Technical and Market Technical and Market AnalysisAnalysis

Mike ZaccardiMike Zaccardi

Technical AnalystTechnical Analyst

2009-2010 Osprey Financial 2009-2010 Osprey Financial GroupGroup

Street CredStreet Cred

2009-10 OFG – Energy, Materials, Utilities 2009-10 OFG – Energy, Materials, Utilities equity analyst; Technicianequity analyst; Technician

2010 CFA Global Investment Research 2010 CFA Global Investment Research Challenge Competitor, Florida ChampionsChallenge Competitor, Florida Champions– One of five OFG students, competed in New York One of five OFG students, competed in New York

City in Americas ChallengeCity in Americas Challenge 2010 Financial Management Association 2010 Financial Management Association

Financial Quiz Bowl Champion – Chicago, ILFinancial Quiz Bowl Champion – Chicago, IL 10-11 UNF Finance and Investment Society 10-11 UNF Finance and Investment Society

PresidentPresident Financial Columnist, UNF SpinnakerFinancial Columnist, UNF Spinnaker 2011 FMA Best All-Around Forecaster (Crude 2011 FMA Best All-Around Forecaster (Crude

Oil, Weather)Oil, Weather) Briefly…Research Analyst, Intrepid Capital Briefly…Research Analyst, Intrepid Capital

MgmtMgmt

AgendaAgenda

TA as defined by the CFA InstituteTA as defined by the CFA Institute Current Market Analysis & OutlookCurrent Market Analysis & Outlook OFG Technical CallsOFG Technical Calls Energy ChartsEnergy Charts Other Technical Analysis IndicatorsOther Technical Analysis Indicators Lightning RoundLightning Round

What is Technical What is Technical Analysis?Analysis? Security analysis discipline for Security analysis discipline for

forecasting the future direction of forecasting the future direction of prices through the study of past prices through the study of past data, primarily price and volumedata, primarily price and volume

Contradictory to weak-form EMHContradictory to weak-form EMH Like weather forecasting, TA does Like weather forecasting, TA does

not provide an absolute not provide an absolute predictionprediction

Technical Analysis per Technical Analysis per CFAICFAI

Though the CFA Though the CFA program does not program does not emphasize TA, it emphasize TA, it WILL appear on WILL appear on the examsthe exams

Quantitative Quantitative MethodsMethods

About 5 questions About 5 questions out of 240out of 240

AssumptionsAssumptions

Stock values determined by supply and Stock values determined by supply and demanddemand

Supply and demand are driven by both Supply and demand are driven by both rational and irrational behaviorrational and irrational behavior

Security prices move in trends that persist Security prices move in trends that persist for long periodsfor long periods

While causes of changes in supply and While causes of changes in supply and demand are difficult to determine, the demand are difficult to determine, the changes themselves can be observed in changes themselves can be observed in market price behaviormarket price behavior

TA vs. FundamentalsTA vs. Fundamentals

Fundamental analystsFundamental analysts look for changes look for changes in stock values (risk and return) that in stock values (risk and return) that lead to changes in supply and demand lead to changes in supply and demand and believe stock prices adjust quickly and believe stock prices adjust quickly to new information about valueto new information about value

Technical analystsTechnical analysts look directly for look directly for signals and indicators of changes in signals and indicators of changes in supply and demand and believe stock supply and demand and believe stock prices move in trends that can persist prices move in trends that can persist for long periodsfor long periods

Advantages of Technical Advantages of Technical AnalysisAnalysis

Quick and easy (sometimes)Quick and easy (sometimes) Does not involve messing with data Does not involve messing with data

and adjusting for accounting changes and adjusting for accounting changes and differencesand differences

Incorporates psychological as well as Incorporates psychological as well as economic (rational as well as economic (rational as well as irrational) reasons behind price irrational) reasons behind price changeschanges

Behavioral FinanceBehavioral Finance

Challenges to Technical Challenges to Technical AnalysisAnalysis

The weak form of EMH suggests that stock The weak form of EMH suggests that stock prices reflect all available trading prices reflect all available trading informationinformation

Statistical tests find no evidence of price Statistical tests find no evidence of price trends or profitable trading rulestrends or profitable trading rules

