Charts, Charts, Everywhere

FIGURE 1: Pulldown menus from CBS MarketWatch.com (far left) and BigCharts.com showing the many selections available for chart customization. Going clockwise, the choices are for sector comparison, upper indicators, lower indicators, and price displays.

Charts on the web have gained tremendous popularity among investors, and for good reason. With the eruption of information -- both technical and fundamental -- available online, you need a way to digest and synthesize the raw data into a meaningful, tradable form. Online charts can do just that, and then some. Charts have gone far past simply connecting datapoints; now they can be customized to do a multitude of magic tricks previously available only to those willing to spend money on powerful trading software and real-time datafeeds. Once you understand the principles of reading charts and using technical indicators and oscillators, you may very well want to invest in professional trading software that lets you program your own trading parameters. But for now, companies are begging you to visit their sites and use their information -- for free. It's impossible to cover all the websites that have charting capabilities, so I chose the most frequently visited ones to show what's available in online charting. BigCharts, ProphetFinance, ClearStation, Yahoo!Finance, and StockCharts are some of the premier sites for customizable charting, with many others not far behind. Each contains several indicators (that is, technical analysis tools that measure market activity) that provide different measures of the market.

ONLINE CHARTING TOOLS

A fully equipped charting website offers many, many choices -- more choices than you can shake a mouse at. Where do you start? Enter a symbol and select a time frame -- that is, the date the chart will begin and end. In addition, select a time interval -- from intraday to daily or weekly data, to data going back several years.

A chart displays price data for either an index or a stock. You may want to compare a stock's price activity to an index, or to another stock in the same industry. Some sites give you this option. It usually involves selecting a comparison chart from a comparison section, which lists a number of indexes such as the Standard & Poor's 500, the Dow Jones Industrial Average (DJIA), the Nasdaq Composite, and the Russell 2000. Some sites, such as CBS MarketWatch, also include a lengthy list of sector indexes. (See Figure 1.)

FIGURE 2: KRISPY KREME (KREM). Fast and slow exponential moving average lines of nine and 18 days, respectively, are overlaid on this chart of Krispy Kreme. Notice how the faster moving average stays closer to the candlesticks, while the slower moving average lags and is a more rounded and smoother line.

When you compare two charts, you will notice the price scale on the x-axis will change to a percentage (also known as a percentage change chart), which makes for an accurate comparison.

Next, select the indicators that will be overlaid on the price chart (referred to as upper indicators), and the indicators that will be displayed in a graph below the chart (lower indicators). Figure 1 shows BigCharts' selection of upper indicator, lower indicator, and price.

IDENTIFYING THE INDICATORS

Indicators are the meat of any interactive charting website. There are numerous indicators out there, and they are divided into upper and lower indicators. One of the basic upper indicators is the moving average.

A simple moving average (SMA) removes the daily fluctuations in trading prices by taking an average of the last several days' worth of closing prices. For example, to determine a five-day moving average, add the closing prices for the last five days of the target stock, then divide it by five. On the following day, drop the oldest price and add the new closing-day price. Plot these points and you'll get a less-spiky, smoother price line. If you increase the number of days beyond five, you will find that the moving average is slower to respond to changes, but it is smoother.

Another form of moving average is the exponential moving average (EMA) (Figure 2). It weights the simple moving average, favoring the most current closing prices. For example, for a five-day moving average, the current day's price may be weighted by 5x, meaning that you multiply that number by five. The previous day's price may be weighted by 4x, and the day before by 3x, down to the first price, which would be 1x. That would give you the equivalent of 15x days. Add the resulting numbers together and divide by 15 to get a weighted average for the five days. Because of this weighting, the EMA is more sensitive to changes in trends and quicker to pick up on reversals.

When using EMAs, you can look at more than one moving average at the same time. Figure 2 displays a chart of Krispy Kreme Doughnuts, Inc. (Krem), with two EMAs. When the slow, blue EMA is below the red, fast EMA, the stock is declining. Conversely, when the fast line is above the slow line, the stock is trending up. When the two lines cross, it usually suggests a change in the stock's trend.

