Technical analysis OF STOCK MARKET presentation of mba 4 sem FINANCE PPT


Published on

Technical analysis presentation of mba 4 sem FINANCE PPT

Published in: Economy & Finance, Business
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Technical analysis OF STOCK MARKET presentation of mba 4 sem FINANCE PPT

  1. 1. Technical Analysis 4/10/2013
  2. 2. Technical Analysis  Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that how price over time. Definition 1: A method of evaluating future security prices and market directions based on statistical analysis of variables such as trading volume, price changes, etc., to identify patterns. Definition 2: Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors. 4/10/2013
  3. 3. Assumptions of Technical Analysis Market Action discounts everything  Supply Vs. Demand factors.  Fundamental, Political and Psychological factors. Prices move in trends  Identify new and existing trend.  Prices move in trends– Trend in motion is more likely to continue than to reverse. History repeats itself  Future is the repetition of past 4/10/2013
  4. 4. Technical Analysis Most Significant Assumptions:  Stock prices move in trends that persist for long periods  These trends can be detected in charts Thus past trends in market movements can be used to forecast or understand the future. The lag between the time a technical analyst perceives a change in the value of a security and when the investing public ultimately assesses this change provides a profit opportunity to the chartist 4/10/2013
  5. 5. Technical Vs. Fundamental Fundamental:  Study the cause of market movement.  Supply-demand factor.  Government interventions. Technical:  Study the effect of movement.  Charts, price, volume, Trend 4/10/2013
  6. 6. Advantages Of Technical Analysis : •Its quick and easy • It does not involve data and accounting problems • It incorporates psychological as well as economic reasons behind price changes • It tells when to buy ; not why investors are buying Disadvantages Of Technical Analysis : • Efficient market followers say it doesn’t work • If it worked it would self destruct. • It is too subjective to be of any real use 4/10/2013
  7. 7. Technical Analysis Tools to project future market movements  Charting  Key indicator series 4/10/2013
  8. 8. Theories Supports Technical Analysis Dow Theory  Assumptions: Averages discounts everything. The market has three trends. Major trend have three phases. Volume must confirm the trend. ElliotWave Theory  Elliott Wave Theory, which states that security prices are governed by cycles founded upon the Fibonacci series (1-2- 3- 5-8-13-21...). 4/10/2013
  9. 9. Technical Analysis Use of Charting  Often linked to development of the Dow Theory in the late 1890s by Charles Dow  Generally believed successful in signaling the market crash of 1929  Essential Elements of the Dow Theory There are 3 major movements in the market: 1. Daily fluctuations 2. Secondary movements (two weeks to a month) 3. Primary trends (long term)  May be bullish or bearish in nature  Daily fluctuations and secondary movements only important to extent they reflect on the persistence of the long term primary trend4/10/2013
  10. 10. 4/10/2013
  11. 11. Presentation of the Dow Theory: Example of use to analyze a trend  Chart shows positive primary trend despite two secondary downward trends  Bullish primary trend is confirmed by the increases in the levels of secondary lows and highs  Pattern assumed to persist long term but ultimately to end 4/10/2013
  12. 12. 4/10/2013
  13. 13. Presentation of the Dow Theory: Market reversal and confirmation Ultimate end of a bullish trend detected by a new pattern:  Recovery fails to exceed previous high (Abortive recovery) +  New low penetrates a previous low +  New pattern confirmed by subsequent movement in Dow Jones Transportation Average 4/10/2013
  14. 14. Types of Charts  Line Chart.  Candlesticks chart.  Bar Chart.  Point & Figure Chart. Candlesticks charts have become very popular among all chartist. 4/10/2013
  15. 15. Line Chart. Line graph represents a continuous line, connecting the closing prices Line graph is also used when considering the volume and open interest indicators. 4/10/2013
  16. 16. Bar Chart 4/10/2013
  17. 17. The Bar Chart (Continued)  Some of the most popular type of charts  Advantage is that it show the high, low, open and close for each day 4/10/2013
  18. 18. The Bar Chart (Continued) 4/10/2013
  19. 19. Candlesticks Chart 4/10/2013
