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Grading Financial Data Analysis

ECON3140B Class performance (10%) Four homework assignments (4 x 5%) A term project (no more than 3 members. The project is a 2000-word paper studying the profitability of a trading rule, 20%) A mid-term exam (20%) A final exam (30%).

Ng Yau Man, David

References
(2 2) Course Handouts, by DN Technical Analysis of the Financial Markets, by J. Murphy, 1999, New York Institute, New York Technical Analysis Explained, by M.J. Pring, 4th edition, 2002, McGraw Hill The Alchemy of Finance, by G. Soros, 2003, John Wiley and Sons. The Candlestick Course, 2003, by Steve Nison and Marketplace Books Breakthroughs in Technical Analysis: New Thinking from the Worlds Top Minds by David Keller, 2007. Technical Analysis of Stock Trends by Robert D. Edwards and John Magee, 2007
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Financial Data Analysis

Fundamental analysis ()
Analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets

Technical analysis ()
study of charts and statistics

Principles of TA
Market action discounts everything ( ) Prices move in trends () History tends to repeat itself ( )

The Dow Theory ()

The market has three movements. Market trends have three phases. The stock market discounts all news. Stock market averages must confirm each other. Trends are confirmed by volume. Trends exist until definitive signals prove that they have ended.
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Illustration: Stock market averages

must confirm each other.

Illustration: Trends are confirmed by volume.

Does a Downward Trend Exist and Continue?

Contents
Part 1. Brief Introduction to the Stock Market of Hong Kong and other Equity Markets Part 2. Chart Construction Part 3. Chart Pattern Analysis Part 4. Moving Average Part 5. Advanced Analysis Part 6. The Elliott Wave Theory Part 7. Warrants Part 8. Point and Figure Charting
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Part 1. Brief Introduction to the Stock Market of Hong Kong and other Markets

Part 1

Weeks 1 & 2

The History of Hong Kong Stock market The Calculation of Hang Seng Index The Hang Seng Futures Forex Market Commodity Market

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The History of Hong Kong Stock Market (1) The first Companies Ordinance () in 1865. The Association of Stockbrokers in Hong Kong, was formed in 1891 and was renamed the Hong Kong Stock Exchange in 1914. The Hong Kong Sharebrokers Association was formed on 1 October 1921. The two exchanges merged to form the Hong Kong Stock Exchange in 1947.
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The History of Hong Kong Stock Market (2)

The Hang Seng Index was made public on 24 November 1969. The index was based on the performance of 33 representative stocks (=100 on 31/7/1964). Far East Exchange (17 December 1969) The Kam Ngan Stock Exchange (15 March 1971) The Kowloon Stock Exchange (5 January 1972).
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The History of Hong Kong Stock Market (3) The HSI reached a high of 1774.96 points on 9 March 1973 from less than 700 points only four months earlier. Towards the end of 1973, the bubble began to burst and the HSI plunged to 177.22 by end of December 1974.

The History of Hong Kong Stock Market (3a)

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The History of Hong Kong Stock Market (4) The Stock Exchange of Hong Kong (Stock Exchange) was incorporated on 7 July 1980. Amid a crisis of confidence stemming from uncertainties about Hong Kongs future, the HSI fell to a year low of 676.30 points on 2 December 1982. The Hong Kong Commodity Exchange was renamed the Hong Kong Futures Exchange (Futures Exchange) on 7 May 1985.
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The History of Hong Kong Stock Market (5) The four exchanges ceased trading after the close of business on 27 March 1986 and the unified Stock Exchange of Hong Kong (Stock Exchange) with 570 participant organizations commenced trading on 2 April that year. The Futures Exchange launched the HSI Futures on 6 May 1986.

