Basic Technical Analysis

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Basic Technical AnalysisPresented to

Australian Shareholders Association


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Workshop Purpose

• Basic theory• Share experiences with fundamental and

technical analysis• ASA members collectively have a large pool

of knowledge• Draw on experience from the group• Focus on interactive sessions


Fundamental or Technical?

Two main approaches to analysing markets

Fundamental analysis

• Financial and economic theory

• Company financial performance

Technical Analysis

• Examines current and past price action

• Looks for high probability patterns


Fundamental or Technical?

Should your analysis use fundamental or technical?

There is not one right answer!

• Personal preference

• Whatever feels best for you

• Learn them both and try them out

Possible Solution: FA to select companies & TA to time the entry and exit


What is Technical Analysis

– Technical analysis is the study of the price and volume movements of a stock or market.

– It is based on the belief that everything that is known about a stock is reflected in the share price and the volume of shares traded.

– Technical analysis tells investors when to buy or sell by providing insights into market sentiment and emotion

– Can be used on all timeframes – daily, weekly, monthly

– Covers many techniques. We are able to cover only a few …


What’s involved?

– Dow Theory– Price Charts– Chart Patterns– Candlestick Patterns– Indicators– Fibonacci– Elliot Wave– W.D Gann Theory– Cycles– ...... Plus a whole lot more!


Introduction

1. Different types of charts

2. Classical methods

3. Pattern recognition

4. Software for technical analysis


Chart Types

Technical analysis uses data based on

price open, low, high, close and volume.

The data are presented as charts. There are many different types of charts – we will consider three…


Line Chart


Bar Chart


Candle Chart


Candlestick


Candle Patterns

• Bullish• Bearish• Doji• Shooting Star• Hammer• Harami• Engulfing• Piercing• Hanging Man• Evening Star


Candle Patterns


Dojis


Harami


Candle Patterns


Candlestick SummaryLearning to read candle patterns which are a

visual representation of market psychology and emotion can be very useful

• Candle basics – open, high, low, close• Length of body – long or short?• Length of tails – or absence of tails• Can suggest a possible change in trend• With other ‘western’ techniques


Dow Theory

• Proposes that markets are cyclical

• That markets go through bull and bear cycles

• Within each cycle different phases can be recognized

• These different phases represent different risk situations

Consider the different phases of the S&P500...


S&P 500


Trend LinesPerhaps the simplest form of technical analysis

Markets are not random they often move in trends…


Counter Trends


Support

A support level is the price at which buyers are expected to enter the market in sufficient numbers to take control from sellers.

Can be horizontal or sloping upward


Resistance

A resistance level is the price level at which sellers are expected to enter the market in sufficient numbers to take control from buyers.

Can be horizontal or sloping downward


Support & Resistance


Moving Averages

‒ Moving averages are a way of coping with the problem of random information.

‒ Moving Averages are lagging indicators and are the basis of many other indicators

‒ Takes data points and plots them as an average making it easier to discern trends


Plotted Moving Average


Multiple Moving Averages


Chart Patterns

Chart patterns reflect human behaviour in a market.

The following chart patterns offer a high probability of future market movement and can be used to select stocks or to time entries into stocks.

(a) Continuation patterns• The triangle• The flag

(b) Reversal patterns• Double tops• Head and shoulders


Reversal or Continuation


Ascending Triangle


Flag


Double Top


Head and Shoulders


Bottom Reversal Patterns


Summary

Technical Analysis does not provide a forecast.It provides tools to gauge the probability that a

future event may occur.Always be aware of the time frame – look at the

longest time frame charts first to get the big picture.

Generally signals in longer time frames are more reliable than those in shorter time frames.


Workshop

Part 1As a large group we will look at 5 charts and

identify some of the key technical analysis tools that we have learned.


Workshop

Part 2In small groups discuss how you might use

technical analysis as part of a long term investing strategy.

Refer to the questions on the handout to guide your discussion.


Workshop

Part 3In small groups review the two printed charts

and with group consensus draw on the chart the technical analysis tools as requested.

Education

Basic Technical Analysis