  20. 20. Candle Stick Charting (Continued)  Been around for hundreds of years  Often referred to as ―Japanese Candles‖ because the Japanese would use them to analyze the price of rice contracts  Similar to bar chart, but uses color to show if stock was up (green) or down (red) over the day  More than 20 patterns are used by technicians for candlestick charting. Some of the most popular include the following. 4/10/2013
  21. 21. Candle Stick Charting (Continued) 4/10/2013
  22. 22. Candle Stick Charting (Continued)  Green is an example of a bullish pattern, the stock opened at (or near) its low and closed near its high  Red is an example of a bearish pattern. The stock opened at (or near) its high and dropped substantially to close near its low 4/10/2013
  23. 23. Candle Stick Charting (Continued)  Top example is called a hammer and is a bullish pattern only if it occurs after the stock price has dropped for several days.  Theory is that pattern indicates a reversal  Bottom is an example of a star, typically indicating a reversal and/or indecision. 4/10/2013
  24. 24. Charts 4/10/2013
  25. 25. Point & Figure chart X's represent increasing prices . O's represent decreasing prices. Does not consider open and close prices. 4/10/2013
  26. 26. Point and Figure Chart  Somewhat rare  Plots day-to-day increases and declines in price.  A rising stack of XXXX‘s represents increases  A rising stack of OOOO‘s represents decreases.  Typically used for intraday charting  If used for multi-day study, only closing prices will be used 4/10/2013
  27. 27. Point and Figure Chart (continued) 4/10/2013
  28. 28. Point and Figure Chart (continued)  Helps to filter out less-significant price movements allowing analyst to focus on most important trends  Used to keep track of emerging price patterns  No time dimension  Two attributes affecting the appearance of a point & figure chart  Box size  Reversal amount 4/10/2013
  29. 29. What are moving averages?  An average of a number of specified historical time periods from the point on the chart. Moving averages offer an indication of the clear direction and slope of the trend in the market.  The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).  SMA is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price.  EMA in order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages). 4/10/2013
  30. 30. Using the Moving Average  Shows the average value of a security‘s price over a period of time  Using compared or used in conjunction with EMA (see discussion below)  The most commonly used averages are of 20,30,50, 100 and 200 days  The longer the time span, the less sensitive the moving average to daily price changes  Moving averages are used to emphasize the direction of a trend and smooth out price and volume fluctuations (―noise‖). 4/10/2013
  31. 31. Moving Average 4/10/2013
  32. 32. Moving Average (Continued)  Notice in April when the stock price dropped well below its 5-day average (the green line).  Bearish signal  February it rose above its 50-day average and continued to rise for several weeks  Bullish signal  Typically, when a stock moves below its moving average it is a bad sign, above it is a good sign 4/10/2013
  33. 33. Moving Average (Continued)  What do the different days mean?  20 days - choppy line. It isn't the most accurate, but is probably the most useful for short term traders.  30 day - similar to 20 day but provides a bit more certainty for the trend.  50 day - moving averages provide a much less volatile, smooth line. This can be used to detect somewhat longer term trends.  100 day - similar to the 50 day, it is less volatile, and one of the most widely used for long term trends.  200 day - even less volatile, more of a rolling chart or smooth line. It doesn't react to quick movements in the stock price therefore it is rarely used. 4/10/2013
  34. 34. Strategies for Moving Averages  Filters  Used to increase confidence about an indicator  No set rules or things to look out for when filtering, just whatever makes you confident enough to invest your money  For example you might want to wait until a security crosses through its moving average and is at least 10% above the average to make sure that it is a true crossover.  Remember, setting the percentile too high could result in "missing the boat" and buying the stock at its peak.  Another filter is to wait a day or two after the security crosses over, this can be used to make sure that the rise in the security isn't a fluke or unsustained.  Again, the downside is if you wait too long then you could end up missing some big profits.  When current price crosses the average a trading signal occurs  Bullish signal when the current price rises above the moving average  Bearish sign when the current price falls below the moving average  4/10/2013
