Technical Analysis• There are hundreds of thousands of market participants buying andselling securities for a wide variety of reasons:• hope of gain, fear of loss, tax consequences, short-covering,hedging, stop-loss triggers, price target triggers, fundamentalanalysis, technical analysis, broker recommendations and a fewhundred more.• Trying to figure out why participants are buying and selling can be adaunting process.• Chart patterns put all buying and selling into perspective byconsolidating the forces of supply and demand into a concisepicture.
Technical Analysis• Method of evaluating securities byanalyzing statistics generated by– Market activity– Past Prices– Volume• Do not attempt to measure intrinsic value• Instead look for patterns and indicators oncharts to determine future performance
Technical Analysis• The world of technical analysis is huge• Hundreds of different patterns andindicators investors claim to be successful
Technical Analysis• Technicians believe that securities movein very predictable trends and patterns• Trends continue until something happensto change the trend• Until that change takes place, price levelsare predictable
Charts• Line Charts• Bar Charts• Candle Stick Charting• Point and Figure Chart
Candle Stick Charting(Continued)• Green is an example of abullish pattern, the stockopened at (or near) itslow and closed near itshigh• Red is an example of abearish pattern. Thestock opened at (or near)its high and droppedsubstantially to close nearits low
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 priceswill be used
Point and Figure Chart(continued)• Helps to filter out less-significant pricemovements allowing analyst to focus on mostimportant trends• Used to keep track of emerging price patterns– No time dimension• Two attributes affecting the appearance of apoint & figure chart– Box size– Reversal amount
Resistance and Support• 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 buyinginterest should be able to overcome selling pressure and thuskeep the price from going any lower• Resistance– Price level above the current market price, at which sellingpressure should be strong enough to overcome buying Interestand thus keep the price from going any higher
Resistance and SupportOne of two things can happen when stock approachesresistance/support• Can act as a reversalpoint– When price drops to asupport level, it will goback up– When price rises to aresistance level, it willgo back down• Support/Resistancereverse roles oncepenetrated.– Market price fallsbelow a support level,then the formersupport level becomesa resistance levelwhen the market latertrades back up to thatlevel
Resistance and SupportResistanceSupportResistance/Support
Trend Line MechanicsUPTREND LINE DRAWN ACROSS TWO LOWSDOWNTREND LINE DRAWN ACROSS TWO HIGHSThe uptrend line is drawn across two lows that are several trading days (preferably10 or more) apart. The line should not be significantly steeper than the trends thatappear via inspection of the price patterns on the chart. The downtrend line isdrawn across two highs. The chart below demonstrates both.
Technical Analysis: Double Tops, BottomsDOUBLE TOP ALONG MAJORRESISTANCE PLANEDOUBLE BOTTOM ALONG MAJORSUPPORT PLANERELIABLE FORMATIONSThe top or bottom will occur along resistance and support planes respectively. Whenthe market fails on a rally to a previous high a "double top" is developed. Volume isfound to be distinctly low at second Top. A double bottom occurs along the plane atthe old low.
Double Tops and Bottoms• Double top is a bearish indicator• Double bottom is a bullish indicator• If the price line falls from the neckline by adistance equals to the distance betweenthe peak and trough, the indication is tosell for top and buy for bottom.
810 was also resistance on themonthly NovDouble Top
Technical Analysis:Head and Shoulder FormationsWIDELY OBSERVEDPROVIDES A PROJECTION OF HOW FARTHE MARKET WILL MOVEVERY RELIABLE FORMATIONA widely observed formation, we often see head and shoulder tops and bottoms inthe market. Once completed, the formations give relatively accurate measures ofhow far the market will move. Volume is Heavy at the left shoulder and noticeablylow volume at the right shoulder.
Head and Shoulders• Volume is heavy at the left shoulder• Low volume at the right shoulder• The prices are expected to decline afterthe penetration at least as much as thedistance between the head and theneckline.
Notice how thebreakout is tested, agood place to sell
DOW JONES INDUSTRIAL INDEX(Basket of large company stocks)NecklineShoulderShoulderHeadFormation not relevant untilneckline is broken. Projectsdistance between head andneckline. Projection dependson where price breaksneckline.10800
TrianglesDescending Triangle.Break out tends to be todownside.Ascending triangle. Breakout tends to be to theupside.Symetrical triangle. When prices break out of asymmetrical triangle, the reversal is generally sharp.Triangles are:1. Frequent.2. Not very reliable.