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I received the following email from a reader named John:

I was hoping to learn how to do some technical analysis of these stocks b/c I haven’t had much luck in the past. I think some knowledge about technical analysis might help me a lot. I decided to start with the Candlesticks. Other than Candlesticks, what other charts or indicators do you use to analyze stocks? Any help would be very much appreciated.

Thanks. John

John, here are the steps I normally take to analyze stocks:

Look at the Major Indices

My first step is to look at the major market indices (I look mostly at the Dow Jones-$INDU but you can look at the $SPX and $COMP as well-recommended) to get a sense of where we are in terms of resistance/support - areas and psychologically important moving averages such as 50 and 200dma, number of days up/down (important).

What are the strongest sectors?

Next step is to look at the individual sectors. Why is the sector important? Because 20% of a stock movement comes from the sector. That doesn’t mean you can’t pick stocks in under-performing sectors (XLF right now), but if you are just starting I would suggest that you go with the stronger winds and pick stocks in strong sectors. How do you know when a sector is performing/under-performing? Multiple ways, pick one: MACD positive, 10/30smas or even above 50mas if you want to keep it really simple, just pick one and stick to it otherwise you will go indicator-nuts.

Long term charts? Get context by looking at least at 6 months of data

Once you have identified a specific sector you’d like to focus on, find the strongest stock components in that sector. If you are using sector ETFs, view the holdings in Yahoo! or you can use the PHLX sectors.

What charts should you use? It depends, everyone is different but bar charts (OHLC) usually gives more clarity when you are just starting in technical analysis, it’s usually clear to visualize the patterns. The following is a bar chart and a candlestick chart for MCD (McDonalds), side-by-side. Note how the patterns are a bit more clear on the Bar Chart.

Now, let’s add some "colour" to the same candlestick chart… if that’s what you prefer.

Get more context, review the weekly chart…

Your next step should be understanding where the stock "is", long-term by looking at the weekly chart

Now that you have a long-term view the stock, zoom in by looking at a shorter term (3 months perhaps) candlestick chart to help pinpointing your entry… I personally use bands (Keltner in my case) to avoid entering in resistance areas. Here are two examples, note how it bounces when it stretches too far outside the bands - never buy when the stock is trading outside of them (I’m referring to long positions).

Where do you enter?

This is not a difficult question (although most beginners spend a lot of time on this topic). The big question is where you "Exit" — here’s an entry example for RIO, I saw the FTD (failure to drop) pattern and entered on price action (break of the first high after the pullback. My stop was just below that low.

Hope this helps John. Good luck to you.