If statistical trading rules worked, price If statistical trading rules worked, price changes would become self-fulfilling changes would become self-fulfilling prophecies; its value would be neutralizedprophecies; its value would be neutralized

Interpreting technical rules is subjective, Interpreting technical rules is subjective, and decision variables change over timeand decision variables change over time

Categories of Technical Categories of Technical IndicatorsIndicators

1.1. Contrarian indicators: Contrarian indicators: The majority The majority is often wrong, do the oppositeis often wrong, do the opposite

2.2. Smart money indicators: Smart money indicators: “Smart” “Smart” investors are right, do what they are investors are right, do what they are doingdoing

3.3. Momentum indicators: Momentum indicators: Direction and Direction and strength of market movementstrength of market movement

4.4. Stock price and volume Stock price and volume techniques: techniques: Identify patterns that Identify patterns that repeatrepeat

Contrarian Opinion Contrarian Opinion RulesRules Mutual fund (cash) ratio = cash/total Mutual fund (cash) ratio = cash/total

assetsassets Investor credit balances in brokerage Investor credit balances in brokerage

accountsaccounts Opinions of investment advisory servicesOpinions of investment advisory services OTC volume/NYSE volumeOTC volume/NYSE volume CBOE put/call ratioCBOE put/call ratio Percentage of bullish stock index futures Percentage of bullish stock index futures

traderstraders

Smart Money Smart Money IndicatorsIndicators Confidence indexConfidence index= = high quality bond high quality bond

yieldsyields average bond yields average bond yields– Increase (closer to 1) is bullish; Yield CIIncrease (closer to 1) is bullish; Yield CI

T-bill yield to Eurodollar yield T-bill yield to Eurodollar yield spreadspread– Narrower is bullish, wider is bearishNarrower is bullish, wider is bearish

Margin debt in brokerage Margin debt in brokerage accountsaccounts– Increase is bullish, decrease is bearishIncrease is bullish, decrease is bearish

Momentum IndicatorsMomentum Indicators

Breadth of market: Advance-Breadth of market: Advance-decline linedecline line

Number of stocks above 200-Number of stocks above 200-day moving averageday moving average– 80% of stocks above 200-day MA, a 80% of stocks above 200-day MA, a

correction is likely (overbought)correction is likely (overbought)

Price and Volume Price and Volume TechniquesTechniques Dow TheoryDow Theory – major trends (tides), – major trends (tides),

intermediate trends (waves), short-run intermediate trends (waves), short-run movements (ripples)movements (ripples)

Ratio of upside to downside volumeRatio of upside to downside volume (>1.75 (>1.75 is overbought, <0.75 is oversold)is overbought, <0.75 is oversold)

Support and resistance levelsSupport and resistance levels – movements – movements through these levels on high volume, breakoutsthrough these levels on high volume, breakouts

Relative strengthRelative strength – ratio of stock price to – ratio of stock price to market index, increasing is bullish, decreasing market index, increasing is bullish, decreasing is bearish, trend expected to continueis bearish, trend expected to continue

Price and Volume Price and Volume TechniquesTechniques Moving averagesMoving averages – –

– Stock price moves through the 50-day moving Stock price moves through the 50-day moving average on strong volumeaverage on strong volume

– 50-day moving average crosses the 200-day 50-day moving average crosses the 200-day moving average on strong volume (golden moving average on strong volume (golden cross)cross)

To identify Trends: To identify Trends:

Bar ChartsBar Charts – a bar from high to low price over a – a bar from high to low price over a period with volume per period at the bottomperiod with volume per period at the bottom

Point and figure chartsPoint and figure charts – only record price – only record price movements of some minimum amount movements of some minimum amount

Market Analysis Market Analysis HighlightsHighlights Headline riskHeadline risk Dollar near lows, Euro weak (you’ll see)Dollar near lows, Euro weak (you’ll see) US Stocks fairing well vs. IntlsUS Stocks fairing well vs. Intls Energy, Health Care leading the wayEnergy, Health Care leading the way Volume steady, low (summertime)Volume steady, low (summertime) A look at gold, silverA look at gold, silver Commodities cool offCommodities cool off Credit markets, money velocity - DeflationCredit markets, money velocity - Deflation

SPX 9-Month

NASDAQ 100 ETF (NDX) 9-Month

10-yr Yield10-yr Yield

Small Caps Small Caps OutperformanceOutperformance

Internationals vs. SPXInternationals vs. SPX

Emerging Markets vs. SPXEmerging Markets vs. SPX

CBOE VIX 1-YearCBOE VIX 1-Year

VIX 10-YearVIX 10-Year

What’s the worst ETF in What’s the worst ETF in the world?the world?

