Introduction to TA

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Introduction to TA

  1. 1. Technical Analysis –IntroductionDow Theory, Chart Construction, Concept of TrendDeclan Fallon, B.A. (Mod.) Ph.D.Senior Market Technician, Zignals (www.zignals.com)Affiliate member of the Market Technicians Association
  2. 2. What is Technical Analysis?• A decision process where price is a factor inthe outcome• “Fundamentalist studies the cause of marketmovement, while the technician studies theeffect”George Murphywww.zignals.com
  3. 3. Advantages of Technical Analysis• All available information in the market place isexpressed in the stock’s price• Level playing field with the “Big Money”• “Big Money” action is readily apparent on aprice chart (‘elephant foot prints’)• Quantitative representation of marketpsychology; greed and fearwww.zignals.com
  4. 4. Tools of the Trade• Charts– All chartists are technicians, but not all technicians arechartists– Supply / Demand (Support/Resistance)• Indicators– Trend (e.g. Moving averages)– Momentum (e.g. Stochastics)– Volume (e.g. Accumulation/Distribution)• Sentiment– Percentage of investors bullish or bearish– Professional and Retail money flowwww.zignals.com
  5. 5. Technical Analysis vs Fundamental AnalysisThere is no ‘right’ and ‘wrong’ each have pros andcons• Fundamental analysis is heavily dependent on accurate (andfair) reporting• Technical analysis does not offer yes/no solutionsIn both cases it is important to know WHEN to tradewww.zignals.com
  6. 6. Chart construction
  7. 7. Types of Chartwww.zignals.comLineCandlestickPoint-n-FigureBar
  8. 8. Displayed Pricewww.zignals.comOpenHighLowCloseHighOpenCloseLowRising Prices
  9. 9. Displayed Pricewww.zignals.comOpenHighLowCloseHighOpenCloseLowFalling Prices
  10. 10. Key Information on a Chart• Pricey-axis• Timex-axis• VolumeTypically runs below timeTotal number of shares traded for a given daydisplayed as a histogramwww.zignals.com
  11. 11. Zignals Chart Structurewww.zignals.com
  12. 12. Time Scale of Charts• Long termUsually a chart longer than a yearPlotted on logarithmic or arithmetic scale (price)Weekly, Monthly• Intermediate term (most common)Between 1-6 monthsUsually arithmetic price scaleDaily• Short termLess than a monthArithmetic scale60, 30, 15, 10, 5 and 1 minute(s)www.zignals.com
  13. 13. Creating a Chart• Create an account on Zignals.comShould be prompted to download Silverlight 2; this isneeded to work the charting service• Go to ChartsStock: CRH (‘CRG - ISE’)Settings: 2 yearsChart type: Linewww.zignals.com
  14. 14. CRH – Sample Chartwww.zignals.com
  15. 15. Dow Theory
  16. 16. Dow Theory• Charles Dow– Father of Technical Analysis– His tenets are the cornerstone of TA– Published first stock market average 1884• 9 railroad stocks• 2 manufacturers– Increased to 30 stocks in 1928www.zignals.com
  17. 17. Tenets of Dow Theory [i]1. Averages Discount Everything“The sum and tendency of the transactions of the Stock Exchange represent thesum of all Wall Street’s knowledge of the past, immediate and remote,applied to the discounting of the future.”2. Market Has Three TrendsDow defined an uptrend as a situation in which each successive rally closes higherthan the previous rally high, and each successive rally low also closes higherthan the previous rally low. (Vice Versa for a downtrend)Three parts:[1] Primary - 1 year[2] Secondary - 3 weeks – 3 months[3] Minor - < 3 weekswww.zignals.com
  18. 18. Tenets of Dow Theory [ii]3. Major Trends Have Three Phases[1] AccumulationInformed buying; typically “Big Money”[2] Public ParticipationImproving Business NewsTechnical / Trend traders[3] Distribution PhaseMedia hypeInformed sellingwww.zignals.com
