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TECHNICAL ANALYSIS 101 - PART 1

This is the first part of a series of articles about Technical Analysis from a new course we're developing. If you are new to charting, these articles will give you the "big picture" behind the charts on our site. if you are an "old hand", these articles will help ensure you haven't "strayed too far" from the basics. Enjoy!

Technical analysis is the study of price and volume changes over time. Technical analysis usually involves the use of financial charts to help study these changes. Any person who analyzes financial charts can be called a Technical Analyst.

Despite being surrounded with data, charts, raw numbers, mathematical formulas, etc., technical analysts are really studying human behavior - specifically the behavior of crowds with respect to fear and greed. All of the investors that have any kind of interest in a particular stock can be considered to be "the market" for that particular stock and the emotional state of those investors is what determines the price for that stock. If more investors feel the stock will rise, it will! If more feel that the stock will fall, then fall it will. Thus, a stock's price change over time is the most accurate record of the emotional state - the fear and the greed - of the market for that stock and thus, technical analysis is, at its core, a study of crowd behavior.

When was the last time you saw a 100% accurate weather forecast for your area? Chances are that at least some of the weather predictions your local weather person tells you won't come to pass. In many cases, most of the predictions are wrong. So why do we keep listening to weather forecasts?

Weather forecasts are useful because they help us prepare for what is likely. If the forecast calls for rain, we bring our umbrellas with us when we go out. If sunshine is predicted, we bring our sunglasses. We know that we might not need these things, but more than likely we will and we like to be prepared.

Technical analysis is very similar to weather forecasting. Good technical analysts know that T/A can prepare you for what is likely to happen but, just like many weather forecasts, things can change in unpredictable ways. Here are some other ways that technical analysis is like weather forecasting:

Weather forecasters measure temperature and air pressure and then use that data to determine more about the factors that cause weather changes - i.e., fronts, high pressure, low pressure, etc. Technical analysts use price and volume to determine more about the factors that cause market changes - i.e. fear and greed, trends, reversals, support, etc.Despite huge quantities of weather data at their disposal, weather forecasters still use their experience and intuition when creating each forecast. Technical analysis also draws heavily from the experience and intuition of the person doing the analysis (you!).Accurate weather forecasting requires local knowledge and experience. A forecaster from Florida that moves to Alaska will need time to become familiar with Alaska's weather patterns. Similarly, technical analysis requires experience and knowledge about the kinds of markets being charted - stocks are different from commodities which are different from mutual funds, large stocks are different from small stocks, etc.In the early days of weather forecasting, charlatans tried to convince people that they could somehow control the weather or that their predictions where always accurate. Unfortunately, even today, you can find people making similar claims about technical analysis.Weather forecasts tend to be most accurate when things aren't changing. If it has been sunny for the past three days and no big weather systems are approaching, chances are it will be sunny again today. Technical analysis also works well when conditions aren't changing dramatically. Both disciplines have more trouble with predicting exactly when big changes will occur.Both weather forecasting and technical analysis work well for the "mid-sized view." While predicting the weather for a large city is possible, predicting things for a city block is very hard. Similarly, second-by-second technical analysis can be extremely tricky; daily and weekly analysis is more reliable. Conversely, predicting weather for the country as a whole (i.e., "It will be sunny in the US today") and predicting the market as a whole (i.e., "This year stocks will go up") are too broad to be useful.

It is easy to lose perspective on what technical analysis can and cannot do. Try to remember this comparison with weather forecasting to keep yourself aware of its benefits and limitations.

Next time, we'll look at the real goal of Technical Analysis, why it works, and how it can be misused.

OTHER BOND CATEGORIES ARE BOUNCING

I recently wrote about how investment grade corporate bonds were starting to gain some ground on Treasury bonds. Today, I'm adding two other bond categories to that list. The flat line in Chart 1 is the 20+Year Treasury Bond iShares (TLT) which has been the strongest part of the yield curve over the past few months. That's been partly due to a flight to safety and deflationary concerns. The three other lines in Chart 1 are relative strength ratios versus the TLT. All three bond ETFs have been gaining ground on Treasury Bonds since mid-December. The strongest has been the LQD (blue line) which I wrote about in the earlier article. The next strongest is National Muni Bond Fund (PZA) which is the green line. The next in line is the High Yield Corporate Bond Fund (HYG). Charts 2 through 4 show what those bond ETFs look like. The LQD in Chart 2 is trading well above its 200-day line. The Muni Bond ETF (Chart 3) is testing that resistance line and its early November peak. Chart 4 shows the High Yield Corporate Bond ETF trading at a three-month high and nearing its 200-day line. For those who think that the recent surge in Treasury bond prices is overdone (I certainly do), these other bond ETFs offer some alternatives.

ON HIATUSRichard Rhodes will be back in the next issue. RALLY FAILURE

In my January 2 article I pointed out that the stock market was overbought by bear market standards, but that the rally had plenty of internal room for prices to expand upward if bullish forces were to persist. There was a brief rally and a small breakout, but then the rally failed, breaking down from an ascending wedge formation. I wasn't really expecting a bullish resolution, but one must keep an open mind when appropriate conditions appear.

