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Technical Analysis Assumptions & Tools - Maximizing Market Trends

Learn about the assumptions and tools used in technical analysis to exploit trends in prices. Discover charting techniques, indicators, and sentiment indicators such as Trin, Put/Call Ratio, Mutual Fund Cash Position, Odd-Lot Trading, Flow of Funds Indicators, and Market Structure Indicators.

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Technical Analysis Assumptions & Tools - Maximizing Market Trends

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  1. Chapter15 Technical Analysis

  2. Assumptions & Tools Used in Technical Analysis • Assumptions • Trends in prices can be exploited • Markets are somewhat inefficient • Tools • Charting • Technical Indicators • Evidence - very limited support of superior performance

  3. Charting • Price movements - (open, high, low and close) • Reoccurring trends • Point and figure charts • Support & resistance levels • Signals when support and resistance levels are confirmed

  4. Sample Price Chart Price High Close Low Days

  5. Point and Figure Chart Price Congestion areas x x x x x x x o o o x x o o o o x x o o o o o o o o o o x x o o x Sell

  6. Sentiment Indicators Trin Statistics # Advancing / # Declining Volume Advancing / Volume Declining # Declining / Volume Declining # Advancing / Volume Advancing If Trin > 1.0 bearish signal

  7. Sentiment Indicators • Put / Call Ratio • Historical value 65% • When higher than 65% a signal occurs • Bearish view • Bullish view • Mutual Fund Cash Position • Cash levels are low - bearish sign • Cash levels are high - bullish sign

  8. Sentiment Indicators Odd - Lot Trading • Ratio of odd-lot purchases to odd-lot sales • When ratio exceeds 1.0, bearish sign • Contrarian logic - small investors are the last to buy in bull markets

  9. Flow of Funds Indicators • Short Interest - total number of shares that are sold short • When short sales are high a signal occurs • Bullish interpretation • Bearish interpretation • Credit Balances in Brokerage Accounts • Investor leave balances when they plan to invest in the future • When levels are high a bullish sign

  10. Market Structure Indicators Moving Averages • Average price over some historical period (5 weeks or 200 days) • When current price crosses the average a trading signal occurs • Bullish signal when the current price rises above the moving average • Bearish sign when the current price falls below the moving average

  11. Market Structure Indicators Breadth • The extent to which movements in a broad index are reflected widely in movements of individual stocks • Spread between advancing stocks and declining stocks • Also used in industry indexes

  12. Value Line System • Widely followed with some evidence of superior performance • Value Line System is predominately a technical system • Earnings momentum • Relative stock prices • Ratios of moving averages

  13. Value Line System • Paper vs actual performance indicates that the system is difficult to implement • Value Line Fund has not shown superior performance • High turnover costs are associated with the strategy • Evidence shows prices react quickly to reported ranking changes

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