TECHNICAL ANALYSIS LECTURE THURSDAY MBA CLASS

What Is Technical Analysis? • Technical analysis is a method of evaluating

securities by analyzing the statistics generated by market activity, such as

a) past prices b) volume . • Technical analysts do not attempt to measure a

security's intrinsic value• Technical analysts instead use charts and other

tools to identify patterns that can suggest future activity.

What Is Technical Analysis?

• The field of technical analysis is based on three assumptions:

1. The market discounts everything. 2. Price moves in trends. 3. History tends to repeat itself. technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company

. The Market Discounts Everything

• Technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company

• Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately

2. Price Moves in Trends

• In technical analysis, price movements are believed to follow trends

• after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it.

3.History Tends To Repeat Itself

• history tends to repeat itself, mainly in terms of price movement.

• The repetitive nature of price movements is attributed to market psychology.

• market participants tend to provide a consistent reaction to similar market stimuli over time.

• Technical analysis uses chart patterns to analyze market movements and understand trends

Dow Theory

• The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis today.

• Dow created the Industrial Average, of top blue chip stocks.

• a second average of top railroad stocks (now the Transport Average)

Dow Theory

• The theory is based on the existence of three types of price movements 1.Primary moves is a broad market movement

that lasts for years 2.Secondary moves ,occurring within the

primary moves which represent interruptions lasting several weeks or months

3.Day to day moves occurring randomly around the primary and secondary moves

Dow theory

• The bull and bear market are the two terms coined by the theory

• The bull market refers to an upward primary move

• The bear market refers to downward primary movement .

Primary Movements have Three Phases

The following general conditions in the market prevail in the market

1. Bull markets• Bull markets commence with reviving confidence

as business conditions improve.• Prices rise as the market responds to improved

earnings• Rampant speculation dominates the market and

price advances are based on hopes and expectations rather than actual results

Primary Movements have Three Phases

2. Bear markets• Bear markets start with abandonment of the

hopes and expectations that sustained inflated prices.

• Prices decline in response to disappointing earnings.

• Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value

Primary Movements have Three Phases

3.Ranging Markets• A secondary reaction may take the form of a

‘line’ which may endure for several weeks.• Price fluctuates within a narrow range of

about five per cent.