Download Technical analysis

Technical analysis
By
Kamran Ahmad Kami
Cell: 0321 5368321
Web: oly.com.pk
Underlying assumptions of of
technical analysis

Technical analyst base trading decisions on
examination of prior price and volume of
data to determine past market trends from
which they predict future behavior of market
as a whole and for individual securities.
Certain aspects of these assumptions are
controversial, leading fundamental analysis
and advocates of efficient markets to
question their validity. We have initialed
those aspects on our list…..
1-The market value of any goods or
services is determine solely by the
interaction of supply and demand.
 2- supply and demand are governed by
numerous rational or irrational factors.
included these factors are those
economic variables relied on the
fundamental analyst as well as opinions,
moods, and guesses. The market weights
all factors continually and automatically.

3- disregarding minor fluctuations, the
price for individual securities and the
overall value of the market tend to move
in trends,which persist for appreciable
length of time.
 4-prevailing trends change in reaction to
shift in supply and demand relationships.
The shifts, no matter why they occur, can
be detected sooner or later in the action
of the market itself.

Advantages of technical analysis
Most technical analyst admit that a
fundamental analyst with a good information,
good analytical ability, and a keen sense of
information requires qualification.
 According to technical analysts, it is
important to recognize that the fundamental
analysts can experience superior return only
if they obtain new information before other
investors and process it correctly and
quickly.


The technical analysts claim that major
adv of there is that it is not heavily
dependent on financial statements, the
major source of information about the
past performance of the firm or industry.
The technician contends that there are several
problems with accounting statements:
1-the lack of great deal of info needed by security
analysts, such as a info related to sales, earning, and
capital utilized by product line and customers.
2-according to GAAP corporations may choose among
several procedures for reporting expenses, assets, or
liabilities.
3- many psychological factors do not appear in financial
statements. Investor attitude could be important
when investors become concerned about the risk
from restrictions or taxes on products such as a
tobacco or alcohol and political risk .

CHALLENGES to Technical trading
Rules
Those who doubt the value of technical
analysis for investment decisions question
the usefulness of this technique in two
areas.
 1- challenges on basic assumptions
 2- challenges on specific technical trading
rule

Challenges on technical analyst
assumptions

The major challenges to technical analyst
is based on the results of empirical tests
of the efficient market hypotheses. The
technical trading rules to generate
superior risk adjustment after taking
account of transaction cost, the market
would have to be slow to adjust prices to
the arrival of new information; that is , it
would have to be inefficient.
Challenges to technical trading rules

An obvious challenge to technical analysis
is that the past price pattern or
relationships b/w specific market variables
and stock prices may not be repeated.
The result, a technique that previously
work might miss subsequent market
turns. This possibly leads most technicians
to follow several trading rules and to seek
consensus of all of them to predict to
future market pattern.
Technical Trading Rules & Indicators
Technical Terminologies
Bull (Bullish Market)
 Bear (Bearish Market)
 Bid/ Ask
 Spread
 Breakeven
 Broker
 Bullion (Gold & Silver)
 Limit Order

Technical Terminologies
Day Order
 Day Trading
 Futures Contract
 Futures Exchange
 Hedging ( Minimize the risk)
 Market Order
 Overbought
 Over Sold

Technical Terminologies
Quotation ( Bid, Ask,Volume, High , Low)
 Support
 Resistance
 Sell Stop Entry ( sold at below mkt rate)
 Buy Stop Entry ( buy at above mkt rate)
 Settlement Price ( closing price)
 Stop Loss Order
 Volume

Trends in market
Raising Trend
 Flat Trend
 Declining Trend


Downward Trend
◦ Every next bottom is lower at Previous one

Upward Trend
◦ Every next Bottom is high at Previous one

Flat Trend
◦ Prices in Narrow Range
How we make trend line
Flat trend line
created by joining both bottoms and highs
 Upward trend line
Created by joining bottom points
 Downward trend line
Created by joining highest points

Next buy?

We’ll wait for trough again and when It
reached and we are also expecting , raising
trend on that stock , that would be our buying
point
Four Groups based on the attitudes
of Technical Analyst
Contrary Opinion
 Smart Money
 Momentum Indicators
 Stock Price & volume Techniques

Contrary opinion
Mutual Fund Cash Position
 Credit Balances in Brokerage Accounts
(+)
 Investment Advisory Option
 OTC versus NYSE Volume
 Futures Traders Bullish on Stock Index
Futures

Credit Balances in Brokerage Accounts

If increases, It shows upward trends into the
market
◦ Credit balances result when investors sell stocks
and leave the proceeds with their brokers,
expecting to reinvest them shortly
Follow the Smart Money
Confidence Index
 T-Bill Euro Dollar yield Spread
 Debit Balances in Brokerage Accounts (
Margin Debt)


A confidence indicator calculated by dividing
the average yield on high-grade bonds by the
average yield on intermediate-grade bonds.
The discrepancy between the yields is
indicative of investor confidence.
A rising ratio indicates investors are
demanding a lower premium in yield for
increased risk and so are showing
confidence in the economy.

The theory is that if investors are optimistic
they are more likely to invest in the more
speculative grade of bonds, driving yields
downwards and the confidence index
upwards. The opposite is true if investors are
pessimistic.
T-Bill-Eurodollar Yield Spread

Measure the spread b/w T-Bill yield &
Euro Dollar Rates.
◦ Reason: At time of International Crisis, this
spread widens as the smart money flows to
safe-heaven U.S.
◦ T-bills causes a decline in this ratio. It’s
contended that the stock market typically
experience a trough shortly thereafter.
Debit Balances in Brokerage Accounts (
Margin Debt)
Momentum Indicators
Breadth of Market
 Stock above their 200-day Moving
Average

Breadth of Market
Stocks above their 200-Day Moving
Average
Market is considered to be overbought
and subject to a negative correction when
more than 80 percent of the stocks are
trading above their 200-day moving
average
 If less than 20 percent of the stocks are
selling above their 200 day moving
average, the market is considered to be
oversold, means investor’s should expect
positive correction.

Stocks above their 200-Day Moving
Average
Stock Price and Volume Techniques
Dow Theory
 Importance of volume
 Support & Resistance Level
 Moving Average Lines
 Relative Strength
 Bar Charting
 Multiple-Indicators
 Candle Stick Chart

Dow Theory
Three Types of Price Movements
Major Trends that are like tides in the
ocean
 Intermediate Trends that resemble waves
 Short-run movements that are like ripples

Dow Theory
Importance of Volume

Volume changes along with price
movement as an indicator of changes in
supply and demand.
◦ A price movement in one direction means
that the net effect on price is in that direction
but the price change alone doesn’t indicate
the breadth of the excess demand or supply.
Support and Resistance Level
Moving Average Line
Moving Average Line
Relative Strength

Technicians believe that once a trend
begins, It will continue until some major
event causes a change in direction. They
believe this is also true of relative
performance. If an individual stock or an
industry group is outperforming the
market , technicians believe it will
continue to do so.
Bar Charting
Multiple-Indicate Charts

Combination of several indicators like two
MA lines (50 and 200 day) and RS lines.
Candle Stick Chart
Candle Stick Chart
Candle Stick Chart
Candle Stick Chart