Technical analysis

Technical analysisTechnical analysis

Of the Financial MarketsOf the Financial Markets||||

James Wright, RIT Financial Management AssociationJames Wright, RIT Financial Management Association

What is ta?What is ta?

Forecasting of Forecasting of futurefuture financial price financial price movements based on an examination movements based on an examination of of pastpast price movements price movements

Like weather forecasting, does Like weather forecasting, does notnot provide an provide an absoluteabsolute prediction prediction

Offers a glimpse at where prices are Offers a glimpse at where prices are most most likelylikely to go in the future to go in the future

Why analyze securities?Why analyze securities?

Goal of any investor is Goal of any investor is to to beat the marketbeat the market

Fundamental AnalysisFundamental Analysis ““Functional Analysis”Functional Analysis” Metaphysical AnalysisMetaphysical Analysis How one feels about How one feels about

TA depends on ones TA depends on ones thoughts on MARKET thoughts on MARKET EFFICIENCYEFFICIENCY

Market efficiency – weak formMarket efficiency – weak form

FundamentalistsFundamentalists Current price does Current price does

NOT reflect fair NOT reflect fair value value

Determination of Determination of future trends based future trends based on past info NOT on past info NOT possiblepossible

Valuation based on Valuation based on readily-available readily-available financial infofinancial info

Semi-strong formSemi-strong form

““Random-Walkers”Random-Walkers” Current price Current price

reflects all reflects all availableavailable infoinfo

Once non-available Once non-available info becomes info becomes public, it is instantly public, it is instantly reflected in pricesreflected in prices

Insider Trading only Insider Trading only way to beat marketway to beat market

Strong form efficiencyStrong form efficiency

TechniciansTechnicians ALL INFO is readily ALL INFO is readily

available and available and reflected in stock reflected in stock priceprice

Exploitations of Exploitations of inefficiencies NOT inefficiencies NOT possible with possible with fundamental fundamental analysisanalysis

Which form exists today?Which form exists today?

Most academics Most academics believe in the Random believe in the Random Walk TheoryWalk Theory

Strong-Form gaining Strong-Form gaining ground thanks to ground thanks to legislation to prevent legislation to prevent fraud, computerized fraud, computerized and quick marketsand quick markets

Nasdaq, Amex, Forex, Nasdaq, Amex, Forex, ArchipelagoArchipelago

NYSE to go electronic NYSE to go electronic soonsoon

Random Walk theory? Is it Random Walk theory? Is it relevant?relevant?

After announcing that earnings would come in below expectations on 6-Jan-00, Lucent fell from 59 to 43 in

one day.

Random walk theory? Is it Random walk theory? Is it relevant?relevant?

After positive comments from an influential analyst on 23-Feb-00, Time Warner shot up 49 to 59 in 2 days

Random walk theory? Is it Random walk theory? Is it relevant?relevant?

After reporting earnings that were below expectations on 15-Feb, Abercrombie and Fitch fell from 24 to 15.

Even though these are but a few examples, it is obvious that new information can move the price of a security in non-random ways.

The technician’s missionThe technician’s mission

BEAT THE CROWD!BEAT THE CROWD! Markets are 80% psychological and Markets are 80% psychological and

20% logical20% logical Thousands and Thousands of people Thousands and Thousands of people

make their first trade every day, and make their first trade every day, and 90% of them have no idea what they 90% of them have no idea what they are doingare doing

Technicians employ tricks to take Technicians employ tricks to take advantage of “Dumb Money”advantage of “Dumb Money”

What do ta and surfing have in What do ta and surfing have in common?common?

Much like a surfer attempts to get a head start on a coming wave in order to ride it into shore, so does a market technician attempt

to outpace the “sheeple” and their wave of mindless, irrational behaviors that move markets.

The basis of all technical The basis of all technical analysis – dow theoryanalysis – dow theory

Charles Dow known Charles Dow known as the “Godfather as the “Godfather of TA”of TA”

Dow Theory pieced Dow Theory pieced together from the together from the writings of Charles writings of Charles Dow over several Dow over several years years

Charles dow’s three main ideasCharles dow’s three main ideas

Price Discounts Price Discounts EverythingEverything

Price Movements are Price Movements are NOT always randomNOT always random

““What” more What” more important than important than “Why”“Why”

““You show me the You show me the chart and I will tell chart and I will tell you the news.”you the news.”