VXX – Short Term VIXVXX – Short Term VIX

NYSE Daily Volume 1-Year

Cotton (BAL) ETF – Parabolic Move

Cotton ($CT_F) Bubble Burst

Gold ($GC_F) 1-YrGold ($GC_F) 1-Yr

Silver ($SI_F) 4-MonthSilver ($SI_F) 4-Month

FibonacciFibonacci

1313thth century Italian mathematician century Italian mathematician discovered a self-replicating discovered a self-replicating sequence of numberssequence of numbers

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 etc1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 etc Sum of two adjacent numbers forms Sum of two adjacent numbers forms

the next numberthe next number Ratio of two consecutive numbers is Ratio of two consecutive numbers is

1.618, or its inverse, 0.6181.618, or its inverse, 0.618 Thus 61.8% and 38.2% are thought Thus 61.8% and 38.2% are thought

to be important retracement levelsto be important retracement levels

US Dollar Index 1-YearUS Dollar Index 1-Year

JPY and EUR vs. USDJPY and EUR vs. USD

Australian Dollar (AUDUSD)

USDJPY 1-Year (Flash USDJPY 1-Year (Flash Crash)Crash)

EURCHF – “Risk-Off”EURCHF – “Risk-Off”

US Dollar Index 40-US Dollar Index 40-YearYear

S&P 500 Sectors YTDS&P 500 Sectors YTD

S&P 500 CompaniesS&P 500 Companies

OFG Technical CallsOFG Technical Calls

Raytheon (RTN) Upside Raytheon (RTN) Upside BreakoutBreakout

OIH Double-BottomOIH Double-Bottom

Oil Services ETF 200-Oil Services ETF 200-EMAEMA

Energy E&P ETF (XOP)Energy E&P ETF (XOP)

USD – ReversalUSD – Reversal

DXY Flag FormationDXY Flag Formation

OFG and the DollarOFG and the Dollar

Diamond Offshore (DO)Diamond Offshore (DO)

Freeport-McMoRan Freeport-McMoRan (FCX)(FCX)

S&P 500 w/200ema & S&P 500 w/200ema & 50sma50sma

OFG Strategy: Raise Cash on 2/3 with S&P at 1090-1105

Buy back equities between 1045-1060

Reasoning: Market was in Corrective phase, 200 ema @ 1045, 10% correction at 1035 – buyers likely to step in ahead of 10% number as it had been much anticipated

What Happened?What Happened?

Technical call at 1103 on the S&P turned out to be Technical call at 1103 on the S&P turned out to be nearly exactly what occurrednearly exactly what occurred

S&P quickly moved from 1103 to 1044.50 in only a S&P quickly moved from 1103 to 1044.50 in only a few days and reversed higher, retracing 100% of few days and reversed higher, retracing 100% of the move downward within just 2 weeks the move downward within just 2 weeks

My sectorsMy sectors: : – sold FCX in January, remained in cash in sold FCX in January, remained in cash in

Materials SectorMaterials Sector– Energy was roughly half in cash as of 2/4Energy was roughly half in cash as of 2/4– Market weight defensive Utilities SectorMarket weight defensive Utilities Sector

Bought back OIH at $115.10 (S&P 1057) 2/5Bought back OIH at $115.10 (S&P 1057) 2/5 Bought back XOP at $38.38 (S&P 1049) 2/5Bought back XOP at $38.38 (S&P 1049) 2/5 Bought back FCX at $69.20 (S&P 1059) 2/8Bought back FCX at $69.20 (S&P 1059) 2/8

– Sold on 2/19 at $77.75 for a 12.4% profit Sold on 2/19 at $77.75 for a 12.4% profit in <9 trading daysin <9 trading days

