technical analysis (ch. 12) - cfa institute
TRANSCRIPT
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CHAPTER 12 TECHNICAL ANALYSIS
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THE LOGIC OF TECHNICAL ANALYSIS
Supply and demand determine prices
Changes in supply and demand cause changes in prices
Prices can be projected with charts and other technical tools
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ASSUMPTIONS OF TECHNICAL ANALYSIS
• Human behavior is often erratic and driven by emotion.
• Market trends and patterns reflect irrational human behavior.
• Trends and patterns repeat themselves and are thus predictable.
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CHARTS
Line ChartBar ChartCandlestick ChartPoint and Figure Chart
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LINE CHARTS AND SCALE
EXHIBIT 12-7 Dow Jones Industrial Average on a Linear Scale, 1928–2010 (in U.S. dollars)
EXHIBIT 12-8 Dow Jones Industrial Average on a Logarithmic Scale, 1928–2010 (in U.S. dollars)
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BAR CHARTS
EXHIBIT 12-2 Bar Chart Notation
EXHIBIT 12-3 Bar Chart: Bovespa Index, November 2007–November 2009 (price in Brazilian reals)
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CANDLESTICK CHARTS
EXHIBIT 12-4 Construction of a Candlestick Chart
EXHIBIT 12-5 Candlestick Chart: Companhia Vale do Rio Doce, 1 January– 15 June 2009 (prices in U.S. dollars)
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POINT AND FIGURE CHARTS
EXHIBIT 12-6 Point and Figure Chart: Wharf Holdings Daily Price Chart, 2007–2009 (Hong Kong dollars)Note: The box size is HK$1, and the reversal size is three.
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PRICE AND VOLUME
Price Is Trending Higher or Lower
Volume Is Increasing
Confirmation: Trend Will Continue
Volume Is Decreasing
Divergence: Trend Will End
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RELATIVE STRENGTH ANALYSIS
EXHIBIT 12-10 Relative Strength Analysis: HOG vs. the S&P 500 and RODM vs. the S&P 500, January–June 2009
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TREND ANALYSIS
Uptrend
Higher Highs, Higher Lows
Demand Exceeds Supply
Downtrend
Lower Highs, Lower Lows
Supply Exceeds Demand
EXHIBIT 12-11 Trend Analysis: China Mobile Weekly Price Chart, 2002–2010 (prices in Hong Kong dollars)
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SUPPORT AND RESISTANCE
• A low price range in which buying activity is sufficient to stop a decline in price
Support• A high price range in which selling
activity is sufficient to stop a rise in priceResistance• Once a resistance (support) level is
breached, it becomes a support (resistance) level
Change in Polarity
Support
Resistance Becomes Support
Resistance/Support
Price
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CHART PATTERNSChart Patterns
Reversal PatternsHead and Shoulders or Inverse Head and
Shoulders
Double Tops or Bottoms
Triple Tops or Bottoms
Continuation Patterns
Triangles
Rectangles
Flags and Pennants
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HEAD AND SHOULDERS
EXHIBIT 12-13 Head and Shoulders Pattern: Marvell Technology Daily Price Chart, June 2005–June 2006 (price in U.S. dollars ÷ 100)
(Head and Shoulders) Price target = Neckline – (Head − Neckline)(Inverse Head and Shoulders) Price target = Neckline + (Head – Neckline)
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DOUBLE TOPS AND BOTTOMS
EXHIBIT 12-16 Double-Bottom Pattern: Time Warner Daily Price Chart, November 2007–October 2009 (price in U.S. dollars)
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TRIPLE TOPS AND BOTTOMS
EXHIBIT 12-17 Triple-Top Pattern: Rockwell Automation Daily Price Chart, 1999 (price in U.S. dollars)
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TRIANGLES
EXHIBIT 12-18 Ascending Triangle Pattern
EXHIBIT 12-19 Descending Triangle Pattern
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RECTANGLES
EXHIBIT 12-21 Rectangle Patterns
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FLAGS AND PENNANTS
EXHIBIT 12-22 Pennant Formation: China Mobile ADR, November 2006–July 2009 (price in U.S. dollars)
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TECHNICAL INDICATORS
Price-Based Indicators
Momentum Oscillators
Sentiment Indicators
Flow-of-Funds Indicators
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PRICE-BASED INDICATOR: MOVING AVERAGE
