PM final ppt.PPT

7/28/2019 PM final ppt.PPT

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INVESTMENTS


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Chapter 16

Technical Analysis


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Define technical analysis and explain why it is

used.

Describe the major techniques used intechnical analysis.

Discuss the limitations of technical analysis.

Learning Objectives


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Use of published market data for analysis of

both aggregate stock prices and individual

stocks

May produce insight into the psychologicaldimensions of the market

Used by investors and investment advisory

firms Oldest approach to stock selection

What is Technical Analysis?


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Prices move in trends determined by changing

attitudes of investors

Identify change in trend at an early stage and

maintain investment posture until evidenceindicates otherwise

Market itself is the best source of data about

trends Data includes prices, volume, and technical

indicators

Technical Approach


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Technicians disagree with fundamental analysis

because they believe it is extremely difficult to

estimate intrinsic value and to obtain and

analyze information consistently Technicians believe market data indicates forces

of demand and supply

Record of investor mood that can be detected

and is likely to continue

Technical Approach


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Use of graphs, charts, and technical trading

rules and indicators

Price and volume are primary tools of the pure

technical analyst Technicians use charts to identify trends and

patterns in stock prices that provide trading

signals

Volume data used to gauge market condition

and to assess its trend

Tools For Technical Analysis


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Charts Of Price Patterns

Trend lineA line on the chart of a security indicating the general direction in whichthe securitys price is moving .

Support levelA price range at which a technician expects a significant increase in the

demand for a stock.

Resistance levelA price range at which a technician expects a significant increase in the

supply for a stock.


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Bar Chart

A plot of daily stock price plotted

Against time, having price on the

Vertical and time on the horizontal

Axis. The technician use these

charts to predict future price

moves.


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Point and Figure chart

Point and figure (P&F) is a

charting technique used

in technical analysis. Point and

figure charting is unique in that it

does not plot price against time as

all other techniques do. Instead itplots price against changes in

direction by plotting a column of Xs

as the price rises and a column of

Os as the price falls
http://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Technical_analysis


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The theory was derived from 255 Wall Street

Journal editorials written byCharles H.

Dow (18511902), journalist, founder and first

editor of the Wall Street Journal and co-founderof Dow Jones and Company. Following Dow's

death, William Peter Hamilton, Robert Rhea

and E. George Schaefer organized and

collectively represented Dow theory, based onDow's editorials.

The Dow Theory


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Based on three types of price movements

Primary move: a broad market movement that lasts

several years

Secondary moves: occurring within primary move,lasting several weeks or months

Day-to-day moves: occurring randomly around

primary and secondary moves

Bull (bear) market refers to upward (downward)primary move

The Dow Theory


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Bull market occurs when successive rallies

penetrate previous highs

Declines remain above previous lows

Bear market occurs when successive rallies fail

to penetrate previous highs

Declines penetrate previous lows

Secondary moves called technical corrections Day-to-day ripples are of minor importance

The Dow Theory


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Used for analyzing both the overall market and

individual stocks

Used specifically to detect both the direction

and rate of change New value for moving average calculated by

dropping earliest observation and adding latest

observation to the average

Comparison to current market prices producesbuy or sell signal

Moving Averages


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Ratio of a stocks price to a market or industry

index

Ratios plotted to form graph ofrelative price

across time Rising (falling) ratio indicates relative strength

(weakness)

What if a stock is declining less quickly than the

market?

Relative Strength


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Advance-Decline Line

Measures the net difference between number of

stocks advancing and declining

Plot of running total across time is compared to astock average to analyze any divergence

Divergence implies trend changing

Number hitting new highs (lows)

High trading volume regarded as bullish

Breadth Indicators


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Based on contrary opinion

Mutual funds, viewed like odd-lotters, assumed

to act incorrectly before a market turning point

Low liquidity implies funds fully invested (bullish)

and market is near or at peak

High liquidity implies funds are bearish

Considered a good time to buy

Mutual Fund Liquidity


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Speculators buy calls (puts) when stock

prices expected to rise (fall)

Rise (fall) in ratioof put option purchases to

call option purchases indicates pessimism(optimism)

Buy (sell) signal to a contrarian

Extreme readings (below .7 or above .9)

convey trading information

Put/Call Ratio


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Thorough tests of technical analysis have failed

to confirm their value, given all trading costs and

the alternatives, such as a buy-and-holdstrategy

Several interpretations of each technical tool

and chart pattern are not only possible, butusual

Conclusions about Technical

Analysis


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Strong evidence exists suggesting that stock

price changes are weak-form efficient

Impossible to test all techniques of technical

analysis

Regardless of evidence, technical analysis

remains popular with many investors

Conclusions about Technical

Analysis

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