Technical analysis 2


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Technical analysis 2

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Technical analysis 2

  1. 1. Technical Analysis
  2. 2. Bar Chart Information <ul><li>High </li></ul><ul><li>Open </li></ul><ul><li>Close </li></ul><ul><li>Low </li></ul><ul><li>Daily </li></ul><ul><li>Weekly </li></ul><ul><li>Monthly </li></ul>
  3. 3. Chart formations <ul><li>Trends </li></ul><ul><li>Planes </li></ul><ul><ul><li>Other top and bottom formations </li></ul></ul><ul><ul><li>Key Reversals </li></ul></ul><ul><ul><li>Flags, Triangles and Pennants </li></ul></ul><ul><ul><li>Gaps </li></ul></ul>
  4. 4. Up Trend <ul><li>Connect two or more daily price lows </li></ul><ul><ul><li>Preferably 10 days apart </li></ul></ul><ul><li>When market closes below an uptrend line, a sell signal is generated </li></ul><ul><li>Computer trading vs fundamental </li></ul><ul><ul><li>Computers may drive prices lower for a few days </li></ul></ul><ul><ul><li>If fundamentals don’t support this, then prices will rally </li></ul></ul>
  5. 5. Up Trend Sell Signal
  6. 6. Down Trend <ul><li>Connect two or more daily price highs </li></ul><ul><ul><li>Preferably 10 days apart </li></ul></ul><ul><li>When market closes above a down- trend line, a buy signal is generated </li></ul><ul><li>Computer trading vs fundamental </li></ul><ul><ul><li>Computers may drive prices higher for a few days </li></ul></ul><ul><ul><li>If fundamentals don’t support this, then prices will decline </li></ul></ul>
  7. 7. Down Trend False Buy Signal
  8. 8. Trend line market signals <ul><li>Speculators </li></ul><ul><ul><li>Buy and sell based on signals </li></ul></ul><ul><li>Hedgers – Short </li></ul><ul><ul><li>Place on sell signal </li></ul></ul><ul><ul><li>May choose to offset on buy signal </li></ul></ul><ul><li>Hedgers – Long </li></ul><ul><ul><li>Place on buy signal </li></ul></ul><ul><ul><li>May choose to offset on sell signal </li></ul></ul>
  9. 9. Trend Line reliability <ul><li>A close above a major down trend or below a major up trend will lead to a significant price move about 75% of the time </li></ul>
  10. 10. Resistant Planes <ul><li>Life-of-contract highs can be very difficult for market to penetrate </li></ul><ul><li>Strong Fundamental conditions needed to move market above resistance </li></ul><ul><li>Sell signal if market fails to take out resistance </li></ul><ul><li>Buy signal if market closes above resistance (particularly 2 closes above) </li></ul>
  11. 11. Resistant Planes <ul><li>There are also intermediate resistance planes </li></ul><ul><li>These are not as hard to penetrate as life-of-contract highs are </li></ul>
  12. 12. Resistance plane Sell Signal
  13. 13. Resistance plane Sell Signal Buy Signal
  14. 14. Support Planes <ul><li>The mirror image of Resistance Planes </li></ul><ul><li>Life-of-contract lows </li></ul><ul><li>Buy signal if market fails to penetrate </li></ul><ul><li>Sell signal if low is taken out </li></ul>
  15. 15. Support Planes Sell Signal
  16. 16. Hedgers and Technical Analysis <ul><li>If understand trends and support and resistance planes: </li></ul><ul><ul><li>Time placement of hedge </li></ul></ul><ul><ul><li>Set realistic market targets </li></ul></ul><ul><ul><li>Perhaps minimize margin calls </li></ul></ul>
  17. 17. Other Bar Chart Formations <ul><li>Double Top or Double Bottom </li></ul><ul><li>Head and Shoulders </li></ul><ul><li>Key Reversal </li></ul><ul><li>Flags, Triangles and Pennants </li></ul><ul><li>Gaps </li></ul><ul><ul><li>Common, break away, measuring, exhaustion </li></ul></ul>
  18. 18. Double Top (triple top)
  19. 19. Head and Shoulders Shoulder Shoulder Head Neck line
  20. 20. Key Reversal <ul><li>Higher high </li></ul><ul><li>Lower low </li></ul><ul><li>Close below prior day close </li></ul><ul><ul><li>Sell signal </li></ul></ul><ul><li>Close above prior day close </li></ul><ul><ul><li>Buy signal </li></ul></ul>
  21. 21. Flag Decline Project = Decline
  22. 22. Triangle or Pennant <ul><li>Buy Signal if market breaks out to the top </li></ul><ul><li>Sell signal if market breaks out to the bottom </li></ul>
  23. 23. Gaps Common Break away Measuring Exhaustion
  24. 24. Complements to Chart Patterns <ul><li>Trading Volume </li></ul><ul><li>Open Interest </li></ul><ul><li>Relative Strength Index (RSI) </li></ul>
  25. 25. Trading Volume <ul><li>Barometer of level of intensity in the market </li></ul><ul><li>If buy/sell signal occurs on a relatively high volume day, then it is more reliable </li></ul><ul><li>High/low volume is relative to past trading and relative to specific contract </li></ul>