On the chart below you can see the short-term declining tops line through which the breakout occurred. Instead of a buying opportunity, it was a bull trap. At this point we must assume that the November low will be tested. Note also that the PMO has crossed down through its 10-EMA, generating a sell signal.

The weekly chart below gives a better perspective, I think. It shows how aggressive the current down move is compared to the price activity that precedes it. Also, the PMO has topped below its moving average, a bearish sign. Prices are once again approaching the long-term support drawn from the 2002 lows. A successful retest could set up a double bottom from which another intermediate-term rally could launch, but in a bear market we shouldn't bet on that outcome.

For many months I have been emphasizing that our analysis should be biased toward bearish outcomes because we are operating in the longer-term context of a bear market. The tide is going out and it is foolish to try to swim against it. In a much broader context, we are in the midst of a global debt collapse that is only in the beginning stages. I find it impossible to imagine economic circumstances in the immediate future that would be even remotely favorable to stocks.

Bottom Line: In a bull market overbought conditions most often result in small corrections, consolidations, or deceleration of the up trend. In a bear market overbought conditions are usually a sign that a price top is at hand. Because the most recent overbought event has resulted in a price top, I think we can safely assume that the bear has not retreated.

Visit Carl's website -- DecisionPoint.com -- for the most comprehensive collection of market indicator charts on the Web. Breadth charts, sentiment charts, and historical charts going back to the 1920s. Been looking for NYSE Common Stock Only indicators? He's got those too!

EURO FINDS SUPPORT AS DOLLAR HITS RESISTANCE

With a bounce on Friday, the Euro Trust ETF (FXE) found support from a confluence of indicators and chart features. First, broken resistance turns into support in 130-132 area. Second, there is support in this area from the 50-day moving average. Third, the decline over the last few weeks retraced around 62% of the prior advance. The ETF was also oversold after a rather sharp decline from 145 to 130. This combination of conditions and chart features made FXE ripe for a bounce.

With the Euro bouncing, the US Dollar Index Bullish ETF (UUP) came under pressure on Friday. Notice that these two charts are mirror images of each other. After a surge over the last few weeks, UUP met resistance near broken support and the 50-day moving average. The advance in UUP looks like a rising flag, which is potentially bearish. For now, the flag is clearly rising as the trend has yet to actually reverse. A move below the early January low would break flag support and call for a continuation of the December decline.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

For more of Arthur's insights, check out his Web site: TDTrader.com

IS THE DOLLAR TOPPING?

An interesting result of the government bailout of the financials and automakers, along with the huge economic stimulus package will be the long-term impact on the U.S. dollar. Can the dollar maintain its relative value as interest rates fall and deficits mount? Let's take a look at a few charts regarding the dollar and how we can profit if the dollar does plunge. First, let's take a look at the long-term picture of the dollar:

As you can see, the long-term trend in the dollar is down. Unless the dollar can pierce through the 92-93 area, the intermediate-term trend is down as well. Only the near-term chart shows any positive action on the dollar. And that rally is suspect technically as shown below:

A bearish head and shoulders pattern formed from October through December and broke down below the neckline with force. Should the dollar fail to navigate the near-term resistance (retest of neckline) and the longer-term trend resumes to the downside, gold is likely to be a primary beneficiary. Gold is one commodity whose long-term uptrend remains intact because of the long-term downtrend in the dollar. Take a glimpse at the long-term chart on gold:

The dollar and gold have an inverse relationship that's quite evident when you compare the two charts. During periods of dollar strength, gold weakens. However, dollar weakness leads to gold strength. So the question remains: What happens to the dollar as a result of the massive government bailout and the economic stimulus package? Answer that question correctly and you profit. It's as simple as that.

Happy trading!

Join Tom and the Invested Central team at http://www.investedcentral.com/. Invested Central provides daily market guidance, intraday stock alerts, annotated stock setups, LIVE member chat sessions, and much, much more.

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Top Gaining stocks of the day

OREX -Orexigen Therapeutics IncEDMC -Education Management CorporationJNGW -Jingwei International LimitedCCME -China MediaExpress Holdings IncFRBK -Republic First Bancorp IncPBIP -Prudential Bancorp Inc of Pennsylvania

52 week High Stocks

AKAM ?Akamai Technologies Inc

ARUN -Aruba Networks Inc

ATML -Atmel Corporation

ATRC -AtriCure Inc

BSFT -BroadSoft Inc

DTV ?-DIRECTV

DISCB-Discovery Communications Inc

DTSI -DTS Inc

PLUS -ePlus Inc

EXAS -EXACT Sciences Corporation

EXPE -Expedia Inc

FFIV -F Networks Inc

GIII -G-III Apparel Group LTD

GOODO-Gladstone Commercial Corporation

GOODP-Gladstone Commercial Corporation

HGRD -Health Grades Inc

HBANP-Huntington Bancshares Incorporated

ILMN -Illumina Inc

INFA -Informatica Corporation

AMAG – AMAG Pharmaceuticals Inc

AACC – Asset Acceptance Capital Corp

ATEA – Astea International Inc

BFSB -Brooklyn Federal Bancorp Inc

CHIO -China INSOnline Corp

GNMK – GenMark Diagnostics Inc

JAXB – Jacksonville Bancorp Inc

XPRT -LECG Corporation

LEGC – Legacy Bancorp Inc

NCIT – NCI Inc

NURO – NeuroMetrix Inc

FFFD – North Central Bancshares Inc

TIXC -Tix Corporation

VBFC -Village Bank and Trust Financial Corp

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Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.

