I Reading 12: Technical Analysis

Front 1

Technical Analysis

Back 1

Study of collective market sentiment as expressed in buying and selling of assets. Reflects both rational and irrational investor behavior. Implies that efficient market hypothesis doesn't hold.

Front 2

Line Charts

Back 2

Simplest technical analysis chart. Show closing prices for each period as a continuous line.

Front 3

Bar Charts

Back 3

Add high and low prices for each trading period and often include the opening price as well.

Front 4

Candlestick Chart

Back 4

Uses same data as bar charts, but display a box bound by the opening and closing prices. Box is clear is closing price is higher than the opening price or filled if opening price is higher than closing.

Front 5

Point and Figure Charts

Back 5

Helpful in identifying changes in the direction of price movements.

Volume charts are usually displayed below price charts with each period's volume shown as a vertical line.

Front 6

Relative Strength Analysis

Back 6

Ratio of an asset's closing prices to benchmark values (then make line chart)

Front 7

Uptrend

Back 7

Prices are consistently reaching higher highs and retracing to higher lows (demand is increasing relative supply)

Front 8

Downtrend

Back 8

Prices are consistently declining to lower lows and retracing to lower highs. (supply is increasing relative to demand)

Front 9

Trendline

Back 9

Uptrend - connects the increasing lows

Downtrend - connects decreasing highs

Price crosses trend line - Breakout from downtrend, breakdown from uptrend

Front 10

Support Level

Back 10

Buying is expected to emerge that prevents further price decreases

Front 11

Resistance Level

Back 11

Selling is expected to emerge that prevents further price increases

Front 12

Change in Polarity

Back 12

Breached resistance levels become support levels and breached support levels become resistance levels.

Front 13

Reversal Patterns

Back 13

When a trend approaches a range of prices but fails to continue beyond that range.

eg. head and shoulders pattern, double top, triple top (uptrends)

inverse head-and-shoulders, double bottom, triple bottom (downtrends)

Front 14

Continuation Patterns

Back 14

Suggest a pause in a trend rather than a reversal.

Front 15

Triangles

Back 15

Form when prices reach lower highs and higher lows over a period of time. Suggest buying and selling power have become roughly equal temporarily.

Front 16

Rectangles

Back 16

Form when trading temporarily forms a range between a support level and a resistance level. Suggests prevailing trend will resume.

Front 17

Flags and Peanuts

Back 17

Refers to rectangles and triangles that appear on short-term price charts.

Front 18

Moving Average Lines

Back 18

Used to smooth the fluctuations in a price chart. The mean of the last n closing prices.

Front 19

Bollinger Bands

Back 19

Constructed based on the standard deviation of closing prices over the last n periods. '

Overbought - prices at or above the upper Bollinger band (likely to decrease in the near future)

Oversold - prices at or below the lower Bollinger band (likely to increase in the near future)

Front 20

Contrarian Strategy

Back 20

Buy when price is at the lower band or sell when the price is at the upper band. (Buying when most traders are selling and selling when most traders are buying)

Front 21

Convergence

Back 21

Occurs when the oscillator shows the same pattern as prices (ex. both reaching higher highs) suggests price trend is likely to continue

Front 22

Divergence

Back 22

Occurs when oscillator shows a different pattern than prices (failing to reach a higher high when the price does) Suggests a potential change in the price trend

Front 23

Rate of Change Oscillator

Back 23

ROC/momentum oscillator is calculated as 100 times the difference between the latest closing price and the closing price n periods earlier. Oscillates around zero.

Front 24

Relative Strength Index

Back 24

Based on the ratio of total price increases to total price decreases over a selected number of periods. Scaled to oscillate between 0 and 100 with high values (greater than 70) indicating overbought and low values (lower than 30) indicating oversold

Front 25

Moving Average convergence/divergence

Back 25

Drawn using exponentially smoothed moving averages which place greater weight on more recent observations. MACD line is the difference between two exponentially smoothed moving averages of the price and the Signal Line is an exponentially smoothed moving average of the MACD line.

Front 26

Stochastic Oscillator

Back 26

Calculated from the latest closing price and highest and lowest prices reached in a recent period (ex. 14 days).

Front 27

Sentiment Indicators

Back 27

Can be used to discern the views of potential buyers and sellers. Bullish when investors expect increasing prices and Bearish when they expect decreasing prices.

Front 28

Put/Call ratio

Back 28

Put options increase in value when the price of an underlying asset decreases while call options increase in value if the price of the underlying asset increases.

Front 29

Volatility Index (VIX)

Back 29

The Chicago Board Options Exchange calculates the VIX, which measures the volatility of options on the S&P 500 stock index. High levels suggest investors fear declines in the stock market.

Front 30

Margin Debt

Back 30

Brokers are required to report this data. Increases in total margin debt outstanding suggest aggressive buying by bullish margin investors and strong positive sentiment.

Front 31

Short interest ratio

Back 31

Increases in shares sold short (indicates strong negative sentiment).

Front 32

Arms index (short-term trading index TRIN)

Back 32

Measure of funds flowing into advancing and declining stocks

TRIN = (Number of advancing issues/Number of declining issues) / (Volume of advancing issues/Volume of declining issues)

Close to 1 - funds flowing about equally to advancing and declining stocks

Greater than 1 - Majority of volume is in declining stocks

Less than one - More of the volume is in advancing stocks

Front 33

Mutual Fund Cash Position

Back 33

Ratio of mutual funds' cash to total assets. High ratio suggests prices are likely to increase and low ratio suggests prices will decrease.

Front 34

New Equity Insurance

Back 34

Initial Public Offerings

Front 35

Secondary Offerings

Back 35

Sales of additional shares by the issuer.

Front 36

Kondratieff Wave

Back 36

54 year cycles

Front 37

Elliot Wave Theory

Back 37

Based on the belief that financial market prices can be described by an interconnected set of cycles.

Prevailing uptrend - Upward moves - 5 waves. Downward moves - 3 waves

Prevailing downtrend - downward moves - 5 waves, upward moves - 3 waves

Sizes of waves are thought to correspond with the Fibonacci sequence.

Front 38

Intermarket Analysis

Back 38

Analysis of the interrelationships among the market values of major asset classes.