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The History of Hong Kong Stock Market (6)

A long bull run took the HSI to a high of 3968.70 points on 1 October 1987. On 19 October 1987 (Monday) that followed a global market crash, the Hong Kong market dived to 3362.39 points at the close. The Stock Exchange suspended trading for four days from 20 October to 23 October 1987. HSI Futures was also suspended. When the market reopened on 26 October, the HSI plunged about 43 per cent in one day.
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The History of Hong Kong Stock Market (6a)

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The History of Hong Kong Stock Market (7) In March 1989, the Hong Kong Securities Clearing Company (HKSCC) was formed. The Securities and Futures Commission (SFC) was established on 1 May 1989. Hong Kong Securities Clearing Company Limited created CCASS, the central clearing and settlement system, which became the central counterparty for all CCASS participants since 1992.
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The History of Hong Kong Stock Market (8)

Transactions between CCASS participants are settled on T+2. Nominee service. Since 25 January 1996, terminals installed in securities brokers offices enabled them to execute trades from their offices, in addition to the Trading Hall. 201137, , 9:30, 12:00130,130, 4,201235, 1:00,
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The History of Hong Kong Stock Market (9) The Hong Kong-incorporated Mainland Enterprise (red chip ) firstly listed on the Stock Exchange in July 1992. The first H-share company (a Mainlandincorporated Enterprise) commenced trading in Hong Kong on 15 July 1993.

The History of Hong Kong Stock Market (10) The Futures Exchange introduced HSI options on 5 March 1993, Stock options contracts were introduced by the Stock Exchange in September 1995, Trading of Rolling Forex currency futures on the futures market started in November 1995.

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The History of Hong Kong Stock Market (11)

On 7 August 1997, the HSI reached a high of 16820.31 points. However, in October 1997, the Hong Kong dollar pegged to the US dollar came under significant speculative pressure and the HSI bottomed at 6544.79 points on 13 August 1998. The Government injected about $120 billion to buy blue chips in defence of the pegged exchange rate; and the HSI rebounded to about the 8000 level in two weeks. The Government started to divest itself from the position in 2001.
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The History of Hong Kong Stock Market (11a)

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The History of Hong Kong Stock Market (12) On 15 November 1999, the Stock Exchange launched a second board, the Growth Enterprise Market (GEM). The Stock Exchange, the Futures Exchange and the HKSCC became wholly owned subsidiaries of Hong Kong Exchanges and Clearing Limited (HKEx) on 6 March 2000. HKEx (388) floated on the Stock Exchange on 27 June 2000.
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The History of Hong Kong Stock Market (13)

On 5 June 2000, floor trading on the Futures Exchange was abolished. The Securities and Futures Ordinance (SFO) together with a number of codes and guidelines came into effect on 1 April 2003. HKEx was ranked number one globally in funds raised through IPOs in 2009 with a total $248.23 billion. CEPA International floating.
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The History of Hong Kong Stock Market (14)

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The History of Hong Kong Stock Market What have you learnt from the history of HK stock market?

The Calculation of Hang Seng Index

Descriptions on parameters: P(t)Current Price at Day t P(t-1)Closing Price at Day (t-1) IS Issued Shares FAF(, )Freefloat-adjusted Factor, which is between 0 and 1, adjusted quarterly CF()Cap Factor, which is between 0 and 1, adjusted quarterly

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FAF & CF FFA: the proportion of shares that is free floated as a percentage of issued shares.
Not include restricted stocks, such as those held by company insiders.

The Hang Seng Index : 24

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CF: 15% 6.72%6.68% 6.08%

There are 45 HSI constituent stocks in total. As of September 6, 2010, they are:
Hang Seng Finance Sub-index 0005 HSBC Holdings plc 0011 Hang Seng Bank Ltd 0023 Bank of East Asia, Ltd 0388 HKEx Limited 0939 China Construction Bank 1398 Industrial and Commercial Bank of China 2318 Ping An Insurance 2388 BOC Hong Kong (Holdings) Ltd 2628 China Life 3328 Bank of Communications Ltd 3988 Bank of China Ltd Hang Seng Utilities Sub-index 0002 CLP Holdings Ltd 0003 Hong Kong and China Gas Company Limited 0006 Hong Kong Electric Holdings Ltd 0836 China Resources Power Hang Seng Properties Sub-index 0001 Cheung Kong (Holdings) Ltd 0012 Henderson Land Development Co. Ltd 0016 Sun Hung Kai Properties Ltd 0083 Sino Land Co Ltd 0101 Hang Lung Properties Ltd 0688 China Overseas Land & Investment Limited 1109 China Resources Land Limited Hang Seng Commerce & Industry Sub-index 0004 Wharf (Holdings) Ltd 0013 Hutchison Whampoa Ltd 0017 New World Development Co. Ltd. 0019 Swire Pacific Ltd 'A' 0066 MTR Corporation Ltd 0144 China Merchants Holdings (International) Co Ltd 0267 CITIC Pacific Ltd 0291 China Resources Enterprise, Ltd 0293 Cathay Pacific Airways Ltd 0330 Esprit Holdings Ltd 0386 Sinopec Corp 0494 Li & Fung Ltd 0700 Tencent Holdings Limited 0762 China Unicom Ltd 0857 PetroChina Company Limited 0883 CNOOC Ltd 0941 China Mobile Ltd 1088 China Shenhua Energy Company Limited 1199 COSCO Pacific Ltd 1880 Belle International 1898 China Coal Energy 2038 Foxconn International Holdings Ltd 2600 Aluminum Corporation of China Limited (Chalco)

