Technical analysis uses statistics related to market activity, such as past prices and the volume of shares traded, to identify patterns that may suggest future share price. It is different from fundamental analysis in that it does not involve determining a stock’s intrinsic value, but is similar in that both valuation methodologies seek to identify stocks that are either overvalued or undervalued.
Investors can use several different indicators to determine if a stock is undervalued. Technical investors will look at these indicators in chart form when evaluating shares.
On-Balance Volume (OBV)
Combines volume and price movement to show the flow of volume relative to price over time. If changes in volume precede changes in price, an increase in trade volume could indicate that a stock is shifting away from being undervalued.
Accumulation/Distribution (A/D) Line
Looks at the closing price and trading period for a stock over a period of time, and is designed to give a picture of money flow. An upward trend shows increasing buying. Even if the price of a stock is moving sideways, an increasing A/D line shows that the stock was being accumulated.
Average Directional Index (ADX)
Measures the strength and momentum of a trend. Because ADX is non-directional it doesn’t show the direction of the trend, which is why investors typically plot two other indicators alongside ADX. Values above 20 indicate that a trend is increasing, while a value of 40 indicates that a trend is exhausted and may reverse.
Used to determine whether a stock is in a trend, and how significant that trend is. There are two indicator lines – one bullish and one bearish – though they can be combined into one value for simplicity. When using a single oscillator, the higher the number, the more bullish the predictor. An investor may consider an increasing Aroon indicator value a sign that a stock is potentially undervalued.
Moving Average Convergence Divergence (MACD)
This indicator is comprised of two exponential moving averages, and is designed to signal the trend and momentum behind a stock. It measures short-term momentum versus long-term momentum by taking the difference between the moving averages for both terms.
Relative Strength Index (RSI)
This indicator is used to signal overbought and oversold conditions for a stock. Low values suggest that the stock is oversold.
Shows whether a trend is closing in on highs or lows of a trading range, with oversold conditions below a value of 20 and overbought conditions above 80.
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