Lecture 7 27


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Technical Analysis lecture 7-27-11

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Lecture 7 27

  1. 1. Technical and Market Analysis Mike Zaccardi Technical Analyst 2009-2010 Osprey Financial Group
  2. 2. Street Cred <ul><li>2009-10 OFG – Energy, Materials, Utilities equity analyst; Technician </li></ul><ul><li>2010 CFA Global Investment Research Challenge Competitor, Florida Champions </li></ul><ul><ul><li>One of five OFG students, competed in New York City in Americas Challenge </li></ul></ul><ul><li>2010 Financial Management Association Financial Quiz Bowl Champion – Chicago, IL </li></ul><ul><li>10-11 UNF Finance and Investment Society President </li></ul><ul><li>Financial Columnist, UNF Spinnaker </li></ul><ul><li>2011 FMA Best All-Around Forecaster (Crude Oil, Weather) </li></ul><ul><li>Briefly…Research Analyst, Intrepid Capital Mgmt </li></ul>
  3. 4. Agenda <ul><li>TA as defined by the CFA Institute </li></ul><ul><li>Current Market Analysis & Outlook </li></ul><ul><li>OFG Technical Calls </li></ul><ul><li>Energy Charts </li></ul><ul><li>Other Technical Analysis Indicators </li></ul><ul><li>Lightning Round </li></ul>
  4. 5. What is Technical Analysis? <ul><li>Security analysis discipline for forecasting the future direction of prices through the study of past data, primarily price and volume </li></ul><ul><li>Contradictory to weak-form EMH </li></ul><ul><li>Like weather forecasting, TA does not provide an absolute prediction </li></ul>
  5. 6. Technical Analysis per CFAI <ul><li>Though the CFA program does not emphasize TA, it WILL appear on the exams </li></ul><ul><li>Quantitative Methods </li></ul><ul><li>About 5 questions out of 240 </li></ul>
  6. 7. Assumptions <ul><li>Stock values determined by supply and demand </li></ul><ul><li>Supply and demand are driven by both rational and irrational behavior </li></ul><ul><li>Security prices move in trends that persist for long periods </li></ul><ul><li>While causes of changes in supply and demand are difficult to determine, the changes themselves can be observed in market price behavior </li></ul>
  7. 8. TA vs. Fundamentals <ul><li>Fundamental analysts look for changes in stock values (risk and return) that lead to changes in supply and demand and believe stock prices adjust quickly to new information about value </li></ul><ul><li>Technical analysts look directly for signals and indicators of changes in supply and demand and believe stock prices move in trends that can persist for long periods </li></ul>
  8. 9. Advantages of Technical Analysis <ul><li>Quick and easy (sometimes) </li></ul><ul><li>Does not involve messing with data and adjusting for accounting changes and differences </li></ul><ul><li>Incorporates psychological as well as economic (rational as well as irrational) reasons behind price changes </li></ul><ul><li>Behavioral Finance </li></ul>
  9. 10. Challenges to Technical Analysis <ul><li>The weak form of EMH suggests that stock prices reflect all available trading information </li></ul><ul><li>Statistical tests find no evidence of price trends or profitable trading rules </li></ul><ul><li>If statistical trading rules worked, price changes would become self-fulfilling prophecies; its value would be neutralized </li></ul><ul><li>Interpreting technical rules is subjective, and decision variables change over time </li></ul>
