Technical Analysis Lecture 10-13-11

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Technical Analysis guest lecture to the Security Analysis and Portfolio Management class at the University of North Florida. October 13, 2011. DVD available upon request.

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Technical Analysis Lecture 10-13-11

  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 </li></ul><ul><li>2010-11 UNF Finance and Investment Society President </li></ul><ul><li>Financial Columnist, UNF Spinnaker </li></ul><ul><li>2011 FMA Best All-Around Forecaster </li></ul>
  3. 4. Agenda <ul><li>TA as defined by the CFA Institute </li></ul><ul><li>OFG Technical Calls </li></ul><ul><li>Other Technical Analysis Indicators </li></ul><ul><li>Current Market Analysis & Outlook </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. OFG Technical Calls
  17. 18. Raytheon (RTN) Upside Breakout
  18. 19. OIH Double-Bottom
  19. 20. Oil Services ETF 200-EMA
  20. 21. Energy E&P ETF (XOP)
  21. 22. USD – Reversal
  22. 23. DXY Flag Formation
  23. 24. OFG and the Dollar
  24. 25. Diamond Offshore (DO)
  25. 26. Freeport-McMoRan (FCX)
  26. 27. 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
  27. 28. 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>
  28. 29. Scotts Miracle Gro (SMG)
  29. 30. Anomalies <ul><li>January Effect </li></ul><ul><li>Sell (equities) in May and Go Away </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>
  30. 31. Technical Indicators
  31. 32. Candlesticks
  32. 33. Bullish Candle Formations
  33. 34. Bearish Candle Formation
  34. 35. Ichimoku
  35. 36. Golden Cross
  36. 37. Death Cross
  37. 38. 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>
  38. 39. 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>
  39. 40. Bollinger Bands
  40. 41. Elliot Wave
  41. 42. Cup and Handle
  42. 43. AAPL
  43. 44. 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>
  44. 45. 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>
  45. 46. Market Analysis Highlights <ul><li>Headline risk, much priced in </li></ul><ul><li>Dollar pops, Euro weakens, Central Banks </li></ul><ul><li>US Stocks fairing well vs. Intls this year </li></ul><ul><li>Defensives have outperformed (duh) </li></ul><ul><li>Volume surges around volatility </li></ul><ul><li>A look at gold, oil </li></ul><ul><li>Flight to Treasuries </li></ul>
  46. 47. SPX YTD
  47. 48. 10-yr Yield YTD
  48. 49. Small Caps vs. SPX
  49. 50. Internationals vs. SPX
  50. 51. Emerging Markets vs. SPX
  51. 52. CBOE VIX 1-Year
  52. 53. VIX 20-Year
  53. 54. <ul><li>What’s the worst ETF in the world? </li></ul>
  54. 55. VXX – Short Term VIX
  55. 56. NYSE Daily Volume 1-Year
  56. 57. Gold 1-Yr
  57. 58. Crude Oil 1-yr
  58. 59. US Dollar Index 1-Year
  59. 60. JPY,EUR,CHF,USD
  60. 61. Australian Dollar (AUDUSD)
  61. 62. EURCHF - Pegged
  62. 63. US Dollar Index 40-Year
  63. 64. S&P 500 Sectors YTD
  64. 65. S&P 500 Companies
  65. 66. 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>Outflows from equity mutual funds in ensuing months </li></ul><ul><li>High-frequency trading, computer algorithms: Man vs. Machine </li></ul>
  66. 69. Apple on Flash Crash
  67. 71. DJIA All-time (log scale)
  68. 72. Now’s the time?
  69. 73. Or are we the next Japan?
  70. 74. 10-yr Returns
  71. 75. Sentiment
  72. 76. 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>
  73. 77. 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>
  74. 78. 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>
  75. 79. 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>Candlesticker.com </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>

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