Credit risk management and loan performance in microfinance....pdf
Technical Analysis
1. GRADUATE PROJECT IN FINANCE
BFIN 695
TECHNICAL ANALYSIS FOR GOLD IN 2012
Submitted to the Lebanese International University
The School of Business
In Fulfillment of the
Requirements for the Degree of
Master in Business Administration
By
Mohammad Abdallah Alkhodor
11210133
Supervised by Dr. Mohammad Kassem
Beirut – Lebanon
Spring 2014
2. 1
DEDICATIONS
I would like to dedicate this project to Almighty GOD who gave me patience and
health to finish this project, then to my family members who support me in my study, to
my subject instructor who guide me, to my life mate who encourage me.
3. 2
ACKNOWLEDGEMENTS
I would like to acknowledge the academic support that LIU’s constituencies have
granted to us. My deepest acknowledgements are expressed to the academic directors of
the university. In a particular way, my thanks go to Dr. Mohammad Kassem who stands
by my side in order to fulfill the needed requirements for this project; I want to thank him
for his great knowledge and for his valuable time, his serious attitude and manner.
4. 3
ABSTRACT
This project aims at conducting a technical analysis for gold during the year 2012. The
researcher tried to use the technical tools to develop a clear understanding and
confirmation for technical analysis theory. Moreover, this study shows how investors can
use these tools to anticipate the future direction for prices and to develop buy and sell
signals. Several tools were used in assessing gold prices during 2012 including charts
showing support and resistance levels, trends, patterns, and oscillators. This project
proved that technical analysis is crucial for predicting and forecasting prices. In addition,
several technical analysis tools are supposed to be used together to give more accurate
and clear signals. Finally, it was found that trend lines, which reflect the main direction of
price movements, can be considered the most useful tool for long term investment
decisions.
5. 4
TABLE OF CONTENTS
PART I: THE THEORETICAL FRAMEWORK........................................................10
CHAPTER 1: INTRODUCING THE GRADUATE PROJECT ................................11
1. INTRODUCTION............................................................................................11
1.1.Statement of the Problem........................................................................11
1.2.Objectives of the Graduate Project........................................................11
CHAPTER 2:THEORETICAL PART OF THE GRADUTE PROJECT .................11
2.1.The Role of Investment Analysis ............................................................14
2.2.Methods of Analysis.................................................................................14
2.2.1. Fundamental Analysis................................................................14
2.2.1.1.Economy Analysis...............................................................15
2.2.1.2.Industry Analysis ................................................................15
2.2.1.3.Company Analysis ..............................................................15
2.2.2. Technical Analysis......................................................................18
2.2.2.1.Charts...................................................................................19
2.2.2.2.Support and Resistance......................................................21
2.2.2.3.Trends ..................................................................................22
2.2.2.4.Chart Patterns.....................................................................24
2.2.2.5.Volume .................................................................................29
2.2.2.6.Moving Averages.................................................................30
2.2.2.7.Indicators and Oscillators..................................................32
PART II: THE PRACTICAL FRAMEWORK ............................................................35
CHAPTER 3: RESEARCH METHODOLOGY ..........................................................36
3.1.Data Collection Method...........................................................................36
3.1.1. Gold Background.........................................................................36
3.1.2. Gold Supply..................................................................................38
3.1.3. Gold Reserves by countries.........................................................39
3.2.Study Limitations.....................................................................................39
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CHAPTER 4: FINDINGS AND RESULTS ..................................................................40
4.1.Data Analysis Methods............................................................................40
4.2.Fact Finding Results ................................................................................40
4.3.Support and Resistance for Gold............................................................40
4.4.Trends of Gold..........................................................................................44
4.5.Patterns of Gold ......................................................................................47
4.5.1. Symmetrical Triangle ..................................................................47
4.5.2. Ascending Triangle......................................................................48
4.5.3. Descending Triangle ....................................................................49
4.5.4. Flag................................................................................................50
4.5.5. Pennants........................................................................................51
4.5.6. Head and Shoulders ....................................................................52
4.6.Indicators and oscillators ........................................................................53
4.6.1. Moving Averages Convergence Divergence ..............................53
4.6.2. Relative Strength Index (RSI).....................................................55
4.6.3. Stochastic ......................................................................................56
4.6.4. The average directional index (ADX) ........................................57
PART III: GRADUATE PROJECT CONCLUSIONS AND
RECOMMENDATIONS.................................................................................................59
CHAPTER 5: CONCLUSIONS & RECOMMENDATIONS .....................................60
5.1.Conclusions...............................................................................................60
5.2.Recommendations....................................................................................61
REFERENCES.................................................................................................................63
7. 6
LIST OF TABLES
Table 4.1 historical gold prices..........................................................................................36
Table 4.2 Gold Reserves by Countries .............................................................................38
8. 7
LIST OF FIGURES
Figure 2.1 Bar chart components.......................................................................................18
Figure 2.2 Line charts ........................................................................................................19
Figure 2.3 Candlestick components ..................................................................................19
Figure 2.4 Candlestick charts.............................................................................................20
Figure 2.5 Horizontal support and resistance on chart ......................................................21
Figure 2.6 Diagonal support and resistance ......................................................................21
Figure 2.7 Uptrend forms ..................................................................................................22
Figure 2.8 Downtrend forms..............................................................................................22
Figure 2.9 Sideway trend forms.........................................................................................23
Figure 2.10 Major and intermediate trend ........................................................................24
Figure 2.11 Symmetrical triangle in uptrend .....................................................................25
Figure 2.12 Symmetrical triangle in downtrend ................................................................25
Figure 2.13 Ascending triangle..........................................................................................26
Figure 2.14 Descending triangle .......................................................................................27
Figure 2.15 Flags and pennants .........................................................................................27
