzing the Major Markets
  • Finding Strong Sectors and Strong Industries
  • Finding Strong Stocks by Running Technical Scans
  • Watching Potential Buy Candidates
  • Monitoring Currently Open Positions
  • Reviewing/Learning from Closed Positions

At its core, the Framework is a collection of empty ChartLists with distinctive names that group your own ChartLists into those key investing phases.  Here's a picture of what the Framework looks like immediately after being installed into a new account:

TheFramework

Once the Framework is installed you should add your own regular ChartLists inside of it to make it truly useful.  To add a ChartList into the Framework simply give it a name that starts with a 4-digit number that fits inside the Framework's numbering scheme.

For instance, let's say that you have a collection of charts of the various International Exchanges that we cover - symbols like $CAC, $NIKK, $BVSP, etc.  If you are using the Framework, you'd create a ChartList that begins with a number between 1200 and 1400 because those are the number that the Framework reserved for International Exchange ChartLists.  The actual number that you use is up to you - it depends on what order you want to see your various International ChartLists in.  For this example, let's say that we wanted to use "1250."  In that case, we'd click on the "Create a New List" link just below the ChartLists and create a new list named "1250 - My International Exchange Charts" (or whatever name you wanted).

Once that was done, and you created some charts inside that new list, the bottom of the Members page would look something like this:

Framework2

You should continue adding new ChartLists (or renaming your old ones) with numbers that cause them to "slot" into the appropriate part of the Framework.

Note: The Framework is automatically installed when you install one of our ChartPacks.  If you'd like to install the Framework by itself (and you a member of our Extra, ExtraRT or PRO services) you can quickly install it into your account using these steps:

  1. Log in to your StockCharts.com account
  2. Click on the "Your Account" link at the top of the page in the righthand corner.
  3. Scroll down and find the "ChartPacks" section of the page
  4. Click on the link that says "Click here to learn more about the optional StockCharts ChartList Framework"
  5. Carefully read the information provided on the next page.
  6. If everything looks good, click the "Install Framework" button at the bottom.
  7. Use the "Create a New ChartList" links on the "Members" page to start populating the Framework with your charts.

Let me be clear, there is definitely some work involved when you first set up the Framework.  However the payoff for that work is a much better organized collection of charts that will make StockCharts.com much, much more useful (and hopefully profitable) to you for years to come.

Q: But wait a second Chip.  I'm way too lazy to want to create all those charts and ChartLists inside the Framework.  Isn't there some way that you could automatically populate key parts of the Framework for me?

A: I'm so glad you asked!  Yes, yes there is.  Stay tuned for another major announcement from us this weekend concerning "ChartPacks" and how they plug-in to the Framework in a way that greatly expands your charting capabilities.

Until then, try out the Framework and see if it works for you.  Getting organized doesn't get any easier than this!

- Chip

P.S.  For those of you that have maxed out the number of ChartLists you can have in your account (200 for Extra, 300 for PRO), don't worry.  We've given you an additional 50 ChartLists that you can use for installing the Framework and our new ChartPacks.

Consolidated Data for Canadian Stocks Coming on August 1st

In case you did not know, over the past 5 years, the Canadian stock market has undergone a bit of a revolution.  Several alternate exchanges - most prominently the "Alpha" exchange - have sprung up and managed to capture a significant portion of the trading volume for many Canadian stocks - over 1/3rd of total volume in many cases.

This has put technicians in a bit of a bind when it comes to analyzing data for Canadian stocks.  The volume data that comes directly from the Toronto exchange has been decreasing (or increasing more slowly) as these new exchanges siphoned off more and more trades.  At what point does a chartist try to account for that "lost" volume and, maybe more importantly, how important is having a continuous history of consistantly reported volume?

With those questions serving as a backdrop, I am pleased to announce that StockCharts.com is now able to receive so-called "Consolidated" Canadian volume data - i.e., volume data that includes both TSX trades and Alpha trades.  We plan on switching over from our current TSX-only charts to Consolidated volume charts on August 1st.

While this change will not have a significant effect on price data, it will cause the volume bars for many Canadian stocks to jump up noticably.  Because of that, after this change goes into effect, volume-based indicators will probably give misleading readings as they adjust to the increased volume values.  These issues will primarily effect daily and weekly charts.

We spent a lot of time researching other options for minimizing the impact of this change on our charts but unfortunately we were unable to come up with a better workable solution.  Our apologies for any inconvenience that this change will cause in the near term.  In the long run, I think all Canadian investors will agree that Consolidated volume data is an important improvement to our charting capabilities.  Hopefully it will result in even better chart analysis and more profitable trades down the road.

As always, I'm interested in everyone's opinions on this change.  Feel free to leave yours in the "Comments" section below.

- Chip

Achievements for StockCharts Members

Over the weekend we rolled out our "Achievements" system for StockCharts members.  Now members that have attended one of our in-person events will see a new area on the "Members" home page reminding them of the event.  We currently have given out achievements to everyone that attended our ChartCon conferences and/or our SCU 100 and 101 seminars.  Each achievement has a corresponding badge that appears on the Members page after it has been earned.  Here's what those badges look like:

Achievements

You will also see smaller versions of these badges on our Public ChartList page for each author that has earned them.