- - - %

0001 2.60 0002 1.89 0003 1.32 0004 1.08 0005 15.00 0006 1.18 0011 1.66 0012 1.09 0013 2.32 0016 3.17 0017 0.68 A 0019 1.34 0023 0.94 0066 0.72 0083 0.65 0101 1.09 0144 0.61 0267 0.44 0291 0.65 0293 0.31 0330 1.32 0386 2.06

0388 2.74 0494 1.85 0688 1.19 0700 2.98 0762 0.83 0836 0.57 0857 3.80 0883 4.35 0939 6.77 0941 9.09 1088 2.26 1109 0.61 1199 0.27 1398 6.22 2038 0.37 2318 1.75 2388 1.24 2600 0.64 2628 5.11 3328 0.92 3988 4.32

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The Hang Seng Indices

Hang Seng China Enterprises Index () Hang Seng China-Affiliated Corporations Index () Hang Seng China H-Financials Index (H) Hang Seng Mainland 100 (100) Hang Seng Mainland 25 (25) Hang Seng HK 35 (35) Hang Seng REIT Index () Hang Seng Corporate Sustainability Index Series () Hang Seng Composite Index () Hang Seng Composite Industry Indexes () Hang Seng Composite Size Indexes () Hang Seng Short & Leveraged Index Series () Hang Seng China A Industry Top Index (A) Hang Seng China 50 Index (50) Hang Seng China AH Premium Index(AH) Hang Seng China AH Index Series (AH) Hang Seng Total Return Index Series () Hang Seng Dividend Point Index Series ()

The Hang Seng Futures

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Type Index Currency Tick Size Tick Value Pre-Open Trading Session Pre-Open Trading Session Last Trading Day Final Settlement Day Final Settlement Price Settlement Type Contract Months Position Limit

Underlying Hang Seng Index Hong Kong Dollar (HKD) 1.0 HKD 50 1 09:15 09:45 1 09:45 12:30 2 14:00 14:30 2 14:30 16:15 The Business Day immediately preceding the last Business Day of the Contract Month The Business Day immediately preceding the last Business Day of the Contract Month Average of quotations of Hang Seng Index taken at five minute intervals during the Last Trading Day Cash Spot month, next calendar month, and next two calendar quarter months 10000 long or short position delta limit for all contract 38 months combined

The Hang Seng Futures

Willing to buy / take a long position in the HS future
Bid/ask 14999 / 15000 Spot = 14999 15000(^), 14999 (100^), 14998(200), /14999 (40), 15000 (50), . Done at 15000

Markets Securities Broker (itself does not take a position) Dealer (from its own portfolio) Trader (with the goal of profiting)

Want to square by taking a short

Bid/ask 15100/15111 Spot =15100 15100(15), 15099(50), /15100(8^), 15111(25), Done at 15100 Then in a square position

P/L =(15100-15000) x 50 Long 15000 Short 14900 P/L =-100 x 50

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(1/7/2012)