Figure 2.16 Head and shoulders top ..................................................................................28
Figure 2.17 Head and shoulders bottom ............................................................................29
Figure 2.18 Volume ..........................................................................................................30
Figure 2.19 Moving average with price.............................................................................31
Figure 2.20 MACD and its indications..............................................................................31
Figure 2.21 Stochastic indicator ........................................................................................33
Figure 2.22 The ADX indicator ........................................................................................33
Figure 4.1 Historical prices of gold ...................................................................................37
Figure 4.2 Gold contribution in GVA of countries ...........................................................37
Figure 4.3 Resistance zone 1718-1734..............................................................................40
Figure 4.4 Resistance level 1785 .......................................................................................40
Figure 4.5 Support level became resistance level 1629.....................................................41
Figure 4.6 Resistance levels in six months........................................................................42
Figure 4.7 Support level 1652............................................................................................42
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Figure 4.8 Downtrend and uptrend ...................................................................................43
Figure 4.9 Long term downtrend .......................................................................................44
Figure 4.10 Downtrend after uptrend finish .....................................................................44
Figure 4.11 Sideway trend ................................................................................................45
Figure 4.12 The main trends in 2012 ................................................................................45
Figure 4.13 Symmetrical triangle .....................................................................................46
Figure 4.14 Ascending triangle .........................................................................................47
Figure 4.15 Descending triangle........................................................................................48
Figure 4.16 Flag in uptrend................................................................................................49
Figure 4.17 Pennant in downtrend.....................................................................................50
Figure 4.18 Head and shoulders pattern ............................................................................51
Figure 4.19 MACD indicator.............................................................................................52
Figure 4.20 MACD and histogram signals .......................................................................53
Figure 4.21 RSI ndicator ...................................................................................................54
Figure 4.22 Stochastic indicator .......................................................................................55
Figure 4.23 Stochastic oscillator from June 2012..............................................................56
Figure 4.24 ADX oscillator ...............................................................................................57
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CHAPTER ONE: INTRODUCTION
1.1. Statement of the Problem
Although fundamental and technical analysis techniques are widely used and
reported in the financial press, their use and interpretation is often misunderstood. An
advisor or investor considering an investment based on an analyst’s interpretation of
these techniques, or on their own analysis, must have a clear understanding of what the
techniques measure, how they are determined, and how they are interpreted.
While building a portfolio, an investor needs to compare between alternatives by
evaluating securities according to their risk and return. Market and economic data, stock
charts, industry and company characteristics, and financial statistical data are analyzed to
take investment decisions. Therefore, for investors and advisors, there are different
branches of analysis which helps to organize the information. Some analysis focuses
relatively narrowly on companies themselves, while some looks more broadly, using an
international and market perspective.
1.2. Objectives of the Graduate Project
The objective of this project is to describe technical analysis method, to test the
accuracy of the used tools relying on practical confirmation from charts for gold during
2012. This goal will be achieved through conducting the technical analysis on gold
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during one year horizon, to check if this analysis can provide the analyst with good future
predictions.
Technical analysis is one of the most important analytical methods that depend
heavily on charts, to understand the historical performance for the price. This historical
performance can be used to forecast the future movement depending on different tools.
The tools to be used in this project are the most common ones in technical analysis.
Starting with support and resistance, the researcher will describe how these levels on
chart can give clear and useful indictors to anticipate price movements. Besides, the trend
lines will be analyzed to determine price directions on the long, medium, and short terms.
Moreover, chart pattern will be used as a conforming tool for the breakout point and the
target price after this breakout. Finally, the indicators and oscillators will be used also as
confirmation tools to support the trend direction and to determine its strength.
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CHAPTER 2: LITREATURE REVIEW
2.1.The Role of Investment Analysis
Although fundamental and technical analysis techniques are widely used and
reported in the financial press, their use and interpretation is often misunderstood. An
advisor or investor considering an investment based on an analyst’s interpretation of
these techniques, or on their own analysis, must have a clear understanding of what the
techniques measure, how they are determined, and how they are interpreted. For example,
in conducting an investment analysis of a mutual fund, the investor would look at factors
such as how the fund has performed compared to its benchmark. The investor could also
compare performed to similar funds, its expense ratio, management stability, sector
weighting, and style and asset allocation.
2.2.Methods of Analysis
The two applied methods for security analysis are the fundamental and technical
analysis. These methods are both used to provide a more accurate prediction for future
price movements. On the one hand, fundamental analysis relies on information about
economy, industry and the company. On the other hand, technical analysis uses the
historical price to predict the future movements.
2.2.1. Fundamental Analysis
Suresh (2013) mentioned that the everyday changing business environment and
the specialty of capital market instruments, both force investors to depend strongly on
fundamental factors in their analysis and investment decisions. These fundamental factors
relate to the overall economy or a specific industry or a company. The performance of the
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securities that represent the company can be said to depend on the performance of the
company itself. As companies are a part of industrial and business sector, which in turn
are parts of overall economy, the economic and industry factors can affect the investment
decision. The selection of any investment should start with the fundamental analysis
process. This process examines the economic environment, industry performance and
company performance, respectively, before making an investment decision.
McClure (2010) has defined fundamental analysis as a technique that attempts
to determine a security’s value by focusing on underlying factors that affect a company's
actual business and its future prospects. He continued that on a broader scope, you can
perform fundamental analysis on industries or the economy as a whole. Besides, Hans
(2007) stated that fundamental analysis involves examining the economic, financial and
other qualitative and quantitative factors related to a security in order to determine its
intrinsic value. Therefore, fundamental analysis is a process of studying all internal and
external factors which can affect stock price.