  10. 11. Categories of Technical Indicators <ul><li>Contrarian indicators: The majority is often wrong, do the opposite </li></ul><ul><li>Smart money indicators: “Smart” investors are right, do what they are doing </li></ul><ul><li>Momentum indicators: Direction and strength of market movement </li></ul><ul><li>Stock price and volume techniques: Identify patterns that repeat </li></ul>
  11. 12. Contrarian Opinion Rules <ul><li>Mutual fund (cash) ratio = cash/total assets </li></ul><ul><li>Investor credit balances in brokerage accounts </li></ul><ul><li>Opinions of investment advisory services </li></ul><ul><li>OTC volume/NYSE volume </li></ul><ul><li>CBOE put/call ratio </li></ul><ul><li>Percentage of bullish stock index futures traders </li></ul>
  12. 13. Smart Money Indicators <ul><li>Confidence index = high quality bond yields average bond yields </li></ul><ul><ul><li>Increase (closer to 1) is bullish; Yield CI </li></ul></ul><ul><li>T-bill yield to Eurodollar yield spread </li></ul><ul><ul><li>Narrower is bullish, wider is bearish </li></ul></ul><ul><li>Margin debt in brokerage accounts </li></ul><ul><ul><li>Increase is bullish, decrease is bearish </li></ul></ul>
  13. 14. Momentum Indicators <ul><li>Breadth of market: Advance-decline line </li></ul><ul><li>Number of stocks above 200-day moving average </li></ul><ul><ul><li>80% of stocks above 200-day MA, a correction is likely (overbought) </li></ul></ul>
  14. 15. Price and Volume Techniques <ul><li>Dow Theory – major trends (tides), intermediate trends (waves), short-run movements (ripples) </li></ul><ul><li>Ratio of upside to downside volume (>1.75 is overbought, <0.75 is oversold) </li></ul><ul><li>Support and resistance levels – movements through these levels on high volume, breakouts </li></ul><ul><li>Relative strength – ratio of stock price to market index, increasing is bullish, decreasing is bearish, trend expected to continue </li></ul>
  15. 16. Price and Volume Techniques <ul><li>Moving averages – </li></ul><ul><ul><li>Stock price moves through the 50-day moving average on strong volume </li></ul></ul><ul><ul><li>50-day moving average crosses the 200-day moving average on strong volume (golden cross) </li></ul></ul><ul><li>To identify Trends: </li></ul><ul><li>Bar Charts – a bar from high to low price over a period with volume per period at the bottom </li></ul><ul><li>Point and figure charts – only record price movements of some minimum amount </li></ul>
  16. 17. Market Analysis Highlights <ul><li>Headline risk </li></ul><ul><li>Dollar near lows, Euro weak (you’ll see) </li></ul><ul><li>US Stocks fairing well vs. Intls </li></ul><ul><li>Energy, Health Care leading the way </li></ul><ul><li>Volume steady, low (summertime) </li></ul><ul><li>A look at gold, silver </li></ul><ul><li>Commodities cool off </li></ul><ul><li>Credit markets, money velocity - Deflation </li></ul>
  17. 18. SPX 9-Month
  18. 19. NASDAQ 100 ETF (NDX) 9-Month
  19. 20. 10-yr Yield
  20. 21. Small Caps Outperformance
  21. 22. Internationals vs. SPX
  22. 23. Emerging Markets vs. SPX
  23. 24. CBOE VIX 1-Year
  24. 25. VIX 10-Year
  25. 27. <ul><li>What’s the worst ETF in the world? </li></ul>
  26. 28. VXX – Short Term VIX
  27. 29. NYSE Daily Volume 1-Year
  28. 30. Cotton (BAL) ETF – Parabolic Move Cotton ($CT_F) Bubble Burst
  29. 31. Gold ($GC_F) 1-Yr
  30. 32. Silver ($SI_F) 4-Month
  31. 33. Fibonacci <ul><li>13 th century Italian mathematician discovered a self-replicating sequence of numbers </li></ul><ul><li>1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 etc </li></ul><ul><li>Sum of two adjacent numbers forms the next number </li></ul><ul><li>Ratio of two consecutive numbers is 1.618, or its inverse, 0.618 </li></ul><ul><li>Thus 61.8% and 38.2% are thought to be important retracement levels </li></ul>