  26. 26. Guidelines for trading volume <ul><li>Look at all months being traded for a particular commodity </li></ul><ul><li>Interpret volume on limit up/down days very carefully </li></ul><ul><li>Usually low prior to holiday, 3 day weekend, or major report </li></ul>
  27. 27. Open Interest <ul><li># of contracts that are outstanding </li></ul><ul><ul><li>Have not been offset </li></ul></ul><ul><li>No binding relationship between Open Interest and Trading Volume </li></ul><ul><ul><li>Day traders create volume, don’t change open interest </li></ul></ul><ul><li>Open Interest tends to peak and then decline prior to an uptrend reversal </li></ul><ul><ul><li>Less reliable on downtrend reversal </li></ul></ul>
  28. 29. Relative Strength Index <ul><li>Widely used measure of momentum in the market </li></ul><ul><li>14 day RSI is the most common </li></ul><ul><li>To calculate </li></ul><ul><ul><li>Record last 14 day price changes (closes) </li></ul></ul><ul><ul><li>Sum the negative changes and positive changes and divide each by 14 to create (D) down average and (U) up average </li></ul></ul><ul><ul><li>RSI=U/(U+D) * 100 </li></ul></ul>
  29. 30. RSI Market Indicator <ul><li>RSI > 70 </li></ul><ul><ul><li>Market is thought to be over bought </li></ul></ul><ul><li>RSI < 30 </li></ul><ul><ul><li>Market is thought to be over sold </li></ul></ul><ul><li>Numbers vary by commodity </li></ul><ul><li>Major change in Supply or Demand may keep RSI above 70 or below 30 for an extended period of time </li></ul>
  30. 31. RSI example calculations <ul><li>Close 2.40, 2.38, 2.36, 2.38, 2.36, 2.40, 2.44, 2.42, 2.44, 2.48, 2.56, 2.48, 2.52, 2.50, 2.46 </li></ul><ul><li>Up .02 .04 .04 .02 .04 .08 .04 </li></ul><ul><ul><li>Up sum = 28/14 =2 </li></ul></ul><ul><li>Down .02 .02 .02 .02 .08 .02 .04 </li></ul><ul><ul><li>Down sum = 22/14=1.57 </li></ul></ul><ul><li>RSI = 2/(2+1.57) * 100 = 56 </li></ul>
  31. 33. Point and Figure Charts <ul><li>2 CRITICAL parameters </li></ul><ul><ul><li>The cell size </li></ul></ul><ul><ul><li>The reversal requirement </li></ul></ul><ul><li>Cell size – The value in terms of price increment for each cell </li></ul><ul><li>Reversal requirement – Magnitude of price change required for a reversal </li></ul>
  32. 34. Point and Figure Charts <ul><li>There is no time on chart </li></ul><ul><li>X use to plot uptrending prices </li></ul><ul><li>O use to plot downtrending prices </li></ul><ul><li>Only use daily high or low, close doesn’t matter </li></ul><ul><li>Buy/Sell signal generated when new Higher/Lower X/O is plotted </li></ul>
  33. 36. Moving Averages <ul><li>May be a compliment to bar chart </li></ul><ul><ul><li>Single Moving Average 40-day </li></ul></ul><ul><ul><li>Help signal turning points in market </li></ul></ul><ul><li>May be an alternative to bar chart </li></ul><ul><ul><li>Two moving averages employed </li></ul></ul><ul><ul><li>Example 3-day and 10-day </li></ul></ul><ul><ul><li>Example 9-day and 18-day </li></ul></ul><ul><ul><li>Sell signal when shorter cuts longer from top </li></ul></ul><ul><ul><li>Buy signal when shorter cuts longer from bottom </li></ul></ul>
  34. 37. Buy B and Sell S Signals using the 4-day & 9-day Moving Average B B B B B S S S S S B
  35. 38. Moving Averages <ul><li>Advantages </li></ul><ul><ul><li>Provide clear market signals </li></ul></ul><ul><ul><li>No guessing as to chart formation </li></ul></ul><ul><ul><li>Good if there are trends in the data </li></ul></ul><ul><li>Disadvantage </li></ul><ul><ul><li>May generate multiple trades </li></ul></ul><ul><ul><li>Don’t perform well in choppy (sideways) markets </li></ul></ul>
  36. 39. Moving Average <ul><li>Short Hedgers </li></ul><ul><ul><li>Place on Sell signals </li></ul></ul><ul><ul><li>Lift (offset) on Buy signals </li></ul></ul><ul><li>Long Hedgers </li></ul><ul><ul><li>Place on Buy signals </li></ul></ul><ul><ul><li>Lift (offset) on Sell signals </li></ul></ul><ul><li>Speculators </li></ul><ul><ul><li>Buy and Sell and Offset on all signals </li></ul></ul>
  37. 40. Technical Analysis Summary <ul><li>Technical Analysis does work </li></ul><ul><li>It requires Work to make it work </li></ul><ul><li>Need to study past technical analysis for several years worth of data on a particularly commodity before trading </li></ul><ul><li>For hedgers </li></ul><ul><ul><li>Trends and Support/Resistance Planes </li></ul></ul><ul><ul><li>Moving Averages </li></ul></ul>