Technical Price AnalysisTechnical Price Analysis

The analysis of historical prices The analysis of historical prices patterns using charts, diagrams, patterns using charts, diagrams, mathematical equations, etc.mathematical equations, etc.

This approach emphasizes This approach emphasizes howhow prices got to where they are.prices got to where they are.

We’ll only cover few methods.We’ll only cover few methods.

Technical Price AnalysisTechnical Price Analysis

Two views:Two views:

Prices reflect all available, relevant Prices reflect all available, relevant fundamental information. Random fundamental information. Random prices tomorrow.prices tomorrow.

Price movements are not random. Price movements are not random. Recognizable price patterns or Recognizable price patterns or formations are often repeated.formations are often repeated.

Benefits of ChartingBenefits of Charting

Provide a price history.Provide a price history.

Help identify important fundamental Help identify important fundamental factors; early warning of changes in factors; early warning of changes in process.process.

Help identify repetitive price Help identify repetitive price patterns. Will they repeat in future?patterns. Will they repeat in future?

Benefits of ChartingBenefits of Charting

Can improve the timing of Can improve the timing of purchases or sales.purchases or sales.

Can help one to be more Can help one to be more mechanical and objective (less mechanical and objective (less emotional)emotional)

But, many methods! Which work?But, many methods! Which work?

Tools of Technical AnalysisTools of Technical Analysis

ChartsChartsTrading InformationTrading Information

Volume and Open InterestVolume and Open InterestMathematical or Statistical Formulas Mathematical or Statistical Formulas

or Calculationsor CalculationsMoving Averages and Moving Averages and OscillatorsOscillators

ChartingCharting

PP HighHigh

CloseClose

LowLow

TimeTime

Forecasting Price ChangesForecasting Price Changes

Trend = general directionTrend = general directionTypesTypes

Rising = “Bullish”Rising = “Bullish”Falling = “Bearish”Falling = “Bearish”Change = “Reversal”Change = “Reversal”

Forecasting Price ChangesForecasting Price Changes

Trend LengthsTrend LengthsMinor = 1 month or lessMinor = 1 month or lessIntermediate = 1 - 6 monthsIntermediate = 1 - 6 monthsMajor = 6 months or moreMajor = 6 months or more

Magnitude = extent of moveMagnitude = extent of move

Trend LinesTrend Lines

UPUPShows trend of increasing pricesShows trend of increasing pricesDrawn by connecting ascending Drawn by connecting ascending extreme lowsextreme lows

DOWNDOWNShows trend of decreasing pricesShows trend of decreasing pricesDrawn by connecting descending Drawn by connecting descending extreme highsextreme highs

Channel Lines (Up &Down)Channel Lines (Up &Down)

Top line is parallel to bottom lineTop line is parallel to bottom lineDrawn by connecting ascending or Drawn by connecting ascending or

descending extreme highs and descending extreme highs and lowslows

Useful in showing likely trading Useful in showing likely trading ranges and possible deviations ranges and possible deviations from up or down trendsfrom up or down trends

Support LineSupport Line

An apparent lower bound on prices An apparent lower bound on prices which market prices seem to not be which market prices seem to not be able to fall below (due to increased able to fall below (due to increased interest in buying at that price interest in buying at that price level.)level.)

Is a flat line drawn by connecting Is a flat line drawn by connecting “equal” extreme lows.“equal” extreme lows.

Support LineSupport Line

The greater the number of extreme The greater the number of extreme equal lows, the greater the belief equal lows, the greater the belief that it is a genuine area of support.that it is a genuine area of support.

A close (or two) below the support A close (or two) below the support line indicates that there is no longer line indicates that there is no longer any support at that price level. any support at that price level.

Resistance LineResistance Line

An apparent upper bound on prices An apparent upper bound on prices which market prices seem to not be which market prices seem to not be able to rise above (due to increased able to rise above (due to increased interest in selling at that price level)interest in selling at that price level)

Is a flat line drawn by connecting Is a flat line drawn by connecting “equal” extreme highs“equal” extreme highs

Resistance LineResistance Line

The greater the number of extreme The greater the number of extreme equal highs, the greater the belief equal highs, the greater the belief that it is a genuine area of that it is a genuine area of resistance.resistance.

A close (or two) above the resistance A close (or two) above the resistance line indicates that there is no longer line indicates that there is no longer any resistance at that price level.any resistance at that price level.

Resistance LineResistance Line

An excellent spot for a short An excellent spot for a short position. position.

ReversalsReversals

Signal change in direction or trendSignal change in direction or trendObservable with a single day of Observable with a single day of

trading (if there was a previous trend)trading (if there was a previous trend)Bullish (bearish) reversals indicated Bullish (bearish) reversals indicated

that prices are likely to stop that prices are likely to stop decreasing (increasing) & start decreasing (increasing) & start increasing (decreasing)increasing (decreasing)

Key ReversalsKey Reversals

BullishBullishPrevious Previous

DowntrendDowntrendHigher HighHigher HighLower LowLower LowHigher CloseHigher Close

Key ReversalsKey Reversals

Previous Previous UptrendUptrend

Higher HighHigher HighLower LowLower LowLower CloseLower Close

BearishBearish

Hook ReversalsHook Reversals

BullishBullish Previous Previous DowntrendDowntrend

Lower LowLower LowHigher CloseHigher Close

Hook ReversalsHook Reversals

Previous UptrendPrevious UptrendHigher HighHigher HighLower CloseLower Close

BearishBearish

Head and ShouldersHead and Shoulders

A reversal formation in a previous A reversal formation in a previous uptrending market that signals a top uptrending market that signals a top has been reachedhas been reached

Left Shoulder = 1st set of peak pricesLeft Shoulder = 1st set of peak pricesHead = Higher set of peak pricesHead = Higher set of peak pricesRight Shoulder = 3rd set of peak Right Shoulder = 3rd set of peak

prices prices

Head and ShouldersHead and Shoulders

Neckline =Line thru lows between Neckline =Line thru lows between head and l&r shoulders. Good head and l&r shoulders. Good necklines are fairly flat.necklines are fairly flat.