  35. 35. Strategies for Moving Averages (Continued)  Crossovers  Not as easy as filtering  Several different types of crossover's, but all of them involve two or more moving averages.  In a double crossover you are looking for a situation where the shortest MA crosses through the longer one. This is almost always considered to be a buying signal since the longer average is somewhat of a support level for the stock price.  For extra insurance you can use a triple crossover, whereby the shortest moving average must pass through the two higher ones. This is considered to be an even stronger buying indicator.  Notice this happened in May for APPX 4/10/2013
  36. 36. Exponential Moving Averages (EMA)  Calculated by applying a percentage of today's closing price to yesterday's moving average value.  Use an exponential moving average to place more weight on recent prices. 4/10/2013
  37. 37. SMA & EMA Chart.. 4/10/2013
  38. 38. Approaches of Technical Analysis  Supports & Resistances  Pivot Analysis  Trend Channel Supports & Resistances  Trend line theory  Fibonacci method  GANN Theory  Bollinger Band  Patterns  Continuation and Reversal  Market Indicators  Volume indicators  Momentum indicators 4/10/2013
  39. 39. Support and Resistance Levels  Price levels at which movement should stop and reverse direction.  Act as floor and ceiling  Different strengths (major and minor)  Support  Price level below the current market price at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower  Resistance  Price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher 4/10/2013
  40. 40. Resistance and Support One of two things can happen when stock approaches resistance/support  Can act as a reversal point  When price drops to a support level, it will go back up  When price rises to a resistance level, it will go back down  Support/Resistance reverse roles once penetrated.  Market price falls below a support level, then the former support level becomes a resistance level when the market later trades back up to that level 4/10/2013
  41. 41. Trend Channel Supports & Resistances AMZN retraces from a monstrous rally to $60 4/10/2013
  42. 42. Support Breakdowns SELL if support “breaks down”, because it signifies that BUYERS no longer overpower SELLERS. Breakdowns are a BEARISH SELL signal. You should have sold here, at the BREAK DOWN. 4/10/2013
  43. 43. Chart Analysis : Resistance Price at which SELLERS overwhelm BUYERS consistently. When a stock makes a new high and then retraces, sellers who missed out @ the previous peak will feel pressured to sell when price climbs back to that level. 4/10/2013
  44. 44. TGT Resistance Breakout RESISTANCE BECOMES SUPPORT BREAKOUT!! 4/10/2013
  45. 45. Trend line theory  Fibonacci Theory: The Fibonacci numbers are 0, 1, 1, 2, 3, 5, 8, 13, ... The series proceeds, any given number is 1.618 times the preceding number and 0.618% of the next number. (34/55 = 55/89 = 144/233 =0.618) (55/34 =89/55 =233/144 =1.618), and1.618 =1/0.618.  The other Fibonacci numbers are 0.382 and 0.50 commonly used in technical analysis have a less impressive background but are just as powerful in Technical analysis.  0.382=(1-.618)=(0.618*0.618), and 0.5 is the mean of the two numbers. 4/10/2013
  46. 46. Fibonacci numbers are commonly used in Technical Analysis with or without a knowledge of Elliot wave analysis to determine potential support, resistance, and price objectives 4/10/2013
  47. 47. GANN Theory Features:  Price, time and range are the only three factors to consider  The markets are cyclical in nature Based on these three premises, Gann's strategies revolved around three general areas of prediction  Price study– This uses support and resistance lines, pivot points and angles.  Time study – This looks at historically reoccurring dates, derived by natural and social means  Pattern study – This looks at market swings using trend lines and reversal patterns 4/10/2013
