Wednesday, May 4, 2011

Technical Analysis - Research In Motion

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Troubling Chart
Despite the fact that, fundamentally, Research In Motion appears to have value at current prices, the chart points out a significant problem.  The weekly chart shows the stock has been in a multi-year downward trend.  The region between the green lines I drew on the chart is known as a trend channel.  The closer we get to either boundary, the greater the chance of a reversal.

While the chart does not indicate RIM is a good longer term investment, buying at a reversal near the bottom of the channel could result in a healthy shorter term profit.  What does not appeal to me about this option is where the channel leads in relation to the blue line which appears close to the top of the channel.  That line represents the 200-day moving average.  It is the result of the average of the preceding 200 days, and the average of the preceding 200 days one day prior to that, and the average of the preceding 200 days one day prior to that, and so on.  I always hesitate to own stocks which are trading below their 200-day moving average because they have a greater probability of downside surprises.

Technical Indicators
For most people, it would be too lengthy to go into an explanation of all of the technical indicators I use.  The ones I rely on include Volume, Moving Averages, the Relative Strength Index, Keltner Channels, Percentage Price Oscillator, and Stochastics.  For more information on these, I recommend

For more of an introduction to Technical Analysis, my favourite is an older classic called Secrets For Profiting In Bull And Bear Markets by Stan Weinstein.  It is a well written book that covers the basics.  I had thought it was out of print, but recently found it to be available on Amazon.  Investigating the Stockcharts website listed above can help in understanding various technical indicators and overlays not covered in that book.

I have also recently read Trend Trading for a Living by Dr. Thomas Carr.  I like the way in which he steps his readers through his process, step by step by step.  This is for more advanced traders, as he also describes his methods for options trading later in the book.  Even without the parts on options, the information is quite helpful.

Not This Time
For now, the technicals are telling me I should not be buying Research In Motion for my portfolio.  That's okay.  While there are not that many tech companies in Canada the likes of RIM, there are many, many good, growth companies I can make money with.  I like great companies I can invest in, but I love great companies whose shares are at the extremes of what they should be selling for when the charts are signalling the start of a new trend.  That is the advantage gained by combining Fundamental Analysis with Technical Analysis.  

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