A close below neckline confirms the A close below neckline confirms the formation.formation.

Belief that prices will decrease below Belief that prices will decrease below neckline by an amt. = distance from neckline by an amt. = distance from top of head to the neckline.top of head to the neckline.

Double TopDouble Top

Like Head and Shoulders w/o headLike Head and Shoulders w/o headLow between two peaks = valley or Low between two peaks = valley or

fulcrumfulcrumClose below fulcrum confirms formation Close below fulcrum confirms formation

and indicates prices will continue to and indicates prices will continue to decline by an amt. at least equal to the decline by an amt. at least equal to the distance from top of peaks to fulcrumdistance from top of peaks to fulcrum

Also holds for multiple topsAlso holds for multiple tops

GapsGaps

A hole or discontinuous part on a A hole or discontinuous part on a bar chart in looking at the trading bar chart in looking at the trading range for two consecutive days (i.e. range for two consecutive days (i.e. contracts traded at price ranges that contracts traded at price ranges that do not overlap).do not overlap).

Today’s high is below yesterday’s Today’s high is below yesterday’s low or today’s low is above low or today’s low is above yesterday’s high.yesterday’s high.

GapsGaps

GAPGAP

Moving AveragesMoving Averages

Calculate the average price in the Calculate the average price in the last several days (e.g. 3,5,7) and plot last several days (e.g. 3,5,7) and plot it.it.

Calculate the average price for a Calculate the average price for a longer price series and plot it.longer price series and plot it.

Moving AveragesMoving Averages

Where the short series average Where the short series average crosses the longer average, that is a crosses the longer average, that is a

buy signal if prices have been buy signal if prices have been moving up recently,moving up recently,

sell signal if they have been sell signal if they have been moving down.moving down.

Moving AveragesMoving Averages

The shorter the short series, the The shorter the short series, the more frequent buy or sell signals.more frequent buy or sell signals.

What is the right length of series to What is the right length of series to use?use?

Differs by commodity?Differs by commodity?Seems to keep changing!Seems to keep changing!

Relative Strength IndexRelative Strength Index

An overbought or oversold indicatorAn overbought or oversold indicator

Calculate the sum of the positive Calculate the sum of the positive price changes and the sum of the price changes and the sum of the negative price changes for the negative price changes for the number of days you selectnumber of days you select

Relative Strength IndexRelative Strength Index

If 1.5 (prices up)

RSI = 100 [RS/(1 + RS)] then RSI = 60RSI = 100 [RS/(1 + RS)] then RSI = 60

If RSI > 70; overbought (SELL)If RSI > 70; overbought (SELL)If RSI < 30; oversold (BUY)If RSI < 30; oversold (BUY)

Sum price increasesRS = _________________

Sum price decreases

Technical analysisTechnical analysis

If technical signal is linked with high If technical signal is linked with high trading volume, signal is often trading volume, signal is often considered strongerconsidered stronger

Advanced traders test historical fits, Advanced traders test historical fits, and use the one and use the one or combinations or combinations that work best recently in each that work best recently in each marketmarket

Reasons for Nonrandom Reasons for Nonrandom Futures Price BehaviorFutures Price Behavior

Risk premium (return for taking Risk premium (return for taking risk) is required by speculators to risk) is required by speculators to encourage them to take encourage them to take positions.positions.

If hedges are primarily short, then If hedges are primarily short, then current futures should be below current futures should be below later expiration price.later expiration price.

Overreaction HypothesisOverreaction Hypothesis

Traders overreact to new market Traders overreact to new market information; if so, trend following information; if so, trend following techniques will work for a while. If techniques will work for a while. If enough traders are trend followers, enough traders are trend followers, may be self fulfilling forecastmay be self fulfilling forecast

Overreaction HypothesisOverreaction Hypothesis

Traders may not be able to Traders may not be able to accurately evaluate impacts of new accurately evaluate impacts of new information, and perceive information, and perceive substantial risk in taking a position substantial risk in taking a position contrary to present trends, so price contrary to present trends, so price moves (overreactions) will persist moves (overreactions) will persist longer.longer.

Success?Success?

Will the return be better than other Will the return be better than other investments, adjusted for risk? investments, adjusted for risk?

Expected futures priceExpected futures priceminusminus current futures price current futures priceminus transaction costs minus transaction costs = Profit = Profit

but how risky vs. alternatives?but how risky vs. alternatives?

Success?Success?

Prevailing wisdom suggests:Prevailing wisdom suggests:80+ percent of small speculators 80+ percent of small speculators

lose moneylose moneyBut new sheep come to be shorn!But new sheep come to be shorn!10% (professionals) make money10% (professionals) make moneyCommodity trading funds--highly Commodity trading funds--highly

variable resultsvariable results

Assignment 8Assignment 8

Where are futures charts found on Where are futures charts found on the web? List several??the web? List several??

Report on best technical analysis Report on best technical analysis site.site.Precise addressPrecise addressHow it’s usefulHow it’s useful

Assignment 9Assignment 9

Find one or more commodity forecast Find one or more commodity forecast newsletter (or similar source).newsletter (or similar source).

Report briefly:Report briefly:Where to get forecast(s)?Where to get forecast(s)?Key factors they consider in their Key factors they consider in their

price forecast process?price forecast process?Does it look useful? At what cost?Does it look useful? At what cost?