  48. 48. GANN Theory Gann noted that there was a relationship between the extent of a price movement and the time the price took to reach its new level. If a share price moves one unit of price per one unit of time this results in a trend line of 45 . Gann described this as a 1 x 1 relationship or squaring of price and time. Gann reasoned that if the price breaks through the trend line the new trend line will have a mathematical relationship with the original one. For example, it could be 2x, 3x or 4x the price or it could be 1/2, 1/3, or 1/4 of the original. A Gann chart uses a series of parallel horizontal lines which act as price targets together with a series of trend lines which fan out at the various Gann ratios from the start of a trend. 4/10/2013
  49. 49. Gann Angle.. 4/10/2013
  50. 50. Gann Chart… 4/10/2013
  51. 51. Bollinger Band  Identify overbought & oversold markets.  Used in combination with oscillator for buy/sell signals.  With other indicators they can warn of impending price moves.  With other indicators they can signal potential tops & bottoms. 4/10/2013
  52. 52. Bollinger Band chart 4/10/2013
  53. 53. Bollinger Band  A simple moving average in the middle (sometimes omitted)  An upper band (SMA plus 2 standard deviations)  A lower band (SMA minus 2 standard deviations)  Standard deviation is a statistical tool that provides a good indication of volatility. The bands react quickly and reflect periods of high and low volatility. 4/10/2013
  54. 54. Bollinger Band  Closing prices are most often used to compute Bollinger Bands. Other variations, including typical and weighted prices, can also be used.  Typical Price = (high + low + close)/3  Weighted Price = (high + low + close + close)/4  Bollinger recommends using a 20-day simple moving average for the center band and 2 standard deviations for the outer bands.  The length of the moving average and number of deviations can be adjusted to better suit individual preferences and specific characteristics of an instrument 4/10/2013
  55. 55. Bollinger Band chart  Double bottom buy: A double bottom buy signal is given when prices penetrate the lower band and remain above the lower band after a subsequent low forms.  Double top sell: A sell signal is given when prices peak above the upper band and a subsequent peak fails to break above the upper band. The bearish setup is confirmed when prices decline below the middle band 4/10/2013
  56. 56. Chart Patterns….  Identifying chart patterns is simply a form of technical analysis  Research has proven that some chart patterns have high forecasting probabilities.  Two types of chart pattern… Continuation. Reversal. 4/10/2013
  57. 57. Continuation Pattern…  Continuation pattern is nothing but continuation of the trend.  Triangles. (Ascending, Descending & Symmetric)  Flags & Pennants.  GAP Theory. 4/10/2013
  58. 58. Ascending Triangle:  Ascending triangles are generally considered bullish and are most reliable when found in an uptrend.  The top part of the triangle appears flat, while the bottom part of the triangle has an upward slant 4/10/2013
  59. 59. Descending Triangle:  The descending triangle is generally considered to be bearish and is usually found in downtrends.  The top part of the triangle has a downward slant and the bottom is flat. 4/10/2013
  60. 60. Symmetric Triangle.  Symmetrical triangles can be characterized as areas of indecision.  A market pauses and future direction is questioned.  Eventually, this indecision is met with resolve and usually explodes out of this formation (often on heavy volume.) 4/10/2013
  61. 61. Flags & Pennants…  Flags and pennants can be categorized as continuation patterns.  Usually represent only brief pauses in a dynamic market.  They are typically seen right after a big, quick move.  The market then usually takes off again in the same direction.  Bullish flags are characterized by lower tops and lower bottoms, with the pattern slanting against the trend. But unlike wedges, their trend lines run parallel. 4/10/2013
  62. 62. Flags & Pennants…  Bearish flags are comprised of higher tops and higher bottoms. "Bear― flags also have a tendency to slope against the trend.  Pennants look very much like symmetrical triangles. But pennants are typically smaller in size (volatility) and duration.  Volume generally contracts during the pause with an increase on the breakout. 4/10/2013
  63. 63. Flags & Pennants… Charts… 4/10/2013
  64. 64. GAP Theory…  A gap is an area on a price chart in which there were no trades.  Normally this occurs after the close of the market on one day and the next day's open. 4/10/2013
  65. 65. Types of Gaps… Common Gaps  A trading gap or an area gap, the common gap is usually uneventful.  They appear in trading range or congestion area. Continued… 4/10/2013