  32. 34. US Dollar Index 1-Year
  33. 35. JPY and EUR vs. USD
  34. 36. Australian Dollar (AUDUSD)
  35. 37. USDJPY 1-Year (Flash Crash)
  36. 38. EURCHF – “Risk-Off”
  37. 39. US Dollar Index 40-Year
  38. 40. S&P 500 Sectors YTD
  39. 41. S&P 500 Companies
  40. 42. OFG Technical Calls
  41. 43. Raytheon (RTN) Upside Breakout
  42. 44. OIH Double-Bottom
  43. 45. Oil Services ETF 200-EMA
  44. 46. Energy E&P ETF (XOP)
  45. 47. USD – Reversal
  46. 48. DXY Flag Formation
  47. 49. OFG and the Dollar
  48. 50. Diamond Offshore (DO)
  49. 51. Freeport-McMoRan (FCX)
  50. 52. S&P 500 w/200ema & 50sma OFG Strategy: Raise Cash on 2/3 with S&P at 1090-1105 Buy back equities between 1045-1060 Reasoning: Market was in Corrective phase, 200 ema @ 1045, 10% correction at 1035 – buyers likely to step in ahead of 10% number as it had been much anticipated
  51. 53. What Happened? <ul><li>Technical call at 1103 on the S&P turned out to be nearly exactly what occurred </li></ul><ul><li>S&P quickly moved from 1103 to 1044.50 in only a few days and reversed higher, retracing 100% of the move downward within just 2 weeks </li></ul><ul><li>My sectors : </li></ul><ul><ul><li>sold FCX in January, remained in cash in Materials Sector </li></ul></ul><ul><ul><li>Energy was roughly half in cash as of 2/4 </li></ul></ul><ul><ul><li>Market weight defensive Utilities Sector </li></ul></ul><ul><ul><ul><li>Bought back OIH at $115.10 (S&P 1057) 2/5 </li></ul></ul></ul><ul><ul><ul><li>Bought back XOP at $38.38 (S&P 1049) 2/5 </li></ul></ul></ul><ul><ul><ul><li>Bought back FCX at $69.20 (S&P 1059) 2/8 </li></ul></ul></ul><ul><ul><ul><ul><li>Sold on 2/19 at $77.75 for a 12.4% profit in <9 trading days </li></ul></ul></ul></ul>
  52. 54. Scotts Miracle Gro (SMG)
  53. 55. Anomalies <ul><li>January Effect </li></ul><ul><li>Sell (equities) in May and Go Away </li></ul><ul><li>Sell Treasuries in February </li></ul><ul><li>Options Expiration – Heavy Volume </li></ul><ul><li>Mutual Fund Monday! </li></ul><ul><li>Final 10-20 Minutes of Trading </li></ul><ul><li>January Barometer </li></ul><ul><li>President’s Third Year </li></ul><ul><ul><li>Presidential Election Cycle </li></ul></ul>
  54. 56. Energy Charts
  55. 57. RBOB Gas 1-YR (+$0.65)
  56. 58. WTI Crude – 10-Year
  57. 59. WTI/Brent Spread
  58. 60. What’s Commodity is not Performing?
  59. 61. Nat Gas 10-YR
  60. 62. Contango!
  61. 63. Backwardation
  62. 64. Technical Indicators
  63. 65. Candlesticks
  64. 68. Abandoned Baby Engulfing Pattern
  65. 69. Golden Cross
  66. 70. Death Cross
  67. 71. Market Internal Indicators <ul><li>CBOE Put/Call Ratio (WILL BE UPDATED) </li></ul><ul><ul><li>Today: 0.76 (VIX: 20.36 +1.29, +6.8%) </li></ul></ul><ul><li>Advance/Decline </li></ul><ul><ul><li>1092/1812 </li></ul></ul><ul><li>New highs/new lows </li></ul><ul><ul><li>214/5 </li></ul></ul><ul><li>Up Volume/DownVolume </li></ul><ul><ul><li>0.645 </li></ul></ul><ul><ul><li>TRIN: +1.60 </li></ul></ul>
  68. 72. Bollinger Bands <ul><li>The indicator consists of three bands designed to encompass the majority of a security's price action. </li></ul><ul><ul><li>A simple moving avg in the middle </li></ul></ul><ul><ul><li>An upper band (SMA plus 2 standard deviations) </li></ul></ul><ul><ul><li>A lower band (SMA minus 2 standard deviations) </li></ul></ul>
  69. 73. Bollinger Bands
  70. 74. Elliot Wave
