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Technical Analysis
4/10/2013 Babasabpatilfreepptmba.com

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.

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

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

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

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

Technical Analysis
Tools to project future market movements
 Charting
 Key indicator series

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...).

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 Babasabpatilfreepptmba.com

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

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

Types of Charts
 Line Chart.
 Candlesticks chart.
 Bar Chart.
 Point & Figure Chart.
Candlesticks charts have become very popular among all chartist.

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.

Bar Chart

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

The Bar Chart
(Continued)

Candlesticks Chart

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.

(Continued)

(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

(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.

Charts

Point & Figure chart
X's represent increasing prices . O's represent decreasing prices.
Does not consider open and close prices.

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

(continued)

(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

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).

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‖).

Moving Average

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

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.

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


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

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.

SMA & EMA Chart..

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

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

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

Trend Channel Supports &
Resistances
AMZN retraces from a monstrous rally to
$60

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.

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.

TGT Resistance Breakout
RESISTANCE BECOMES
SUPPORT
BREAKOUT!!

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.

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

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

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.

Gann Angle..

Gann Chart…

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.

Bollinger Band chart

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.

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

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

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.

Continuation Pattern…
 Continuation pattern is nothing but
continuation of the trend.
 Triangles.
(Ascending, Descending & Symmetric)
 Flags & Pennants.
 GAP Theory.

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

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.

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.)

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.

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.

Flags & Pennants…
Charts…

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.

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…

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.

Runaway Gaps
 Increase interest in the security. Represents traders who
failed to get into the security during initial move.

Exhaustion Gaps
 Starts near the end of a good up or down trend.
Signals the end of the move.

Reversal Patterns…
 Double top
 Double bottom
 Triple top/bottom
 Rounding tops/ Bottom
 Head & Shoulder.
 Wedges

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.

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

Double bottom chart

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.

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.

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

Cup and Handle

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.

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.

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

Head and Shoulders: Archer
Daniels

Technical Analysis: Foreign
Exchange

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

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

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

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

 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
Odd-Lot Theory

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
Short Sales Position

 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
Short Sales Position

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
Investment Advisory Recommendations

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

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.

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

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

Smart Money Rules:
 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

Smart Money Rules:
 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%

Smart Money Rules:
 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)

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

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

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

future weakness in
the market is signaled
by a strength in the
DJIA that is not
reflected in the
advance-decline data

 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)

 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

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

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

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

 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.

 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 Babasabpatilfreepptmba.com

 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.

RSI Chart

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

Money Flow Index

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.

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.

MACD Chart…

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.

 Calculation:

Stochastic Chart

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