Portfolio - Technical Analysis


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Portfolio - Technical Analysis

  3. 3. INTRODUCTION  Technical analysis takes a completely different approach; it doesn’t care one bit about the “Intrinsic value” of a company. Technical analysts are only interested in the price movements in the market.  Despite all the fancy jargons and techniques it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future and to gauge investor sentiments. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components.
  4. 4. THE BASIC ASSUMPTIONS UNDER TECHNICAL ANALYSIS  Technical analysis is a method of evaluating securities by analyzing the statistical data generated by market activity, such as past prices and volume of trading of a particular share. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and tools to identify patterns that can suggest future activity.  The field of technical analysis is based on three assumptions: (1) The market discounts everything; (2) Price moves in trends, (3) History tends to repeat itself.
  5. 5. (1)THE MARKET DISCOUNTS EVERYTHING. A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. (2) PRICE MOVES IN TRENDS. In technical analysis, price movements are believed to follow trends (3)HISTORY TRENDS TO REPEAT ITSELF. Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement
  6. 6. CHARTING TECHNIQUES There are four main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types/ charting techniques are:  The line chart,  The bar chart,  The candlestick chart and  The point and figure chart. All the above techniques are discussed in detail, notice how the data used to create the charts is the same, but the way the data is plotted and shown in the charts is different.
  7. 7. LINE CHART Line charts represents only the closing prices over a set period of time and are therefore the most simple of the four charts. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. But, the closing price is often considered to be the most vital price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.
  8. 8. BAR CHART The bar chart is an extension of line chart in a sense that it adds much more key information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical lines by a horizontal dash. The opening price on a bar chart is denoted by the dash that is located on the left side of the vertical bar. As against this, the close is represented by the dash on the right.
  9. 9. CANDLE STICK CHARTS The candlestick chart is similar to a bar chart, but it is visually constructed. Candlestick also has a thin vertical line showing the period’s trading range which is similar to the bar chart. But the difference lies in the formation of a wide bar on the vertical line, which indicates the difference between the open and close. And like bar charts, candlesticks also rely heavily on the use of colors to explain the activities of share price during the trading period.
  10. 10. THE POINT AND FIGURE CHART The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the stock, which can distort traders view of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis.
  11. 11. CHART PATTERNS  A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals.  The theory behind chart pattern is based on the third assumption i.e. history repeats itself. The idea is that certain patters are seen many times, and that these patterns signal a certain high possibility of movement in a stock. Based on the past trend of a chart pattern setting up a certain price movement, chartists look for these patterns to identify trading opportunities.
  12. 12. TRENDS Trend one of the most important concepts in technical analysis. A trends is really nothing more than the general direction in which a security or market is headed.
  13. 13. Types of trend There are three types of trend:  Up trends  Downtrends  Sideways/ horizontal trend As the names imply, when each successive peak and trough is higher, it’s referred to as an upward trend. If the peaks and troughs are getting lower, it’s a downtrend. When there is a little movement up or down in the peaks and troughs, it’s a sideways or horizontal trend. If you want to get really technical, you might even say that a sideways trend is actually not a trend on a trend on its own, but a lack of a well-defined trend in either direction. In any case, the market can really only trend in these three ways: up, down or nowhere.
  14. 14. Trend lengths An uptrend, down trend or horizontal trend can continue for a long time period, short time period or intermediate time period. Accordingly a trend of any direction can be classified as a long term trend. Intermediate trend or a short term trend. In terms of stock market, a major trend is generally categorized as one lasting longer than 12 months. An intermediate trend is considered to last between one month to quarter of a year and a near term is anything less than a month.
  15. 15. Trend lines A trend line is a simple charting technique that adds a line to chart to represent the trend in the market or a stock. Drawing a trend is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and also used in identification of trend reversals.
  16. 16. Channels A channel, or a channel lines, is the addition of two parallel trend lines that act as strong areas of support and resistance. The upper trend line connects a series of highs, while the lower trend line connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same.
  17. 17. Support and resistance Once the support of a trend is understood, the next major concept is that of support and resistance you must have often heard about bulls and the bears and the battle that goes around between them, or the struggle between buyers demand and sellers supply,. This is revealed by the prices a security seldom moves above resistance or below support.
  18. 18. Role reversal Role reversal refers to situation where the role of support or resistance is reversed, this happens when a resistance or support level is broken. If the price falls below a support level, that level will become resistance. If the rises above a resistance level, it will often become support.
  19. 19. The importance of support resistance  As support and resistance analysis can be used to make trading decision and identify a trend reversal it becomes an important part of trends.  Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level support or resistance does not always have to be a reversal.
  20. 20. Head and Shoulders This is one of the very popular and reliable chart patterns in technical analysis. It is a reversal chart pattern that when formed signals that the security is likely to move against the previous trend.
  21. 21. Cup and Handle A cup and handle chart is a bullish continuation pattern in which the upward trend has not stopped but has only paused for some time and continue in an upward direction once the pattern is confirmed. This price pattern forms what looks like a cup which is preceded by an upward trend the handle follow the cup formation and is formed by a generally downward sideways movement in the security price.
  22. 22. Double Tops and Bottoms This chart pattern is another well-knows pattern that signals a trend reversal it is considered to be one of the most reliable and is commonly used these pattern are formed after a sustained trend and signal to chartists that the trends is about to reverse the pattern is created when a price movement test support or resistance levels twice and is unable to break through the price movement has twice tried to move above a certain price level after two unsuccessful at pushing the price higher the trend reverses and the price heads lower in the case of a double bottom the price movement has tried to go lower twice .
