Technical analysis is the attempt to forecast stock prices on the basis of market-derived data.

Technicians (also known as quantitative analysts or chartists) usually look at price, volume and psychological indicators over time. They are looking for trends and patterns in the data that indicate future price movements.

Technical analysis involves the development of trading rules based on past price and volume data for individual stocks and the overall stock market. Fundamental analysis involves economic, industry, and company analysis that lead to valuation estimates for companies, which can then be compared to market prices to aid in investment decisions.

Charting Stocks
Bar Charts and Japanese Candlestick Charts Point and Figure Charts

Major Chart Patterns Price-based Indicators Volume-based Indicators Dow Theory Elliot Wave

Chartists use bar charts, candlestick, or point and figure charts to look for patterns which may indicate future price movements. They also analyze volume and other psychological indicators (breadth, % of bulls vs % of bears, put/call ratio, etc.). Strict chartists dont care about fundamentals at all.

Each bar is composed of 4 elements:

Open High Low Close
High Close Open High

Note that the candlestick body is empty (white) on up days, and filled (some color) on down days Note: You should print the example charts (next two slides) to see them more clearly

Open Low Low

Close

Standard Bar Chart

Japanese Candlestick

Standard Bar Chart

Japanese Candlestick

This is a bar (open, high, low, close or OHLC) chart of AMAT from early July to mid October 2001.

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

This is a Japanese Candlestick (open, high, low, close) chart of AMAT from early July to mid October 2001

Point & Figure charts are independent of time. An X represents an up move. An O represents a down move. The Box Size is the number of points needed to make an X or O. The Reversal is the price change needed to recognize a change in direction. Typically, P&F charts use a 1-point box and a 3point reversal.

X X X XO X XO XO O XO O X

Somewhat rare Plots day-to-day increases and declines in price. A rising stack of XXXXs represents increases A rising stack of OOOOs represents decreases. Typically used for intraday charting If used for multi-day study, only closing prices will be used

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

Granville believed that volume leads price. To use OBV, you generally look for OBV to show a change in trend (a divergence from the price trend). If the stock is in an uptrend, but OBV turns down, that is a signal that the price trend may soon reverse.

Bollinger bands were created by John Bollinger Bollinger Bands are based on a moving average of the closing price. They are two standard deviations above and below the moving average. A buy signal is given when the stock price closes below the lower band, and a sell signal is given when the stock price closes above the upper band. In my experience, the buy signals are far more reliable than the sell signals.

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

Resistance/Suppor t

Support

Resembles an M in which a stocks 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

This formation is characterized by two small peaks on either side of a larger peak. This is a reversal pattern, meaning that it signifies a change in the trend.

H&S Top
Head

Left Shoulder

Right Shoulder

Neckline

H&S Bottom
Neckline

Left Shoulder

Right Shoulder

Head

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

There are three basic kinds of trends:

An Up trend where prices are generally increasing. A Down trend where prices are generally decreasing. A Trading Range.

1- SIMPLE MOVING AVERAGE-A simple moving average is formed by computing the average price of a security over a specific number of periods. Most moving averages are based on closing prices 2- EXPONENTIAL MOVING AVERAGE-it is same as simple moving average but it give more weightage to the current change in price. EMA: {P - EMA(previous day)} x S + EMA(previous day) Where, P=PRICE S=(2 / (Time periods + 1) =smoothing constant

MACD was developed by Gerald Appel as a way to keep track of a moving average crossover system.

MACD involve comparing of a short term moving average,say 50 days moving average,with long term moving average say a 200 day moving average -if short term moving average is higher than long term moving average ,it is bullish in nature -if short term moving average is lower than long term moving average ,it is bearish in nature

Triangles are continuation formations. Three flavors:

Ascending Descending Symmetrical

Ascending

Symmetrical Symmetrical

Descending

Rounding formations are characterized by a slow reversal of trend.

Rounding Bottom

Rounding Top

This theory was first stated by Charles Dow in a series of columns in the WSJ between 1900 and 1902. Dow (and later Hamilton and Rhea) believed that market trends forecast trends in the economy. A change in the trend of the DJIA must be confirmed by a trend change in the DJTA in order to generate a valid signal.

Primary Trend

Secondary Trend

Called the tide by Dow, this is the trend that defines the long-term direction (up to several years). Others have called this a secular bull or bear market. Called the waves by Dow, this is shorter-term departures from the primary trend (weeks to months) Not significant in Dow Theory

Day to day fluctuations

R.N. Elliot formulated this idea in a series of articles in Financial World in 1939. Elliot believed that the market has a rhythmic regularity that can be used to predict future prices. The Elliot Wave Principle is based on a repeating 8wave cycle, and each cycle is made up of similar shorter-term cycles (Big fleas have little fleas upon their backs to bite 'em - little fleas have smaller fleas and so on ad infinitem). Elliot Wave adherents also make extensive use of the Fibonacci series.

5 B A 3 4 1 2 C

Put/Call Ratio: Ratio normally hovers around 65%.

Rising ratio investors should be bearish? Rising ratio investors should be bullish? More cash bearish?

Mutual Fund Cash Positions

 Market Volume: Higher volume gives strong confirmation

to price trend.

Volume declining/ Number declining Trin Volume advancing/Number advancing

Trin>1: Bear Market; Trin<1: Bull Market

 Short Interest: The volume of short selling

High volume investors should be bearish. Low volumeinvestors should be bullish.

or
High volume investors should be bullish. Low volumeinvestors should be bearish.

Breadth: The spread between the number of advancing issues and the
number of declining issues.

Advances > declines bullish

Advances < declines bearish

Unlike fundamental analysis, technical analysis is not heavily dependent on financial accounting statements
Problems with accounting statements: Lack information needed by security analysts Many psychological and other non-quantifiable factors do not show up in financial statements

Fundamental analyst must process new information and quickly determine a new intrinsic value, but technical analyst merely has to recognize a movement to a new equilibrium Technicians trade when a move to a new equilibrium is underway but a fundamental analyst finds undervalued securities that may not adjust to correct prices as quickly

Challenges to basic assumptions

Empirical tests of Efficient Market Hypothesis (EMH) show that prices do not move in trends

Challenges to technical trading rules

Rules that worked in the past may not be repeated Patterns may become self-fulfilling prophecies A successful rule will gain followers and become less successful Rules all require subjective judgment