This document provides an introduction and overview of technical analysis. It defines technical analysis as using price movements to make trading decisions. Key concepts discussed include Dow Theory, chart construction, identifying trends through tools like moving averages, support and resistance levels, and trendlines. The advantages of technical analysis are that all market information is reflected in price and it provides a quantitative representation of market psychology. Technical analysis is compared to fundamental analysis.

1. Technical Analysis –
Introduction
Dow Theory, Chart Construction, Concept of Trend
Declan Fallon, B.A. (Mod.) Ph.D.
Senior Market Technician, Zignals (www.zignals.com)
Affiliate member of the Market Technicians Association

2. What is Technical Analysis?
• A decision process where price is a factor in
the outcome
• “Fundamentalist studies the cause of market
movement, while the technician studies the
effect”
George Murphy
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3. Advantages of Technical Analysis
• All available information in the market place is
expressed in the stock’s price
• Level playing field with the “Big Money”
• “Big Money” action is readily apparent on a
price chart (‘elephant foot prints’)
• Quantitative representation of market
psychology; greed and fear
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4. Tools of the Trade
• Charts
– All chartists are technicians, but not all technicians are
chartists
– 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 flow
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5. Technical Analysis vs Fundamental Analysis
There is no ‘right’ and ‘wrong’ each have pros and
cons
• Fundamental analysis is heavily dependent on accurate (and
fair) reporting
• Technical analysis does not offer yes/no solutions
In both cases it is important to know WHEN to trade
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6. Chart construction

7. Types of Chart
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Line
Candlestick
Point-n-Figure
Bar

8. Displayed Price
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Open
High
Low
Close
High
Open
Close
Low
Rising Prices

9. Displayed Price
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Open
High
Low
Close
High
Open
Close
Low
Falling Prices

10. Key Information on a Chart
• Price
y-axis
• Time
x-axis
• Volume
Typically runs below time
Total number of shares traded for a given day
displayed as a histogram
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11. Zignals Chart Structure
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12. Time Scale of Charts
• Long term
Usually a chart longer than a year
Plotted on logarithmic or arithmetic scale (price)
Weekly, Monthly
• Intermediate term (most common)
Between 1-6 months
Usually arithmetic price scale
Daily
• Short term
Less than a month
Arithmetic scale
60, 30, 15, 10, 5 and 1 minute(s)
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13. Creating a Chart
• Create an account on Zignals.com
Should be prompted to download Silverlight 2; this is
needed to work the charting service
• Go to Charts
Stock: CRH (‘CRG - ISE’)
Settings: 2 years
Chart type: Line
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14. CRH – Sample Chart
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15. Dow Theory

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 1928
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17. Tenets of Dow Theory [i]
1. Averages Discount Everything
“The sum and tendency of the transactions of the Stock Exchange represent the
sum of all Wall Street’s knowledge of the past, immediate and remote,
applied to the discounting of the future.”
2. Market Has Three Trends
Dow defined an uptrend as a situation in which each successive rally closes higher
than the previous rally high, and each successive rally low also closes higher
than the previous rally low. (Vice Versa for a downtrend)
Three parts:
[1] Primary - 1 year
[2] Secondary - 3 weeks – 3 months
[3] Minor - < 3 weeks
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18. Tenets of Dow Theory [ii]
3. Major Trends Have Three Phases
[1] Accumulation
Informed buying; typically “Big Money”
[2] Public Participation
Improving Business News
Technical / Trend traders
[3] Distribution Phase
Media hype
Informed selling
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19. Tenets of Dow Theory [iii]
4. Averages Must Confirm Each Other
No important bull or bear market signal could take
place unless both averages gave the same signal.
What are the “Averages”?
Industrial Index (Dow Jones Index)
Transport Index
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20. Tenets of Dow Theory [iv]
5. Volume Must Confirm Trend
Volume should expand or increase in the direction of
the major trend.
Volume should decrease in the direction of the
countertrend
Dow considered volume a secondary tool
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21. Tenets of Dow Theory [v]
6. A Trend is Assumed to be in Effect until it
Gives Definite Signals that is has Reversed
How is this known?
[1] Support/Resistance
[2] Price Patterns
[3] Trendlines
[4] Moving Averages
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22. Dow Theory In Action
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Dow Jones ETF (DIA) 2006-2007

23. Dow Theory In Action
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Dow Jones ETF (DIA) 2006-2007
Higher Highs
Higher Lows
Breakdown

24. Dow Theory In Action
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Dow Transports ETF (IYT) 2006-2007
Higher Highs
Higher Lows
Breakdown

25. Dow Theory In Action
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Dow Jones ETF (DIA) 2007-2009
Lower highs
Lower lows

26. Dow Theory In Action
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Dow Transports ETF (IYT) 2007-2009
Lower highs
Lower lows

