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Group No.09: Chapter No. 16 Technical Analysis

The document provides an overview of technical analysis, including: - Definitions of technical analysis and its basic assumptions around stock price movements - A brief history noting Charles Dow as the father of technical analysis - Differences between technical and fundamental analysis - Various technical indicators and trading rules like moving averages, support/resistance, and momentum indicators - Types of charts commonly used in technical analysis like bar charts, candlestick charts, and point and figure charts.

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Wasim Atta
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61 views33 pages

Group No.09: Chapter No. 16 Technical Analysis

The document provides an overview of technical analysis, including: - Definitions of technical analysis and its basic assumptions around stock price movements - A brief history noting Charles Dow as the father of technical analysis - Differences between technical and fundamental analysis - Various technical indicators and trading rules like moving averages, support/resistance, and momentum indicators - Types of charts commonly used in technical analysis like bar charts, candlestick charts, and point and figure charts.

Uploaded by

Wasim Atta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Group no.

09
Chapter no. 16

Technical analysis
Group Member
Amna Arshad (30)
Hamza Mushtaq (55)
Laiba Iqbal (03)
Muhammad Naeem (56)
Muhammad Saeed (36)
Technical analysis (contents)
Introduction

Definition

History

Technical Vs Fundamental analysis

Advantages of technical analysis


Conti…..
Assumption of technical analysis

Challenges to technical analysis

 Technical Indicators

 Types of charts
Introduction
Two major types of analysis for predicting the
performance of a company’s stock
i. Fundamental
ii. Technical
Looks for peaks, bottoms, trends, patterns, and other
factors affecting a stock’s price movement
Makes a buy/sell decision based on those factors
What is technical analysis?
It is the forecasting of future financial price
movement based on an examination of past price
movement.
It does not result in absolute predictions about future.
Its purpose is to help the investor make more sound
investment decision.
History of technical analysis
Charles Dow is the father of modern technical analysis
in the west.
He developed a theory later called dow theory.
It describes his ideas on price actions in the stock
market.
Technical Vs Fundamental analysis
Technical analysis involves the development of trading
rules based on past price and volume data for
individual stocks and the overall stock market.
Fundamental analysis involves economic, industry,
and company analysis that lead to valuation estimates
for companies, which can then be compared to market
prices to aid in investment decisions.
Advantages of technical analysis
Trend Analysis:
The biggest advantage of technical analysis is that is helps
investors and traders predict the trend of the market.
Entry/Exit Point:
Timing plays an important role in trading and investing. With the
help of technical analysis, traders and investors can predict the
right time to enter and exit a trade.
Provides Early Signal:
  Technical analysis gives early signals and also paints a picture
about the psychology of investors and traders regarding what they
are doing. Price-volume analysis also indicates the movement of
market makers and their activities related to a particular market.
Conti…
Quick and Less Expensive
In currency trading, technical analysis is less expensive as
compared to the fundamental analysis and there are so
many companies that provide free charting software.
Provides Lots of Information 
Technical analysis is helpful for short term trading, swing
trading, and long term investing. Technical charts
provide a lot of information that helps the traders and
investors build their positions and take trades.
Assumption of technical analysis
Stock value determine by supply and demand

Supply and demand are driven by both rational and


irrational behavior

Security prices move in trends that persist for long


periods

While causes of changes in supply and demand are


difficult to determine, the changes themselves can be
observed in market price behavior
Challenges to technical analysis
Challenges to basic assumptions
 empirical tests of efficient market hypothesis show
that prices do not move in trends
Challenges to technical trading rules
Rules that worked in the past may not be repeated
Patterns may become self-fulfilling prophecies
Rules all require subjective judgment
Technical trading rules and indicators
The Rationale
 A typical stock price cycle for the market or a stock
goes through a peak and trough as well as trends
 By analyzing the trend patterns (rising trend
,declining trend) and the change in trend, a technical
analyst would be able to decide what trade is needed
Typical stock market cycle
Conti…
Stock price
Declining trend channel
Flat trend channel
Sell point
Rising trend channel
Buy point
Trough
Conti…
Trading rule