Foreign Exchange Market

0.814 1.096 9.883 11.980 7.766
L/H = Bid/ask or offer = buy/ sell ~ put/call = long/short = borrow/lend (LIBID<LIBOR) Base currency (unit currency, transaction currency) / quote currency (price currency, payment currency)
USD/HKD: USD1 = HKD7.8 HKD/RMB: HKD1= RMB0.81 (RMB/HKD: RMB1 =HKD1.2355) In most parts of the world, the order is: EUR GBP AUD NZD USD others. Accordingly, a conversion from EUR to AUD, EUR is the base currency, AUD is the quote currency and the exchange rate indicates how many Australian dollars would be paid or received for 1 Euro.
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* ()

0.813 1.095 9.880 11.977 7.765

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Direct / Indirect Quotations Direct quotation: 1 foreign currency unit = x home currency units
GBP/USD 1.6054 1.6059 in the U.K. USD/HKD 7.7805 7.7829

Cross Rates
Exchange rate between two currencies, both of which are not home currency or do not involve the U.S. dollar.
Example: Given EUR/USD GBP/USD USD/JPY USD/CHF Find GPB/CHF GBP/USD: USD/CHF: GBP/USD X USD/CHF Find CHF/JPY USD/JPY: USD/CHF: CHF/USD X USD/JPY

Indirect quotation: 1 home currency unit = x foreign currency units

HKD/USD 0.12849 0.12852

= 1.0060/65 = 1.5847/52 = 120.25/30 = 1.4554/59 Bid: 1.5847 Offer: 1.4554 1.5847 X1.4554 120.25 1.4554 120.251.4559 Offer: 1.5852 1.4559 1.5852 X 1.4559 120.30 1.4559 120.301.4554

Bid:

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Spot / Forward Rates

Spot Rate: the present value of a currency. Forward Rate: a specific exchange rate at which two parties agree to trade currencies at a future date. Forwards () : specific agreements between two parties. Futures (): standardized contracts traded over a regulated futures exchange.

Forward Exchange Rate

Future Value of Currency FV=P(1+r)n where P = Principal r = interest rate per year n = number of years Forward Exchange Rate
Forward Exchange Rate = Spot Price x (Future Value of Quote Currency / Future Value of Base Currency) = S(1+rq)n/ (1+rb)n S = Spot Price rq = Interest Rate of Quote Currency rb = Interest Rate of Base Currency n = Number of Compounding Periods
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Example Calculating the Forward Exchange Rate

If the spot price for USD/EUR = 0.7395 / 0.7405, the borrowing / lending interest rates in Europe is currently 3.75% / 4% p.a. and the current interest rates in the United States is 5% / 5.25% p.a. 1-year Buying Rate = S(1+rq)n/ (1+rb)n = 0.7395 x (1+0.0375)1 (1+0.0525)1 = 0.7290 1-year Selling Rate = 0.7405 x (1+0.04)1 (1+0.05)1 = 0.7334 Thus, the 1-year USD/EUR forward rates = 0.729 / 0.7334.
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Spot USD/EUR = 0.7395 / 0.7405, EURO borrowing / lending = 3.75% / 4% p.a. USD borrowing/lending = 5% / 5.25% p.a.
Borrow USD for one year @lending, buy EUR, deposit EUR @borrowing

USD Spot 1 1.0525

EUR
Spot 0.7395 1.0525

1 Yr Later 1 (L) (H)

1 Yr Later 0.7395 1.0525 x 1.0375

(L)

(H)

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Spot USD/JPY = 77.765 / 77.960, JPY 1-mon borrowing / lending = 0.0107 / 0.1442% p.a. USD 1-mon borrowing/lending = 0.0965 / 0.2263% p.a.
Deposit USD for one month @borrowing, sell JPY, borrow JPY @lending

Spot EUR/USD = 1.3657 / 1.3660, EUR 2-mon borrowing / lending = 1.2356 / 1.3581% p.a. USD 2-mon borrowing/lending = 0.1437 / 0.2608% p.a.
Deposit EUR for 2 mon. @borrowing, buy USD, borrow PUSD @lending

USD Spot
1 (1+0.000965/12)

JPY Spot
77.960 (1+0.000965/12)

USD Spot
1.3657(1+0.012356/6)

EUR Spot
1(1+0.012356/6)

