Lecture 28

1. Lecture 28 Technical Indicators

2. Moving average • The resulting moving average line supposedly represent the basic trend of stock prices • A comparisons of the current price to the moving average produces a buy or sell signal • Buy signal is generated when actual prices rise through the moving average on high volume, with the opposite applying to a sell signal

3. Use of moving average • Specifically, sell signal is generated when 1.actual price is below the moving average, advances towards it, does not penetrate the average, and starts to turn down again • 2. following a rise, the moving average flattens out or declines Buy signal would be generated if these situations were turned upside down

4. Moving Average Convergence Divergence (MACD) • The MACD is calculated by subtracting a 26-day moving average of a security’s price from a 12-day moving average of its price • When MACD is above zero, it means the 12-day moving average is highe than 26-day moving average • This is bullish trend as it shows that current expectations are more bullish than previous expectations

5. When MACD falls below zero it implies a bearish trend • Buy signal is generated when MACD value has positive value • And sell signal is generated when MACD when MACD is negative value

6. Relative Strength • This technique may be used for stocks or industries analysis • A relative strength is calculated for a stock as a ratio of its price to a market index, or an industry, or the stock’s average price in some previous period • This ratio is plotted on a graph across time • The graph will show the relative strength of the stock to market, industry or whatever

7. The ratio of RS can be plotted on a graph across time • A rising ratio ( an upward-sloping line of RS) indicates that the stock is outperforming the market and is assumed to continue to do so • One rule of thumb is this that a stock is attractive when the relative strengh has improved for at least four months

8. A rising curve of RS will show that the stock is outperforming the market and is assumed to do so in near term • One rule of thumb is that a stock is attractive when its RS has improved for at least four months • Technician use RS first for industries. If an industry is outperforming the market, then RS is calculated for individual stocks in that industry • This way investor narrow down the number of possibilities to be considered

9. One problem with RS is that a stock or group could show increasing RS because it is declining less quickly than the market, not because it is increasing • So RS is not a technique to be used in isolation

10. Relative Sensitive Index • RSI was first introduced by Wells Wilder in 1978 • RSI = 100 – [100 / (1+RS)] • RS= average of upward change in the last 14 days / average of downward price change in the last 14 days • RSI fluctuates between 0 and 100. • It usually tops above 70 and bottoms below 30 • RSI peak indicates overbought levels and suggest price tops • RSI trough denotes oversold levels

11. Stochastic Oscillator • Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator • It shows the location of the current close relative to the high/low range over a set number of periods • The idea behind this indicator is that prices tend to close near their past highs in bull market, and near their lows in bear markets. • This is why investor should stop buying when prices reach their previous high or stop selling when prices drop to their previous lows

12. The Stochastic Oscillator is displayed as two lines. The main line is called %K. The second line, called %D, is a Moving Average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.

13. Calculation

14. %K tells us that the close (115.38) was in the 57th percentile of the high/low range, or just above the mid-point.  • Because %K is a percentage or ratio, it will fluctuate between 0 and 100 • Readings below 20 are considered oversold and readings above 80 are considered overbought