  23. 23. Triangles Triangles are some of the most well-known chart pattern used in technical analysis symmetrical triangle ascending and descending triangle are the three types of triangles which vary in the way they are constructed and what they imply these chart pattern are considered to last anywhere from a forth night to several months
  24. 24. Flag and Pennant When there is a sharp price movement followed by a generally sideways price movement these two short term chart pattern are the continuation pattern that are formed this pattern is then complete upon another sharp price movement in same direction as the move that started the trend the pattern are generally thought to last from one to three weeks.
  25. 25. Wedge The wedge chart pattern can be either a continuation or reversal pattern it is similar to asymmetrical triangle generally shows a sideways movement the other difference is that wedge tend to form over longer period usually between three and six months.
  26. 26. Triple Tops and Bottoms. Another type of reversal chart pattern I chart analysis triple tops and triple bottoms these act in a similar fashion as head and shoulder and double tops and bottoms but are not equally prevalent in charts these two chart patterns are formed when the price movement test a level of support or resistance three times and is unable to break through this signals a reversal of the prior trend triple tops and bottom can lead to confusion during the formation of the pattern because they can look similar to other chart pattern after the first two support test are formed in the price movement .
  27. 27. Rounding Bottom A rounding bottom also referred to as a saucer bottom is a long term reversal pattern which signals a shift from a downward trend to an upward trend this pattern is traditionally thought to last anywhere from several months to several years . A rounding bottom chart pattern looks similar to a cup and handle pattern but without the long term nature of this pattern and the lack of a confirmation trigger such as the handle in the cup and make it a difficult pattern to trade.
  28. 28. TECHNICAL INDICATORS There are many technical indicators which when referred collectively may create great deal of confusion and may not make any sense but when studied on one on one or individual basis can be of great help to the technical analyst. • Moving Averages The moving average of a stock index is the average level of the index over a given interval of time a 52 week moving averages tracks the averages index value over the most recent 52 weeks each week the moving average is recomputed by dropping the oldest observation and adding the latest.
  29. 29. Day Advances Declines Net Advances Cumulative Breadth 1 802 748 54 54 2 917 640 227 331 3 703 772 -69 262 4 512 1122 -610 -348 5 633 1004 -371 -719 Advance Decline Ratio / Market Breath The breath of the market is a measures of the extent to which movement in a market index is reflected widely in the price movement of all the stocks in the market.
  30. 30.  Relative Strength Relative strengths measures the extent to which a security has outperformed or underperformed either the market as a whole its particular industry.  Trin Statistic Market volume is sometimes used to measures the strength of a market rise or fall. Trin = volume declining/no. declining Volume adv. / no. adv.  Confidence Index Confidence index is a ratio of trading of low rated bonds to high rated bonds.  Put/Call Ratio Call option gives investors the right to buy a stock at a “fixed” exercise price and therefore are a way of betting on stock price increases.
  31. 31.  Spreads Spread refers to difference between selling price and buying price quoted for a share, it should be understood here that unlike any other commodity (say, chocolate) there is no MRP for a share, the seller would like to sell the shares he is holding at the lowest possible price and the buyer would like to buy the same share at the lowest possible price  Odd Lot Theory In stock market, shares are traded in lot (say a lot of10 or 50 or 100 shares as the case may be), therefore if marketable lot of a share is 10, every time trade for such share takes place it would be traded in multiples of 10, such lot is known as ‘Marketable lot’.  Insider Trading ‘Insiders ‘ means the people involved in conducting actual business of the company or the people who are directly or indirectly related to such business activity, some example of ‘Insiders’ are directors of the company, high ranked employees of the company, etc.
  32. 32. Dow Theory Dow Theory the grandfather of trend analysis is the Dow Theory, named after its creator, Charles Dow (who established The Wall Street Journal). Many of today’s more technically sophisticated methods are essentially variants of Dow’s approach. The Dow Theory posits three forces simultaneously affecting stock price:  The primary trend is the long-term movement of pries, lasting from several months to several years.  Secondary or intermediate trends are caused by short-term deviation of prices from the underlying trend line. These deviations are eliminated via corrections when prices revert back to trend values.  Tertiary or minor trends are daily fluctuations of little importance.
  33. 33. Technical vs. fundamental analysis Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As mentioned earlier, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand. Looks at economic factors, known as fundamentals. The main differences between technical and fundamental analysis are:  Financial statements vs. charts: at the most basic level, fundamental analyst starts with the financial statements while a technical analyst approaches a security from the charts. A fundamental analyst tries to determine a company’s value by looking at the balance sheet.  Time horizon: fundamental analysis takes a long term approach to analyzing the market while technical analysis takes the short term road to judge a security. Whole technical analysis can be used on a time frame of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.
  34. 34.  Treading vs. investing: not only is technical analysis more short term in nature that fundamental analysis, but the goals of a purchase or sale of stock are usually different for each approach. In general, technical analysis is used for a tread, whereas fundamental analysis is used to make an investment. Criticism of technical analysis Some critics see technical analysis as some kind of kind of taboo or black magic that’s one of the reasons that, technical analysis has only recently begun to enjoy some mainstream standing. While most analysis in stock market focus on the fundamental side, just about any major brokerage now employs technical analysts as well.
  35. 35. Can fundamental & technical analyses be used simultaneously? Although technical analysis and fundamental analysis are seen by many as total opposites- the sugar and diabetes of investing many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to buy an undervalued security. By timing entry into a security, the gains on the investment can be greatly improved. Alternatively, some technical traders might look at fundamentals (for e.g. reputation of the management, etc.) to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Oftentimes, incorporating best of two thoughts (i.e. the fundamentals and technicals) can provide the best case scenario for a trade.