4 Important Factors for Technical Analysis

Moving averages, historical price points, and open interest can provide clues into a stock's technical backdrop

Jul 22, 2016 at 2:29 PM
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Technical analysis is one of the three key facets of Schaeffer's Expectational Analysis®, which examines a security's charts, fundamental backdrop, and investor sentiment to help traders get a holistic view on a stock. As earnings season picks up, paying attention to the following four technical factors can give traders an edge on where a stock might find support or resistance: moving averages, round-number levels, important historical price points, and areas of heavy options open interest.

A moving average allows investors to filter out the "noise" or irregular fluctuations to get a clearer idea of price trends. The 20- and 50-day trendlines are in very wide usage and tend to be somewhat crowded indicators, when analyzing short-term trends. At Schaeffer's, we've grown partial to the somewhat uncommon 30-day moving average, particularly for analyzing volatile stocks for short-term directional moves. Using "offbeat" moving averages can often give you an edge over the rest of the investing crowd, signaling when to "pull the trigger" on a trade. For example, consider the Signet Jewelers Ltd. (NYSE:SIG) chart below -- the stock's 30-day trendline has acted as both support and resistance in recent months.


Meanwhile, the longer-term 200-day moving average is one of the most commonly watched across the board. Speculators often utilize this trendline to send up "buy" or "sell" flares -- meaning it tends to act as support, as you can see in this chart of 3D Systems Corporation (NYSE:DDD), or resistance.  

 DDD 200 day MA Chart 2

But at Schaeffer's, another under-the-radar moving average we like to follow is the 160-day, as well as its longer-term counterpart, the 320-day trendline. As you can see, Netflix, Inc.'s (NASDAQ:NFLX) 160-day moving average has served as a cap to most of its rally attempts in 2016. 

NFLX 160 day ma chart Chart 3

Stocks can also find support or resistance at historically significant or round-number prices. This graph of Wells Fargo & Co (NYSE:WFC) shows that the shares seem to have encountered resistance between the $50-$51 range. Not only is the $50 level a round number -- sometimes viewed as appropriate entry or exit points -- but this region contained many of WFC's pullbacks in 2014 and 2015. Often, areas of support can reverse roles to serve as resistance, and vice versa.


A gap in a stock's chart, created when an equity suddenly spikes higher or drops lower, can also act as a level of support or resistance. It is not uncommon to see these kinds of sudden price changes after an earnings release, and some stocks struggle to fill their bull or bear gap.

For example, after Cree, Inc. (NASDAQ:CREE) released a preliminary earnings report in early April, the stock dropped from the $29 area (in purple) to the $25 region (in yellow), creating a definite bear gap. In the subsequent months, CREE ran into a speed bump in the $25 area, and could now run into another roadblock in the $29 region. 


Option-related support and resistance can also affect the behavior of an equity. Large amounts of put interest can signify potential resistance levels, while heavy levels of call open interest could represent potential short-term resistance levels.

In conclusion, technical analysis is a huge piece of the Expectational Analysis puzzle. Moving averages are great to filter out the "noise" of a stock's short- or long-term trend, but don't be afraid to use "offbeat" trendlines like the 30-day and 160-day, which can provide an edge. In addition, take heed to round numbers and historical price points -- like the site of a bull or bear gap -- and know an equity's short-term options backdrop, as open interest can also provide valuable clues. 

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