®1999 South-Western College Publishing 1 Chapter 13 Technical Analysis.
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Transcript of ®1999 South-Western College Publishing 1 Chapter 13 Technical Analysis.
1® 1999 South-Western College Publishing
Chapter 13Technical Analysis
2® 1999 South-Western College Publishing
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
3® 1999 South-Western College Publishing
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
4® 1999 South-Western College Publishing
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
5® 1999 South-Western College Publishing
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
6® 1999 South-Western College Publishing
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
7® 1999 South-Western College Publishing
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
8® 1999 South-Western College Publishing
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
9® 1999 South-Western College Publishing
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
10® 1999 South-Western College Publishing
Summary Of ChartsBar Point-Figure Candlestick
Data HighLowClose
Close OpenHighLowClose
Time Days None Days/Weeks
App Trendlines Trendlines Pattern andShapes
11® 1999 South-Western College Publishing
Theoretical Basis Of TA
• Dow TheoryDow Theory
– TrendsTrends
• Moving AveragesMoving Averages
– 5-day5-day
– 200-day200-day
• Relative StrengthRelative Strength
– RSIRSI
12® 1999 South-Western College Publishing
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
13® 1999 South-Western College Publishing
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
14® 1999 South-Western College Publishing
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?
15® 1999 South-Western College Publishing
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
16® 1999 South-Western College Publishing
Advance-Decline Line
ADLADLtt = A = Att - D - Dtt + ADL + ADLt - 1t - 1