2. • It involves the examination of past data
market such as prices and the volume
trading, which leads to an estimate of
future trends, and therefore, an
investment decision.
• An alternative method of making the
investment decision and answering the
questions: “What securities should an
investor buy or sell? When should these
investments be made?”
3. • Uses data from the
market itself.
• Believe the past price
movements will signal
future price
movements.
• Believe that change in
price trend may predict
a forthcoming change
in the fundamental
variables .
• Such as earnings and
risk before the change
is perceived by most
fundamentals analyst.
4. • Market value of any good or service is
determined solely by the interaction of supply
and demand.
• Supply and demand are governed by
numerous rational and irrational factors.
5. • Disregarding the minor fluctuations,
the prices for individual securities and
the overall value of the market tend to
move in trends, which persist for
appreciable lengths of time.
• Prevailing trends change in direction to
shifts in supply and demand
relationships.
6. • Not heavily dependent on financial
accounting statements.
1) Lack of great deal of information
needed by security analyst.
7. 2) According to GAAP (Generally Accepted
Accounting Principles), corporations
may chose among several procedures
for reporting expenses, assets, and
liabilities.
3) Many psychological factors and other
nonquantifiable variables do not appear
in financial statements.
8. 1. Challenges to Technical Analysis
Assumptions; and
2. Challenges to Technical Trading
Rule.
9. • Major challenge to technical analysis is
based on the results of empirical test
of the efficient market hypothesis
(EMH).
10. • Obvious challenge of technical analysis
is that price patterns or relationship
between specific market variables and
stock prices may not be repeated.
• Others critic contend that many price
patterns become self-fulfilling
prophecies.
11. • The success of particular trading will
encourage many investors to adopt it.
If numerous investors focus on a specific
technical trading rule:
• Some of them will attempt to anticipate
the price pattern; and
• Either ruin the expected historical pattern
or eliminate profits for most traders by
causing the price to change faster than
expected.
12. • Graph begins with the end of a
declining(bear) market that finishes in
a trough.
• Followed by an upward trend that
breaks through the declining trend
channel.
• Confirmation that the declining trend
has reversed would be a buy signal.
13. • The analyst would then expect the
development of a rising trend channel.
• As along as the stock price stayed in this
rising channel, the technician would
hold the stock(s).
• Ideally, they want to sell at the peak of
the cycle, but they cannot identify a
peak until after the trend changes.
14. • If the stock (or the market) begins trading
in a flat pattern, it will necessarily break
out of its rising trend channel.
• At this point, some technical analyst would
sell, but most would hold to see if the stock
experiences a period of consolidation and
then breaks out of the flat trend channel
on the upside and begins rising again.
15. • Alternatively, if the stock were to break
out of the channel on the downside, the
technician would take this as a sell
signal and would expect a declining
trend channel.
• The next buy signal would come after
the trough when the price breaks out of
the declining channel and establishes a
rising trend.
17. • These technicians try to determine
when the majority of investors is either
strongly bullish or bearish and then
trade in the opposite direction.
18. • Mutual Fund Cash Positions
• Credit Balances in Brokerage Accounts
• Investment Advisory Opinions
• NASDAQ versus NYSE Volume
• Chicago Board Option Exchange (CBOE)
Put-Call Ratio
• Futures Traders Bullish on Stock-Index
Futures
19. • Mutual Funds hold some part of their
portfolio in cash for one of several reasons:
1. They need cash to liquidate shares
submitted by fundholders.
2. New investment in the mutual fund
may not have been invested.
3. Portfolio manager might be bearish on
the market and want to increase the
fund’s defensive cash position.
20. • Believe that mutual funds usually are
wrong at peaks and troughs.
• Watch for the mutual fund cash position
to approach one of the extremes and
act contrary to the mutual fund.
• In buy-sell decision, high cash position
is a bullish indicator because of
potential buying power.
21. • Credit balance result when investors sell
stocks and leave the proceeds with their
brokers, expecting to reinvest them
shortly.
• Technical analyst view these credit
balances as potential purchasing power.
• A decline in this balances is considered
bearish.
22. • Believe that if a large proportion of
investment advisory services are
bearish, this signals the approach of a
market trough and the onset of a bull
market.
• Specified in terms of the percent of
advisory services that is bearish/bullish
given the number of services expressing
an opinion.
23. reading
indicates a major market bottom (a
bullish indicator).
reading
suggest a major market top ( a bearish
signal).
24. • Considered a measure
of speculative activity.
• Speculative trading
typically peaks at
market peak.
decision rule was in
terms of specific
percentage where:
- considered
heavy speculative
trading and an
overbought market.
- considered low
speculative trading and
an oversold market.
25. Percentages kept
increasing because
of faster growth in
NASDAQ trading and
dominance of the
NASDAQ market by
a few large-cap
stocks.
To detect excess
speculative activity
by using the
direction of the
volume as a guide.
26. • Contrary-opinion technicians use put
options, as signals of a bearish
attitude.
