Investment Management Technical Analysis Unit 4

V.Prabakaran, Ap/MBA - Technical Analysis ROC The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure momentum oscillator that measures the percent change in price from one period to the next. The ROC calculation compares the current price with the price “n” periods ago. The plot forms an oscillator that fluctuates above and below the zero line as the Rate-of-Change moves from positive to negative. As a momentum oscillator, ROC signals include centerline crossovers, divergences and overbought-oversold readings. Divergences fail to foreshadow reversals more often than not so this article will forgo a discussion on divergences. Even though centerline crossovers are prone to whipsaw, especially short-term, these crossovers can be used to identify the overall trend. Identifying overbought or oversold extremes comes natural to the Rate-of-Change oscillator. 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis Calculation ROC = [(Close - Close n periods ago) / (Close n periods ago)] * 100 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis The table above shows the 12-day Rate-of-Change calculations for the Dow Industrials in May 2010. The yellow cells show the Rate-of-Change from April 28th to May 14th. It is actually 13 trading days, but the close on the 28th acts as the starting point on the 29th. The blue cells show the 12-day Rate-of-Change from May 7th until May 25th. 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis Cont… As noted above, the Rate-of-Change indicator is momentum in its purest form. It measures the percentage increase or decrease in price over a given period of time. Think of its as the rise (price change) over the run (time). In general, prices are rising as long as the Rate-of-Change remains positive. Conversely, prices are falling when the Rate-of-Change is negative. ROC expands into positive territory as an advance accelerates. ROC dives deeper into negative territory as a decline accelerates. There is no upward boundary on the Rate-of-Change. The sky is the limit for an advance. There is, however, a downside limit. Securities can only decline 100%, which would be to zero. Even with these lopsided boundaries, Rate-of-Change produces identifiable extremes that signal overbought and oversold conditions. 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

Moving Average Convergence Divergence (MACD) Is probably the most widely used technical indicator. It signals not only the trend, but also the momentum of a stock. The idea behind the MACD line is to compare the short-term and long-term momentum of a stock in order to estimate its future direction. Basically it is the comparison of two moving averages, which you can set for any time period you like, but typically the 12-day and 26-day moving average of the stock are used. The idea behind MACD is that when the short-term line crosses the long term line, it is a signal of future stock activity. When the short-term line is running under the long-term line, and then crosses above it, the stock will typically trade higher. Likewise, we can predict a selloff when the short-term line crosses under the long-term line. MACD = shorter-term moving average – longer-term moving average 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

Relative Strength Index RSI or Relative Strength Index is one of the most popular momentum indicator in Technical Analysis. It’s value fluctuates between 0 to 100 and indicates the strength and velocity of price move. RSI indicator is mostly calculated on 14 period timeframe and any value above 70 indicates over-brought level and value below 30  indicates over-sold level. However, there are many variations of this indicator and the manner in which the RSI levels are interpreted varies with your trading style. 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis Cont… When the RSI move above 50, the average gains outweigh the average losses; this is regarded as bullish. When the RSI falls below 50, the average losses outweigh the average gains; this is regarded as bearish. 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis Cont… It is a technical indicator used in analysis of financial markets. RSI = 100 – 100/(1+RS*) RS * =Avg of x days’ up closes/Avg of x days’ down closes 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis Momentum Investment strategy that aims to capitalize on the rate of acceleration of a security’s price or volume. Considered an oscillator ; Used to help identify trend lines. Rate of Change It is a pure momentum oscillator, measures the percent change in price from one period to next. It compares the current price with the price ‘n’ periods ago. 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis

V.Prabakaran, Ap/MBA - Technical Analysis Thanks… 30-04-2018 V.Prabakaran, Ap/MBA - Technical Analysis