Scotts Miracle Gro Scotts Miracle Gro (SMG)(SMG)

AnomaliesAnomalies

January EffectJanuary Effect Sell (equities) in May and Go AwaySell (equities) in May and Go Away Sell Treasuries in FebruarySell Treasuries in February Options Expiration – Heavy VolumeOptions Expiration – Heavy Volume Mutual Fund Monday!Mutual Fund Monday! Final 10-20 Minutes of TradingFinal 10-20 Minutes of Trading January BarometerJanuary Barometer President’s Third YearPresident’s Third Year

– Presidential Election CyclePresidential Election Cycle

Energy ChartsEnergy Charts

RBOB Gas 1-YR (+RBOB Gas 1-YR (+$0.65)$0.65)

WTI Crude – 10-YearWTI Crude – 10-Year

WTI/Brent SpreadWTI/Brent Spread

What’s Commodity is What’s Commodity is not Performing?not Performing?

Nat Gas 10-YRNat Gas 10-YR

Contango!Contango!

BackwardationBackwardation

Technical IndicatorsTechnical Indicators

CandlesticksCandlesticks

Abandoned Baby Abandoned Baby Engulfing PatternEngulfing Pattern

Golden CrossGolden Cross

Death Death CrossCross

Market Internal Market Internal IndicatorsIndicators CBOE Put/Call Ratio (WILL BE UPDATED)CBOE Put/Call Ratio (WILL BE UPDATED)

– Today: 0.76 (VIX: 20.36 +1.29, +6.8%)Today: 0.76 (VIX: 20.36 +1.29, +6.8%) Advance/DeclineAdvance/Decline

– 1092/18121092/1812 New highs/new lowsNew highs/new lows

– 214/5 214/5 Up Volume/DownVolumeUp Volume/DownVolume

– 0.6450.645TRIN: +1.60TRIN: +1.60

Bollinger BandsBollinger Bands

The indicator consists of The indicator consists of three bands designed to three bands designed to encompass the majority of a encompass the majority of a security's price action. security's price action. – A simple moving avg in the middleA simple moving avg in the middle– An upper band (SMA plus 2 standard An upper band (SMA plus 2 standard

deviations)deviations)– A lower band (SMA minus 2 standard A lower band (SMA minus 2 standard

deviations)deviations)

Bollinger BandsBollinger Bands

Elliot WaveElliot Wave

3 More…3 More…

MACDMACD – Moving average – Moving average convergance/divergance: momentum indicator convergance/divergance: momentum indicator that shows the relationship between two moving that shows the relationship between two moving averages of prices. averages of prices.

StochasticsStochastics – Slow/Fast: momentum indicator – Slow/Fast: momentum indicator that shows the location of the current close that shows the location of the current close relative to the high/low range over a set number relative to the high/low range over a set number of periods. of periods.

RSIRSI – Relative strength index: compares the – Relative strength index: compares the magnitude of a stock's recent gains to the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that magnitude of its recent losses and turns that information into a number that ranges from 0 to information into a number that ranges from 0 to 100. 100.

Netflix (NFLX)Netflix (NFLX)

Kroger (KR) Quiet Kroger (KR) Quiet LeaderLeader

Apple (AAPL) Loud Apple (AAPL) Loud LeaderLeader

Beat down Goldman Sachs Beat down Goldman Sachs (GS)(GS)

Molycorp (MCP)Molycorp (MCP)

Google (GOOG) BewareGoogle (GOOG) Beware

Mosaic (MOS) looks Mosaic (MOS) looks goodgood

Bank of America (BAC)Bank of America (BAC)

Peet’s Coffee (PEET)Peet’s Coffee (PEET)

Flash Crash – 5/6/2010Flash Crash – 5/6/2010

1000 point drop in Dow1000 point drop in Dow SPX lost 105 points (9%) intradaySPX lost 105 points (9%) intraday SPX lost 7% in about 10 minutesSPX lost 7% in about 10 minutes Recovered 6% in 20 minutesRecovered 6% in 20 minutes Errant trade in SPX futuresErrant trade in SPX futures PG fat fingerPG fat finger Many stocks had ‘trade-aways’ causing Many stocks had ‘trade-aways’ causing

scrutiny at the exchangesscrutiny at the exchanges Shattered investor confidenceShattered investor confidence Continued outflows from equity mutual funds Continued outflows from equity mutual funds

in coming monthsin coming months High-frequency trading, computer High-frequency trading, computer

algorithms: Man vs. Machinealgorithms: Man vs. Machine

Apple on Flash CrashApple on Flash Crash

Now’s the time?Now’s the time?

