1® 1999 South-Western College Publishing

Chapter 13Technical Analysis

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Technical Analysis As An Art

• Prices are Determined by Investors’ AttitudesPrices are Determined by Investors’ Attitudes

– Prices move in trendsPrices move in trends

• Changing Attitude TowardChanging Attitude Toward

– Economic forcesEconomic forces

– Monetary forcesMonetary forces

– Political forcesPolitical forces

– Psychological forcesPsychological forces

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Technical Analysis As A Science

• Study of the Action of the MarketStudy of the Action of the Market

• Science of Recording in Graphic FormScience of Recording in Graphic Form

– Price changes, volume, highs and lows,…Price changes, volume, highs and lows,…

– The averages of aboveThe averages of above

• Deducing the Probable Future TrendDeducing the Probable Future Trend

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Is Technical Analysis An Art Or Science?

• ArtArt

– Martin J. PringMartin J. Pring

• ScienceScience

– Robert D. Edwards and John MageeRobert D. Edwards and John Magee

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Is There Any Empirical Evidence To Support Technical

Analysis (TA)?• Patterns in Security PricesPatterns in Security Prices

– Fall one week, bounce back next weekFall one week, bounce back next week

– Monthly returns over a long timeMonthly returns over a long time

– Seasonal patternsSeasonal patterns

• January effect (Chapter 12)January effect (Chapter 12)

• Resent Research Merits Resent Research Merits TATA

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Charting• Bar ChartsBar Charts

– Illustrates each daysIllustrates each days• High, low, and closing priceHigh, low, and closing price

– Looks at stock price behavior over timeLooks at stock price behavior over time• Point-and-Figure ChartsPoint-and-Figure Charts

– Identifies stock price reversals Identifies stock price reversals – Does not consider timeDoes not consider time

• Candlestick ChartsCandlestick Charts– Illustrates each daysIllustrates each days

• Opening, high, low, and closing priceOpening, high, low, and closing price

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Bar Charts• TrendlineTrendline

– Drawn on chart to identify trendDrawn on chart to identify trend

• ChannelChannel

– Pattern formed by 2 trendlinesPattern formed by 2 trendlines

• ResistanceResistance

– Downward price movementDownward price movement

• SupportSupport

– Upward price movementUpward price movement

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Point-And-Figure Charts

• A Series of Xs and OsA Series of Xs and Os

• Same as Bar ChartsSame as Bar Charts

• Popular ToolPopular Tool

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Candlestick Chart• Candlestick LineCandlestick Line

– Real bodyReal body• Difference between opening and closing Difference between opening and closing

priceprice– ShadowShadow

• Vertical line identifying the high and low Vertical line identifying the high and low priceprice

– Can be constructed with Different Time DataCan be constructed with Different Time Data• IntradayIntraday• WeeklyWeekly

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Summary Of ChartsBar Point-Figure Candlestick

Data HighLowClose

Close OpenHighLowClose

Time Days None Days/Weeks

App Trendlines Trendlines Pattern andShapes

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Theoretical Basis Of TA

• Dow TheoryDow Theory

– TrendsTrends

• Moving AveragesMoving Averages

– 5-day5-day

– 200-day200-day

• Relative StrengthRelative Strength

– RSIRSI

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Dow Theory

• Primary TrendPrimary Trend

– Cycle in years Cycle in years

• Intermediate TrendIntermediate Trend

– 3 Weeks to 6 months3 Weeks to 6 months

• Short-Term TrendShort-Term Trend

– Volatile and erraticVolatile and erratic• Basic Tenets Basic Tenets next slidenext slide

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Basic Tenets Of Dow Theory

• Requires Data on Stock IndexesRequires Data on Stock Indexes

– No additional informationNo additional information

• Types of Financial Market MovementsTypes of Financial Market Movements

– PrimaryPrimary

– IntermediateIntermediate

– Short-termShort-term

• Positive Relationship BetweenPositive Relationship Between

– TrendTrend

– Volume of shares tradedVolume of shares traded

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RSI• Range From 0% to 100%Range From 0% to 100%

• HighHigh

– Industry stock prices outperform the Industry stock prices outperform the marketmarket

– Indicate a sell signal? Indicate a sell signal? Buy signal?Buy signal?

• Low Low The trend is your friend!The trend is your friend!

– Market outperforming the industry stockMarket outperforming the industry stock

– Indicates a buy signal? Indicates a buy signal? Sell signal?Sell signal?

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Technical Indicators• Breadth IndicatorsBreadth Indicators

– Advance-decline line (Advance-decline line (ADLADL))– VolumeVolume– New high/new lowNew high/new low

• Sentiment IndicatorsSentiment Indicators– Stock market newsletterStock market newsletter– Odd-lot tradingOdd-lot trading– Put/call tradingPut/call trading– Specialists short sellingSpecialists short selling

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Advance-Decline Line

ADLADLtt = A = Att - D - Dtt + ADL + ADLt - 1t - 1