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    Technical Analysis

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    fyrshan
    Technical analysis uses published market data and tools like charts and indicators to identify patterns in stock prices and predict future movements. It believes prices move in trends as investor attitudes change and that the market reflects all relevant information. Technicians disagree with fundamental analysis and instead focus only on market data. Some common techniques include analyzing moving averages, relative strength, breadth indicators, and sentiment measures to generate buy and sell signals. However, thorough empirical tests have failed to consistently prove the profitability of technical strategies after accounting for trading costs. While technical analysis remains popular with many investors, there is no scientific consensus on its effectiveness.

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    Technical Analysis

    Uploaded by

    fyrshan
    27 views4 pages
    Technical analysis uses published market data and tools like charts and indicators to identify patterns in stock prices and predict future movements. It believes prices move in trends as investor attitudes change and that the market reflects all relevant information. Technicians disagree with fundamental analysis and instead focus only on market data. Some common techniques include analyzing moving averages, relative strength, breadth indicators, and sentiment measures to generate buy and sell signals. However, thorough empirical tests have failed to consistently prove the profitability of technical strategies after accounting for trading costs. While technical analysis remains popular with many investors, there is no scientific consensus on its effectiveness.

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    Technical analysis uses published market data and tools like charts and indicators to identify patterns in stock prices and predict future movements. It believes prices move in trends as investor attitudes change and that the market reflects all relevant information. Technicians disagree with fundamental analysis and instead focus only on market data. Some common techniques include analyzing moving averages, relative strength, breadth indicators, and sentiment measures to generate buy and sell signals. However, thorough empirical tests have failed to consistently prove the profitability of technical strategies after accounting for trading costs. While technical analysis remains popular with many investors, there is no scientific consensus on its effectiveness.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    27 views4 pages

    Technical Analysis

    Uploaded by

    fyrshan
    Technical analysis uses published market data and tools like charts and indicators to identify patterns in stock prices and predict future movements. It believes prices move in trends as investor attitudes change and that the market reflects all relevant information. Technicians disagree with fundamental analysis and instead focus only on market data. Some common techniques include analyzing moving averages, relative strength, breadth indicators, and sentiment measures to generate buy and sell signals. However, thorough empirical tests have failed to consistently prove the profitability of technical strategies after accounting for trading costs. While technical analysis remains popular with many investors, there is no scientific consensus on its effectiveness.

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    of 4

    Technical Analysis details

    Chapter 16

    What is Technical Analysis?


    Use of published market data for analysis of both aggregate stock prices and
    individual stocks
    May produce insight into the psychological dimensions of the market
    Used by investors and investment advisory firms
    Oldest approach to stock selection
    Technical Approach
    Prices move in trends determined by changing attitudes of investors
    Identify change in trend at an early stage and maintain investment posture until
    evidence indicates otherwise
    Market itself is own best source of data about trends
    Data includes prices, volume, and technical indicators
    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
    Tools For Technical Analysis
    Use of graphs, charts, and technical trading rules and indicators
    Price and volume 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
    The Dow Theory
    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
    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 minor importance

    1/25/17 1

    Charting Price Patterns


    Prices changes can be recognized and categorized
    Support price level: significant increase in demand is expected
    Resistance price level: significant decrease in demand is expected
    Treadline: identifies a trend or direction
    Momentum: speed of price changes
    Bar Chart
    Vertical bars top (bottom) represents the high (low) price of the day
    Point-and-Figure Chart
    Compresses price changes into small space
    Areas of congestion identified
    X (O) used to indicate significant upward (downward) movement
    Moving Averages
    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 and adding
    latest observation to the average
    Comparison to current market prices produces buy or sell signal
    Relative Strength
    Ratio of price to index or past average price over some period
    Ratios plotted to form graph of relative price across time
    Rising (falling) ratio indicates relative strength (weakness)
    What if overall market is weak?
    What if stock declining less quickly than the market?
    Breadth Indicators
    Advance-Decline Line
    Measures the net difference between number of stocks advancing and
    declining
    Plot of running total across time is compared to a stock average to analyze
    any divergence
    Divergence implies trend changing
    Number hitting new highs (lows)
    High trading volume regarded as bullish
    Sentiment Indicators
    Short interest is number of stocks that have been sold short
    Short interest ratio =
    Total shares sold short/Average daily trading volume

    1/25/17 2

    Indicates number of days needed to work off the short interest


    Many technicians take a high short interest ratio as a bullish sign
    Short interest figures may be distorted
    Opinions of Investment Advisory Services
    Bearish sentiment index
    Ratio of advisory services bearish to total number with an opinion
    When at 60% (15%), the DJIA goes from bearish to bullish (bullish to
    bearish)
    Advisory services assumed wrong at extremes
    Do services follow trends rather than forecast them?
    Mutual Fund Liquidity

    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
    CBOE Put/Call Ratio
    Speculators buy calls (puts) when stock prices expected to rise (fall)
    Rise (fall) in ratio of 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
    Testing Technical Strategies
    What constitutes a fair test of a technical trading rule?
    Risk considerations
    Including transaction and other costs
    Consistency in performance
    Out-of-sample validation
    Filter rule tests
    Trades made when price change greater than predetermined filter
    Conclusions About Technical Analysis
    Thorough tests of technical analysis have failed to confirm their value, given all
    trading costs and the alternatives, such as a buy-and-hold strategy
    Several interpretations of each technical tool and chart pattern are not only
    possible but usual
    Art or science?

    1/25/17 3

    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

    1/25/17 4

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