NOT ALWAYS RANDOMNOT ALWAYS RANDOM

"One way of viewing it is that markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal of

the chartist is to identify those periods (i.e. major trends)." - Jack Schwager

What more important than whyWhat more important than why

"A technical analyst knows the price of "A technical analyst knows the price of everything, but the value of nothing". everything, but the value of nothing".

The price is the end result of the battle The price is the end result of the battle between the forces of supply and demand between the forces of supply and demand for the company's stock. for the company's stock.

By focusing on price and volume, technical By focusing on price and volume, technical analysis represents a direct approach.analysis represents a direct approach.

Why did the price go up? It is simple, more Why did the price go up? It is simple, more buyers (demand) than sellers (supply). buyers (demand) than sellers (supply). After all, the value of any asset is only After all, the value of any asset is only what someone is willing to pay for it. Who what someone is willing to pay for it. Who needs to know why? needs to know why?

Tech Analysis – the tricks of Tech Analysis – the tricks of the tradethe trade

CHARTSCHARTS PricePrice VolumeVolume TrendsTrends

Support/ResistanceSupport/ResistanceMomentumMomentum

General steps to technical General steps to technical evaluationevaluation

TOP-DOWN TOP-DOWN approachapproach

1.1. Broad Market Broad Market AnalysisAnalysis

2.2. Sector AnalysisSector Analysis

3.3. Individual Security Individual Security AnalysisAnalysis

The Principles behind The Principles behind TA are UNIVERSAL!TA are UNIVERSAL!

Trading Floor, CBOT

Multiple timeframes?Multiple timeframes?

Scalpers – 1 minute to 5 minutesScalpers – 1 minute to 5 minutes Day Traders – 5 minutes to 60 Day Traders – 5 minutes to 60

minutesminutes Swing Traders – 60 minutes to DailySwing Traders – 60 minutes to Daily Investors/Position Trading – Daily to Investors/Position Trading – Daily to

WeeklyWeekly Institutions – Weekly to MonthlyInstitutions – Weekly to Monthly

www.stockcharts.comwww.stockcharts.com

Long term vs. short term viewsLong term vs. short term views

Choose a view that works for you!The longer you plan on your trade lasting, the longer timeframe

chart you require!

Longer Timeframes are more “important” than shorter ones!

Its all in the chartsIts all in the charts

Applied ta – Chart patternsApplied ta – Chart patterns

Chart patterns represent a visual Chart patterns represent a visual display of a certain market behaviordisplay of a certain market behavior

Graphical representation of market Graphical representation of market participation and crowd behaviorparticipation and crowd behavior

Patterns formed by trendlinesPatterns formed by trendlines Volume plays critical role in the Volume plays critical role in the

execution of patternsexecution of patterns

Bullish patterns – the falling Bullish patterns – the falling wedgewedge

Triangles (flags)Triangles (flags)

The head and shouldersThe head and shoulders

Who has made money with ta?Who has made money with ta?

Larry Williams, regarded as one of the great technicians, Larry Williams, regarded as one of the great technicians, entered a trading competition and returned over entered a trading competition and returned over 20,000% in a year trading TECHNICAL picks20,000% in a year trading TECHNICAL picks

Daughter, actress Michelle Williams returns 10,000% in Daughter, actress Michelle Williams returns 10,000% in same competition using her fathers strategiessame competition using her fathers strategies

TA mastersTA masters

Kenneth Griffin, CEO, Citadel Financial uses a Kenneth Griffin, CEO, Citadel Financial uses a computerized form of TA he programmed to computerized form of TA he programmed to assist in his implementation of convertible assist in his implementation of convertible arbitrage trading strategiesarbitrage trading strategies

Paul Tudor Jones, Tudor Investments inc, Net Paul Tudor Jones, Tudor Investments inc, Net worth $9,000,000,000worth $9,000,000,000

Final thoughts5Final thoughts5

Develop a strategy unique to your Develop a strategy unique to your personality and comfort levelspersonality and comfort levels

Tweak your strategy until it works Tweak your strategy until it works the best that it canthe best that it can

Test it using virtual (paper) tradingTest it using virtual (paper) trading DO NOT STRAY FROM THE SYSTEM!DO NOT STRAY FROM THE SYSTEM! Remember that 1% every day leads Remember that 1% every day leads

to about 290% a year! A little goes a to about 290% a year! A little goes a long way!long way!