  66. 66. Breakaway Gaps  Occur when the price action is breaking out of their trading range or congestion area. (Price range in which market has traded for some period of time.)  Volume increases instantly. 4/10/2013
  67. 67. Runaway Gaps  Increase interest in the security. Represents traders who failed to get into the security during initial move. 4/10/2013
  68. 68. Exhaustion Gaps  Starts near the end of a good up or down trend. Signals the end of the move. 4/10/2013
  69. 69. Reversal Patterns…  Double top  Double bottom  Triple top/bottom  Rounding tops/ Bottom  Head & Shoulder.  Wedges 4/10/2013
  70. 70. Double top  Double Tops appear on a chart in the shape of the letter "M" and are quite common.  Volume is important to confirm the formation. (Greater volume in the 1st peak than the 2nd one. 4/10/2013
  71. 71. Double bottom  A double bottom is the opposite of a double top and appears as a letter "W" on a chart.  Volume (Greater volume in the 2nd peak than the 1st one.)  Occurs when a stock price drops to a similar price level twice within a few weeks or months  Buy when the price passes the highest point in the handle.  In a perfect double bottom, the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors  The middle point of the ―W‖ should not go into new high ground.  This is a very bullish indicator 4/10/2013
  72. 72. Double bottom chart 4/10/2013
  73. 73. Rounding tops/ Bottom  The rounding top reflects the market's perception that the underlying  fundamentals driving the prices are changing, but the turn is markedly slow. 4/10/2013
  74. 74. Triple top/bottom  The triple top is a reversal pattern made up of three equal highs followed by a  break below support. In contrast to the bottom. 4/10/2013
  75. 75. Cup and Handle  Pattern on bar chart as short as 7 weeks or as long as 65 weeks  Cup in the shape of a U; Handle has a slight downward drift  Right hand side of pattern has low trading volume  As the stock comes up to test old highs, the stock will incur selling pressure by the people who bought at or near the old high  Selling pressure will take the stock price sideways for 4 days to 4 weeks, then it takes off 4/10/2013
  76. 76. Cup and Handle 4/10/2013
  77. 77. Head & Shoulder.  A technical analysis term used to describe a chart formation in which a stock‗s price: 1. Rises to a peak and subsequently declines. 2. Then, the price rises above the former peak and again declines. 3. And finally, rises again, but not to the second peak, and declines once more.  The first and third peaks are shoulders, and the second peak forms the head.  The "head-and-shoulders" pattern is believed to be one of the most reliable trend-reversal patterns. 4/10/2013
  78. 78. Head and Shoulders Patterns  Head and shoulders is a reversal pattern that, when formed, signals the security is likely to move against its previous trend.  The signal appears to be most reliable (?) in detecting a reversal of an uptrend.  A Head and Shoulders pattern consists of four distinct parts: The left shoulder, the head, the right shoulder, and the neckline. Each of these four must be present for the formation to exist.  In addition, the volume pattern must also meet strict requirements. Volume must show a peak on the left shoulder, a lower peak at the head, and then an even lower level at the right shoulder. 4/10/2013
  79. 79. Head and Shoulder Formation  Left Shoulder: A high volume rally and top followed by a minor reaction with significantly less volume than during the rise and top.  Head: Another high volume rally with the top reaching a higher level than the left shoulder, followed by a another reaction on less volume that takes the price to a level near the bottom of the previous reaction.  Right Shoulder: A third rally on noticeably less volume that fails to reach the top of the head.  Neckline: A decline in prices from the top of the right shoulder which falls below the line formed when connecting the bottoms of the left shoulder and head by at least 2-3% of the stock's market value. Head and Shoulders as a Reversal Pattern in an Uptrend 4/10/2013
  80. 80. Head and Shoulders: Archer Daniels 4/10/2013
  81. 81. Technical Analysis: Foreign Exchange 4/10/2013
  82. 82. Key Indicator Series A number of technical indicator series may be watched for bearish ( )and bullish ( ) trends  Contrary opinion rules  Smart money rules  Overall market indicators 4/10/2013