1 Mon Later 1

1 Mon Later
77.960(1+0.000965/12)x(1+0.001442/12)

2 Mon Later
1.3657(1+0.012356/6)x(1+0.002608/6)

2 Mon Later
1

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Forward premium or discount = [(Forward rate Spot rate) (Spot rate)] x [360(# of days)] x 100.
Example If the 3-month / $ forward exchange rate is 109.50 and the spot rate is / $ = 109.38, then the dollar is considered to be "strong" relative to the yen, as the dollar's forward value exceeds the spot value. The dollar has a premium of 0.12 yen per dollar. Find forward premium. Answer: Annualized forward premium= ((109.50 109.38) 109.38)
(12 3) 100% = 0.329%
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Forward premium or discount = [(Forward rate Spot rate) (Spot rate)] x [360 (# of days)] x 100.
Example But the yen would trade at a discount because its forward value in terms of dollars is less than its spot rate. Find the discount for the Japanese yen. Answer: First, calculate the forward and spot rates for the Japanese yen in terms of dollars per yen: (1/109.50 = 0.0091324) and (1/109.38 = 0.0091424) respectively. The annualized forward discount for the Japanese yen, in terms of U.S. dollars, would be: ((0.0091324 0.0091424) 0.0091424) (12 4) 100% = -0.328%
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Speculation
Investment ( expenditures made for income) Speculation ( high risk, anticipated price movement, high profit) Gambling (not make informed decision) Sells USD/EUR 1-month forward at USD1 = EUR 0.729. Three hours later, squares off at 0.730. The change in price is 0.001/$. Has 2 contracts and each contract is USD1 million. Profit is 2000.
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Arbitrage () Example
A stock price is quoted as 100 for $162 in New York The current exchange rate is 1.6500 in London. What is the arbitrage opportunity?

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Foreign Exchange Market In 1983, the Hong Kong dollar was linked to the US dollar at $7.80.

Derivatives () are Used

To hedge risks () To speculate (take a view on the future direction of the market) To lock in an arbitrage profit To change the nature of a liability To change the nature of an investment without incurring the costs of selling one portfolio and buying another
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Forward Contract () & Futures () (1)

Forward contracts are similar to futures. allow people to buy or sell a specific type of asset at a specific time at a given price. Difference between futures and forward contracts: Futures are exchange-traded and, therefore, are standardized contracts. Forward contracts are private agreements between two parties. A party may default on its side of a forward. Futures contracts have clearing houses that guarantee the transactions.
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Forward Contract & Futures (2)

Settlement of a forward occurs at the end of the contract. Futures contracts are marked-to-market daily (Daily changes are settled day by day until the end ). Futures are usually closed out prior to maturity and delivery usually never happens. Forward contracts, delivery of the asset or cash settlement will usually take place. Forward & futures are popular on currencies and interest rates.
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Forward Contracts vs Futures Contracts

Forward Private contract between two parties Not standardized Usually one specified delivery date Settled at end of contract Delivery or final settlement usual Some credit risk Futures Traded on an exchange Standardized Range of delivery dates Settled daily Usually closed out prior to maturity Virtually no credit risk

Options ()
A call option is an option to buy a certain asset by a certain date for a certain price (the strike price) A put option is an option to sell a certain asset by a certain date for a certain price (the strike price)

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Options vs Futures/Forwards
A futures/forward contract gives the holder the obligation to buy or sell at a certain price. An option gives the holder the right to buy or sell at a certain price.

American vs European Options

An American option can be exercised at any time during its life. A European option can be exercised only at maturity.

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Commodity Market
As time passes, the contract's price changes relative to the initially fixed price. This creates profits or losses for the trader. In most cases, delivery never takes place. Arbitrage (). Price via expectation.
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Futures for Crude Oil on Aug 4, 2009

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Futures for Soybeans on Aug 4, 2009

Commodity Futures
January: an investor enters into a long futures contract to buy 100 oz of gold @ $1750 in Nov Nov: the price of gold $1650 per oz What is the investors profit?
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1. Gold: An Arbitrage Opportunity?