• Higher put-call ratio indicates a
pervasive bearish attitude for
investors, which technicians consider a
bullish indicator.
27. These technicians consider it:
more than 70% of the speculators are
bullish; and
this ratio declines to 30% or lower.
28. • Confidence Index
• T-Bill-Eurodollar Yield Spread
• Debit Balances in Brokerage Account
(Margin Debt)
29. • Measures the change in yield spread
over time between high-grade bonds
and a large cross-section of bond.
• Technicians believe that ratio is a
bullish indicator.
30. • A popular measure of investors
attitude or confidence on a global
basis.
• This spread widens as the smart money
flows to safe-haven U.S. T-bills, which
cause a decline in this ratio.
31. • Represent borrowing (margin debt) by
knowledgeable investors from their
brokers.
• Indicate the attitude of sophisticated
investors who engage in margin
transactions.
32. • An increase in debit balances implies
buying by this sophisticated investors and
is considered a bullish sign; and
• A decline in debit balances would indicate
selling and would be a bearish indicator.
• Technicians can only look for changes in
the trend of borrowing– that is increases
are bullish, declines are bearish.
33. • Breadth of Market
• Stocks above their 200-Day Moving
Average
34. • Measures the number of issues that
have increased each day and the
number of issues that have declined.
• Helps explain in a change of direction in
a composite market index.
35. • Technicians often compute moving
average of an index to determine its
general trend.
• Used as an indicator of general
investor sentiment.
36. Market is considered overbought and
subject to negative correlation.
The market is considered to be oversold,
which means investor should expect a
positive correlation.
37. • Dow Theory
• Importance of Volume
• Support and Resistance
Levels
• Moving Average Lines
• Relative Strength
• Bar Charting
• Candlestick Charts
• Multiple-Indicator
Charts
• Point-and-Figure Charts
38. • Basis of many technical indicators.
• Dow described stock prices as moving
in trends analogous to the movement
of water.
39. 1) Major trends that are like tides in the
ocean;
2) Intermediate trends that resemble
waves; and
3) Short-run movements that are like
ripples.
40. • Serves as an indicator of changes in
supply and demand.
• Price movement in one direction means
that the net effect on price is in that
direction.
• But, price changes alone does not
indicate the breadth of the excess
demand or supply.
41. • Technicians look for a price increase on
heavy volume relative to the stock’s
normal trading volume as an indication
of bullish activity.
• Conversely, a price decline with heavy
volume is considered bearish.
42. • Technicians also use a ratio of upside-
downside volume as an indicator of
short-term momentum for the
aggregate stock market.
• Upside-downside volume of 1.75 or
more indicates an overbought position
that is bearish.
43. • A value of 0.75 and lower supposedly
reflects an oversold position and is
considered a bullish but:
In march 2008,value is clearly below
1.00 and is providing a bullish signal.
44. • Support level is the price range at which
the technician would expect a substantial
increase in the demand for a stock.
• When the price reaches this support price,
demand surges and price and volume begin
to increase again.
45. • Resistance level is the price range at
which the technician would expect an
increase in the supply of stock and a
price reversal.
46. • After a decline, the stock begins to
recover, but the prior decline in price
leads some investors who acquired the
stock at a higher price:
47. • The supply of stock owned by these
nervous investors is the
market.
• When the price rebounds to the target
price set by these investors:
48. • We add 50-day moving average line
(short-term trend) and consider large
volume.
50-day MA line should be above
the 200-day MA line.
When 50-day MA line is always
below the 200-day MA line.
49. • Technicians believe that once a trend
begins, it will continue until some event
causes a change in direction.
• Technicians compute weekly or monthly
relative-strength (RS) ratios for
individual stocks and industry groups.
• RS ratio is equal to the price of a stock or
an industry index divided by value of
some stock-market index.
50. • If this ratio increases over time, it shows
that the stock or industry is
outperforming the overall stock market,
and a technician would expect this
superior performance to continue.
• RS Ratios work during declining as well as
rising markets.
51. • In a declining market, if a stock’s price
declines less than market does, the
stock’s relative-strength ratio will
continue to rise.
• If this ratio is stable or increases during a
bear market, the stock should do well
during the subsequent bull market.
52. • Technicians use charts that show daily,
weekly, or monthly time series of stock
prices.
• For a given interval, the technical analyst
plots the high and low prices and
connects the two points vertically to
form a bar.
54. • Basically an extension of the bar chart.
• In addition to high, low, and closing price
for each trading day, they also include:
55. • Technicians include as many price and
volume indicators as are reasonable on
one chart and then, based on the
performance of several technical
indicators, try to arrive at consensus
about the future movement for the
stock.
56. • Includes only significant price changes,
regardless of their timing.
• Technicians determine what price interval to
record as significant (one point, two points,
and so on) and when the note price
reversals.
• Provide a compact record or movements
because they only consider significant price
changes for the stock being analyzed.