  83. 83. Suggest observing unsuccessful market behavior and choosing a contrary position:  Odd-lot Theory  Short Sales Position  Investment Advisory Recommendations  Put-Call Ratio Contrary Opinion Rules 4/10/2013
  84. 84. Contrary Opinion Rules: Odd-Lot Theory An odd-lot trade is one of less than 100 shares — only small investors tend to engage in odd-lot transactions This theory suggests watching what the small investor is doing and then do the opposite The weekly Barron’s reports odd-lot trading on a daily basis in its ―Market Laboratory – Stocks‖ section It is easy to construct a ratio of odd-lot purchases to odd-lot sales 4/10/2013
  85. 85. Contrary Opinion Rules: Odd-Lot Theory Here, the odd-lot trader is on the correct path as the market is going up (net selling position) but becomes a net buyer preceding a fall in the market 4/10/2013
  86. 86.  The odd-lot trader is also presumed to be a strong seller right before the bottom of a bear market  A corollary to the odd-lot theory says that Monday odd-lot trades are particularly suspect  The theory actually suggests the small trader does all right most of the time but badly misses on key market turns  While the odd-lot theory appeared to have some validity in the 1950s and 1960s, it was not particularly valuable in more recent decades. However, odd-lot traders outguessed many professional traders in the mid-1970s and late 1980s as well as in October 1997 and in the fall of 2003 Contrary Opinion Rules: Odd-Lot Theory 4/10/2013
  87. 87. A rule based on the volume of short sales in the market [A short sale represents the selling of a security you do not own with the anticipation of purchasing the security in the future to cover your short position] The contrary opinion stems from two sources:  Short seller are sometimes emotional and may overreact to the market, and more importantly  There is now a built-in demand for stocks that have been sold short by investors who will have to repurchase shares to cover their short positions Contrary Opinion Rules: Short Sales Position 4/10/2013
  88. 88.  When the number of short sellers is large (i.e., they are bearish), this is thought to be a bullish signal  Technical analysts compute a ratio of total short sales positions on an exchange to average daily exchange volume for the month  Normal ratio is between 2.0 and 3.0  A ratio of 2.5 indicates current short sales are equal to 2 ½ times the day‘s average trading volume  As the ratio (called the short interest ratio) approaches the higher end of the normal range, this would be considered bullish  Use of the ratio has produced mixed results Contrary Opinion Rules: Short Sales Position 4/10/2013
  89. 89. A further contrary opinion rule: Watch the predictions of investment advisory services and do the opposite  Investors Intelligence has formalized this into an Index of Bearish Sentiment:  When 60% or more of advisory services are bearish, expect a market upturn  When only 15% or fewer are bearish, expect a decline in the market Contrary Opinion Rules: Investment Advisory Recommendations 4/10/2013
  90. 90. Contrary Opinion Rules: Put-Call Ratio ILL-CONCEIVED speculation in the options market suggests that a ―put-call‖ ratio may tell you to do the opposite of what option traders are doing  Puts and calls represent options to buy or sell stock over a specified period of time at a given price:  A put is an option to sell  A call is an option to buy 4/10/2013
  91. 91. Contrary Opinion Rules: Put-Call Ratio  The ratio of put (sell) to call (buy) options is normally about 0.60 – there are generally fewer traders of put options than call options  When the ratio gets up to 0.65 to 0.70 or higher, this indicates increasing pessimism by option traders and the contrary rules suggests a buy signal  When the ratio goes down to 0.40, decreasing pessimism (increasing optimism) may indicate that it is time to sell if you are a contrarian  The put-call ratio has a better than average record for calling market turns. 4/10/2013
  92. 92. Smart Money Rules Market technicians have long attempted to track the pattern of sophisticated traders in the hope that they might provide unusual insight into the future:  Theories related to bond market traders (e.g., Barron‘s Confidence Index), and  Theories related to stock market specialists (e.g., short sales by specialists)  Barron‘s Confidence Index= Yield on 10 top-grade corporate bonds X 100 Yield on 40 intermediate-grade bonds 4/10/2013