  71. 75. 3 More… <ul><li>MACD – Moving average convergance/divergance: momentum indicator that shows the relationship between two moving averages of prices. </li></ul><ul><li>Stochastics – Slow/Fast: momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. </li></ul><ul><li>RSI – Relative strength index: compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. </li></ul>
  72. 76. Netflix (NFLX)
  73. 77. Kroger (KR) Quiet Leader
  74. 78. Apple (AAPL) Loud Leader
  75. 79. Beat down Goldman Sachs (GS)
  76. 80. Molycorp (MCP)
  77. 81. Google (GOOG) Beware
  78. 82. Mosaic (MOS) looks good
  79. 83. Bank of America (BAC)
  80. 84. Peet’s Coffee (PEET)
  81. 85. Flash Crash – 5/6/2010 <ul><li>1000 point drop in Dow </li></ul><ul><li>SPX lost 105 points (9%) intraday </li></ul><ul><li>SPX lost 7% in about 10 minutes </li></ul><ul><li>Recovered 6% in 20 minutes </li></ul><ul><li>Errant trade in SPX futures </li></ul><ul><li>PG fat finger </li></ul><ul><li>Many stocks had ‘trade-aways’ causing scrutiny at the exchanges </li></ul><ul><li>Shattered investor confidence </li></ul><ul><li>Continued outflows from equity mutual funds in coming months </li></ul><ul><li>High-frequency trading, computer algorithms: Man vs. Machine </li></ul>
  82. 88. Apple on Flash Crash
  83. 90. Now’s the time?
  84. 91. Or are we the next Japan?
  85. 92. 10-yr Returns
  86. 93. All other Technical Indicators <ul><li>100s more technical indicators </li></ul><ul><li>If you look hard enough, you can find an indicator to agree with you (Bad!) </li></ul><ul><li>Use technical indicators with other indicators for better results </li></ul><ul><li>Combine TA with Fundamental Analysis for the best results! </li></ul>
  87. 94. Want to be a TA? <ul><li>Market Technicians Association </li></ul><ul><li>Be aware: having technical analysis on your resume can hurt you. Many firms, especially valuation firms, look down on TA </li></ul><ul><li>Somewhat specialized, not many TA entry level positions </li></ul><ul><li>Stocktwits/Twitter </li></ul>
  88. 95. Books <ul><li>Edwards, Robert D. and Magee, John, Technical Analysis of Stock Trends, 9th Edition </li></ul><ul><li>Kirkpatrick, Charles D. and Dahlquist, Julie R.: Technical Analysis The Complete Resource for Financial Market Technicians </li></ul><ul><li>Pring, Martin J.: Technical Analysis Explained, 4th Edition </li></ul><ul><li>Jeremy du Plessis, The Definitive Guide to Point and Figure </li></ul><ul><li>Frost, A.J. and Prechter, Robert R., Elliott Wave Principle, Tenth Edition </li></ul><ul><li>Kaufman, Perry J., New Trading Systems and Methods, 4th Edition </li></ul><ul><li>Nison, Steve, Japanese Candlestick Charting Techniques, 2nd Edition </li></ul><ul><li>Pring, Martin J., Investment Psychology Explained </li></ul><ul><li>Aronson, David R.: Evidence-Based Technical Analysis </li></ul><ul><li>Brown, Constance M., Technical Analysis for the Trading Professional </li></ul><ul><li>Murphy, John J., Intermarket Analysis: Profiting From Global Market Relationships </li></ul><ul><li>Shiller, Robert J., Irrational Exuberance, 2nd Edition </li></ul><ul><li>O’Neil, William J, How to Make Money in Stocks (latest edition) </li></ul>
  89. 96. Good Websites: <ul><li>Ino.com (Futures charts) </li></ul><ul><li>Kitco.com (metal/commodities) </li></ul><ul><li>Optionmonster.com (TA/Options) </li></ul><ul><li>Sectorspdr.com/marketmap/ (Tree) </li></ul><ul><li>Googlefinance </li></ul><ul><li>Yahoofinance </li></ul><ul><li>Bigcharts.com </li></ul><ul><li>Briefing.com (Economic/Earnings Calendars) </li></ul><ul><li>Twitter (live news, traders) </li></ul><ul><li>Brokerage accounts for streaming quotes/analysis (Thinkorswim, StrategyDesk, eSignal) </li></ul>