Employing Technical Analysis

Technical Analysis (TA)

• Fundamental analysis: Analyzing business fundamentals using financial statements, valuation models, etc

• Technical analysis: Analyzing stock charts by identifying patterns in the stock price caused by supply and demand

The Keys to TA

• Price and Volume• The result 10,000 decisions, graphed

• Everything else is derived from those two

Supply and Demand

• The magnitude of the move is determined by supply/demand factors

• Impacted by the float size, type of shareholders

• In the short run, supply/demand imbalance

• can be caused by fundamentals

• can supersede fundamentals

Supply and Demand

• Supply/demand sweet spot:

• Owning a stock with a low float that is being accumulated by large funds

• Stated float vs. effective float

• What will cause investors to hoard or dump this stock?

Supply and Demand

Sentiment Cycles

Sentiment Cycles

Sentiment Cycles

Toolbox and Examples

• Price patterns• Support & resistance – trend lines (ASPS, BX)

• Bottoming (BAC, OZM, BX, Silver)• Topping (AAPL, TZOO, Silver, S&P 500)

• Continuation (ROP)• Volume patterns• Indicators

• Moving averages• Stochastics / MACD / RSI

Fundamentals & Momentum• Fundamentals should drive long term price

• Effect of earnings surprises and rising consensus earnings estimates

• Momentum may wane as investors await next catalyst

• Price response to news is important indicator

• Overbought vs oversold• Correction by time or price

Entry Checklist

• Price patterns:• Bottom: Losing downside momentum (double bottom, higher low, successful test of trendline, etc)

• Breakout: Upside breakout after basing/consolidating (continuation patterns, rectangular breakout, etc)

• Volume patterns:• Bottom: Declining volume on down days

• Breakout: >Avg volume on breakout, up days

Exit Checklist

• Price patterns:• Top: Losing upside momentum (double top, lower high, etc)

• Breakdown: Breakdown after basing/consolidating (continuation patterns, channels, etc)

• Volume patterns:• Top: Higher volume on down days, declining volume on up days

• Breakdown: >Avg volume on breakdown