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Technical Analysis
Price action context

Technical analysis:-
Price charts summarise the underlying opinions and emotions of the real market participants.
Every chart tells a story. It pays to understand the stories in the price charts.
Price action context:-
When applying technical analysis notions to share market price charts,
it is very useful to also consider the "context" within which the observed price action occurs.
But what do we mean by this? - It's all explained here...
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Related links: Technical Analysis - Getting StartedTechnical Analysis - The Proof; 4 Windows approach
 Dow Theory; Trends and trend-spotting; Support and Resistance; Stop Loss; Chart patterns;
 Fundamental analysis; Funda-Technical Analysis; eBook Articles Master List; eBook Articles INDEX; about eBook Articles

Price action context a definition:

The study of share market price action in conjunction with other relevant information such as:
  • the price action in previous days or weeks (or months or more), and
  • technical analysis chart features (eg. patterns, support, resistance, etc.); and 
  • looking at other time periods, and
  • looking at relevant news and announcements.

How to learn more
about technical analysis?

Technical Analysis - Getting Started - Robert's suggested steps on how to make progress with learning about Technical Analysis.

More information

Funda-Technical AnalysisFunda-Technical Analysis - An investment and trading approach utilising a sensible balance of both Technical Analysis and Fundamental Analysis.

Brainy's 3Ways RuleBrainy's 3Ways Rule - a smart way to understand trends, and the importance of spotting trends.

Brainy's extensive list of eBook (PDF) Articles
on Technical Analysis and other topics.

Brainy's seminars on Technical Analysis and other topics - click here for details...

A variety of publications on Technical Analysis and related topics - click here for details...

Australian Technical Analysts Association

The ATAA is Australia's pre-eminent not-for-profit organisation regarding technical analysis.
Some of the experienced ATAA members have contributed to regular articles in The Age and Sydney Morning Herald newspapers. Scanned copies of these articles are available for perusal.

Robert is a member of the Australian Technical Analysts Association (ATAA). He is (since 2009) also the Melbourne Chapter Vice-President, and a director on the national board. Robert endorses the ATAA as a worthy not-for-profit association for people looking for education, help and networking.
See more information about the ATAA.
Beware the sharks in the ocean.
And whatever you do,
beware of the sharks in the ocean!

Exactly what is "price action context"?

It is not widely discussed, but this term actually means different things to different people. Some brokers refer to it to help guide the thinking of their clients and to encourage particular strategies, especially for use with intraday trading, and also with forex trading.
My own preferred definition here is of more use to the average retail investor or trader in the share market, and considers several aspects which can be described as follows, particularly for the benefit of share traders who are short to medium term (ie. from a few days to many weeks or a few months) and who utilise technical analysis.

The observation of an odd or unexpected
share price movement
which can actually be explained by
a company announcement or other news or
even the simple price chart.

Further to this:
  1. By all means look at a share price movement in the last day or so, but also look at several recent days, and even weeks.
  2. If viewing a price chart, then make sure to look at another time period as well. That is, if viewing a daily chart, then also look at the weekly.
  3. It can be useful to look at recent news for the stock, as this might explain the price behaviour.
  4. If looking at the price performance over a particular time period, then also consider looking over a different time period.

Why is all this important?

Especially for the average retail investor and trader, this can be very useful so as to avoid some of the possible pitfalls that await the inexperienced (and the experienced), but more so so that you can better understand the "bigger picture" (remember that the market is like an elephant). Things like the actual share price trend which might not be apparent from the price chart you are looking at. Or change you view about whether the latest large volatile move was random, or could have been anticipated.
When a technical analyst studies the price charts in order to make a judgement call about the likelihood of future price behaviour, we need to remember that the price action can be influenced by new news, or a company announcement. Once this new news becomes known, then other investors in the stock will adjust their opinion about fair value, and in turn this might result in additional buying or selling of the security.
So when we study the price action, and try to understand why the price did not behave as we thought it would, it can be very useful to look at the context within which the share price is responding.

Problem #1 - The news media numbers

The first problem to be aware of here is that the news media are very good at reporting today's share price movements, either of a particular stock, or several stocks, or an index. In Australia, our major TV stations do this routinely every day, and radio stations do likewise.
The worst example of this is on Monday morning when the radio announcers declare something like "...the Dow Jones fell 700 points over night...". The first issue here is that the Dow Jones index is based on stocks listed on the New York Stock Exchange (NYSE) which trades until 4pm on Fridays. And this coincides with 6am Melb/Sydney time Saturday (or 7am or 8am, depending on whether daylight savings is in place for either the USA or Australia). So, when the Dow Jones reportedly fell 700 points, it was actually 2 days prior! The second problem here is that it is much more useful to report such market moves in percentage terms, and not in "points". If 700 points equates to just 1 per cent, then this is a quite acceptable amount. However, if it is actually 5 per cent, say, then this is more significant.