Here's a list of several other indicators that can be overlaid on a chart, along with a brief description of what they do:

MOVING AVERAGE ENVELOPES
Adds a fixed percentage line above and below the moving average, creating envelopes. When the price bars of a stock break through the envelope lines, a signal is triggered. Generally, a 20-day moving average is used with a 3-5% deviance.

BOLLINGER BANDS
Displays two lines that are two standard deviations (statistical measure of volatility), above and below the base moving average. Since they are two standard deviations away from the moving average, they represent 95% of all likely price action. Bollinger bands add an extra dimension to the simple moving average because they expand when prices are rising and contract when they are in a range. These bands act as support and resistance levels. When prices reach the upper band, there is a big chance they will drop. Conversely, when prices reach the lower band, prices will probably start moving up.

PRICE CHANNELS
Tracks new highs and lows over a 20-day or 20-bar period. This is a rudimentary, trend-following indicator. When prices exceed the 20-day high, it gives a buy signal. When they dip below the 20-day low, it indicates a possible exit.

PARABOLIC SAR (STOP AND REVERSE)
Considered a trading indicator rather than one used by investors for long-term stock purchases. It displays trailing stops on the price bars. When one of these trailing stops intersects the price bar, it indicates a buy or sell signal. The trailing stops initially start out a generous distance from the entry point and then tighten as the stock continues in its trend.

VOLUME BY PRICE
Shows the volume traded for different prices. You can see the volume traded at the different price areas, enabling you to determine support and resistance levels.
 

Lower indicators are plotted on a subgraph below the price chart. These indicators include:
 

VOLUME
Displays the total volume per time period. It is often used to evaluate stock price movement. Some market analysts believe that change in volume precedes change in a stock trend.

VOLUME+
A number of charting sites code the price bars with blue or black bars that indicate positive gain days and red bars that indicate losing days. They may also include a moving average of the volume.

RELATIVE STRENGTH INDEX (RSI)
Compares the average number of up days for a given period, usually 14, to the average number of down days for the same period. RSI is measured as a percentage between 1 and 100. When RSI is above 70, it usually means that prices are approaching their highs. Similarly, when RSI dips below 30, it's likely that prices are close to their bottom. Like other indicators, the shorter the time period used, the faster it reacts to changes — and the more prone it is to false signals.

MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD)
Uses two highly smoothed moving averages to create buy and sell signals. The first average is the average of two exponentially smoothed averages. The slower second line, called a signal or trigger line, is an exponentially smoothed average of the first line. MACD generates buy and sell signals when the two lines cross, and/or when they go into overbought or oversold territory.

ON-BALANCE VOLUME (OBV)
OBV is a volume indicator, calculated by simply adding a day's volume when the stock closes up and subtracting the volume when the stock closes down. The direction of the line is a significant measure, rather than the actual running total of OBV. When OBV diverges from the direction of the target stock, it signals a possible trend reversal.

FAST STOCHASTIC (%K) AND SLOW STOCHASTIC (%D)
A stochastic shows the relationship between the closing price and the highest high and lowest low of a given stock within a given period of days (usually five or 10). Theoretically, stocks that close near their lows are going down and those that close near their highs are going up. The fast stochastic %K line is a combination of three moving averages.

Slow stochastic (%D) is a moving average of %K converted into a percentage. Buy and sell signals are generated when %D and price diverge, when %D goes above 80 or below 20, and when %K and %D cross. The sidebar for Yahoo!Finance shows a chart of Ford Motor Co. (F) using stochastics as an example.

RATE OF CHANGE (ROC)
Measures the acceleration of a price by comparing today's price with a price n days ago. ROC is measured relative to zero. When ROC is greater than zero, it means that prices are increasing. When it's less than zero, it means that prices are decreasing. ROC can be applied to volume, price, or even other indicators. Overbought and oversold conditions are suggested when ROC diverges from the target stock's direction and at extreme values.

WILLIAMS %R
Looks at the relationship of the highest high, lowest low, and closing prices of a given stock. Unlike the stochastic, it does not use moving averages to smooth the results. %R is plotted upside down. Readings over 80 indicate an oversold condition, while reading in the zero to 20 range suggest overbought.

