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Chapter 13 Technical Analysis

Chapter 13 Technical Analysis. Underlying Assumptions of Technical Analysis. 1. The market value of any good or service is determined solely by the interaction of supply and demand. 2. Supply and demand are governed by numerous factors, both rational and irrational.

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Chapter 13 Technical Analysis

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  1. Chapter 13 Technical Analysis

  2. Underlying Assumptions of Technical Analysis 1. The market value of any good or service is determined solely by the interaction of supply and demand. 2. Supply and demand are governed by numerous factors, both rational and irrational.

  3. Underlying Assumptions of Technical Analysis 3.The prices for individual securities and the overall value of the market tend to move in trends. 4.Prevailing trends change in reaction to shifts in supply and demand relationships 5.These shifts can be detected in the action of the market

  4. Technical View of Price Adjustment to New Information Exhibit 13.1

  5. Advantages of Technical Analysis • Not heavily dependent on financial accounting statements • Problems with accounting statements: 1. Lack information needed by security analysts 2. GAAP allows firms to select reporting procedures, resulting in difficulty comparing statements from two firms 3. Non-quantifiable factors do not show up in financial statements

  6. Advantages of Technical Analysis • 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 their prices as quickly

  7. Challenges to Technical Analysis • Assumptions of Technical Analysis • Empirical tests of Efficient Market Hypothesis (EMH) show that prices do not move in trends

  8. Technical trading rules • The past may not be repeated • Patterns may become self-fulfilling prophecies (預言) • A successful rule will gain followers and become less successful • Rules require a great deal of subjective judgement.

  9. Technical Trading Rules and Indicators • Stock cycles typically go through a peak and trough(低谷) • Analyze the following chart of a typical stock price cycle and we will show a rising trend channel, a flat trend channel, a declining trend channel, and indications of when a technical analyst would want to trade

  10. Typical Stock Market Cycle Stock Price Exhibit 13.2

  11. Typical Stock Market Cycle Stock Price Exhibit 13.2 Declining Trend Channel Peak Flat Trend Channel Sell Point Rising Trend Channel Declining Trend Channel Buy Point Buy Point Trough Trough

  12. Contrary-Opinion • Many analysts rely on rules developed from the hypothesis that the majority of investors are wrong as the market approaches peaks and troughs • Technicians try to determine whether investors are strongly bullish or bearish and then trade in the opposite direction • These positions have various indicators

  13. Contrary-Opinion Rules • Mutual fund cash positions • Credit balances in brokerage accounts • Investment advisory opinions • OTC versus NYSE volume • Chicago Board Options Exchange (CBOE) put/call ratio • Futures traders bullish on stock index futures

  14. Time-Series Plot of Dow Jones Industrial Average and the Bullish and Bearish Advisory Services (1) Exhibit 13.3

  15. Time-Series Plot of Dow Jones Industrial Average and the Bullish and Bearish Advisory Services (2) Exhibit 13.3

  16. Time-Series Plot of Dow Jones Industrial Average and the Bullish and Bearish Advisory Services (3) Exhibit 13.3

  17. Follow the Smart Money • Indicators showing behavior of sophisticated investors • The Barron’s Confidence Index • T-Bill - Eurodollar yield spread • Short sales by specialists • Debit balances in brokerage accounts (margin debt)

  18. Other Market Indicators • Breadth of market • Advance-decline • Diffusion index • Short interest • Stocks above their 200-day moving average • Block uptick-downtick ratio

  19. Stock Price and Volume Techniques • The Dow theory – oldest technical trading rule • 1. Major trends are like tides in the ocean • 2. Intermediate trends resemble waves • 3. Short-run movements are like ripples • Importance of volume • Ratio of upside-downside volume • Support and resistance levels • Moving average lines

  20. Stock Price and Volume Techniques • Relative-strength (RS) ratios • For individual stocks and industry groups • Bar charting • Multiple indicator charts • Point-and-figure charts • Overall feel from a consensus of numerous technical indicators

  21. Sample Bullish Price Pattern Exhibit 13.8

  22. Daily Stock Prices for Stryker Corp. with Indications of Support and Resistance Levels Exhibit 13.9

  23. Daily Stock Prices for Concord EFS with 50-Day and 200-Day Moving Average Lines and a 14-Day Relative Strength Index Compared to the S&P 500 Index Exhibit 13.10

  24. How to Read Industry Group Charts Exhibit 13.11

  25. A Typical Bar Chart Exhibit 13.12

  26. Sample Point-and-Figure Chart Exhibit 13.13

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