EXHIBIT12-23 Daily Price Chart with 20-Day and 60-Day Moving Averages: Gazprom EDR, November 2007–August 2009 (price in euros)
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PRICE-BASED INDICATOR: BOLLINGER BAND
EXHIBIT12-24 Bollinger Band Using 60-Day Moving Average and 2 Standard Deviations: Gazprom EDR Daily Price Chart, November 2007–August 2009 (price in euros)
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MOMENTUM OSCILLATOR: RATE OF CHANGE OSCILLATOR (M = V ÷ VX × 100)
EXHIBIT 12-25 Momentum Oscillator with 100 as Midpoint: Toyota Motor, May 2008–October 2009 (price in Japanese yen)
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MOMENTUM OSCILLATOR: RELATIVE STRENGTH INDEX
1001001
(Up changes for the period under consideration)Down changes for the period under construction
RSIRS
RS
EXHIBIT 12- 27 Candlestick Chart with RSI: Ford, January–August 2009 (price in U.S. dollars)
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MOMENTUM OSCILLATOR: STOCHASTIC OSCILLATOR
14%K 10014 14
%D Average of the last three %K values calculated daily
C LH L
EXHIBIT 12-28 Weekly Price Chart and Stochastic Oscillator: Petroleo Brasileiro ADR, June 2008–July 2009 (price in U.S. dollars)
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MOMENTUM OSCILLATOR: MACD OSCILLATOR
EXHIBIT12-29 MACD and Daily Price Chart: Exxon Mobil, March–November 2005 (price in U.S. dollars)
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SENTIMENT INDICATOR: OPINION POLLS
Investors Intelligence Advisors’ Sentiment Report
Market Vane Bullish Consensus
Consensus Bullish Sentiment Index
Daily Sentiment Index
AAII Investor Sentiment Survey
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SENTIMENT INDICATOR: CALCULATED STATISTICAL INDICES
Put/Call Ratio• Normally
below 1.0• Considere
d a contrary indicator
CBOE Volatility Index• Based on
options on stocks in the S&P 500
• Used with trend, pattern, or oscillator tools
Margin Debt• Rising
margin debt believed to be a signal of aggressive buying
• Considered a contrary indicator
Short Interest Ratio• Short
interest ÷ Average daily trading volume
• Considered a contrary indicator
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FLOW-OF-FUNDS INDICATOR: ARMS INDEX (TRIN)
Number of advancing issues / Number of declining issuesArms Index Volume of advancing issues / Volume of declining issues
EXHIBIT12-32 Arms Index for the S&P 500, January–July 2009
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OTHER FLOW-OF-FUNDS INDICATORS
• Ability to buy stock on margin may increase demand
• Declining margin balances may result in forced selling
Margin Loans
• Considered a contrary indicator: High cash balances represent buying power
• Some analysts take into account the level of interest rates
Mutual Fund Cash
Positions
• Considered a contrary indicator: High issuance and offerings are considered signs of a market top
New Equity Issuance and
Secondary Offerings
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CYCLES
Kondratieff Wave (K-wave)• Western
economies have a 54-year cycle
• Originally tied to economic cycles and commodity prices
18-Year Cycle• 3 × 18 years
= 54 years• Most often
mentioned in connection with real estate prices
Decennial Pattern• Pattern of
market returns broken down based on the last digit of a year
• Years ending in 5 have the best returns
Presidential Cycle• Returns
broken down by year of U.S. President’s term in office
• Third year (year prior to next election) has best historical performance
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ELLIOTT WAVE THEORYGrand Supercycle
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette
Follow
patterns
that are
ratios of
Fibonacci Sequence: 0, 1, 1, 2, 3,
5, 8, 13, 21…
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EXHIBIT 12-34 IMPULSE WAVES AND CORRECTIVE WAVES
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INTERMARKET ANALYSIS
Inflection points in one market
May be a warning sign of a change in
trend in another market
EXHIBIT 12-35 Relative Strength of 10-Year T-Bonds vs. S&P 500, September 2008–July 2009
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SUMMARY
• Principles, applications, and assumptions of technical analysis
• Construction and interpretation of charts• Trend, support, and resistance lines, and change
in polarity• Common technical analysis patterns, indicators,
and cycles• Elliott Wave Theory• Intermarket analysis