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Chapter 15
Technical Analysis
Questions to be answered:
How does technical analysis differ from
fundamental analysis?
What are the underlying assumptions of technical
analysis?
What major assumption causes a difference
between technical analysis and the efficient
market hypothesis?
Chapter 15
Technical Analysis
What are the major advantages of technical
analysis compared to fundamental analysis?
What are the major challenges to the assumptions
of technical analysis and its rules?
What is the logic for the major contrary opinion
rules used by technicians?
Chapter 15
Technical Analysis
What are some of the significant rules used by
technicians who want to follow the smart
money and what is the logic of those rules?
What are the breadth of market measures and
what are they intended to indicate?
What are the types of price movements postulated
in the Dow Theory and how are they used by a
technician?
Chapter 15
Technical Analysis
Why is volume of trading important and how do
technicians use it?
What are support and resistance levels and how
are they used?
How do technicians use moving-average lines to
detect changes in trends?
Chapter 15
Technical Analysis
What is the rationale behind the relative strength
line for an industry or a stock and how is it
interpreted?
How are bar charts different from point-andfigure charts?
What are some uses of technical analysis in
foreign security markets?
How is technical analysis used when analyzing
bond?
Underlying Assumptions
of Technical Analysis
1. The market value of any good or service is
determined solely by the interaction of
supply and demand
2. Supply and demand are governed by
numerous factors, both rational and
irrational
Underlying Assumptions
of Technical Analysis
3. Disregarding minor fluctuations, the prices
for individual securities and the overall
value of the market tend to move in trends,
which persist for appreciable lengths of
time
4. Prevailing trends change in reaction to
shifts in supply and demand relationships.
These shifts, no matter why they occur, can
be detected sooner or later in the action of
the market itself.
Peak
Flat Trend Channel
Sell Point
Rising Trend
Channel Declining
Buy Point
Trend
Channel
Trough
Peak
Flat Trend Channel
Sell Point
Rising Trend
Channel Declining
Trend
Channel
Trough
Declining
Trend
Channel
Trough
Declining
Trend
Channel
Trough
Trough
Trough
Trough
Trough
KSE
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
99
00
01
02
03
04
05
06
07
08
09
Exhibit 15.2
Declining
Trend
Channel
Peak
Flat Trend Channel
Sell Point
Rising Trend
Channel Declining
Buy Point
Trend
Trough
Channel
Buy Point
Trough
Exhibit 15.2
Declining
Trend
Channel
Peak
Flat Trend Channel
Sell Point
Rising Trend
Channel Declining
Buy Point
Trend
Trough
Channel
Buy Point
Trough
Contrary-Opinion Rules
Many analysts rely on rules developed from
the premise that the majority of investors
are wrong as the market approaches peaks
and troughs
Technicians try to determine whether
investors are strongly bullish or bearish and
then trade in the opposite direction
These positions have various indicators
Contrary-Opinion Rules
Short interest
Stocks above their 200-day moving average
Block uptick-downtick ratio
Importance of volume
Ratio of upside-downside volume
Bar charting
Multiple indicator charts
Point-and-figure charts
Overall feel from a consensus of
numerous technical indicators
Technical Analysis
of Foreign Markets
Foreign stock market series
Technical analysis of foreign
exchange rates
Technical analysis of bond markets
The Internet
Investments Online
http://www.mta.org
http://www.bigcharts.marketwatch.com
http://www.stockcharts.com
End of Chapter 15
Technical Analysis
Future topics
Chapter 16
Equity Portfolio Management
Strategies