27. Trends

28. Importance
• Concept of trend is essential to the technical
approach to market analysis
• All tools used by a chartist have the sole
purpose of helping to measure trend
• By understanding the underlying trend it is
possible to trade in the direction of that
trend
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29. Definition
• Direction of the Market
• Movement characterized by zigzags
• Zigzags resemble a series of successive
waves with peaks and troughs
• Direction of peaks and troughs that
constitutes market trend.
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30. Direction
• Markets can go
1. Up
2. Down
3. Sideways
• Approximately 60% of the time markets go
sideways
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31. Psychology of Trend
• UP Market (“Bullish”)
Initial buyers sitting on profits want more
Sideline individuals tempted to enter the market
Shorts (people who sell to buy later at a lower
price) forced to buy
• DOWN Market (“Bearish”)
Initial buyers eager to dump losing position
Sideline individuals disinterested in buying
Shorts (people who sell to buy later at a lower
price) in profit and wanting more
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32. Trends in different time frames
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Uptrend
Sideways
Downtrend

33. Trends in Zignals
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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 buying
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35. Support and Resistance in Zignals
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36. Manually draw support / resistance
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Use annotations and the
crosshair tool to pick your
own support and resistance

37. How Support and Resistance work
• During a trending market, support and
resistance levels will break and hold in the
direction of trend; in an uptrend support
holds and resistance breaks; in a downtrend
resistance holds and support breaks
BUT
• Whenever support of an uptrend or
resistance in a downtrend is penetrated by a
significant amount, they reverse their roles
and become the opposite
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38. Support turns Resistance
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39. Volume in Support and Resistance
• Increased volume (at least double a 2-month
average) is frequently associated with breaks
of resistance
• Increased volume isn’t necessary to break
support
– Low volume on breaks of support suggests
complacency
– High volume on breaks of support suggests panic
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40. Volume and Support Break
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Complacency
More fearful
Support turned resistance
Backtest

41. Trendlines
• A technician’s basic tool
• Up-trendline
– Connects successive upward reaction lows
• Down-trendline
– Connects successive downward reaction highs
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42. Rules of Trendlines
1. Evidence of a trend
• Two reaction lows for an uptrend
• Two reaction highs for a downtrend
2. The middle peak of the two reactions is
breached
• The mid-high for an uptrend
• The mid-low for a downtrend
3. Confirmation with a third touch of the line
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43. Benefits of Trendlines
1. Enter a Trade on touches of the line
2. A break of a trendline is the first sign of a
trend reversal
3. The strongest trendlines run at a 45 degree
angle
4. The longer the trendline (and the more
tests) the greater its significance
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44. What Constitutes a Trendline Break?
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45. Trendline Breaks
1. Intraday breaks less significant than closing
price breaks
2. Price filters
• 3% break long term
• 1% break short term
3. Time filters
• 2-days of closes outside of the line
4. Role reversal
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46. Fan Principle
1. Used for trendline violations
• Common for a break to move away from the
trendline before returning to the old trendline
2. Three Strike rule
• Each trendline break results in a new trendline
been drawn
• On the third trendline break the trend itself is
considered to have reversed.
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47. Fan Principle
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1.
2.
3.
Breakdown

48. Trend Indicators
1. Sometimes trendlines aren’t enough
2. Trends can be measured with
• Price overlays
• Moving Averages
• Price indicators
• MACD
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49. Moving Averages
1. Smooth Price Action
2. Can be adapted to different time frames
1. Long term : 200-day MA or 40-week MA
2. Intermediate term: 50-day MA
3. Short term: 5-, 10-, or 20-day MA
3. Different kinds
1. Simple Moving Average (most common)
2. Exponential Moving Average
3. Weighted Moving Average
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50. Zignals Moving Averages
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51. How do Moving Averages Work?
1. When a Moving Average is rising the trend is
bullish
2. When a Moving Average is falling the trend
is bearish
3. Depending on the period of the Moving
Average, bullish and bearish trends can
occur together.
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52. Trend Indicators
1. Supporting Indicators
2. Price derived
3. Examples
• Moving Average Convergence Divergence
(MACD) – most common
• Directional Indicator (ADX)
• Linear Regression
• Parabolic SAR
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53. Moving Average Convergence
Divergence (MACD)
1. Two Exponential Moving Averages
2. A Third Moving Average on the difference
between the Two Moving Averages
3. Triggers on crossover of MA difference and
third Moving Average
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54. Zignals MACD
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55. Putting It All Together
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56. Where is CRH now?
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57. Using Zignals
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1. Email / SMS Alerts
• Price breaks Support or Resistance
• Price crosses a Moving Average
• One Moving Average crosses another
2. Charts
• Trendlines
• Support / Resistance
• Indicators

58. Record your thoughts
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1. 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. Tools
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1. Blogging
Zignals.com/Community (coming soon), Blogger.com, Wordpress.com
2. MicroBlogging (excellent for publishing YourCall)
Twitter.com, Stocktwits.com
3. Books
“Technical Analysis of the Financial Markets” – John Murphy
4. Websites
Zignals.com, Wikinvest.com, Covestor.com, Cake.com, SocialPicks.com,
Stockpickr.com , Instantbull.com, Finviz.com
5. Blogs
Zignalsblog.blogspot.com, Blog.fallondpicks.com, Ritholz.com/blog,
TimothySykes.com, Globaleconomicanalysis.blogspot.com,
Traderfeed.blogspot.com, HowardLindzon.com, Paddypowertrader.com/blog

60. QUESTIONS?
Thank you
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