Three technical measures I use frequently

Nilus Mattive

I recently closed out two more big winners in my dad’s retirement portfolio — a 43 percent gain on Wal-Mart and an 18 percent profit on oil company Total that came in just about three months.

Dad’s total profits from these two trades alone came to a solid $2,766.83, including all his commissions and fees.

[Editor's note: That's more than 70 times the annual cost of Nilus'Income Superstars newsletter. Try his recommendations out yourself risk-free by clicking here.]

As always, I chose both of those companies because of fundamental measures … their business prospects going forward … and the dividends they were paying out.

However, I don’t want you to think I completely ignore stock charts and technical measures. I DO use these things to figure out good buy and sell points.

So today I want to review a few of the simplest indicators I look at …

Technical Analysis Technique #1: Trendlines

If you want to see an amazing example of a trendline, look no further than Altria, one of my long-standing recommendations in the Dividend Superstars portfolio …

Altria Group

As you can see, the stock has just been going up and up, with minor pullbacks along the way. And right now, it looks like MO may be heading for a bit more downside before it resumes its long-term uptrend.

That’s what trendlines can give us … a broad picture of how a given stock is performing relative to past action.

Of course, if you’re looking for a more sophisticated version of the trendline you can also use …

Technical Analysis Technique #2: The Moving Average

Moving averages take trendlines to the next level because rather than being constructed somewhat arbitrarily (i.e. “pick a couple points that look important to you”), they are computed automatically based on a preset series of data.

Specifically, a moving average is a line based on the arithmetic average of the prices it’s drawn against.

What’s the benefit? This smoothes out all the little movements and creates a line that you can compare them to. Common moving average periods include 200-day, 90-day, and 60-day periods.

I like moving averages as another way to gauge general uptrends and downtrends, and to spot major market reversal points.

Here’s a chart of the S&P 500 with a 120-day moving average thrown in for good measure …

S&p 500 Index

As you can see, the market’s recent surge took it above the moving average, which suggests more upside ahead simply based on this one technical indicator.

Conversely, a move substantially below 1,434 would be seen as the start of a more serious downward leg.

Of course, perhaps the most useful (and intuitive) way to look at entry and exit points is through …

Technical Analysis Technique #3: Support and Resistance Levels

Investors have a tendency to get hung up on certain numbers … quite often round ones. You know, like Dow 10,000.

I’m not a psychologist, so I’m not going to hypothesize on why it happens. But from many years of following the markets, I can tell you that it does happen with alarming regularity.

This is precisely why I pay close attention to clear levels of support and resistance whenever I look at any investment’s chart.

Here’s a chart of Wal-Mart, which I mentioned earlier …

Walmart

See how for almost three years it struggled to get above $56 a share?

Every time it got to that level, it started heading right back down. Until late in 2011 … when it finally managed to head up to another level that seemed important to the market: $62.

Again, it took three attempts to get above that price … but once it did, wow!

Today, the shares seems to be forming a new level of support in the mid-$70s. But for me, it made more sense to take profits off such a sharp move just in case the stock quickly finds itself freefalling back down to the low $60s.

Ultimately, that’s what’s really interesting about charts in the first place: They reflect the market’s collective thoughts and opinions.

When events are enough to push an investment through a level that previously presented resistance … it means a certain critical mass has been achieved … and momentum quite often takes over from there.

Obviously the opposite is also true. When a level has previously held on countless downdrafts — forming a strong area of support — you better look out below the first time that level is seriously broken!

Now I’ll be the first to say that you never know when an important level is going to hold or not. However, simply being aware of critical breaking points — along with the fundamental reasons moving a market or an individual investment — will help you make more educated (and hopefully more profitable) decisions.

And perhaps the best part about technical analysis tools like moving averages is that they are no longer only available to professional investors with thousands of dollars in trading software. In fact, most online chart providers — including free websites like Yahoo Finance — now allow you to overlay these tools to whatever investment you’re viewing.

If you don’t already use these indicators, I encourage you to play around with them … they can give you another interesting way of viewing your investments … especially given the wild swings we’re seeing nowadays.

Best wishes,

Nilus Mattive

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