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CHAPTER 16 TECHNICAL ANALYSIS

Chapter Summary. Objective: To examine the basic principles of technical analysis and show how they relate to the efficient market hypothesis.ChartingTechnical indicators. Fundamental analysis (chap 15):Looks at the fundamentals of the stock to get a calculated price.If actual market price >

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CHAPTER 16 TECHNICAL ANALYSIS

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    1. CHAPTER 16 TECHNICAL ANALYSIS

    2. Chapter Summary Objective: To examine the basic principles of technical analysis and show how they relate to the efficient market hypothesis. Charting Technical indicators

    3. Fundamental analysis (chap 15): Looks at the fundamentals of the stock to get a calculated price. If actual market price > calculated price, then the stock should be sold. Technical analysis: An attempt to exploit recurring and predictable patterns in stock prices to make money through timing the market Technical Analysis

    4. Technical analysis Technicians beliefs: Shifts in market fundamentals can be discerned before their impact is fully reflected in prices Market fundamentals can be perturbed by irrational factors These presumptions are in contradiction with the weak form of the EMH

    5. Definitions BULL MARKET: market increasing BEAR MARKET: market decreasing

    6. Technical indicators - orientation Technicians are: Contrarian: everyone else is dumb so do the opposite Follow the smart money: most investors are sophisticated so copy them

    7. 3 types of indicators Market structure indicators Sentiment indicators Flow of funds indicators Technical Indicators

    8. Technical Indicators Market structure Indicators: Monitor price trends and cycles then find patterns Sentiment Indicators Measures the expectations of various groups of investors Flow of Funds Indicators Predicts price inc/dec by measuring the tendency of investors to buy/sell stocks bec. when large groups buy/sell, then prices will move

    9. I. MARKET STRUCTURE INDICATORS Dow Theory Point and Figure Charts Candlestick Charts Moving averages Breadth Relative Strength

    10. Uses Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA) DJIA signifies underlying trends and DJTA confirms/rejects the signal Charting the Dow Theory

    11. Dow Theory Primary trend: LT movements of stock Secondary or intermediate trends: Caused by ST deviations from underlying trend Tertiary or minor trends Support and resistance levels Support value below which mkt is unlikely to fall Resistance value above which mkt is unlikely to rise When DJIA moves above resistance ? signals BULL MARKET When DJTA moves above it ? confirms signal

    12. Dow Jones Industrial Average

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