We'll be adding more achievement categories soon.  Not all of them will be associated with physical events either so keep your eyes peeled for more ways to earn these badges in the future.

- Chip

 

MarketCarpets v3.0 are Here!

We've just released the new 3.0 version of our MarketCarpet visual scanning tool.  Check it out!

NewMarketCarpet
(Click here for the live version.)

The new version has the following changes from the older version:

  • It uses HTML5 instead of requiring the Java plugin
  • It can be used by tablets and smartphones
  • It loads much faster
  • It contains 60 days of data instead of just 45
  • It initially shows you the stocks in Market Cap mode where each box is sized according to the underlying stock's market capitalization
  • It allows you to hide the "Mini-chart/Top 5" sidebar if you want
  • It automatically scales the box colors as you stretch/shrink/move the date slider
  • It shows you the ticker symbol of the stock your mouse is hovering over
  • It shows you many more ticker symbols when you turn them on with the menu option
  • It allows you to put the popup information box underneath the "Bottom 5" list if you want
  • The color scaling is less jarring
  • and much, much more!

Again, the MarketCarpet lets you quickly find outliers and clusters of similarly performing stocks.  It is like a PerfChart that can contain up to 500 different lines.  For more, please see our (currently out-of-date but soon-to-be-updated) documentation pages and videos.

Let us know what you think of these changes using our feedback page.

Two Good Things Come to an End - Text and Dynamic P&F Charts

We are removing our Text-based P&F charts and our Java-based Dynamic P&F charts from the site today.  Our graphical P&F charts will continue to work just like they always have.

The removal of our Java-based Dynamic P&F charts continues our progress towards a Java-free experience for our users.  Recent security issues with Java have caused us to accelerate our progress in removing/replacing our Java-based tools.  We recently replaced our Java-based PerfCharts and Yield Curve tools with HTML5-based equivalents.  (Expect that to happen to our MarketCarpet tool shortly.)  Unfortunately, the usage for our Java-based Dynamic P&F charting tool has been very low for years and so we've decided not to re-write it.

The decision to remove of our Text-based P&F charts was much more difficult.  We would love to keep that tool around however, unfortunately, it is based on out-dated technology that Microsoft no longer supports.  That technology has become a serious security concern for us and thus we made the difficult decision to shut down this popular P&F charting tool for now.  We have looked into several possible ways to move that program on newer, more secure servers but so far we haven't had any luck.  There is a small chance we will be able to rewrite that program at some point in the future as well.

The good news is that our graphical P&F charts do not have any of the problems/issues that these two other charts have.  Our Graphical P&F charts will remain an integral part of StockCharts.com for the foreseeable future.

If you feel strongly that we should bring back text-based P&F charts, please let us know by clicking on the following link and signing the online petition that we've created for this issue:

http://www.ipetitions.com/petition/stockcharts-text-based-pf-charts/

- Chip

 

Migration to HTML5 Continues with our New Yield Curve Page

Earlier this year we converted our Interactive PerfCharts tool from Java to HTML5.  This month, we've done the same for our Dynamic Yield Curve.  As I mentioned before, Java continues to be a problematice solution for client-side interactivity.  It has always been a struggle to support Java because some of our customers have had a very hard time installing and upgrading it successfully.  The large number of recent securuty issues was the final straw that forced us to start migrating our Java-based tools to the new kid on the block, HTML5.

The pros of HTML5 are many - built-in to the browser, loads faster, not owned by one company, very flexible, etc.  The downside of HTML5 - lack of support in older browsers - continues to fade.  Still, if you are using IE 7 or IE 8, you'll need to upgrade.

Once you do, you can click on the Dynamic Yield Curve link on our homepage to see the new version.  If you've never played with this tool, it's worth taking some time to look at.  The Yeild Curve is a great indicator of future trouble in the stock market and this tool shows you how that has worked in the past as well as what the current curve looks like.

NewYieldCurve

We'll continue to migrate our interactive tools away from client-side Java in the coming months.  As always, stay tuned...

- Chip 

New Partnership with Stocks & Commodities Magazine

Cover

Today I'm thrilled to announce a new partnership between StockCharts.com and Stocks & Commodities magazine.  StockCharts.com members can now freely search for and view all articles from all current and past issues of Stocks & Commodites magazine.  They can also view the currently edition of the magazine simply by using a new link on the "Members" page.

This means that when you now search for a topic such as "MACD" using the "Search" feature on our website, your search results will not only contain articles from our website, but now also articles from the complete Stocks & Commodities archives going back to 1982(!).  Clicking on any of those search results will take you directly to a PDF file of the actual magazine article for that topic.

In addition, as I mentioned, there is now a new link on the "Members" homepage that will take StockCharts members directly to the Stocks & Commodities website where you can read the latest issue of the magazine as well as their companion magazine Working Money.

And what is the cost for all this additional content?  Zero.  Zip.  Zilch.  Nada.  It is totally free to StockCharts.com members.  (And, just to be clear, we did not give anyone's name or address to S&C either.  Our Privacy Policy forbids that.)

I'd like to thank and acknowledge Jason Hutson and everyone else at Stocks & Commodities for their help with this project.  As many of you know, we have been fans and supporters of that magazine for years and I heartily recommend it to everyone I talk to.

Please let me know what you think of this new partnership in the comments section below.

- Chip