Hans (2010) classified factors affect security prices into the qualitative and
quantitative ones, which can be collected from internal or external sources. These factors
can reflect the real situation for the company that can be used in determining the intrinsic
value of its stock. Peterson (2005) has classified these factors as follows:
Economy analysis
Industry analysis
Company analysis
2.2.1.1. Economy Analysis
According to the changes in the economic environment, analysts must conduct
scenario analysis to evaluate how the company will perform under different economic
conditions. By doing so, analysts will be able to develop better forecast of how the
company will perform in the future. Companies will be affected by different economic
data, main factors included in economic analysis, not exclusively, are:
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Gross Domestic Product (GDP): is one measure of economic activity, which is the
total amount of goods and services produced in a country in a year. It is calculated
by adding the market values of all the final goods and services produced in a year.
Interest Rate: is the price of credit. It is the percentage of fee received or paid by
individual or organization when they lend and borrow money. In general,
increases in interest rate, whether caused by inflation, government policy, rising
risk premium, or other factors, will lead to reduced borrowing and economic
slowdown.
Unemployment: This indicator usually is difficult to predict, but its weight is
important and has immediate impact on both the income and consumption of
families.
Inflation: Inflation can be defined as a trend of rising prices caused by demand
exceeding supply. Over time, even a small annual increase in prices of say 1 %
will tend to influence the purchasing power of the nation. In other words, if prices
rise steadily after a number of years, consumers will be able to buy only fewer
goods and services (lower purchasing power) assuming income level does not
change with inflation.
Fiscal Policy: The fiscal policy of the government involves the collection and
spending of revenue. In particular, fiscal policy refers to the efforts by the
government to stimulate the economic directly, through spending.
2.2.1.2. Industry Analysis
The second level of analysis will be conducted on the industry taking into account
different aspects, mainly:
Competition: The nature of competition and the number of companies in the industry
(concentration ratio) can affect investment decisions. Besides, the position of the
company in the market has a critical impact on the decision.
Industry growth: It can be explained by the increase in consumption for a customer in
the overall industry.
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Labor conditions: Depends mainly on each company’s specific needs. These needs
(job specification) determine the kind of employees and special qualifications needed
to perform their jobs.
Regulatory conditions: Each industry has its regulations in addition to the public
regulation in a country; this can permit or forbid the company to perform its
operations.
2.2.1.3. Company Analysis
The analysis of a company requires deep understanding of its performance during
the last period to predict the future performance, in this analysis there are two groups of
information, qualitative and quantitative information.
Qualitative information : it is the information that can’t be explained in numbers
such as :
- Business model
- Brand names
- Competitive advantages
- Management
Quantitative information: that can be easily explained by numbers which can be
estimated from the previous performance of the company and mainly rely on
financial statements :
- Balance sheet: Includes company’s assets, liabilities and equity. It
reflects company’s health, resources owned, leverage level, liquidity,
etc.
- Income statement: the income statement reflects the amount of
revenues the company earned and the amount of expenses incurred
covering a certain period of time. Net profits or losses can be
determined from the net between the two after taxes.
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- Cash flow statement: It shows the sources of cash and uses of cash
within the company. It is classified into three major parts reflecting
the main activities of the firm: Operation, investing, and financing
activities.
2.2.2. Technical Analysis
According to Suresh (2013) fundamental analysis and Technical analysis are the
two main approaches to security analysis. Technical analysis is frequently used as a
supplement to fundamental analysis rather than as a substitute to it. Referring to technical
analysis, the price of stock depends on demand and supply in the market place. It has
little correlation with the intrinsic value. All financial data and market information of a
given stock is already reflected in its market price. Murphy (1999) has defined technical
analysis as the study of market action, primarily through the use of charts, for the purpose
of forecasting future price trends. Suresh (2013) has determined the tools and techniques
that can be used in technical analysis as follows:
Prices: Whenever there is change in prices of securities, it is reflected in the
changes in the investor attitude by which it affects the supply and demand of
securities.
Time: The degree of movement in price is a function of time. The longer it
takes for a reversal in trend, the greater will be the price change that follows.
Volume: The intensity of price changes is reflected in the volume of
transactions that accompanied the change. If an increase in price is
accompanied by a small change in transactions, it implies that the change is
not strong enough.
Width: The quality of price change is measured by determining whether a
change in trend spreads across most sectors and industries, or it is
concentrated in few securities only. The study of market width indicates the
extent to which price changes have taken place in the market in accordance to
a certain overall trends.
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2.2.2.1. Charts
Edwards (1948) has identified charting as the working tools of technical analyst,
it has been developed in many forms and styles to represent everything that is happening
in the market graphically. Every entity in the chart can represent a month, week, day or
an hour to perform the entire chart. Murphy (1999) has described that there are three
types of available charts:
Bar Chart: it is called bar chart because each day’s range (in day time fame) chart
represented by a vertical bar. In each bar there is four components high price,
low price, open price and closing price. The opening price is the tic in the left of
bar and the tic in the right indicate the closing price.
Figure2.1 Bar chart components
www.forexrealm.com
Line chart: in line charts only closing price plotted on the chart, it is used by
chartist who believes that only closing price is important.
