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Pattern Recognition and the stock market

Pattern Recognition and the stock market. Is it possible to predict future prices of stocks?. The 2 types of analyses of the market. There are two major analysis methods. Fundamental analysis (also known as quantitative analysis) Technical analysis. Fundamental analysis.

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Pattern Recognition and the stock market

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  1. Pattern Recognition and the stock market Is it possible to predict future prices of stocks? Dr. Henrick Jeanty

  2. The 2 types of analyses of the market • There are two major analysis methods. • Fundamental analysis (also known as quantitative analysis) • Technical analysis Dr. Henrick Jeanty

  3. Fundamental analysis • A method of evaluating a stock by attempting to measure its intrinsic value. Fundamental analysts study everything from the overall economy and industry conditions, to the financial condition and management of companies. • In other words, fundamental analysis is about using real data to evaluate a stock's value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. Dr. Henrick Jeanty

  4. Technical analysis • Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time. Dr. Henrick Jeanty

  5. The three basic principles of Technical Analysis • Price Discounts Everything • Prices move in trends • History repeats itself Dr. Henrick Jeanty

  6. 1. Price discounts everything • Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, and … • Stock Market Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future. Dr. Henrick Jeanty

  7. 2. Prices Move in Trends • Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend. Dr. Henrick Jeanty

  8. 3. History Repeats Itself • Technical analysts believe that investors repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions Dr. Henrick Jeanty

  9. A stock chart. The DJI Dr. Henrick Jeanty

  10. Candlestick • A graphical way to represent the price movement of a stock during a fixed period of time. • It depicts the opening price, the high price, the low price and the closing price for the period of time of interest • The period can be as small as 1 minute and as long as a quarter (3 months) Dr. Henrick Jeanty

  11. Anatomy of a candlestick • The 2 types of candles Dr. Henrick Jeanty

  12. Retracement • After a stock has gained value, there is a tendency for the stock to give back some of the gains in what is called a retracement. • After a stock has lost value, there is a tendency for the stock to recoup some of the losses in what is also called a retracement Dr. Henrick Jeanty

  13. The Jeanty Buy pattern • Phase 1. Look for a downward price movement. • Phase 2. Look for an upward retracement that bounces one or more times off the 38%, 50% or 62% retracement levels. • Phase 3. Look for a resumption of the downward price movement and a bounce off the 38%, 50% or 62% extension price levels. • Phase 4. If you buy the stock at the confirmation of the bounce, expect the target price to be the 0% extension (or equivalently, the 0% retracement) which is the bottom of the downward price move seen in Phase 1. Dr. Henrick Jeanty

  14. Extensions • After a downward or upward move and associated retracement, the downward or upward trend may resume. Price levels corresponding to an extension of the original trend are called extensions. For instance, the 50% extension represents the price that would be reached if you were to add half the value of the original movement to the original move. Dr. Henrick Jeanty

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  16. The Jeanty sell pattern • Phase 1. Look for an upward price movement. • Phase 2. Look for a downward retracement that bounces one or more times off the 38%, 50% or 62% retracement levels. • Phase 3. Look for a resumption of the upward price movement and a bounce off the 38%, 50% or 62% extension price levels. • Phase 4. If you sell (or short) the stock at the confirmation of the bounce, expect the stock to move down to the 0% extension (or equivalently, the 0% retracement) which is the top of the upward price move seen in Phase 1. Dr. Henrick Jeanty

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  18. Is this true? Dr. Henrick Jeanty

  19. The next step Dr. Henrick Jeanty

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  21. Wal-mart Dr. Henrick Jeanty

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  24. Detailed Analysis of the DOW over the last weeks Dr. Henrick Jeanty

  25. First pattern Dr. Henrick Jeanty

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  37. Scales • These patterns occur at all scales: • They occur at intraday, daily, weekly and monthly scales. • Following is a chart of these patterns at an intraday scale for Microsoft Dr. Henrick Jeanty

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  39. Do events affect stocks? Dr. Henrick Jeanty

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  44. Were there patterns giving out signals recently? (Oct. 2008) • Yes there were. Google produced 3 Buy patterns and Buy signals. • One on July 21, 2008 • One on September 10, 2008 • One on October 8, 2008 Dr. Henrick Jeanty

  45. Google: Buy signal July 21, 2008 Dr. Henrick Jeanty

  46. Google: Buy signal September 10, 2008 Dr. Henrick Jeanty

  47. Google: Buy signal October 8, 2008 Dr. Henrick Jeanty

  48. Google: What happened after those Buy signals? • Remembering that the target prices are the bottom of the red rectangles we have the following Buy prices (assuming buying at the close on the day of the signal), target prices and potential percentage gains: • July 21: Buy:$468.80 Target:$501.10 Potential %Gain: 6.89% • Sept.10: Buy:$414.16 Target:$461.90 Potential %Gain:11.53% • Oct. 8: Buy:$338.11 Target:$380.71 Potential %Gain:12.60% Dr. Henrick Jeanty

  49. Did GOOG actually reach those target prices? • To answer the question we simply need to look at the days following the buy signals. Dr. Henrick Jeanty

  50. What happened after July 21, 2008? Dr. Henrick Jeanty

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