  93. 93. Smart Money Rules: Barron’s Confidence Index  This index is used to observe the trading pattern of investors in the bond market on the premise that they are more sophisticated than stock traders and pick up trends more quickly  The theory suggests that a person who can figure out what bond traders are doing today may be able to determine what stock market investors will be doing in the near future  As top-grade bonds pay smaller yields than intermediate- grade bonds, the Confidence Index is always below 100%  Normal trading range is between 80 and 96 4/10/2013
  94. 94. Smart Money Rules: Barron’s Confidence Index  If bond investors are bullish about future economic prosperity, they are rather indifferent between holding top-grade and intermediate-grade bonds  the yield differences between the two categories will be relatively small   Confidence Index near 96 4/10/2013
  95. 95. Smart Money Rules: Barron’s Confidence Index  10 Top Grade Bonds yielding 8.4% while 40 Intermediate Grade Bonds yield 9.1%:  Barron’s Confidence Index = x 100 = 92%  Investors become quite concerned about the economy‘s future health and will invest in lower- quality bond issues only at a sufficiently high yield differential to justify the risk – the gap widens:  Barron’s Confidence Index = x 100 = 83% 8.4% 9.1% 8.9% 10.7% 4/10/2013
  96. 96. Smart Money Rules: Barron’s Confidence Index  Market technicians assume there are a few months of lead time between what happens to the Confidence Index and what happens to the economy and stock market  The Confidence Index has a mixed record of predicting future events  This mixed record may partly be due to the fact that the supply of new bond issues can influence yields as much as investor attitudes (demand) 4/10/2013
  97. 97. Smart Money Rules: Short Sales By Specialists  Because of the uniquely close position of specialists to the action on Wall Street, market technicians ascribe unusual importance to their decisions  Frequently monitored is the ratio of specialists‘ short sales to the total amount of short sales  The normal ratio of specialists‘ short sales to the total amount of short sales on an exchange is about 45%  If the ratio goes above 50%, technicians interpret this as a bearish signal  If the ratio falls below 40%, technicians consider this bullish 4/10/2013
  98. 98. Overall Market Rules  Breadth of the Market  Attempts to measure what a broad range of securities are doing compared to a market average  Advance-declines are often compared with movement of a popular market average  Cash Position of Mutual Funds  Indicates their buying potential  Is generally representative of the purchasing potential of other large institutional investors 4/10/2013
  99. 99. Breadth of the Market Compare advance-declines: The number of stock prices which are rising compared to those declining relative to movements in a stock market average as a potential signal of a turning point in the market E.g., if the Dow-Jones Industrial Average (DJIA) is rising while the number of daily declines consistently exceeds the number of daily advances, this might signal the end of a bull market. Why? Although conservative investors are investing in blue-chip stocks, there is a lack of a broad-based confidence in the market 4/10/2013
  100. 100. future weakness in the market is signaled by a strength in the DJIA that is not reflected in the advance-decline data 4/10/2013
  101. 101.  When the DJIA is going down but advanced consistently lead declines, the market may be posed for recovery  Weighted averages calculated of daily advances/declines are also used  Comparisons may provide insights but also false signals – care in interpretation should include a look at a wide range of variables  Decimalization of stock prices in 2001 may have caused the advance-decline measure to lose some of its usefulness as an advance or decline of only a penny is all that is now needed to make the list  (You could, with effort, make up your own measures) 4/10/2013
  102. 102.  Cash Position of Mutual Funds  Between 5 - 20% as a percent of total assets  At the lower end of this range, mutual funds appear to be fully invested and can provide little in the way of additional purchasing power  As their cash position goes to 15% or higher, this might represent significant purchasing power that might help trigger a market upturn  While the overall premise is valid, problems arise in identifying significant cash positions for mutual funds in a given market cycle 4/10/2013