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Figure2.2 Line chart
www.forexrealm.com
Candlestick chart: it is the most popular chart used. A candlestick is composed of
two features: The first is the real body which is the rectangle between the open
and close price and is what gives candlestick graph its distinctive appearance,
this area is blacked in if open above close and in white if close above open. A
session in which the open and close are the same is called doji session and
represented by a single horizontal line in this price. The second distinctive
feature is the shadow of the candle, which drawn in the area above and below the
real body, it is possible to have one, tow or no shadows. When a shadow is
absent the result is referred to as shaved candle.
Figure2.3 Candlestick components
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2.2.2.2. Support and Resistance
Edwards (1948) has mentioned that support level is a price level below current
price where there is a massive demand that prevent the price from going down or to make
the price go up. Resistance level is a price level above current price where there is a
massive selling power that encounters the price and prevents it from continuing its upside
or to pressure it to decline. The support and resistance levels are important tools in
confirming a reversal, in forecasting the course of prices, and in making appropriate price
moves. There are two types of support and resistance:
Horizontal support and resistance: it happens when the price of a security rise or
fall to the same level every time.
Diagonal support and resistance: when the price of a security follow a trend it
will form higher highs and higher lows in the case of uptrend or will form lower
highs and lower lows in case of downtrend, the line that connect these higher
highs and higher lows or the line that connect lower highs and lower lows is
diagonal support and resistance level.
Figure 2.5 Horizontal Support and Resistance on Chart
www.keytradebank.com
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Figure 2.6 Diagonal Support and Resistance
www.keytradebank.com
2.2.2.3.Trend
Murphy (1999) has mentioned that the trend is the direction of the market prices
which constitutes of series of highs and lows. Trend has three directions:
Uptrend: is a series of successive higher highs and higher lows.
Figure 2.7 Uptrend form
www.forextofreedom.co
23. 22
Downtrend: it is a series of lower highs and lower lows.
Figure 2.8 Downtrend Form
www.forextofreedom.com
Sideway Trend: it constitutes of highs that are approximately at the same price
level and lows that are approximately at the same price level.
Figure2.9 Sideway Trend Form
www.forextofreedom.com
24. 23
In terms of period of time trend can be classified into three classifications:
Major Trend: is the trend that lasts more than one year
Intermediate Trend: lasts from one month to three months.
Near term Trend: is a trend that lasts less than one month.
A long-term trend is composed of several intermediate trends, which often move
against the direction of the major trend. If the major trend is upward and there is a
downward correction in price movement followed by a continuation of the uptrend, the
correction is considered to be an intermediate trend. The short-term trends are
components of both major and intermediate trends.
Figure 2.10 Major and intermediate trend
www.forextofreedom.com
2.2.2.4. Chart Patterns
Edwards (1948) has identified chart patterns as its shapes on the chart that give us
an estimation of the future direction of the price when these patterns are complete. There
are two types of patterns:
25. 24
Reversal: reversal pattern can give advanced warning that the price of the
security has complete its pattern and it will turn around and begin new trend.
Moreover, it tells approximately how far the price will move.
Continuation: continuation patterns can give a warning that the trend will
continue its direction after a short consolidation period, and it tells how far
the price will move.
Matras (2011) has classified the types of patterns as follows:
- Symmetrical Triangles: are continuation pattern that make a static situation in
the movement and then the trend continue its direction.
Figure 2.11 Symmetrical Ttriangle in Uptrend
www.aboutcurrency.com
In this period the price is being challenged with selling forces that prevent it from
breakup and being challenged with buying forces preventing it from go down. At the end
of this period the price will breakout and will continue the preceding trend direction.
The two types of symmetrical triangle are:
Symmetrical triangle in uptrend (Bullish): the preceding trend line will
continue by the end of symmetrical triangle with a breakout to upside.
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Symmetrical triangle in downtrends (Bearish): the downtrend will
continue its falling by breaking down the price obstacle.
Figure 2.12 Symmetrical Triangles in Downtrend
www.aboutcurrency.com
- Ascending Triangles: the ascending triangle is a continuation pattern formed
mostly in uptrend to continue its direction. It is formed by two trend lines a flat
line that represent resistance and ascending line represents support, the price will
go uptrend when this pattern is being complete.
Figure 2.13 Ascending Triangle
www.istockanalyst.com
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- Descending Triangles: it is a continuation pattern founded generally to continue
downtrend line after consolidation. It is the opposite of ascending triangle in
which the flat line represents the support level and descending line represents
resistance level, when this pattern is complete the price will go down.
Figure 2.14 Descending triangle
www.istockanalyst.com
- Flags and pennants: the flag and pennant are considered as continuation patterns
which come after sharp move in the price followed by sideway price movement.
When the price breakout in the same direction of the initial trend then the pattern
is being complete.
Flags: after acting sharply move in the price it reach an area to make
consolidation before continuing its direction, this area will be seen in
the opposite direction of the initial trend by forming two parallel lines
like support and resistance lines, this area is known as flag. By
completing the flag the price breakout to continue in the main trend
line. The flag can be either bullish or bearish depending on the initial
trend.
Pennants: the pennants forms look like symmetrical triangle .This area
is formed after sharp move in the price then pause in this area by two
converging lines that form the pennant.
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Figure 2.15 Flags and Pennants
www.ikonfx.com
- Head and Shoulders: head and shoulders is a reversal pattern which indicates
that the trend wills inverse its directions when the pattern is complete. From the
name we can notice that the pattern is look like head and shoulders with one
higher top and two lower tops on the right and left. This pattern has four main
parts two shoulders, a head and a neckline. There are two types of head and
shoulders:
Head and shoulders top: this pattern is formed at the end of upward
trend which signals that the trend will reverse its direction to downward
by breakout below the neckline.