MONEY FLOW INDICATOR (MFI)
Measures the strength of money flowing in and out of a security by creating a cumulative ratio of positive to negative money flow and factoring in volume. MFI is considered a leading trend-reversal indicator. When money flow is at 20, it suggests prices have bottomed; at 80, it suggests prices have peaked.

DYNAMIC MOMENTUM OSCILLATOR (DMI)
Compares a stock's up days to its down days, using a market volatility index to adjust its length of calculation. Changing the length of calculation by using fewer periods of data when volatility increases and more when volatility decreases allows the indicator to respond quicker to changes. When the indicator is over 70 or below 30 it suggests a possible breakout.

VOLATILITY
Takes a stock's price fluctuation over a given period of time and turns it into a percentage. The more volatile a stock, the wider its price range.

MOMENTUM
Measures the speed of a security's price change over a set amount of time. The momentum indicator displays the rate of change as a ratio.

VOLUME ACCUMULATION
This is a modification of the on-balance volume (OBV) indicator. It uses a proportional amount of volume based on the relationship between its closing price and intraday mean price. This redistributes the volume for stocks that spend most of a trading day in the negative or positive side but closes in the opposite direction. When volume accumulation is greater than zero it suggests an increase in buying pressure, whereas if it's less than zero, it suggests an increase in selling pressure.

ULTIMATE OSCILLATOR
Uses the weighted sums of three oscillators, each of which uses a different time period, to measure buying and selling pressure. Possible entry and exit points occur when there is a divergence and breakout in the ultimate oscillator's trend.
 

Every charting website provides a different set of indicators -- tools you can use to customize charts, maximize your research, and improve your trading. (For examples of how charts can help you decide when to buy and sell stocks, see "Stocks And The Art Of Charts" at www.working-money.com.) The indicators mentioned here are only a handful of the total indicators used, but they are a good starting point. Now that you have a basic understanding of some of the more popular indicators, try your hand at them. You may just find they can clarify the movement of stock prices.

Sharon Yamanaka can be reached at SYamanaka@Traders.com.

SUGGESTED READING

Penn, David [2001]. "Technical Analysis For The Masses," Working Money, Volume 2: January/February.
Peterson, Dennis D. [2001]. "Interpret Stock Prices With MACD," Working Money, Volume 2: June.
_____ [2001]. "Which Way Will The Market Go?" Working Money, Volume 2: April.
Yamanaka, Sharon [2001]. "Stocks And The Art Of Charts," Working Money, Volume 2: January/February.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.

BIGCHARTS.COM

BigCharts For Big Choices

BigCharts is run by CBS MarketWatch.com. To get to the customizable charting section, click the red Interactive Charting button in the upper right corner of the opening screen. The customizable chart features will pop up in the left column (Figure 1, above). They are divided into the following categories: Time Frame, Compare To, Indicators, and Chart Style. Time Frame gives you choices ranging from one day to one decade to all data.  The other upper and lower indicator selections are shown in the pulldown menus on the left.

Using Microsoft as an example, I arbitrarily chose a number of indicators: Volume by price, exponential moving averages for the upper indicators, and relative strength index (RSI) and Williams' %R for the lower indicators. The price by volume indicator is probably the most telling, showing a lot of volume at 70 and what seems to be a resistance line that formed back in November 2000, and again in April 2001. The RSI is showing no overbought/oversold areas, although Williams' %R is.

YAHOO!FINANCE

Below is the technical indicator screen of Yahoo!Finance's charting section. To get there, go to the financial section and enter a symbol in the Get Quote field. In this example, I used Ford Motor Co. (F) and changed the selection in the right-hand pulldown menu from Basic to Chart. Then I selected Technical Indicator to get the display.

Your choice of indicators is listed in the top of the display. If you click on any of the blue underlined words, they appear instantly on the chart. You can keep choosing different indicators until you find one that responds well to your target stock. Here, the stochastic diverges from the stock trend -- a signal that the trend may be changing.

