AGEC 420, Lec 341 Agec 420 Homework #7 –Charting Review Quiz 7

AGEC 420, Lec 342 Markets CBOT: CME:

AGEC 420, Lec 343 Readings on Technical Analysis Purcell: Chapter 4 on the Bar Chart describes many chart patterns, their “reliability” Chapter 5: section on moving averages Malkiel: Chapters 5 and 6 disputes the claim of “reliability”

AGEC 420, Lec 344 Charts Trends and reversals Tops, bottoms, (Head & Shoulders) Other reversal patterns –Key, Hook, Island reversals See Purcell text for others: –Consolidation patterns – flags, pennants –Gaps and Corrections

AGEC 420, Lec 345 Technical Vocabulary “The market’s rise after a period of reaccumulation is a bullish sign. Nevertheless, fulcrum characteristics are not net clearly present and a resistance area exists 40 points higher in the Dow, so it is clearly premature to say the next leg of the bull market is up. If, in the coming weeks, a test of the lows holds and the market breaks out of its flag, a further rise would be indicated. Should the lows be violated, a

AGEC 420, Lec 346 cont. continuation of the intermediate term downtrend is called for. In view of the current situation, it is a distinct possibility that traders will sit in the wings awaiting a clearer delineation of the trend and the market will move in a narrow trading range.”

AGEC 420, Lec 347 Final thought … If a well known buy signal is “reliable” ---- who would sell? Same argument applies to fundamental analysis !!

AGEC 420, Lec 348 Indices and Moving Averages Purcell: Chapter 4: RSI Chapter 5: S ection on moving averages

AGEC 420, Lec 349 Relative Strength Index (RSI) measures market “momentum” based on price changes in the previous 14 days Signals whether market is “overbought” or “oversold”

AGEC 420, Lec 3410 Calculating RSI record the last 14 price changes –calculate D sum the negative changes, divide by 14 –calculate U sum the positives, divide by 14 RSI = U/U+D (%) see Purcell, Ch. 4

AGEC 420, Lec 3411 Using RSI –RSI > 70% “overbought” market all traders who want to buy are in market running out of momentum price decline imminent --> prepare to sell –RSI < 30% signals an oversold market a buy signal

AGEC 420, Lec 3412 Moving Averages to monitor trends –3-day moving average add the last 3 closing prices; divide by 3 –by construction, behaves more smoothly than the daily price reveals the trend See Purcell, Ch 5

AGEC 420, Lec 3413 Using Moving Averages use 2 moving averages –long (e.g. 18 day) --> reveals trend –short (e.g. 9 day) --> reveals change in trend get signals when lines cross short crosses long moving up --> buy short crosses long moving down --> sell

AGEC 420, Lec 3414 Other technical systems Stochastic oscillators (%k and %d) Elliot wave theory Bollinger bands Andrew’s pitchfork Zig Zag indicator See