 Contrary-opinion rule
 Follow the smart money
 Momentum indicators
 Stock price and volume techniques
Contrary-opinion rule
Many analysts rely on rules developed from the
premise that the majority of investors are wrong as the
market approaches peaks and troughs
Technicians try to determine whether investors are
strongly bullish or bearish and then trade in the
opposite direction
These positions have various indicators
Conti…
Mutual fund cash positions
Buy when the mutual fund cash position is high, sell
when low
Historically, the argument goes, mutual fund cash
positions have been greatest at the bottom of a bear
market and lowest at the peak of a bull market.
Hence investing against this statistic may be
profitable.
Assumes that mutual fund manager are poor judges
of market turning points
Conti…
Credit balances in brokerage
accounts
Credit balances result when investors sell
stocks and leave the proceeds with their
brokers, expecting to reinvest them shortly
Buy when credit balances increase, sell when
credit balances fall
Conti…
Investment advisory opinions
 buy when advisory firms become more bearish.
 This is the ratio of advisory services that are bearish.
When this ratio reaches the threshold (e.g. 60%) the
contrarian starts buying.

Put-call ratio
Buy when option purchasers are bearish (when the
put/call ratio increase)
Further traders bullish on stock index futures
Sell when speculators are bullish
Follow the smart Money

While contrary-opinion rules assume that most


investors are not smart, these indicators seek to follow
the path of sophisticated, and assumed smart,
investors.
The Barron's Confidence Index
Measures the yield spread between high-grade bonds
on a large course section of bonds.
Declining (increasing) yield spreads increase
(decrease) this index, and are a bullish (bearish)
indicator
Conti….

T-Bill Eurodollar yield spread


Decreases in this spread indicates grater confidence,
and is a bullish indicator
Debit(margin) balances in brokerage accounts
Such balances represent buying on margin, which is
assumed to be done large sophisticated investors
Increase are bullish signal
Momentum indicator
Breadth of market
 breadth of market series measures the number of
issues that have increased or decreased in each day
It helps explain what caused a change of direction
in a composite market index
Stock market index an overall increase while the
majority of the individual issues are not
increasing, which means that most stock are not
participants in the rising market
Conti….
Stocks above their 200-day moving average
The 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
When it sells 20% or lower of the stocks are selling
above their 200-day moving averages, the market is
considered to be oversold and subject to a positive
correction
Stock price and volume techniques
Dow theory
Stock prices as moving in trends to the movement
of water
He postulated three types of price movement over
time
a) Major trends that are like tides in the ocean
b) Intermediate trends that resemble waves
c) Short-run movements that are like ripples
Conti…
Each day the stock exchanges announce the volume of
trading in stocks and these data are reported in the
Wall Street Journal
A price decline with heavy volume is considered
bearish
 Ratio of upside to downside volume
 The volume 1.75 or more indicate an overbought
position that is bearish
 The volume 0.75 or lower indicate an oversold
position that is bullish
Support and Resistance level
A support level is the price range at which the
technician would expect a substantial increase in the
demand for a stock
A resistance level is the price range at which the
technician would expect an increase in the supply of
the stock and a price reversal
Moving average lines
Meant to reflect the overall trend for price series
The shorter moving average (the 50-day versus
200-day) reflecting shorter trends
If prices reverse and break through the moving
average line from below accompanied by heavy
trading volume
If the 50-day moving average line crosses the 200-
day moving average line from below on good
volume, this would be a bullish indicator
Types of charts
Bar chart

Candle stick charting

Point and figure chart


Bar chart
The highest price for the day

Closing price and opening price

The lowest price for the day

Some of the most popular type of charts

Advantages is that it show the high, low, open and close for each
day
Candle stick charting
The highest price for the day

Open or closing price

Body is black or red if stock closed lower

Body is white or green if it closed higher

The lowest price for the day


Point and figure chart
Plots day-to-day increases and decline in price
Only record price movements of some minimum
amount
If used for multi-day study, only closing prices will be
used
Two attributes affecting the appearance of a point &
figure chart
a) Box size
b) Reversal amount
Thank you

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