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Head and shoulders bottom (inverse head and shoulders): this pattern is
formed at the end of downward trend which signals that the trend will
reverse its direction to upward by breakout above the neckline.
Figure 2.17 Head and shoulders bottom
www.chartpatterns.com
2.2.2.5.Volume
Murphy (1999) has defined volume as the number of shares executed over a given
period of time. Volume is used to confirm trends and chart patterns. High volume
indicates high movement in the price and vise versa, low volume also indicates that the
trend will be reverse especially low volume in high points. Volume can be used as an
indicator for price patters, this can be done during pattern formation, and especially in
breakout points when the pattern should be complete, then volume should be high to give
confirmation signal that the price will move strongly.
- Volume Precedes Price:
As price move is a result of more buying or selling forces, then the price move will
be preceded by volume increase. If volume starts to decrease in an uptrend, that gives a
sign that the uptrend is about to end.
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Figure 2.18 Volume
2.2.2.6.Moving Averages
Murphy (1999) has defined moving averages as the average price of a security
during a period of time. Moving average aims to remove the impact of fluctuation in the
price during this period, which will result in giving a good indicator to enhance the other
indicators viewpoint. Moving averages are classified into three methods where they differ
in the way of calculation:
- The Simple Moving Average (SMA): Under this method the moving average
can be calculated as the sum of the closing prices during a time period after
dividing them by the number of prices in the same period, for example the SMA
for ten days can be calculated by dividing the sum of the five closing prices by
five. This number can be less sensitive by adding more numbers which give
strong indicator. The criticisms for this method had argued that not all data has
the same impact to the result.
- The Linearly Moving Average (LMA): Under this method the problem of
weighting was eliminated by giving weights to the recent data higher than older
ones. In this case the last day price multiplied by five ( in case of five days) to
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give this number more weight, and the previous price multiplied by four and so
on, then this number is divided by the sum of multipliers. Criticism for this
method is that it includes only prices in a specific period.
- The Exponentially Moving Average ( EMA): Under this method the problem of
(SMA) is addressed by assigning weights to recent prices and the ability to
change this weight according to conditions in the market. By comparing the
moving average with the price action, we can predict price movement. If SMA
line above price action line, then it is a sell signal and conversely if SMA was
below price action line it will be a buy signal.
Figure 2.19 Moving average with price
www.stochcharts.com
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2.2.2.7.Indicators and Oscillators:
Murphy (1999) has defined many indicators and oscillators that can be used to
support the technical analysis view of price direction and trend strength. These
indicators and oscillators basically depend on factors such as money flow, trends and
momentum.
- Moving Average Convergence Divergence (MACD):
It shows the relationship between to moving averages of prices. The MACD is
the difference between 26-day and 12-day exponential moving average. A 9-day
exponential moving average called "signal line" is plotted on top of the MACD to
show bullish and bearish signal points. A bullish signal is generated when the MACD
rises above the signal line or above zero. A bearish signal is generated when MACD
falls below signal line or below zero.
Figure 2.20 MACD and its indications
www.stockchart.com
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- Relative Strength Index (RSI):
The relative strength index is an oscillator which was developed by Welles
and Wilder in 1978. This indicator measures a particular financial instrument’s
current relative strength compared to its own price history. The RSI is plotted on
vertical scale numbered from 0 to 100. The formula for calculation RSI is:
RSI =100-
Where A is the average of the up closes over the calculation period divided by the
average of the down closes over the calculation periods. Usually 14 days period used
to calculate RSI. Welles and Wilder consider an RSI of 30 to indicate an oversold
condition, where values above 70 indicate overbought conditions. If RSI was above 70
then moves below 70 that mean bearish, similarly if RSI was below 30 then move
above 30 this mean bullish.
- Stochastic:
Stochastic is an oscillator which was developed by George Lane in the
1960’s. It is a momentum oscillator that can give a warning sign of strength or
weaknesses of the market. The basic assumption for stochastic is that when the price
is rising it tends to close near the highs, and when the price is falling it tends to close
near the lows. The indicator consists of two lines:
%K compares the latest closing price to the recent trading range.
%D is a signal line calculated by smoothing line.
The overbought signals are when the lines are above 80%, where oversold
signals when the lines are below 20%.
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Figure 2.21 Stochastic Indicator
www.stockchart.com
- The average directional index (ADX):
This indicator was developed by Welles Wilder in 1978 as an indicator of trend
strength of the price movement. The ADX is a combination of two other indicators
the positive directional indicator and negative directional indicator, The ADX
combines them and smooth the result with an exponential moving average. The ADX
does not indicate the direction of the trend but the strength of the trend. ADX has
values from 0 to 100, when ADX below 20 indicate weaknesses of the trend, the
trend is strong when ADX above 40, the ADX above 50 indicates extremely strong
trend.
Figure 2.22 The ADX indicator
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CHAPTER 3: RESEARCH METHODOLOGY
The researcher will conduct the technical analysis on gold prices in 2012. This
technical analysis will include all the indicators we have previously described in this
project.
3.1 Data Collection Method
This project relies on both qualitative and quantitative method; data has been
collected from websites which provide charts, historical prices and indicators for gold
prices during 2012.
3.1.1. Gold Background:
Jastram (1977) mentioned that at the ending of 17th
century the golden coins have
entered to England for international trade purposes. Then in 1717, fourteen English
golden coins were issued but still used for export and import only due to its high value
compared to silver which was used in common. Isaac Newton (1988) pointed out that the
two metals should not continue to be used together as coins at the existing ratio. In case
they retain with the same ratio, then either gold will go down or silver will go down. The
statistics of gold prices in England show that in the period 1870-1914 were about 3
pounds 17 shillings 9 pence. In this period all countries in Europe has followed England
in gold standards, Germany, Holland, France, Scandinavian countries, India, Japan, and
Switzerland also has adapted England gold standard.