STOCKCHARTS.COM

StockCharts.com, the most technical of the websites, offers some of the more exotic indicators. To get to the customized charting section, look under the tools section of Tools and Charts and select SharpCharts. In the example below for CIENA Corp. (CIEN), I’ve used ZigZag and Aroon, as well as the popular Rate of Change (ROC) indicators. In the yellow highlighted area you can see where all three indicators are giving a buy signal.

The Zigzag indicator is set for 7% and shows up as the green line overlaying the price bars. Zigzag draws a line only when the stock advances or declines by a pre-set percentage. It continues drawing that line in the same direction until there is a reversal. The area where the line reverses is known as a pivot point. A trader would buy in at certain points, usually when there is a trend and zigzag is going up or down in a series of lower lows or higher highs.

The Aroon indicator is a type of oscillator. It creates two separate lines: Aroon up, which tracks the amount of time since a new high has been reached; and Aroon down, for new lows. Theoretically, a trend is defined as a series of new highs/lows following each other, so keeping track of the number of days since either event happened will help in picking out trends. Buy/sell signals are given when the indicator is at extreme highs or when Aroon up and down are parallel to each other.

The Rate of Change (ROC) oscillator gives buy/sell signals when it goes into extreme values (zero being neutral), and when the ROC goes in an opposite direction from the price of a stock.

StockCharts.com came up with a unique idea in their Voyeur section. Here you can find out what other investors are doing on the site. To get there, go to the navigation bar to the left of the opening screen. Under Tools And Charts, click SharpCharts Voyeur. SharpCharts Voyeur brings up charts that have been “recently requested by StockCharts.com users.” I learned a lot by looking at other people’s work, not only the companies they were researching, but also how they used the indicators. From there, you can go to CandleGlance Voyeur (shown at left), which shows four of the most recently requested stock symbols, and updates constantly. You can pause or stop the updating, or study these charts in depth.

CLEARSTATION.COM

ClearStation ranks among the highest for most information displayed on the opening screen. It automatically displays a precalculated version of MACD, in both line and histogram form, and includes a stochastic chart. On the left side of the opening screen are significant, current news items. If you like the built-in decision-making tools and the interactive community, then you’ll find this site useful. Otherwise, use it as an overview.

CUSTOMIZING CHARTS: You can choose up to three indicators from a total of eight possible ones.

PROPHETFINANCE.COM

ProphetFinance has a number of different customized charting areas. Java Charting is the most sophisticated; it has indicator choices and the latest in interactive charting. As you roll your pointer over the chart, the black band at the bottom of the chart shows the date, high, low, close, volume, and position on the y-axis of your pointer position. You can draw trendlines and zoom in on specific dates on the chart.

How do you get to the charts? In the upper-left corner of Prophet’s opening screen, you’ll find a palette. To access a pulldown menu, place your mouse over the Charts icon. From there, select Java Charting. On the new screen, enter your stock symbol. Under Tools, select Add Studies from the pulldown menu. There, you can choose your indicator.

PROPHETFINANCE.COM: This chart, which shows Bollinger bands and volume, is available under Java Charting.

3DSTOCKCHARTS.COM

Specialty Charts

3DStockCharts.com does only one thing, but it does it well. As its name describes, it displays charts in three-dimensional form, incorporating volume into the price bars. These charts are for stock limit orders placed on the electronic communication networks (ECNs) of several of the largest ECN-based brokerages. ECNs automatically match up buyer and seller orders through a linked computer system. This allows you to see in stark clarity the buyer/seller dynamics. In the above example of Palm (PALM), a wall of buyers forms at 6.25.

Likewise, on the chart to the right, of Krispy Kreme Doughnut Co. (KREM), a wall of sellers forms at 37. It’s likely that the price won’t pass 37 for a while.

The charts can be rotated to get the best angle on the depth, and you can enlarge areas within the screen.

The examples given here are from the full book selection. The top of the book selection breaks out the volume into the individual brokerages and shows the prices at which each individual broker is filling a particular stock order. Sometimes, you can see the majority of the stocks from one brokerage being filled at a fraction of a dollar less than the others, or you can see large orders going through one brokerage firm.

Copyright © 2001 Technical Analysis, Inc. All rights reserved.