  19. 19. Tenets of Dow Theory [iii]4. Averages Must Confirm Each OtherNo important bull or bear market signal could takeplace unless both averages gave the same signal.What are the “Averages”?Industrial Index (Dow Jones Index)Transport Indexwww.zignals.com
  20. 20. Tenets of Dow Theory [iv]5. Volume Must Confirm TrendVolume should expand or increase in the direction ofthe major trend.Volume should decrease in the direction of thecountertrendDow considered volume a secondary toolwww.zignals.com
  21. 21. Tenets of Dow Theory [v]6. A Trend is Assumed to be in Effect until itGives Definite Signals that is has ReversedHow is this known?[1] Support/Resistance[2] Price Patterns[3] Trendlines[4] Moving Averageswww.zignals.com
  22. 22. Dow Theory In Actionwww.zignals.comDow Jones ETF (DIA) 2006-2007
  23. 23. Dow Theory In Actionwww.zignals.comDow Jones ETF (DIA) 2006-2007Higher HighsHigher LowsBreakdown
  24. 24. Dow Theory In Actionwww.zignals.comDow Transports ETF (IYT) 2006-2007Higher HighsHigher LowsBreakdown
  25. 25. Dow Theory In Actionwww.zignals.comDow Jones ETF (DIA) 2007-2009Lower highsLower lows
  26. 26. Dow Theory In Actionwww.zignals.comDow Transports ETF (IYT) 2007-2009Lower highsLower lows
  27. 27. Trends
  28. 28. Importance• Concept of trend is essential to the technicalapproach to market analysis• All tools used by a chartist have the solepurpose of helping to measure trend• By understanding the underlying trend it ispossible to trade in the direction of thattrendwww.zignals.com
  29. 29. Definition• Direction of the Market• Movement characterized by zigzags• Zigzags resemble a series of successivewaves with peaks and troughs• Direction of peaks and troughs thatconstitutes market trend.www.zignals.com
  30. 30. Direction• Markets can go1. Up2. Down3. Sideways• Approximately 60% of the time markets gosidewayswww.zignals.com
  31. 31. Psychology of Trend• UP Market (“Bullish”)Initial buyers sitting on profits want moreSideline individuals tempted to enter the marketShorts (people who sell to buy later at a lowerprice) forced to buy• DOWN Market (“Bearish”)Initial buyers eager to dump losing positionSideline individuals disinterested in buyingShorts (people who sell to buy later at a lowerprice) in profit and wanting morewww.zignals.com
  32. 32. Trends in different time frameswww.zignals.comUptrendSidewaysDowntrend
  33. 33. Trends in Zignalswww.zignals.com
  34. 34. Defining Boundaries• Support and Resistance– Typically Horizontal Price Bands– Help confirm trends• Bull trends hold support and break resistance• Bear trends break support and hold resistance• Support– A price area below which buying exceeds selling• Resistance– A price area above which selling exceeds buyingwww.zignals.com
  35. 35. Support and Resistance in Zignalswww.zignals.com
  36. 36. Manually draw support / resistancewww.zignals.comUse annotations and thecrosshair tool to pick yourown support and resistance
  37. 37. How Support and Resistance work• During a trending market, support andresistance levels will break and hold in thedirection of trend; in an uptrend supportholds and resistance breaks; in a downtrendresistance holds and support breaksBUT• Whenever support of an uptrend orresistance in a downtrend is penetrated by asignificant amount, they reverse their rolesand become the oppositewww.zignals.com
  38. 38. Support turns Resistancewww.zignals.com
  39. 39. Volume in Support and Resistance• Increased volume (at least double a 2-monthaverage) is frequently associated with breaksof resistance• Increased volume isn’t necessary to breaksupport– Low volume on breaks of support suggestscomplacency– High volume on breaks of support suggests panicwww.zignals.com
  40. 40. Volume and Support Breakwww.zignals.comComplacencyMore fearfulSupport turned resistanceBacktest
  41. 41. Trendlines• A technician’s basic tool• Up-trendline– Connects successive upward reaction lows• Down-trendline– Connects successive downward reaction highswww.zignals.com
