®1999 South-Western College Publishing 1 Chapter 13 Technical Analysis

®1999 South-Western College Publishing 2 Technical Analysis As An Art Prices are Determined by Investors’ AttitudesPrices are Determined by Investors’ Attitudes –Prices move in trends Changing Attitude TowardChanging Attitude Toward –Economic forces –Monetary forces –Political forces –Psychological forces

®1999 South-Western College Publishing 3 Technical Analysis As A Science Study of the Action of the MarketStudy of the Action of the Market Science of Recording in Graphic FormScience of Recording in Graphic Form –Price changes, volume, highs and lows,… –The averages of above Deducing the Probable Future TrendDeducing the Probable Future Trend

®1999 South-Western College Publishing 4 Is Technical Analysis An Art Or Science? ArtArt –Martin J. Pring ScienceScience –Robert D. Edwards and John Magee

®1999 South-Western College Publishing 5 Is There Any Empirical Evidence To Support Technical Analysis (TA)? Patterns in Security PricesPatterns in Security Prices –Fall one week, bounce back next week –Monthly returns over a long time –Seasonal patterns January effect (Chapter 12)January effect (Chapter 12) Resent Research Merits TAResent Research Merits TA

®1999 South-Western College Publishing 6 Charting Bar ChartsBar Charts –Illustrates each days High, low, and closing priceHigh, low, and closing price –Looks at stock price behavior over time Point-and-Figure ChartsPoint-and-Figure Charts –Identifies stock price reversals –Does not consider time Candlestick ChartsCandlestick Charts –Illustrates each days Opening, high, low, and closing priceOpening, high, low, and closing price

®1999 South-Western College Publishing 7 Bar Charts TrendlineTrendline –Drawn on chart to identify trend ChannelChannel –Pattern formed by 2 trendlines ResistanceResistance –Downward price movement SupportSupport –Upward price movement

®1999 South-Western College Publishing 8 Point-And-Figure Charts A Series of Xs and OsA Series of Xs and Os Same as Bar ChartsSame as Bar Charts Popular ToolPopular Tool

®1999 South-Western College Publishing 9 Candlestick Chart Candlestick LineCandlestick Line –Real body Difference between opening and closing priceDifference between opening and closing price –Shadow Vertical line identifying the high and low priceVertical line identifying the high and low price –Can be constructed with Different Time Data IntradayIntraday WeeklyWeekly

®1999 South-Western College Publishing 10 Summary Of Charts

®1999 South-Western College Publishing 11 Theoretical Basis Of TA Dow TheoryDow Theory –Trends Moving AveragesMoving Averages –5-day –200-day Relative StrengthRelative Strength –RSI

®1999 South-Western College Publishing 12 Dow Theory Primary TrendPrimary Trend –Cycle in years Intermediate TrendIntermediate Trend –3 Weeks to 6 months Short-Term TrendShort-Term Trend –Volatile and erratic Basic Tenets next slideBasic Tenets next slide

®1999 South-Western College Publishing 13 Basic Tenets Of Dow Theory Requires Data on Stock IndexesRequires Data on Stock Indexes –No additional information Types of Financial Market MovementsTypes of Financial Market Movements –Primary –Intermediate –Short-term Positive Relationship BetweenPositive Relationship Between –Trend –Volume of shares traded

®1999 South-Western College Publishing 14 RSI Range From 0% to 100%Range From 0% to 100% HighHigh –Industry stock prices outperform the market –Indicate a sell signal? Buy signal? Low The trend is your friend!Low The trend is your friend! –Market outperforming the industry stock –Indicates a buy signal? Sell signal?

®1999 South-Western College Publishing 15 Technical Indicators Breadth IndicatorsBreadth Indicators –Advance-decline line (ADL) –Volume –New high/new low Sentiment IndicatorsSentiment Indicators –Stock market newsletter –Odd-lot trading –Put/call trading –Specialists short selling

®1999 South-Western College Publishing 16 Advance-Decline Line ADLt = At - Dt + ADLt - 1