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Figure 3.1 Historical prices of gold
www.economicoutlook.net
3.1.2. Gold Supply:
The world gold council mentioned that two thirds of new gold supplied in the world
comes from mining and one third comes from recycling, the total gold supply in 2012
was 4,435 tons, global mining in 2012 was 2,861 tons. The top producers of gold are
China, Australia, the United States, Russia, Peru, and South Africa. The gold contributes
with respective amount of gross value added (GVA) in most of this countries which give
a good support to the economy.
Figure 3.2 gold contributions in GVA of countries
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3.3.3. Gold Reserves by countries:
The World Gold Council statistics shows that after the financial crisis in
2008, countries has purchased gold as a safe investment and used it as collateral
to keep bond yields low. Thus, the world reserve of gold in 2012 was 31,491 tons
with increasing amount of 465 tons in last year. These reserves are as follow:
Table 4.2 Gold Reserves by Countries
The world gold council
3.2 Study Limitations
The main limitation in this project is the lack of adequate sources of some indicators
in technical analysis. The other limitation is that this study depends mainly on
information that is available on websites (public source), so most data are extracted from
brokers.
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CHAPTER 4: FINDINGS AND RESULTS
4.1. Data Analysis Method
In the following section, data of gold is analyzed by using technical analysis. Charts
that provide historical prices will enable the researcher to customize the period and
provide all indicators and oscillators.
4.2. Fact Finding Results
All technical analysis tools were found to be valuable, reliable and can give clear and
accurate signals for price movement. Support and resistance can indicate the strong levels
at which the price forced to retrace or penetrate hardly, also trends can clarify the
direction for the price in the short time period or long time period. Patterns on the other
side give good signals about price breakout and how far can the price move. Thus, all
indicators and oscillators provide information that confirm the breakout points in patterns
and give information about trends whether it is strong or weak.
4.3. Support and Resistance for Gold
The chart for gold revealed that the price in the first quarter of 2012 was 1,542; this
value is considered low compared to the previous year. In addition, after 1-1-2012 the
price starts to increase to open the way for an uptrend with strong buying forces. This
trend enhances bullish view until the price of 1,718 per ounce, where the price was
countered with selling prices between the levels 1,718 and 1,734 which starts on 27-1-
2012 and continued till 20-2-2012. Although, the price was reaching this levels but was
unable to penetrate it. Thus, this area between the two prices is considered a resistance
zone.
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Figure 4.3 Resistance zone 1718-1734
www.dailyfx.com
In 21-2-2012 the price success in penetrating the resistance zone and breakout to
continue in its bullish movement where it has tested the price 1,785 three times between
23-2-2012 and 29-2-2012. During this period the price has tested this level several times
without exceeding it which indicates that the price 1,785 is considered a resistance level.
Figure 4.4 Resistance levels 1,785
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The price falls down to test 1,629 several times between 14-3-2012 and 7-5-2012
which indicates that this price is a support level. The price breaks this level in 8-5-2012
and falls down to the levels 1600- 1570-1500-1525. Therefore, we can notice that the
price 1,629 has turned into resistance level which continued to 21-8-2012 when the price
breakout and starts its bullish direction.
Figure 4.5 Support level became resistance level 1629
www.dailyfx.com
Next prices that can be considered as resistance levels are 1670-1695-1734-1776,
these levels have been tested many times and when resistance levels are crossed they
became support level. This situation happens due to psychological reasons that encourage
traders or investors to buy from this level if the price exceeded it in bullish direction.
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Figure 4.6 Resistance levels in six months
www.dailyfx.com
In December 2012 the gold price starts to decrease to 1,643 that weren’t exceeded
which performed a support level.
Figure 4.7 Support level 1652
www.dailyfx.com
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4.4. Trends of Gold
At the beginning of 2012 the price of gold has increased from $1,562 to $1,602 per
ounce which breaks the downtrend that was determined during the last two months in
2011. The price continued increasing to form the first uptrend in 2012; this uptrend lasts
about two months.
Figure 4.8 Downtrend and uptrend
www.dailyfx.com
The trend was performed with higher highs and higher lows in terms of daily frame
candles, the 3-1-2012’s candle were closed at 1,602 as an indicator of uptrend, the price
was countered with selling forces at a level between 1,662 and 1,677 which was trying to
stop bullish. Then, in 25-1-2012 the price has broken this level and closed at 1,709 which
open the road to continue the uptrend. This trend can be considered as short term trend
that lasts for about one month.
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As an example of long term trend is the downward trend that stats in 5-1-2-12 and
continued to the end of 2013.
Figure 4.9 Long term downtrend
www.dailyfx.com
The 29-2-2012’s candle has fallen to $1,684 and closed at $1,696 per ounce to open
the direction for more downward trend which continued till 1-8-2012.
Figure 4.10 Downtrend after uptrend finish
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After the downtrend in the last three months has finished, when the 1-6-2012’s
candle closed at $1,622 per ounce, the price has shown many fluctuation without clear or
specific direction. This manner can be classified as sideway trend that took place between
1-6-2012 and 15-8-2012.
Figure 4.11 Sideway trend
www.dailyfx.com
Finally, the five main trends for gold in 2012 can be noticed in figure 4.12.
Figure 4.12 The main trends for gold in 2012
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4.5. Patterns
Patterns are captured on charts with different time horizon leading to different
recommendations.
