Chapter 16

Bodie Kane Marcus Perrakis Ryan INVESTMENTS, Fourth Canadian Edition

Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-1Slide 16-1

Chapter 16

Technical Technical AnalysisAnalysis



Chapter Summary

Objective: To examine the basic principles of technical analysis and show how they relate to the efficient market hypothesis.

Charting Technical indicators



An attempt to exploit recurring and predictable patterns in stock prices

Technicians’ beliefs: Shifts in market fundamentals can be

discerned before their impact is fully reflected in prices

Market fundamentals can be perturbed by irrational factors

These presumptions are in contradiction with the weak form of the EMH

Technical Analysis



The Dow theory Primary trend Secondary or intermediate trends Tertiary or minor trends Support and resistance levels

Recent variations The Elliot wave theory The theory of Kondratieff waves

Charting



Point and figure charts The figure has no time dimension It traces significant upward or downward

moves in stock prices

Candlestick charts Used to summarize price data Aid in identification of trends

Other Charting Techniques



Summary Reminder

Objective: To examine the basic principles of technical analysis and show how they relate to the efficient market hypothesis.

Charting Technical indicators



Sentiment indicators Flow of funds indicators Market structure indicators

Technical Indicators



Trin statistic

Sentiment indicators

or:

decliningVolume/advancingVolumedecliningNumber/advancingNumber

Trin

advancingNumber/advancingVolumedecliningNumber/decliningVolume

Trin



Odd-Lot trading Confidence Index Put/Call ratio Mutual fund cash position

Sentiment Indicators (cont’d)



Short interest – total number of shares of stock currently sold short in the market Some technicians interpret high levels of

short interest as bullish, some as bearish

Credit balances in brokerage accounts

Flow of Funds Indicators



Moving averages Breadth

The most common measure – the spread between the number of stocks that advance and decline in price

Relative strength The ratio of the price of the security to a

price index for the industry

Market Structure Indicators



Value Line ranks 1,700 publicly traded stocks according to their anticipated 12 months price appreciation.

Components of the stock ranking procedure: Relative earnings momentum Earnings surprise A value index

The Value Line System



Self-destructing patterns Once a useful technical rule is discovered, it

ought to be invalidated once the mass of traders attempts to exploit it

A new view of technical analysis Brown and Jennings propose a more

complex framework than the EMH They envision an economy where many

investors have private information regarding the value of a stock

Can Technical Analysis Work?

Chapter 16

Documents

Transcript of Chapter 16