After such a wrenching plunge, many analysts believe the outlook for the a??black golda?? remains bleak a?? and in the short term it certainly is. in the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) a?? energy advisor to 28 industrialized nations a?? says oil will rise to $100 a barrel by 2015, as a result of a major a??supply crunch,a?? and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the new Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. some of the firms and their specific forecasts include:

Deutsche Bank AG (DB, which says oil prices will average $47.50 for all of next year. Merrill Lynch & Co. inc. (MER), which predicts that prices will average $50 even. Moodya??s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010. Goldman Sachs Group inc. (GS) is slightly more bearish, predicting that prices will average $45 for all of next year a?? after falling as low as $30 in the 2009 first quarter. (Ita??s worth noting that Goldman a?? just five months ago a?? predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: when the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude again will again soar to record highs.

“We may see prices drop lower a?? into the twenties, even a?? but therea??s a better-than-average chance that theya??ll be back over $70 a barrel by the end of next year,a?? says Money Morning Investment Director Keith Fitz-Gerald. a??Thata??s where firms like Goldman and Merrill are getting all of these a??middle-of-the road,a?? $50-a-barrel estimates. and ita??s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = a??Supply Cruncha??

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. but the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. in other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. and right now a?? because of marketplace changes a?? the financial incentives to make that happen just dona??t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. at the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed a?| this is a major worry and could lead to a supply crunch and much higher oil prices than wea??ve seen before,” said Fatih Birol, the IEAa??s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” a?? that will once again send oil prices up into the triple digits.

a??There remains a real risk that under-investment will cause an oil supply crunch in that time frame,a?? the IEA said in an executive summary of its a??2008 World Energy Outlook.a?? a??The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.a??

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

a??While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agencya??s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While ita??s probably true that the a??era of cheap oila?? is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEAa??s target price of $200 a barrel is far too conservative.

The lack of exploration and development is certainly a problem. but a much bigger issue is the fact that output from the worlda??s existing oil fields has sharply declined.

a??The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,a?? the IEA says.

And output from the worlda??s oilfields is declining faster than previously thought.

In its a??2007 World Energy Outlook,a?? the IEA estimated that output from the worlda??s existing oilfields was declining by 3.7% a year. but in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the worlda??s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the worlda??s oil production was nearing a?? or already at a?? an a??inflection point.a?? While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called a??peak oila?? movement.

a??Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “and now, of course, people are starting to say, a??Oh, well, I thought of that.a??”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

a??I finished reading the last paper on a Sunday afternoon,a?? Simmons told Fortune, a??and I sat back and thought, a??Holy crap, this is unbelievable. Ia??ve just discovered the biggest energy illusion ever in the world. Wea??re in big trouble. Ia??m going to write a book.a?? a??

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartela??s producers suddenly raised their levels of “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. that figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently. “Ita??s astonishing. The figure never goes up and it never goes down. They have produced dozens of millions a?? billions a?? of dollars of oil in that period of time.

a??Every oil country in the world has declining reserves except Saudi Arabia,a?? Rogers said. a??And I know that every oil company has declining reserves. so unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.a??

Simmons thinks oil prices could hit $300 a barrel a?? and could possibly even surge as high as $500 a barrel a?? during the next several years.

a??Black Golda?? Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. these companies also have strong balance sheets (Exxon is a??AAAa??- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a a??Buya?? by Money Morning Contributing Editor Horacio Marquez in his a??Buy, Sell or Holda?? column earlier this year.

a??Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels a?? even if oil-and-gas prices were to drop from current levels over the next three years,a?? Marquez said. a??Thata??s because Chevrona??s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market a??spota?? prices were to decline. also, the companya??s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.a??

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. known as Carioca, the field could hold 33 billion barrels of oil and gas, making the worlda??s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. that would equal the production of Chinaa??s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. but these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP (UGA).

[Editora??s Note: As the whipsaw trading patterns energy investors have endured this year have shown, the ongoing financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this a??New Realitya?? will struggle, and will find their financial forays to be frustrating and unrewarding. but investors who embrace this change will not only survive a?? they will thrive.

Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as a??The Golden Age of Wealth Creation.a?? but Fitz-Gerald brings more than a realization a?? and an understanding a?? to the table, here. After a decade of work, hea??s also developed a new computerized trading model based on a mathematical concept known as a??fractals.a?? this system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. and ita??s particularly well suited to the kind of market wea??re all facing right now. Check out our latest report on these new rules, and this new market environment.]

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Jason Simpkins is Associate Editor of Money Morning

Why Crude Oil Will Present Investors With a Golden Opportunity in 2009

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