investments chapter12

5/21/2018 Investments Chapter12

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CHAPTER 12

TECHNICAL ANALYSIS

Presenter

Venue

Date


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THE LOGIC OF TECHNICAL ANALYSIS

Supply anddemanddetermineprices

Changesin supplyanddemand

causechanges inprices

Prices can

be projectedwith chartsand othertechnicaltools


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ASSUMPTIONS OF TECHNICAL ANALYSIS

Human behavior is often erratic and driven byemotion.

Market trends and patterns reflect irrationalhuman behavior.

Trends and patterns repeat themselves and arethus predictable.


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CHARTS

Line Chart

Bar ChartCandlestick

Chart

Point andFigureChart


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LINE CHARTS AND SCALE

EXHIBIT 12-7 Dow Jones

Industrial Average on aLinear Scale, 19282010(in U.S. dollars)

EXHIBIT 12-8 Dow Jones

Industrial Average on aLogarithmic Scale, 19282010 (in U.S. dollars)


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BAR CHARTS

EXHIBIT 12-2Bar ChartNotation

EXHIBIT 12-3 Bar Chart: BovespaIndex, November 2007November2009 (price in Brazilian reals)


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CANDLESTICK CHARTS

EXHIBIT 12-4Construction of aCandlestick Chart

EXHIBIT 12-5 Candlestick Chart:Companhia Vale do Rio Doce, 1January15 June 2009 (prices in U.S.dollars)


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POINT AND FIGURE CHARTS

EXHIBIT 12-6 Point and Figure Chart: Wharf Holdings Daily Price Chart, 20072009 (Hong Kong dollars)Note:The box size is HK$1, and the reversal size is three.


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PRICE AND VOLUME

Price IsTrending Higher

or Lower

Volume IsIncreasing

Confirmation:Trend WillContinue

Volume IsDecreasing

Divergence:Trend Will End


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RELATIVE STRENGTH ANALYSIS

EXHIBIT 12-10 Relative Strength Analysis: HOG vs. the S&P 500and RODM vs. the S&P 500, JanuaryJune 2009


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TREND ANALYSIS

Uptrend

Higher Highs,Higher Lows

Demand ExceedsSupply

Downtrend

Lower Highs,Lower Lows

Supply ExceedsDemand

EXHIBIT 12-11 Trend Analysis: China Mobile Weekly Price Chart,20022010 (prices in Hong Kong dollars)


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SUPPORT AND RESISTANCE

A low price range in which buying activityis sufficient to stop a decline in priceSupport

A high price range in which selling activity

is sufficient to stop a rise in priceResistance Once a resistance (support) level is

breached, it becomes a support(resistance) level

Change inPolarity

Support

Resistance Becomes Support

Resistance/Support

Price


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CHART PATTERNS

ChartPatterns

ReversalPatterns

Head andShoulders orInverse Headand Shoulders

Double Tops orBottoms

Triple Tops or

Bottoms

ContinuationPatterns

Triangles

Rectangles

Flags andPennants


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HEAD AND SHOULDERS

EXHIBIT 12-13 Head and Shoulders Pattern: Marvell Technology Daily Price Chart, June2005June 2006 (price in U.S. dollars 100)

(Head and Shoulders) Price target = Neckline(Head Neckline)(Inverse Head and Shoulders) Price target = Neckline + (HeadNeckline)


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DOUBLE TOPS AND BOTTOMS

EXHIBIT 12-16 Double-Bottom Pattern: Time Warner Daily Price Chart,November 2007October 2009 (price in U.S. dollars)


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TRIPLE TOPS AND BOTTOMS

EXHIBIT 12-17 Triple-Top Pattern: Rockwell Automation Daily Price Chart,1999 (price in U.S. dollars)


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TRIANGLES

EXHIBIT 12-18Ascending Triangle Pattern

EXHIBIT 12-19Descending Triangle Pattern


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RECTANGLES

EXHIBIT 12-21 Rectangle Patterns


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FLAGS AND PENNANTS

EXHIBIT 12-22 Pennant Formation: China Mobile ADR,November 2006July 2009 (price in U.S. dollars)


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TECHNICAL INDICATORS

Price-Based

Indicators

MomentumOscillators

Sentiment

Indicators

Flow-of-Funds

Indicators


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PRICE-BASED INDICATOR: MOVING AVERAGE

