TECHNICAL ANALYSIS

Sándor Bozsik (Ph.D)Miskolc UniversityHungary

EFFICIENT MARKET

In efficient market the NPV of all investment decisions is 0.

Assumptions: Information efficiency Transaction efficiency Allocation efficiencyConsequence: Price movement is a random walk.

TYPES OF EFFICIENT MARKET (FAMA) Weak form

Semi strong form

Strong form

TECHNICAL ANALYSIS – DENIES THE WEAK FORM

The price movement has a trend The history repeats itself The price perfectly reflects the effort of

market forces. The market has got memory. The prices are sticky.

STAGES OF TREND

Accumulation Expansion Dispersion Exhaustion

Discovering with support and resistance lines

METHODS OF TECHNICAL ANALYSIS Graphic tools

Bar chart Japanese candlestick O-X diagram

Statistical tools Moving average, EMA, MACD Momentum, oscillator Market strength, Money Flow Index

Combined tools Fibonacci-lines Bollinger-band Elliott-wave

BAR CHART (MOL)

2000.07.03

2000.07.06

2000.07.11

2000.07.14

2000.07.19

2000.07.24

2000.07.27

2000.08.01

2000.08.04

2000.08.09

2000.08.14

2000.08.17

2000.08.22

2000.08.25

2000.08.30

2000.09.04

2000.09.07

2000.09.12

2000.09.15

2000.09.26

2000.09.29

2000.10.04

2000.10.09

2000.10.12

2000.10.17

2000.10.20

2000.10.26

2000.10.31

2000.11.06

2000.11.09

2000.11.14

2000.11.17

2000.11.22

2000.11.27

2000.11.30

2000.12.05

2000.12.11

2000.12.15

2000.12.20

2000.12.27

0

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10000000

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JAPANESE - CANDLESTICK

0

2000000

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10000000

12000000

10000

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Japanese chandlestick for MOL

2005.01.01-2005.04.18

TRENDS

Trend strengthening forms triangles Channels Mast and flag

Trend changing forms Double peak Saucer Key reversal or inland reversal Head and shoulders Spike

MOVING AVERAGE

Trading rule: if the shorter moving average crosses the longer one below – buying signal, on the contrary – selling signal

Grouping: By term: 3, 7, 14 days Simply, weighted or exponential Direct or Indirect average

The longer is the average, the better follows the trend, the shorter is the average, the quicker gives a signal.

EXPONENTIAL MOVING AVERAGE (EMA) Equation

]1[]1[

][*1

2]1[*

1

21][

XEMA

iXN

iEMAN

iEMA

Stage analysis (Stan Weinstein)Stage 1 – the asset moves in a relative narrow bandStage 2 – developing stage – the asset price increases above the 200 and the 50 days EMA Stage 3 – Peak, the asset price is permanently above the 200 day EMA (profit realisation)Stage 4 – Price drop

TWO DERIVATIVE FROM EMA McClellan oscillator and summary

index Daily breadth – difference between

the number of up-closing and down-closing shares – they are cumulated and an EMA with 10% and 5% adjusting parameter is created. The difference between them is the oscillator.

MACD – Difference between two EMA (12 days and 25 days) Then the 9 days EMA is taken. If it crosses the difference – trading signal.

MOMENTUMS AND OSCILLATORS Oscillator

Momentum

Relative strength index (RSI)

lowestdaily -highest Daily

closing previous -highest Daily

period

opening - Closing

strength Relative1

11indexstrength Relative

days 14in closingLower

days 14in closingUpper strength Relative

MONEY FLOW INDEX

Measures the money in and out of the market Equations:

ratio flowMoney 1

1-1index flowMoney

days 14in flowmoney Negative

days 14in flowmoney Positiveratio flowMoney

overdaily turn*price averagedaily flowMoney 3

Closing Minimum Maximumprice averageDaily

FIBONACCI NUMBERS

What does it show? – Resistance and support level

fn=fn-1+fn-1

The next figure is 1,618 higher than previous one (gold cut)

From 100% we get the followings: 100%; 61,8%; 38,2%; 23,6%; 14,6%; 9% 100% is the gap between maximum and

minimum price in a given period

FIBONACCI LINE

25 390

0

5 000

10 000

15 000

20 000

25 000

30 000

3/24/200010/8/19994/23/199911/6/19985/22/199812/5/1997

20 271

17 10414 54511 986

8 819

3 700

Richter

BOLLINGER - BAND

difference normal *2 average moving - Band

1difference Normal

2

1

n

ii xx

n

Usage: To determine the eruptionsBased on:• Relative support and resistance• Moving average + standard deviationThe larger is the volatility the larger is the width of band.

APPLYING THE BOLLINGER-BAND

0

20

40

60

80

5 0007 0009 000

11 00013 00015 00017 00019 00021 000

3/27/20001/3/200010/11/19997/19/19994/26/19992/1/199911/9/1998

Richter (záró)20 napos mozgóátlagfelsőalsó

-0,20,00,20,40,60,81,01,2

ASSUMPTION OF BOLLINGER-BAND

Narrowing band projects meaningful change in price

If the price reaches the upper or lower limit, then the trend may go on.

If the price leaves one of the limit, but doesn’t reach the another one, then the current trend continues.

If the price breaks the moving average, then reaches the opposite limit.

The break out of the band is a sign of eruption.

FUNDAMENTAL ANALYSIS

PRINCIPLES OF FUNDAMENTAL ANALYSIS

The market is efficient in weak form, but inefficient in semi-strong form.

Not everybody can evaluate properly the public information.

Analyse the fundamentals to determine the company’s intrinsic value.

Invest in medium or long term.

HOW THE FUNDAMENTAL ANALYSIS WORKS

Find a benchmark (similar company or industry average)

Calculate a market ratio Collect the financial statements,

market projections, data on macroeconomic circumstances

Analyse and compare the results Try to explain the differences in market

ratio

HOW TO CHOOSE PROPER BENCHMARK

Operated in the same industry Located in similar region Similar size Similar financial risk profile

FAMOUS MARKET RATIOS

P/E – Price per earning

Market to book value

P/EBITDA

P/E RATIO

P/E – share price/net income per share

Value of shares:

Usage: manufacturing companies

XXX

XX

DBPV

dE

PEPSP

*

1***

Where:• Px – firm’s share price• EPSX – firm’s earnings per share• P/E* - benchmark’s P/E indicator• d – adjusting factor• DBX – number of share issued• VX – value of equity

MORE SOPHISTICATED METHODS

DCF analysis Real option models