Problem #2 - The news media headlines

Take a look at this typical example of sensationalising the numbers.
On 12 June 2020, one well respected newspaper and website reported the following headline:
"ASX down 2.5pc for the week; $90b wiped in two day sell-off". (See the online article here).

Wiping off $90 billion in a 2-day sell-off sounds somewhat alarmist doesn't it? But this tiny amount is insignificant in many ways. This is explained with the following examples and commentary.

Additional thoughts

  • The daily or weekly traded volumes can also be very telling, as per Dow Theory.
  • If you are studying a price chart and cannot work out why a share price has moved the way it has, take a look at the news because very often the news will help to explain it.

Case study example #1 - Coronavirus bear market of 2020

Markets down heavily with little warning

In February 2020 with little warning, many share markets collapsed. In Australia, the All Ordinaries index (XAO) fell 37 percent over just 4 weeks. In this situation it was fairly easy to understand the reasons why - provided we were aware of the unfolding coronavirus situation.
(click for a larger version)

Case study example #2 - XAO index in June 2020

The following considers one specific example of the All Ordinaries (XAO) index in June 2020. (Click on the price charts for a larger version.)


Down heavily in just 2 days

In the daily candlestick price chart at right, the All Ordinaries index (XAO) fell heavily in just 2 days to be down 4.9 per cent. It actually fell on the following day as well to take it down even further.
The news media made sensational headlines and announced the huge dollar value that this fall represents. What they didn't say is what is explained in the next block below.


Index finishes up in 2 weeks

Instead of looking at just the last 2 days of price action (above), we could step back a little and look at the last 2 weeks of price action as shown in the price chart at right.
Notice in this chart that the fall of 4.9 per cent is still indicated on the chart, but when we zoom out on the chart we can see that it is actually 1.5 per cent higher than several days earlier, on Friday 29th May.
So, when we take the latest price action in the context of the last 2 weeks, we can see it's not such a big deal. If the index doesn't fall any further, then so what about the latest fall? Could you call the new headline over-sensationalising?


Index is actually up 30 percent!

Now zoom out the chart even further so that we can see at least 12 weeks of price action, as shown in the price chart at right.
Note the nice uptrend since the lows of 23rd March, and that the index is actually up 30 per cent from those lows over a period of 12 weeks. So it is very important to consider the context within which the price action is taking place.


Index is still down 17 percent!

The next chart at right shows the same index but zoomed out even further so as to see the all-time market highs of late February 2020 before the global coronavirus pandemic caused widespread shudders around the world, and impacted heavily on economies and financial markets all around the world.
The reality as of 12 June 2020 was that the index might have been up 30 percent from the March lows, but it was still down 17 percent from the highs of February.
So we can see that looking at the bigger picture and being cognisant of the recent price action is very valuable to help keep everything in perspective. We call that price action context.
A good argument could be made for paying more attention to the business and finance news items, and even to browse the market announcements that companies make to the stock exchange. There could be a lot of useful explanation hidden within those news items.


Case study example #3 - Superannuation performance for FY20

The following considers the possible performance of a "typical" superannuation fund for the financial year 2019-2020.
(Click on the price charts for a larger version.)

"Superannuation is down for the financial year just ended"

This was the headline in some financial pages of the press in the first few days of July 2020. Whenever someone writes about the performance of superannuation funds, I find it really difficult to comprehend. Because the many superannuation funds and accounts are like a barrel full of mixed fruit - they are potentially all rather different!
Anyway, if the average "balanced" super fund comprised a large amount of share market stocks, then its performance over the financial year might be a little like the performance of our major market index over the same period. And that is what's in the price chart at right.
This chart is a daily line chart of the All Ords (XAO) index showing the performance from 1st July 2019 to 30th June 2020 - it was down 10.9 per cent.
But take a look at the way the index crashed part way along the time period. It is actually up significantly from the lows of March 2020. But for some people, that does not matter. They need to report on the performance over a specific time period.

Which time period?

If we wanted to look at the performance of the market (perhaps as an indication of how just a few super funds might have performed), then let's look at the next chart at right.
This is the same chart as above (a line chart of the XAO index) but going back a further 12 months to start from 1st July 2018.
Note that the market index was down 4.3 per cent over this 2 year period. That's still not very good is it?

Is there a better time period?

If we wanted to find a good looking set of numbers we could zoom this chart out and look at a 4 year period from 1st July 2016. Over this 4 year period the index was up 12.6 per cent. Now that's a better number to look at!
Note: Always remember that zooming the chart out to like at a bigger time period can be very useful. Remember that the market is like an elephant!

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are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.

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Last revised: 8 February 2023