EXHIBIT12-23 Daily Price Chart with 20-Day and 60-Day Moving Averages:Gazprom EDR, November 2007August 2009 (price in euros)


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PRICE-BASED INDICATOR: BOLLINGER BAND

EXHIBIT12-24 Bollinger Band Using 60-Day Moving Average and 2Standard Deviations: Gazprom EDR Daily Price Chart, November 2007August 2009 (price in euros)


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MOMENTUM OSCILLATOR: RATE OF CHANGEOSCILLATOR (M= V VX100)

EXHIBIT 12-25 Momentum Oscillator with 100 as Midpoint: Toyota Motor, May2008October 2009 (price in Japanese yen)


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MOMENTUM OSCILLATOR: RELATIVESTRENGTH INDEX

100100

1

(Up changes for the period under consideration)

Down changes for the period under construction

RSIRS

RS

EXHIBIT 12- 27 Candlestick Chart with RSI: Ford, JanuaryAugust 2009 (price in U.S. dollars)


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MOMENTUM OSCILLATOR: STOCHASTICOSCILLATOR

14%K 100

14 14

%D Average of the last three %K values calculated daily

C L

H L

EXHIBIT 12-28 Weekly Price Chart and Stochastic Oscillator: Petroleo BrasileiroADR, June 2008July 2009 (price in U.S. dollars)


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MOMENTUM OSCILLATOR: MACD OSCILLATOR

EXHIBIT12-29 MACD and Daily Price Chart: Exxon Mobil, MarchNovember2005 (price in U.S. dollars)


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SENTIMENT INDICATOR: OPINION POLLS

Investors Intelligence Advisors SentimentReport

Market Vane Bullish Consensus

Consensus Bullish Sentiment Index

Daily Sentiment Index

AAII Investor Sentiment Survey


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SENTIMENT INDICATOR: CALCULATEDSTATISTICAL INDICES

Put/CallRatio

Normally

below 1.0 Considered

a contraryindicator

CBOEVolatilityIndex

Based onoptions onstocks inthe S&P500

Used withtrend,pattern, oroscillatortools

MarginDebt

Rising

margin debtbelieved tobe a signalofaggressivebuying

Considereda contraryindicator

ShortInterestRatio

Shortinterest

Averagedaily tradingvolume

Considereda contraryindicator


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FLOW-OF-FUNDS INDICATOR: ARMS INDEX(TRIN)

Number of advancing issues / Number of declining issues

Arms Index Volume of advancing issues / Volume of declining issues

EXHIBIT12-32 Arms Index for the S&P 500, JanuaryJuly 2009


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OTHER FLOW-OF-FUNDS INDICATORS

Ability to buy stock on margin mayincrease demand

Declining margin balances may resultin forced selling

Margin Loans

Considered a contrary indicator: Highcash balances represent buyingpower

Some analysts take into account thelevel of interest rates

Mutual FundCash Positions

Considered a contrary indicator: Highissuance and offerings areconsidered signs of a market top

New EquityIssuance andSecondaryOfferings


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CYCLESKondratieff

Wave (K-wave)

Westerneconomieshave a 54-year cycle

Originallytied toeconomiccycles andcommodityprices

18-Year

Cycle 3 18 years =

54 years Most often

mentioned inconnection

with realestate prices

Decennial

Pattern Pattern of

marketreturnsbroken downbased on the

last digit of ayear

Years endingin 5 have thebest returns

Presidential

Cycle Returns

broken downby year ofU.S.Presidents

term in office Third year

(year prior tonext election)has besthistorical

performance


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ELLIOTT WAVE THEORYGrand Supercycle

Supercycle

Cycle

Primary

Intermediate

Minor

Minute

Minuette

Subminuette

Follow

patterns thatare ratios of

FibonacciSequence:

0, 1, 1, 2, 3,5, 8, 13,

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EXHIBIT 12-34 IMPULSE WAVES ANDCORRECTIVE WAVES


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INTERMARKET ANALYSIS

Inflection points inone market

May be a warning

sign of a changein trend in anothermarket EXHIBIT 12-35 Relative Strength of 10-YearT-Bonds vs. S&P 500, September 2008July

2009


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SUMMARY

Principles, applications, and assumptions oftechnical analysis

Construction and interpretation of charts

Trend, support, and resistance lines, and changein polarity

Common technical analysis patterns, indicators,and cycles

Elliott Wave Theory

Intermarket analysis

investments chapter12

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