Technical analysis

Of the Financial Markets

|| James Wright, RIT Financial Management Association

What is ta?
Forecasting of future financial price movements based on an examination of past price movements  Like weather forecasting, does not provide an absolute prediction  Offers a glimpse at where prices are most likely to go in the future


Why analyze securities?

    

Goal of any investor is to beat the market Fundamental Analysis Functional Analysis Metaphysical Analysis How one feels about TA depends on ones thoughts on MARKET EFFICIENCY

Market efficiency weak form

  

Fundamentalists Current price does NOT reflect fair value Determination of future trends based on past info NOT possible Valuation based on readilyreadily-available financial info

SemiSemi-strong form
  

RandomRandom-Walkers Current price reflects all available info Once non-available noninfo becomes public, it is instantly reflected in prices Insider Trading only way to beat market

Strong form efficiency

 

Technicians ALL INFO is readily available and reflected in stock price Exploitations of inefficiencies NOT possible with fundamental analysis

Which form exists today?

Most academics believe in the Random Walk Theory  Strong-Form gaining Strongground thanks to legislation to prevent fraud, computerized and quick markets  Nasdaq, Amex, Forex, Archipelago  NYSE to go electronic soon


Random Walk theory? Is it relevant?

After announcing that earnings would come in below expectations on 6-Jan-00, Lucent fell from 59 to 43 in one day.

Random walk theory? Is it relevant?

After positive comments from an influential analyst on 23-Feb00, Time Warner shot up 49 to 59 in 2 days

Random walk theory? Is it relevant?

After reporting earnings that were below expectations on 15-Feb, Abercrombie and Fitch fell from 24 to 15.

Even though these are but a few examples, it is obvious that new information can move the price of a security in non-random ways.

The technicians mission

BEAT THE CROWD!  Markets are 80% psychological and 20% logical  Thousands and Thousands of people make their first trade every day, and 90% of them have no idea what they are doing  Technicians employ tricks to take advantage of Dumb Money


What do ta and surfing have in common?

Much like a surfer attempts to get a head start on a coming wave in order to ride it into shore, so does a market technician attempt to outpace the sheeple and their wave of mindless, irrational behaviors that move markets.

The basis of all technical analysis dow theory



Charles Dow known as the Godfather of TA Dow Theory pieced together from the writings of Charles Dow over several years

Charles dows three main ideas

   

Price Discounts Everything Price Movements are NOT always random What more important than Why You show me the chart and I will tell you the news.

NOT ALWAYS RANDOM

"One way of viewing it is that markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal of the chartist is to identify those periods (i.e. major trends)." - Jack Schwager

What more important than why

 

 

"A technical analyst knows the price of everything, but the value of nothing". The price is the end result of the battle between the forces of supply and demand for the company's stock. By focusing on price and volume, technical analysis represents a direct approach. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it. Who needs to know why?

Tech Analysis the tricks of the trade

CHARTS  Price  Volume  Trends Support/Resistance Momentum


General steps to technical evaluation

TOPTOP-DOWN approach 1. Broad Market Analysis 2. Sector Analysis 3. Individual Security Analysis The Principles behind TA are UNIVERSAL!

Trading Floor, CBOT

Multiple timeframes?
Scalpers 1 minute to 5 minutes  Day Traders 5 minutes to 60 minutes  Swing Traders 60 minutes to Daily  Investors/Position Trading Daily to Weekly  Institutions Weekly to Monthly
 

www.stockcharts.com

Long term vs. short term views

Choose a view that works for you! The longer you plan on your trade lasting, the longer timeframe chart you require! Longer Timeframes are more important than shorter ones!

Its all in the charts

Applied ta Chart patterns

Chart patterns represent a visual display of a certain market behavior  Graphical representation of market participation and crowd behavior  Patterns formed by trendlines  Volume plays critical role in the execution of patterns


Bullish patterns the falling wedge

Triangles (flags)

The head and shoulders

Who has made money with ta?

Larry Williams, regarded as one of the great technicians, entered a trading competition and returned over 20,000% in a year trading TECHNICAL picks  Daughter, actress Michelle Williams returns 10,000% in same competition using her fathers strategies


TA masters

Kenneth Griffin, CEO, Citadel Financial uses a computerized form of TA he programmed to assist in his implementation of convertible arbitrage trading strategies  Paul Tudor Jones, Tudor Investments inc, Net worth $9,000,000,000


Final thoughts5
Develop a strategy unique to your personality and comfort levels  Tweak your strategy until it works the best that it can  Test it using virtual (paper) trading  DO NOT STRAY FROM THE SYSTEM!  Remember that 1% every day leads to about 290% a year! A little goes a long way!