Reading 13: Technical Analysis (Principles (Price are determined by…
Reading 13: Technical Analysis
Price are determined by investor's supply and demand for asset
Supply and demand are driven by both rational and irrational behaviors
What causes the changes in supply/demand may be hard to see, but the actual changes itself can be observed in market price.
Prices move in trends, and exhibit patterns that can be identified and will repeat over time.
Technical Analysis Charts and Graphs
: a continuous line connecting closing prices for each period.
Bar chart & Candle-stick chart
: Show the open, high, low and close price for each period.
: Show the volume traded, usually accompany line chart
: indicate significant changes in price direction.
Trend; support & resistance lines, and change in polarity
: shows that prices are reaching higher highs and higher lows.
How to draw
: Connect the increasing lows with a straight line
: shows that prices are reaching lower highs and lower lows.
How to draw
: Connect the decreasing highs with a straight line
Support and Resistance lines
: the price levels (connecting similar lows by a straight line) in which buying pressure limits the price to go down more.
: the price levels (connecting similar highs by a straight line) in which selling pressure limits the price to go up more.
Change in polarity principle
: the previously breached resistance (or support) level will become the new support (or resistance) level
Common chart patterns
@ end of uptrend
Double/ tripple tops
@ end of downtrend
Double/ Tripple bottoms
Common technical analysis indicators
Identify changes in price trends
(Ex: Relative Strength Index)
Moving averages convergence/ divergence line
Rate of changes in oscillators
interpret from a contrarian perspective
Put/ Call ratio
Flow of fund indicators
New equity issuance
Market price move in cycles (Ex: 54-year Kondratieff wave, 4-year US-presidential election cycle, etc.)
Elliott Wave Theory & Fibonacci Number
Elliott Wave Theory
: prices exhibit a pattern of 5 waves in direction of a trend and 3 waves counter to the trend
Fibonacci Number sequence
: used by technical analysts to estimate price targets and identify potential support and resistance levels
: examines the relationships among various asset market (ex: stock, bonds, commodities, currencies, etc.) to identify attractive asset classes and attractive sectors within these classes.