Technical Analysis

Chart Patterns

Rectangles

• Signifies an important Consolidation/Continuation Pattern.

• Equal pressure between buyers and sellers and the combat is indecisive until a break out occurs.

• Volume is usually high when rectangle begins to form and tapers off significantly as rectangle extends.

• The breakout from the rectangle is fairly reliable, as prices do not return to the rectangle.

Rectangles

• Rectangles can extend for few weeks to months.

• If the duration is less than three weeks it is considered a flag, also a continuation pattern.

• It is preferable that highs and lows alternate( although not a pre-requisite)

• Target price increase or decrease is usually the breadth of the rectangle.

Rectangles

Flags

• Usually a flag takes 5 days to 2 weeks to form.

• Flags in a rising market are formed with slight downtrend.

• Flags in a falling market are formed with slight uptrend

Flags

Rounding Bottom/Saucers

• Rounding Bottoms occurs at market bottoms when the investors interest in the share is at its lowest ebb.

• It is a long-term reversal pattern.

• It represents a long consolidation patterns that turns from bearish pattern to bullish pattern.

Saucers/Rounding Bottom

Saucers/Rounding Bottom

Gaps

• Three types of Gaps

• Runaway gaps

• Breakaway Gaps

• Exhaustion gaps

Runaway Gaps

• Occurs when prices are in Uptrend or Downtrend.

• Also Called Measuring Gaps

• Generally occur halfway through the trend.

Runaway Gaps

Breakaway Gap

• Usually occurs when price breaks out of a price pattern.

• Breakaway gap emphasizes the bullish or bearishness of the break out.

Breakaway Gap

Exhaustion Gaps

• These gaps appear near the end of good up or down trend.

Exhaustion Gaps

Rising Wedge

• The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows.

• In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

• The boundary line slope upwards with the lower line being at a steeper angle than the upper line.

• Volume will decline as prices rise and the wedge evolves

Falling Wedge

Using the Moving Average

• Shows the average value of a security’s price over a period of time– Using compared or used in conjunction with EMA

• The most commonly used averages are of 20,30,50, 100 and 200 days– The longer the time span, the less sensitive the

moving average to daily price changes– Moving averages are used to emphasize the direction

of a trend and smooth out price and volume fluctuations (“noise”).

Moving Average

Moving Average (Continued)

• Notice in April when the stock price dropped well below its 50-day average (the green line). – Bearish signal

• February it rose above its 50-day average and continued to rise for several weeks– Bullish signal

• Typically, when a stock moves below its moving average it is a bad sign, above it is a good sign

Moving Averages (Continued)

• What do the different days mean? – 20 days - choppy line. It isn't the most accurate,

but is probably the most useful for short term traders.

– 30 day - similar to 20 day but provides a bit more certainty for the trend.

– 50 day - moving averages provide a much less volatile, smooth line. This can be used to detect somewhat longer term trends.

– 100 day - similar to the 50 day, it is less volatile, and one of the most widely used for long term trends.

– 200 day - even less volatile, more of a rolling chart or smooth line. It doesn't react to quick movements in the stock price therefore it is used for long term trends.

Strategies for Moving Averages

• Filters– Used to increase confidence about an indicator

• No set rules or things to look out for when filtering, just whatever makes you confident enough to invest your money

• For example you might want to wait until a security crosses through its moving average and is at least 10% above the average to make sure that it is a true crossover.

– Remember, setting the percentile too high could result in "missing the boat" and buying the stock at its peak.

• Another filter is to wait a day or two after the security crosses over, this can be used to make sure that the rise in the security isn't a fluke or unsustained.

– Again, the downside is if you wait too long then you could end up missing some big profits.

Strategies for Moving Averages (Continued)

• Crossovers– Several different types of crossover's, but all of them involve two

or more moving averages. • In a double crossover you are looking for a situation where the

shortest MA crosses through the longer one. This is almost always considered to be a buying signal since the longer average is somewhat of a support level for the stock price.

• For extra insurance you can use a triple crossover, whereby the shortest moving average must pass through the two higher ones. This is considered to be an even stronger buying indicator.

• Moving average represents a smoothened trend and therefore acts as a Support/Resistance Line.

Moving Averages

• Simple Moving Average

• Weighted Moving Average

• Exponential Moving Average

SMA

WMA

SMA,WMA, EMA• The simple moving average gives equal weight to all data points. • By nature, it is the "true" average.

• The exponential and weighted moving averages give the most recent data points the highest rankings or "weightings".

• Therefore, the simple moving average tends to lag (by representing all data points equally) the exponential and weighted moving averages during large price changes.

• However, during "normal" or "flat" markets the differences become negligible.

Comparing Simple, Weighted and Exponential Moving Averages

Breadth of the Market

• Advance Decline Line

• Stocks in positive trends

• Percentage of stocks over moving average

• High Low Statistics

AD LINE• The AD line and the Market generally move

in tandem.

• A divergence in the AD line is indicative of a turning point

Day Issues Traded Advances DeclinesNet(A-D) Cumulative

Generic P/V relationships

• Volume is an indication of intensity of a price change

• A price rise that is accompanied by expanding volume is normal. Hence not an indication of any potential trend reversal.