4.5.1. Symmetrical Triangle
The symmetrical tiangle is a continuation pattern that constitute of at least four
points, two of them should be at the top to constitute the upper line with downward slope
and the others will constitute the down line with upward slope. For gold in 2012 we can
see a clear symmetrical triangle that started to constitute in March 2012 as a downward
trend. Besides, the upper line of the triangle constitute of two points (1,696.55 &
1,670.6). These two points determined the upper line with downward slope. The bottom
line also need at least tow points to draw it, these two points were 1,612 and 1,621.72 that
constitute it with an upward slope. These two lines converse at 1,644 whis is the apex
point. In theory we can anticipate the breakout direction and distance, as the symmetrical
triangle is a continuation pattern, then we can anticipate that the breakout will be down,
for the target price we will use the original trend line that is parallel with the upper line of
the triangle. Therefore, the target price can be seen on the chart between the levels 1,610
– 1,595 – 1,580 – and 1,550 in extention. In real action, after the breakout in downward
direction, the price go down to test all the expected levels in few days.
Figure 4.13 Symmetrical triangle
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4.5.2. Ascending Triangle
In June 2012 the ascending triangle starts to appear from a consolidation period of
the uptrend to the point 1,632 which perform the upper horizontal line for the triangle
with very small slope the can be undertaken, the points 1553 and 1563 is the tow needed
points for the down line for the triangle with upward slope.
With these two points the triangle has been completed, the break out had happened in 22-
8-2-12 by the price 1631.
To determine the target price we will draw a line that is parallel to the support line, we
can see that the target price 1726, the target price was reached by a short time period after
the breakout.
Figure 4.14 Ascending triangle
www.dailyfx.com
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4.5.3. Descending Triangle
During the downward trend that started in 29-2-2012, we can notice a consolidation
period which contains a descending triangle that begins to constitute in 12-4-2012 at the
price 1,681, after that the price reached 1,673. These two points make up the upper line
for the triangle with a down slope. The down line of the triangle at the point 1,622, with
these two points completed the descending triangle.
The breakout has happened at 1,622 in 8-5-2012, breaking the support line. The
target, after pattern completion, can be calculated as the same distance between the first
upper point for the triangle and the support line. As such, it was determined at 1,561
which were successfully reached after a few days.
Figure 4.15 Descending triangle
www.dailyfx.com
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4.5.4. Flag
This pattern generally happens after a sharp move in the price where the price makes
consolidation in the opposite direction of the trend. In the figure the flag started in 1-2-
2012, with the price 1,760, as starting for the upper line and the price 1,720 as a starting
for the lower line. The upper line constitutes of the two points 1,762 and 1,752. Besides,
the down line constitutes of the two points 1,712 and 1,704.
The breakout has happened at the point 1,732 which happened in 21-2-2012 as an
indicator that the flag pattern has completed and the trend will continue.
Figure 4.16 Flag in uptrend
www.dailyfx.com
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4.5.5. Pennants
This pennant pattern has happened as consolidation during the downward trend. The
pennant has started in 27-3-2012; the upper line constitutes of three points 1,696, 1,680
and 1,670 with downward slope. This down line constitutes of 1,612, 1,622 and 1,630
with upward slope.
The breakout happened at the point 1,632 in 8-5-2012 when the price falls down
to continue the downward trend.
Figure 4.17 Pennant in downtrend
www.dailyfx.com
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4.5.6. Head and Shoulders
As shown in the figure below, the inverse head and shoulders pattern has started in
November 2012, this pattern occurred between 1,685 and 1,800 prices to constitute the
left shoulder. This level is considered as a support level that prevents the price from
falling down. After that the price bulled up to test the level 1,750 and then fell down
sharply to the levels 1,560 that comprise the head for the pattern in the period between
15-12-2011 and 30-12-2011. Therefore, gold starts the year 2012 with a clear bullish
trend, reaching in few days the level 1,600 and continued increasing. The right shoulder
then appeared at the levels between 1,685 and 1,700, this pattern has been completed
after the breakout and the price closed under 1,670 to indicate that the inverse head and
shoulders pattern has finished.
Figure 4.18 Head and shoulders pattern
www.dailyfx.com
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4.6. Indicators and oscillators
Indicators and oscillators provide investors and analysts by a confirmation for
trends and patterns, and help in finding out breakout points.
4.6.1. Moving Averages Convergence Divergence: (MACD)
Moving average convergence divergence is an indicator that can determine the
momentum in buying or selling forces to give clear and reliable signals for short and long
decisions.
Figure 4.19 MACD indicator
www.dailyfx.com
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This figure clarifies the MACD signals. In 3-1-2012 the MACD line crossover the
signal line and diverge from it. The MACD line was above the signal line, this means
bullish which was confirmed in the chart where the price has increased in this period, this
bullish was ended in 8-2-2012. In 28-2-2012 the signal line started to diverges from
MACD line as an indicator for bearish when it rose above MACD which means bearish
signal. The histogram in the figure can be used to measure the distance of convergence
and divergence as an indicator for long or short term direction.
Figure 4.20 MACD and histogram signals
www.dailyfx.com
It is worth noting that bullish or bearish signals don’t depend on the MACD line,
but it depends mostly on the divergence of the two lines from each other to give signals.
The most the divergence is, the most the direction will be clear.
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Referring to the figure, the divergence of the two lines between 2-7-2012 and 9-7-
2012 was not confirmed by the histogram, the price fluctuates in this period without a
clear direction. On the other hand, between 20-8-2012 and 15-9-2012, the divergence of
the two lines has increased which was followed by an increase in price.
