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Technical Analysis Introduction

• Technical
– looks for peaks, bottoms, trends, patterns, and other
factors affecting a stock’s price movement
– makes a buy/sell decision based on those factors
• The world of technical analysis is huge
• Hundreds of different patterns and indicators
investors claim to be successful
What is Technical Analysis?
• Method of evaluating securities by
analyzing statistics generated by
– Market activity
– Past Prices
– Volume
• Do not attempt to measure intrinsic value
• Instead look for patterns and indicators on
charts to determine future performance
What is Technical Analysis?
(Continued)
• Technicians believe that securities move in very
predictable trends and patterns
• Trends continue until something happens to
change the trend
• Until that change takes place, price levels are
predictable
• Most agree that technical analysis is much
more effective when combined with
fundamental analysis
The Bar Chart

Advantage is that it show the high, low, open and close for each day
The Bar Chart
(Continued)
Candle Stick Charting
Candle Stick Charting
(Continued)
• Been around for hundreds of years
• Often referred to as “Japanese Candles”
because the Japanese would use them to
analyze the price of rice contracts
• Similar to bar chart, but uses color to show if
stock was up (green) or down (red) over the day
• More than 20 patterns are used by technicians
for candlestick charting. Some of the most
popular include the following.
Candle Stick Charting
(Continued)
Candle Stick Charting
(Continued)
• Green is an example of a
bullish pattern, the stock
opened at (or near) its
low and closed near its
high
• Red is an example of a
bearish pattern. The
stock opened at (or near)
its high and dropped
substantially to close near
its low
Point and Figure Chart
• Somewhat rare
• Plots day-to-day increases and declines in
price.
• A rising stack of XXXX’s represents
increases
• A rising stack of OOOO’s represents
decreases.
• Typically used for intraday charting
Point and Figure Chart
Point and Figure Chart
(continued)
• Helps to filter out less-significant price
movements allowing analyst to focus on most
important trends
• Used to keep track of emerging price patterns
– No time dimension
• Two attributes affecting the appearance of a
point & figure chart
– Box size
– Reversal amount
Using the Moving Average
• Shows the average value of a security’s price
over a period of time
– Using compared or used in conjunction with EMA
• The most commonly used averages are of
20,30,50, 100 and 200 days
– The longer the time span, the less sensitive the
moving average to daily price changes
– Moving averages are used to emphasize the direction
of a trend and smooth out price and volume
fluctuations (“noise”).
Moving Average
1.Notice in April when
the stock price dropped
well below its 5-day
average (the green
line). Bearish signal
2.February it rose
above its 50-day
average and continued
to rise for several
weeks. Bullish signal
3.Typically, when a
stock moves below its
moving average it is a
bad sign, above it is a
good sign
Moving Averages (Continued)
• What do the different days mean?
– 20 days - choppy line. It isn't the most accurate,
but is probably the most useful for short term
traders.
– 30 day - similar to 20 day but provides a bit more
certainty for the trend.
– 50 day - moving averages provide a much less
volatile, smooth line. This can be used to detect
somewhat longer term trends.
– 100 day - similar to the 50 day, it is less volatile,
and one of the most widely used for long term
trends.
– 200 day - even less volatile, more of a rolling chart
or smooth line. It doesn't react to quick
movements in the stock price therefore it is rarely
used.
Strategies for Moving Averages
• Filters
– Used to increase confidence about an indicator
• No set rules or things to look out for when filtering, just
whatever makes you confident enough to invest your money
• For example you might want to wait until a security crosses
through its moving average and is at least 10% above the
average to make sure that it is a true crossover.
– Remember, setting the percentile too high could result in
"missing the boat" and buying the stock at its peak.
• Another filter is to wait a day or two after the security crosses
over, this can be used to make sure that the rise in the
security isn't a fluke or unsustained.
– Again, the downside is if you wait too long then you could end
up missing some big profits.
Strategies for Moving Averages
(Continued)
• Crossovers
– Not as easy as filtering
– Several different types of crossover's, but all of them
involve two or more moving averages.
• In a double crossover you are looking for a situation where
the shortest MA crosses through the longer one. This is
almost always considered to be a buying signal since the
longer average is somewhat of a support level for the stock
price.
• For extra insurance you can use a triple crossover, whereby
the shortest moving average must pass through the two
higher ones. This is considered to be an even stronger
buying indicator.
Exponential Moving Averages
(EMA)
• Calculated by applying a
percentage of today's
closing price to
yesterday's moving
average value.
• Use an exponential
moving average to place
more weight on recent
prices.
Relative Strength Index (RSI)
• A comparison between the days a stock finishes
up against the days it finishes down.
• Big tool with momentum trading
• Ranges from 0 to 100
– Stock considered overbought around the 70 level
– Stock considered oversold around 30
• The shorter the number of days used to
calculate the more volatile
Relative Strength Index (RSI)
Money Flow Index
• Measures the strength of money flowing
into and out of a stock
• Difference between money flow index and
RSI is that RSI only looks at prices, Money
Flow also looks at volume
• Ranges from 0 to 100
– Overbought at 70
– Oversold at 30
Money Flow Index
Trin statistic
Measures the expectations of groups of investors.
If Trin <1  signals Bull market and
If Trin < 1  signals bear market
Number advancing / Number declining
Trin =
Volume advancing / Volume declining

Volume declining / Number declining


Trin =
Volume advancing / Number advancing
Put/Call ratio
• Put: option to sell
• Call: option to buy

IF #outstanding puts  signals bear mkt


# outstanding calls
Credit balances in brokerage
accounts
• Investors will leave credit balances when
they plan to invest in the future

• As balance increases, they feel market will


decline in future so they will buy

• This signals bull market


Resistance and Support
• Price levels at which movement should stop and
reverse direction.
– Act as floor and ceiling
– Different strengths (major and minor)
• Support
– Price level below the current market price at which
buying interest should be able to overcome selling
pressure and thus keep the price from going any
lower
• Resistance
– Price level above the current market price, at which
selling pressure should be strong enough to
overcome buying pressure and thus keep the price
from going any higher
Resistance and Support
One of two things can happen when stock approaches
resistance/support
• Can act as a reversal • Support/Resistance
point reverse roles once
– When price drops to a penetrated.
support level, it will go – Market price falls
back up below a support level,
then the former
– When price rises to a support level becomes
resistance level, it will a resistance level
go back down when the market later
trades back up to that
level
Resistance and Support
Resistance

Support
Charting Patterns
• Cup and Handle
– Pattern on bar chart as short as 7 weeks or as long
as 65 weeks
– Cup in the shape of a U; Handle has a slight
downward drift
– Right hand side of pattern has low trading volume
– As the stock comes up to test old highs, the stock will
incur selling pressure by the people who bought at or
near the old high
– Selling pressure will take the stock price sideways for
4 days to 4 weeks, then it takes off
Charting Patterns
Head and Shoulders
• Resembles an “M” in which a stock’s price
– Rises to a peak and then declines, then
– Rises above the former peak and again declines, and
then
– Rises again but not the second peak and again
declines
• The first and third peaks are shoulders, and the
second peak forms the head.
• Very bearish indicator
Head and Shoulders
Double Bottom
• Occurs when a stock price drops to a similar
price level twice within a few weeks or months
• The double-bottom pattern resembles a “W”
• Buy when the price passes the highest point in
the handle.
• In a perfect double bottom, the second decline
should normally go slightly lower than the first
decline to create a shakeout of jittery investors
• The middle point of the “W” should not go into
new high ground.
• This is a very bullish indicator
Double Bottom

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