Last week I focused on the Facebook rollout and their disappointing returns. I stated, “One of the biggest reasons investors have lost money is because they bought what they thought and not what they saw”. My recommendation was to study technical analysis (charting) to watch what the big money (the institutions) was doing then learn how to interpret this data to practice smart buying and selling techniques. Today I will introduce you to the basics on technical analysis (TA) and what the professionals are watching to fine-tune their buying and selling decisions.

First, there is no one type of analysis that is a “fits all”. I teach a blend of technical, fundamental and informational-news analysis tools to make our financial decisions. If you just use one type of analysis, there is a good chance you will have your head handed to you. In a perfect world we would load the black box with algorithms and let the black box trade for us.  Unfortunately, it does not work that way with a high probability of success.

Why do I like technical analysis?  The answer is simple. When you learn the basics of charting, you can see what the big money/institutions are doing. What they SAY and what they are DOING (buying or selling) are two very different things. I mute what they say and watch what they do-it is that simple. There is an entire industry designed to drive stock prices up or down with their recommendations.  Many are very successful in separating you from your money.

If the institutions do not buy, then the price of the security will not go up - with conviction. When they sell the price will go down. Think of the basic economic laws of supply and demand. I will introduce you to the chart for Facebook and will explain what the chartists are looking for to make their buying/selling decisions. Once again, this is not a buy/sell recommendation but for educational purposes only.

Many traders use at least three to four indicators to help make their decisions.  I will explain two. Traders will be looking for the price to stay above the 30 SMA (blue line) in addition to having green bars (lower chart) that represent the money flowing into the stock. When the price goes down through the 30 SMA and the bars turn red this indicates the big money is selling or money is flowing out of the stock. This is exactly what happened on July 16 when the money flowed out the stock – the price dropped.

On the other hand, one trader’s buy signal would be when the price goes up through the 30 SMA (blue line) in addition to money flowing in represented by green bars. Note the current action where the price did jump over the 30 SMA but the green bars were AWOL until today. After the price jump the buying did not increase - resulting in the stock moving sidewise in price until today when the security traded over the previous high of 22.75. For the security to go up with conviction the money must continue to flow in, represented by green bars.



There are other indicators, including trend lines, that traders will be watching before making their buying/selling decisions. The bottom line, when learning to interpret charts you are learning to see what the big money is doing and not just what they are saying.

Next month I will revisit the Facebook chart to give feedback on how our tools are working. If you would like to learn more on technical analysis, visit my website (www.thetraderseye.com) for information on my upcoming charting seminar in October.
In full disclosure I have not and do not own Facebook stock.

(Disclaimer) The information above is for educational purposes only and is not intended to be financial advice. Your decision to buy, sell, short or hold any stock or investment product is a direct result of your own decision, free will and research.