Suppose that: The spot price of gold is US$1000 The quoted 1-year futures price of gold is US$1100 The 1-year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity?
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The Futures Price of Gold

If the spot price of gold is S & the futures price is for a contract deliverable in T years is F, then F = S (1+r )T where r is the 1-year (domestic currency) risk-free rate of interest. In our examples, S=1000, T=1, and r=0.05 so that F = 1000(1+0.05) = 1050

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Short / Sell SPOT Bank |P SPOT Bank |1000

Short / Sell

Commodity 1 |

Future @f |1 sell

P/L |

Commodity 1 |

Future @1100 |1 sell

P/L |

One year later Bank Commodity |P+I |1 f |

Future @f 1 buy|

P/L | |f-(P+I)

One year later Bank Commodity |1050 |1 1100|

Future @1100 1 buy |

P/L | |50

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2. Gold: Another Arbitrage Opportunity?

Suppose that: The spot price of gold is US$1000 The quoted 1-year futures price of gold is US$990 The 1-year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity?
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Buy / Long SPOT Bank 1000|

Commodity |1

Future @990 1 buy |

P/L |

One year later Bank Commodity 1050| 1 | |990

Future @990 |1 sell

P/L | |60

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3. Oil: An Arbitrage Opportunity?

Suppose that: The spot price of oil is US$70 The quoted 1-year futures price of oil is US$80 The 1-year US$ interest rate is 5% per annum The storage costs of oil are 2% per annum Is there an arbitrage opportunity?
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4. Oil: Another Arbitrage Opportunity?

Suppose that: The spot price of oil is US$70 The quoted 1-year futures price of oil is US$65 The 1-year US$ interest rate is 5% per annum The storage costs of oil are 2% per annum Is there an arbitrage opportunity?
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Margins
A margin is cash or marketable securities deposited by an investor with his or her broker The balance in the margin account is adjusted to reflect daily settlement Margins minimize the possibility of a loss through a default on a contract

Part 2

Week 3

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Part 2. Chart Construction

-Type of Charts Available -Construction of the Daily Bar Chart -Weekly and Monthly Bar Charts -Candlesticks, Prosticks
Charting

Type of Charts
Shows visual summary of stock activity over time Easy to use and to understand Use to spot developing trends Major types
Line charts Bar Charts (Point-and-Figure Charts) Candlesticks Prosticks

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Line Chart () Displays information as a series of data points connected by straight line segments. Time-series data demonstrate a trend over a period of time.

Hang Seng Index (Closing)

Bar Charts ()
HCL: high-low-close OHCL: open-high-low-close Often used to compare current stock price with moving average When current price goes above or below a moving average, indicates significant price change
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HCL Bar Chart

OHCL Bar Chart

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Bar (OHLC) Charts and Candlesticks ( )

Each bar is composed of 4 elements:
Open High Low Close

High Close Open

High

The candlestick body is empty (white) on up days, and filled (some color) on down days

Open Low Low

Close

Standard Bar Chart

Japanese Candlestick

Standard Bar Chart

Japanese Candlestick

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Candlesticks and Prosticks

Modal () Point : the most heavily transacted price for the particular time interval. Extreme tail: price range that has very little trading activity caused by strong resistance and /or support.

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The Three White Soldiers Candlestick Pattern

A bullish reversal pattern that forms with three consecutive long white candlesticks. Like a long white candlestick which combines the three candlesticks, takes the open of the first candlestick and the close of the last candlestick. After a decline, or down-trend, the three white soldiers pattern signals strong buying. Careful about parabolic moves.

Advance Block
Three white soldiers occur in downtrends, while the advance block occurs in uptrends. The first candlestick in the advance block formation is a long green candlestick with very little upper shadow and closes near its high. The next two candlesticks in the formation will close higher, but they both have lengthy upper shadows. These upper shadows are an early indication that the uptrend is at risk. The second and third candlestick open within the body of the preceding candle. A bearish reversal signal. This chart pattern materializes after a clear uptrend is in place.

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Deliberation
In an upward trend two long blue days occur The third day is a shorter blue candle. Significant after long rallies. Shows a weakening upward trend. Direction: Bearish Type: Reversal

The Three Black Crows Candlestick Formation

Consists of three large, consecutive, declining candles. Precludes lower prices, especially after a strong advance higher. Requires the trader have patience or even wait for a countertrend rally before looking to take a short position or sell out of longs.

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Doji Star: Reversal

Morning Star Evening Star

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