Technical Analysis of Equity Markets

Tridib ChatterjiAl Akhawayn University,Ifrane, Morocco

April 2004

Objectives

Learn a little about: Technical Analysis (TA) the relationship between TA and FA types of graphs Indicators TA vocabulary Trends

What I want From You

Participation Ask questions Answer MY questions Keep your eyes open Laugh at my jokes

To have fun

Let’s talk a little about…

Sheep

Fundamental Analysis Ratio Analysis Analysis of Balance Sheet Analysis of Income Statements SEC Form 10K Sector Analysis Analysis of Indices (NYSE, FTSE,

NASDAQ, etc)

Is that all there is?

You have identified the companies that you want to invest in.

Now what?

Fundamental Analysis (FA) vs. Technical Analysis (TA)

FA = WHAT TA = WHEN

Two sides of the same coin TA = Stock graphs, timeframes and indicators TA = Looking at past and present stock prices

to forecast future prices

Graphing prices Which

would you rather see?

** Historical price from http://finance.yahoo.com

Graphing prices (#2)

Which would you rather see? #2

Types of Graphs (1) Line Graph

Types of Graphs (2) OHLC (Open, High Low, Close)

Types of Graphs (3) Candlesticks

Types of Graphs – Candlesticks 1 Developed by Japanese rice

traders in the 17th century: Price action is more important

than news (What vs. Why) All news is factored into the price Buying and selling happens

through expectations and emotions

Price may not reflect actual value

Types of Graphs – Candlesticks 2

White body = Up day Black body = Down day

Types of Graphs – Candlesticks 3

What do OHLC and Candlesticks Show?

Opening price Closing price Low of the day (LOD) High of the day (HOD)

What’s missing?

More Graphs… What’s missing?

Volume (Very Important!!)

Vocabulary

Indicators – Moving Averages Simple/Exponential Moving Averages:

Building blocks for other indicators Calculated using CLOSING prices Smoothes a data series to spot trends Used over various time periods

(5,10,20,50,200) SMA vs. EMA

SMA gives equal weight to ALL prices EMA gives more weight to RECENT prices

Indicators – Moving Averages (2)

Indicators – Bollinger Bands

Envelope indicator Developed by John Bollinger Used to compare volatility and prices

over a time period 20-period SMA in the middle of the band 20-period SMA + 2 standard deviations

(Upper) 20-period SMA - 2 standard deviations

(Lower)

Indicators – Bollinger Bands (2)

Trends (Dow Theory) Primary Trends:

Can last from a few months to a few years Not usually affected by news

Secondary Trends: Few weeks to a few months Goes against the primary trend

Daily Fluctuations: Affected by news Usually unreliable Used as a building block for longer trends

Trends – Primary Trend

Other indicators Moving Average Convergence

Divergence (MACD) Relative Strength Index (RSI) On Balance Volume (OBV) Stochastics Williams %R Money Flow Index (MFI) And many, many more….

Stock Charting Site

http://www.askresearch.com

Questions?