Or are we the next Or are we the next Japan?Japan?

10-yr Returns10-yr Returns

All other Technical All other Technical IndicatorsIndicators 100s more technical indicators100s more technical indicators If you look hard enough, you can If you look hard enough, you can

find an indicator to agree with you find an indicator to agree with you (Bad!)(Bad!)

Use technical indicators with other Use technical indicators with other indicators for better resultsindicators for better results

Combine TA with Fundamental Combine TA with Fundamental Analysis for the best results!Analysis for the best results!

Want to be a TA?Want to be a TA?

Market Technicians AssociationMarket Technicians Association Be aware: having technical Be aware: having technical

analysis on your resume can hurt analysis on your resume can hurt you. Many firms, especially you. Many firms, especially valuation firms, look down on TAvaluation firms, look down on TA

Somewhat specialized, not many Somewhat specialized, not many TA entry level positionsTA entry level positions

Stocktwits/TwitterStocktwits/Twitter

BooksBooks

Edwards, Robert D. and Magee, John, Technical Analysis of Stock Edwards, Robert D. and Magee, John, Technical Analysis of Stock Trends, 9th EditionTrends, 9th Edition

Kirkpatrick, Charles D. and Dahlquist, Julie R.: Technical Analysis Kirkpatrick, Charles D. and Dahlquist, Julie R.: Technical Analysis The Complete Resource for Financial Market TechniciansThe Complete Resource for Financial Market Technicians

Pring, Martin J.: Technical Analysis Explained, 4th EditionPring, Martin J.: Technical Analysis Explained, 4th Edition Jeremy du Plessis, The Definitive Guide to Point and FigureJeremy du Plessis, The Definitive Guide to Point and Figure Frost, A.J. and Prechter, Robert R., Elliott Wave Principle, Tenth Frost, A.J. and Prechter, Robert R., Elliott Wave Principle, Tenth

EditionEdition Kaufman, Perry J., New Trading Systems and Methods, 4th Kaufman, Perry J., New Trading Systems and Methods, 4th

EditionEdition Nison, Steve, Japanese Candlestick Charting Techniques, 2nd Nison, Steve, Japanese Candlestick Charting Techniques, 2nd

EditionEdition Pring, Martin J., Investment Psychology ExplainedPring, Martin J., Investment Psychology Explained Aronson, David R.: Evidence-Based Technical AnalysisAronson, David R.: Evidence-Based Technical Analysis Brown, Constance M., Technical Analysis for the Trading Brown, Constance M., Technical Analysis for the Trading

ProfessionalProfessional Murphy, John J., Intermarket Analysis: Profiting From Global Murphy, John J., Intermarket Analysis: Profiting From Global

Market RelationshipsMarket Relationships Shiller, Robert J., Irrational Exuberance, 2nd EditionShiller, Robert J., Irrational Exuberance, 2nd Edition O’Neil, William J, How to Make Money in Stocks (latest edition)O’Neil, William J, How to Make Money in Stocks (latest edition)

Good Websites:Good Websites:

Ino.com (Futures charts)Ino.com (Futures charts) Kitco.com (metal/commodities)Kitco.com (metal/commodities) Optionmonster.com (TA/Options)Optionmonster.com (TA/Options) Sectorspdr.com/marketmap/ (Tree)Sectorspdr.com/marketmap/ (Tree) GooglefinanceGooglefinance YahoofinanceYahoofinance Bigcharts.comBigcharts.com Briefing.com (Economic/Earnings Calendars)Briefing.com (Economic/Earnings Calendars) Twitter (live news, traders)Twitter (live news, traders) Brokerage accounts for streaming Brokerage accounts for streaming

quotes/analysis (Thinkorswim, StrategyDesk, quotes/analysis (Thinkorswim, StrategyDesk, eSignal)eSignal)