• A New high reached with a volume that is actually diminishing is a warning to a reversal in price change

P/Volume Relationships (Contd..)

• If you have two consecutive peaks/rally. Lower volume at the later rally is usually a trend reversal.

• Selling Climax occurs when prices fall for a considerable time at an accelerated price and accompanied by expanding volume. – Price may be expected to rise immediately. Indicates

termination of bear market.

Dow Theory

• Six Basic tenets of Dow Theory• The average Discounts Everything

– The share prices quoted in the market reflect all known and predictable factors into account.

• The market has three movements– Primary movements

• One year to several years• Rising (bull) or falling (bearish) trend• Long term movement in prices

– Secondary reactions• Run counter to primary trend and are reactionary in nature• Important Decline in a bull market or advance in a bear market.• Lasting three weeks to three months• Retraces 33 to 66% (Check the Next Slide)

Dow Theory

Dow Theory

– Minor movements• No implications for long term forecasting• Usually part of primary or secondary movements

Dow Theory

Dow Theory

• Price action determines trend– Up trend is formed when successive rallies lead to

peaks that are higher than preceding ones.• Lines indicate movement

– Accumulation between a primary bear trend– Distribution between a primary bull trend.– If prices advance above accumulation- reversal of

bearish trend.• Price/Volume relationships provide background• The averages must confirm

– Transportation and Industrial Average

Oscillators

– ROC index– MACD– RSI (Relative Strength Index)

ROC Index

• Rate of Change = 100 (Y/Yx)

• Y represents the most recent closing price, and

• Yx represents the closing price a specific number of days ago.

• ROC rising gives a short-term bullish signal

• Bearish sign would have the ROC falling.

ROC

ROC

• ROC index above reference line implies the current price is at a higher level prevailing X days before.

• If ROC is above reference line and rises, then the rate at which price increases grows. Any fall in ROC represents drop in momentum.

• If index is falling but still above the reference line, it represents a slow down in the rate of price increase

MACD

• MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics.

• These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average.

• The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits.

MACD• The most popular formula for the "standard" MACD is the difference

between a security's 26-day and 12-day exponential moving averages.

• The 12-day EMA is the faster and the 26-day EMA is the slower.

• Closing prices are used to form the moving averages.

• Usually, a 9-day EMA is plotted along side to act as a trigger line.

• A bullish crossover occurs when MACD moves above its 9-day EMA and a bearish crossover occurs when MACD moves below

MACD

RSI

• Measures the strength of a stock/Market against itself.• The indicator is plotted in a range between zero and 100.

• A reading above 70 is used to suggest that a security is overbought,

• A reading below 30 is used to suggest that it is oversold.

• RSI = 100 - 100 /(1 + RS )

• RS = Average of x days' up closes / Average of x days' down closes

Relative Strength Index

Elliott Wave Theory

Elliot Wave Theory

• One complete cycle has 8 waves, five way advance followed by three way down.

• Waves one, three and five represent the 'impulse', or minor up-waves in a major bull move.

• Waves two and four represent the 'corrective,' or minor down-waves in the major bull move.

• The waves lettered A and C represents the minor down-waves in a major bear move, while B represents the one up-wave in a minor bear wave.

Elliot Wave Theory

Elliot Wave Theory

• Grand Super cycle (200 years)• Super cycle • Cycle • Primary • Intermediate • Minor • Minute • Minuette • Sub-Minuette (Hours)

Elliot Wave Theory

Elliot Wave Theory Analysis

Elliot Wave Theory Analysis

• The S&P 500 remains in bull mode and continues to outperform the Nasdaq 100.

• In Elliott terms, the index has taken on a 5-Wave structure since mid August.

• Wave 1 extends up to 1142, • Wave 2 declined to 1090,• Wave 3 advanced to 1218 and • Wave 4 fell to 1163.

• The recent move above the upper trend line of the falling wedge represents the beginning of Wave 5.

Elliot Wave Theory Analysis

• As a Wave 5 advance, the upside projection would be to around 1240-1245. Wave 5 is often 62 percent of Wave 3 or equal to Wave 1.

• The 62% stems from the Fibonacci number .618. As a Fibonacci 62% of Wave 3, the upside target would be to 1242 (1218 – 1090 = 128, 128 x .62 = 79, 1163 + 79 = 1242).

• Should a repeat of Wave 1 occur, the upside target would be to 1245 (1142 – 1060 = 82, 1163 + 82 = 1245).

Elliot Wave Theory Analysis

• Regardless of the targets, Wave 5 should move above the high of Wave 3 (1218). As long as the blue trend line extending up from the late October low holds, the bull trend is firmly in place and further strength should be expected.

Contrary Opinion Theories

• Odd lot theory

• Odd lot index = Odd lot sales/ odd lot purchases

• a decline in this index indicate more purchases in relation to sales. Small investors are optimistic– Contrary theory says it is time to sell.

Contrary Opinion Theories

• Mutual Fund Liquidity– When funds holds large liquid reserves, it

suggests they are bearish. Contrarians think it is good time to buy.