  42. 42. Rules of Trendlines1. Evidence of a trend• Two reaction lows for an uptrend• Two reaction highs for a downtrend2. The middle peak of the two reactions isbreached• The mid-high for an uptrend• The mid-low for a downtrend3. Confirmation with a third touch of the linewww.zignals.com
  43. 43. Benefits of Trendlines1. Enter a Trade on touches of the line2. A break of a trendline is the first sign of atrend reversal3. The strongest trendlines run at a 45 degreeangle4. The longer the trendline (and the moretests) the greater its significancewww.zignals.com
  44. 44. What Constitutes a Trendline Break?www.zignals.com
  45. 45. Trendline Breaks1. Intraday breaks less significant than closingprice breaks2. Price filters• 3% break long term• 1% break short term3. Time filters• 2-days of closes outside of the line4. Role reversalwww.zignals.com
  46. 46. Fan Principle1. Used for trendline violations• Common for a break to move away from thetrendline before returning to the old trendline2. Three Strike rule• Each trendline break results in a new trendlinebeen drawn• On the third trendline break the trend itself isconsidered to have reversed.www.zignals.com
  47. 47. Fan Principlewww.zignals.com1.2.3.Breakdown
  48. 48. Trend Indicators1. Sometimes trendlines aren’t enough2. Trends can be measured with• Price overlays• Moving Averages• Price indicators• MACDwww.zignals.com
  49. 49. Moving Averages1. Smooth Price Action2. Can be adapted to different time frames1. Long term : 200-day MA or 40-week MA2. Intermediate term: 50-day MA3. Short term: 5-, 10-, or 20-day MA3. Different kinds1. Simple Moving Average (most common)2. Exponential Moving Average3. Weighted Moving Averagewww.zignals.com
  50. 50. Zignals Moving Averageswww.zignals.com
  51. 51. How do Moving Averages Work?1. When a Moving Average is rising the trend isbullish2. When a Moving Average is falling the trendis bearish3. Depending on the period of the MovingAverage, bullish and bearish trends canoccur together.www.zignals.com
  52. 52. Trend Indicators1. Supporting Indicators2. Price derived3. Examples• Moving Average Convergence Divergence(MACD) – most common• Directional Indicator (ADX)• Linear Regression• Parabolic SARwww.zignals.com
  53. 53. Moving Average ConvergenceDivergence (MACD)1. Two Exponential Moving Averages2. A Third Moving Average on the differencebetween the Two Moving Averages3. Triggers on crossover of MA difference andthird Moving Averagewww.zignals.com
  54. 54. Zignals MACDwww.zignals.com
  55. 55. Putting It All Togetherwww.zignals.com
  56. 56. Where is CRH now?www.zignals.com
  57. 57. Using Zignalswww.zignals.com1. Email / SMS Alerts• Price breaks Support or Resistance• Price crosses a Moving Average• One Moving Average crosses another2. Charts• Trendlines• Support / Resistance• Indicators
  58. 58. Record your thoughtswww.zignals.com1. Blogging• Archive your Analysis• Store your Chart images• Provide Research to your ‘Clients’2. Zignals YourCall• Make Price Projections• Share with your Friends• Make Yourself a Star!
  59. 59. Toolswww.zignals.com1. BloggingZignals.com/Community (coming soon), Blogger.com, Wordpress.com2. MicroBlogging (excellent for publishing YourCall)Twitter.com, Stocktwits.com3. Books“Technical Analysis of the Financial Markets” – John Murphy4. WebsitesZignals.com, Wikinvest.com, Covestor.com, Cake.com, SocialPicks.com,Stockpickr.com , Instantbull.com, Finviz.com5. BlogsZignalsblog.blogspot.com, Blog.fallondpicks.com, Ritholz.com/blog,TimothySykes.com, Globaleconomicanalysis.blogspot.com,Traderfeed.blogspot.com, HowardLindzon.com, Paddypowertrader.com/blog
  60. 60. QUESTIONS?Thank youwww.zignals.comwww.zignals.com

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