  103. 103. Market Indicators  Volume Indicators:  Volume Price Trend Indicator (VPT): A technical indicator consisting of a cumulative volume line that adds or subtracts a multiple of the percentage change in security prices trend and current volume, depending upon their upward or downward movements.  This indicator is used to determine the balance between a security‘s demand and supply. The percentage change in the share price trend denotes the relative supply or demand of a particular security, while volume indicates the actual size of the forces 4/10/2013
  104. 104. Momentum Indicators:  Momentum is the changing velocity of a price when related to security analysis. Momentum indicators are designed to track momentum in the price of a tradable to help identify the relative enthusiasm of buyers and sellers involved in the price trend development.  Types of Momentum indicators:  Relative Strength Index (RSI)  Moving Average Convergence and Divergence (MACD)  Stochastic Oscillator 4/10/2013
  105. 105. Relative Strength Index:  A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. 100  formula: RSI = 100 - --------- 1+RS  RS = Average of x days' up closes / Average of x days' down closes 4/10/2013
  106. 106. Relative Strength Index:  The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued  When talking about the strength of a stock there are a few different interpretations, one of which is the RSI. The RSI is a comparison between the days that a stock finishes up against the days it finishes down. 4/10/2013
  107. 107. Relative Strength Index:  The RSI ranges from 0 to 100. A stock is considered overbought around the 70 level and you should consider selling. This number is not written in stone, in a bull market some believe that 80 is a better level to indicate an overbought stock since stocks often trade at higher valuations during bull markets.  Likewise, if the RSI approaches 30 a stock is considered oversold and you should consider buying. Again, make the adjustment to 20 in a bear market.  The shorter number of days used, the more volatile the RSI is and the more often it will hit extremes. A longer term RSI is more rolling, fluctuating a lot less. Different sectors and industries have varying threshold levels when it comes to the RSI.4/10/2013
  108. 108. Relative Strength Index:  Stocks in some industries will go as high as 75-80 before dropping back and others have a tough time breaking past 70.  A good rule is to watch the RSI over the long term (1 year or more) to determine what level the historical RSI has traded at and how the stock reacted when it reached those levels. 4/10/2013
  109. 109. RSI Chart 4/10/2013
  110. 110. Money Flow Index  Measures the strength of money flowing into and out of a stock  Difference between money flow index and RSI is that RSI only looks at prices, Money Flow also looks at volume  Ranges from 0 to 100  Overbought at 70  Oversold at 30 4/10/2013
  111. 111. Money Flow Index 4/10/2013
  112. 112. MACD…  The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day exponential moving averages.  Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line.  A bullish crossover occurs when MACD moves above its 9-day EMA and a bearish crossover occurs when MACD moves below its 9-day EMA  The Moving Average Convergence / Divergence (MACD) is a trend following momentum indicator that shows the relationship between two moving averages of prices.  The basic MACD trading rule is to sell when the MACD falls below its 9 day signal line and to buy when the MACD rises above the 9 day signal line. 4/10/2013
  113. 113. MACD…  The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities.  Three Ways of Interpreting the MACD: 1. Crossovers - When the MACD falls below the signal line it is a signal to sell. Vice versa when the MACD rises above the signal line. 2. Divergence - When the security diverges from the MACD it signals the end of the current trend. 3. Overbought/Oversold - When the MACD rises dramatically (shorter moving average pulling away from longer term moving average) it is a signal the security is overbought and will soon return to normal levels. 4/10/2013
  114. 114. MACD Chart… 4/10/2013
  115. 115. Stochastic Oscillator  The Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range  indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).  Three types of Stochastics: Fast (%k), Slow (%D) and Full. 4/10/2013
  116. 116.  Calculation: 4/10/2013
  117. 117. Stochastic Chart 4/10/2013