chapter 13 technical analysis. 2 underlying assumptions of technical analysis 1. the market value of...
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Chapter 13Technical Analysis
2
Underlying Assumptions
of Technical Analysis1. The market value of any good
or service is determined solely by the interaction of supply and demand.
2. Supply and demand are governed by numerous factors, both rational and irrational.
3
Underlying Assumptions
of Technical Analysis3.The prices for individual
securities and the overall value of the market tend to move in trends.
4.Prevailing trends change in reaction to shifts in supply and demand relationships
5.These shifts can be detected in the action of the market
4
Technical View of Price Adjustment to New Information
Exhibit 13.1
5
Advantages of Technical Analysis
Not heavily dependent on financial accounting statements Problems with accounting
statements:1. Lack information needed by security
analysts2. GAAP allows firms to select reporting
procedures, resulting in difficulty comparing statements from two firms
3. Non-quantifiable factors do not show up in financial statements
6
Advantages of Technical Analysis
Fundamental analyst must process new information and quickly determine a new intrinsic value, but technical analyst merely has to recognize a movement to a new equilibrium
Technicians trade when a move to a new equilibrium is underway, but a fundamental analyst finds undervalued securities that may not adjust their prices as quickly
7
Challenges to Technical Analysis
Assumptions of Technical Analysis Empirical tests of Efficient Market
Hypothesis (EMH) show that prices do not move in trends
8
Technical trading rules The past may not be repeated Patterns may become self-fulfilling
prophecies ( 預言 ) A successful rule will gain followers
and become less successful Rules require a great deal of
subjective judgement.
9
Technical Trading Rules and Indicators
Stock cycles typically go through a peak and trough( 低谷 )
Analyze the following chart of a typical stock price cycle and we will show a rising trend channel, a flat trend channel, a declining trend channel, and indications of when a technical analyst would want to trade
10
Typical Stock Market Cycle
Stock Price
Exhibit 13.2
11
Typical Stock Market Cycle
Stock Price
Exhibit 13.2
Declining Trend
Channel
Trough
Buy Point
Rising Trend Channel
Flat Trend Channel
Sell Point
Peak
Declining Trend
Channel TroughBuy Point
12
Contrary-Opinion
Many analysts rely on rules developed from the hypothesis that the majority of investors are wrong as the market approaches peaks and troughs
Technicians try to determine whether investors are strongly bullish or bearish and then trade in the opposite direction
These positions have various indicators
13
Contrary-Opinion Rules
Mutual fund cash positions Credit balances in brokerage
accounts Investment advisory opinions OTC versus NYSE volume Chicago Board Options
Exchange (CBOE) put/call ratio Futures traders bullish on stock
index futures
14
Time-Series Plot of Dow Jones Industrial Average and the Bullish and Bearish Advisory Services (1)
Exhibit 13.3
15
Time-Series Plot of Dow Jones Industrial Average and the Bullish and Bearish Advisory Services (2)
Exhibit 13.3
16
Time-Series Plot of Dow Jones Industrial Average and the Bullish and Bearish Advisory Services (3)
Exhibit 13.3
17
Follow the Smart Money
Indicators showing behavior of sophisticated investors
The Barron’s Confidence Index T-Bill - Eurodollar yield spread Short sales by specialists Debit balances in brokerage
accounts (margin debt)
18
Other Market Indicators
Breadth of marketAdvance-declineDiffusion index
Short interest Stocks above their 200-day
moving average Block uptick-downtick ratio
19
Stock Price and Volume Techniques
The Dow theory – oldest technical trading rule 1. Major trends are like tides in the
ocean 2. Intermediate trends resemble waves 3. Short-run movements are like ripples
Importance of volume Ratio of upside-downside volume
Support and resistance levels Moving average lines
20
Stock Price and Volume Techniques
Relative-strength (RS) ratiosFor individual stocks and
industry groups Bar charting Multiple indicator charts Point-and-figure charts Overall feel from a consensus
of numerous technical indicators
21
Sample Bullish Price Pattern
Exhibit 13.8
22
Daily Stock Prices for Stryker Corp. with Indications of Support and Resistance Levels
Exhibit 13.9
23
Daily Stock Prices for Concord EFS with 50-Day and 200-Day Moving Average Lines and a 14-Day Relative Strength Index Compared to the S&P 500 Index
Exhibit 13.10
24
How to Read Industry Group Charts Exhibit 13.11
25
A Typical Bar Chart
Exhibit 13.12
26
Sample Point-and-Figure Chart
Exhibit 13.13