4.6.2. Relative Strength Index (RSI)
The RSI explains the momentum and it is used to determine oversold or overbought
points that lead to buy or sell signals. In the figure the RSI was below 30 at the end of
2011, then to the start of 2012, a sharply increase above 30 which gives a strong buy
signal that was proved by the real movements. In 26-1-2012 and in 2-2-2012 the RSI
indicator dropped below 70 but it wasn’t confirmed with decrease in the price in this
period. In 28-2-2012 the RSI indicator was dropped below 70 to give a sell signal which
was confirmed with decrease in the price. By the mid of May 2012 the RSI was below 30
that mean oversold position, a few days later the RSI has raised above 30 to give a buy
signal that was confirmed by the price.
Figure 4.21 RSI indicator
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4.6.3. Stochastic
The stochastic oscillator measures the momentum during a given period. It is also
used to test if the security is overbought or oversold, which can provide buy or sell
signals. Traditionally if stochastic is above 80 this means that the security is overbought,
on the other side if stochastic is lower than 20 this means oversold. In the figure the
stochastic oscillator fluctuate from 0 to 100 during 2012. According to the 14 day period,
the oscillator showed that it was under 20 in the last few days in 2011 and has risen
sharply by the beginning of 2012 to exceed 80 in 9-1-2012. This level means that gold is
overbought, but that doesn’t mean bearish or give sell signals. Although the oscillator
remains above 80 but the price continues increasing, the sharply decrease for stochastic
was followed by decreasing in the price but although stochastic reached 20 and exceeded
it, the price retain decreasing because it was a down trend. Therefore, if the security is in
a down trend, the stochastic overbought or oversold level doesn’t always mean a bearish
signal.
Figure 4.22 Stochastic indicator
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In general, investors and analysts look for buy/sell signals after making sure that the
oscillator has decreased or increased to exceed the 20/80 levels, except in the presence of
uptrend or downtrend.
The stochastic was above 80 for the period 20-8-2012 to 24-9-2012 which provides an
indication of overbought, but the price didn’t response with the decrease during this
period. After the sharp decrease in the stochastic oscillator in 4-10-2012, the price has
decreased and moved in an opposite trend.
Figure 4.23 Stochastic oscillator from June 2012
4.6.4. The average directional index (ADX):
The ADX oscillator is used to identify the trend strength rather than trend direction.
In the figure below, the downtrend that started in 28-2-2012 can be confirmed as a strong
trend because the ADX oscillator was above 20 during this period. Besides, for the period
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between 16-5-2012 and 14-8-2012, the ADX oscillator was under 20 reflecting the
absence of trend and the presence of price fluctuation. Finally, the period between 17-8-
2012 and 8-10-2012 showed uptrend and was provided by the ADX oscillator above 2.
As such, the ADX provides a confirmation of the trend strength both in the uptrend and
downtrend.
Figure 4.24 ADX oscillator
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CHAPTER 5: CONCLUSIONS & RECOMMENDATION
5.1. Conclusions
The objective of this project was to establish an easy and useful method to analyze
and to forecast the future movement of financial securities. This technical method
depends on charts and historical price movements. The researcher conducted the
technical analysis by implementing these techniques on gold charts during 2012 ending
up with the following conclusions:
Support and resistance prices are considered very important and vital tools that
can be used in determining the anticipated levels of prices by which investors can
buy and sell at. Referring to 2012 gold’s charts, it was revealed that the levels
between 1,717 and 1,734 were considered very critical. Moreover, it was
mentioned that the price 1,629 has represented a very important point that the
price couldn’t cross it easily. Many other support and resistance levels were
determined on charts as: 1,670, 1,695, 1,734 and 1,776. Finally, it is worth noting
that support and resistance levels aren’t impossible to penetrate in the presence of
sell/buy forces.
Trend lines have been demonstrated during 2012 many times, the uptrend line can
be seen at the beginning of 2012 which continues till March, the sideway trend
was present in the period between June and September, while the downward trend
has constituted between March and July 2012. Therefore, we can conclude that
the trend lines can be considered as an indicator for a major movement in prices,
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and it is the best technique in the financial markets that is used to track change in
prices, taking time period and retracement situations into account.
Chart patterns have proved that - in normal circumstances- they are very useful
and efficient tools to determine the price movements after consolidation. If we are
able to determine the breakout point and the target, then we will be able to
anticipate the price movement correctly.
Indicators and oscillators can be used as a second source of information. They are
mainly used to confirm price movements, to show the quality of chart patterns,
and to know the strength of the trend. These tools can be used with charts as
assistance tools to provide additional information.
5.2. Recommendations
Technical analysis is considered a critical – but not the only – method to analyze
price movements and provide sell or buy signals for investors.
The selection of one tool while conducting technical analysis and ignoring other
tools can lead to wrong predictions. The analysis should be comprehensive.
Trend analysis is considered as the most significant leading tool in trading
strategies in the context of risk management.
Many tools and indicators should be adopted and implemented in determining the
breakout points. These points will help in determining chart patterns such as:
volume, MACD, stochastic, and many other indicators.
This conducted study for gold in 2012 isn’t reliable to anticipate price
movements, deeper analysis to get more quality signals are required.
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Our study confirmed that gold prices are very sensitive to the change in the
economic condition, especially in the USA.
Gold charts indicated long term trends. Thus it is recommended for investors in
gold to adopt long term horizon while trading in it.
Support and resistance in gold prices in 2012 are levels and not just points, so the
price may fluctuate between these levels before it reverses.
Long term trend may include many support and resistance levels. Therefore, these
levels can make consolidation periods before the price crossover and continue the
main trend direction.
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