Please enable JavaScript.
Coggle requires JavaScript to display documents.
CHAPTER 6: TECHNICAL ANALYSIS - Coggle Diagram
CHAPTER 6: TECHNICAL ANALYSIS
CHAPTER 6: TECHNICAL ANALYSIS
Company Analysis and Stock Valuation
WHAT ARE THE UNDERLYING PRINCIPLES OF TA?
-Market action discounts everything
-Pattern exist
-History repeats itself
Investors are able to determine buy or sell signal, and make buy or sell decision using technical analysis (TA) approach.
What is Technical Analysis?
Method of predicting price movements and future market trends by studying charts of past market price and volume of trading of a securitystock
STRENGTH AND WEAKNESSES OF TA
Strength
Concerned with what actually happening in the market
Rely on accurate and timely data available real time
Weaknesses
Has element of subjectivity and create disagreement
Concern on degree of probability that an event will happen
DOW THEORY
F. A trend is assumed to be in effect until it gives definite symbols that it has reversed
E. Averages must confirm each other- e.g. Plantation sector index trend moving consistently with KLCI trend
D. Volume must confirm the trend
Dow Theory basic principles
A. Average prices discount everything
B. The market moves in trends
C. Major trends have 3 phases
-Phase 1- accumulation
-Phase 2-uptrend and corrections
-Phase 3-peak
CHART IDENTIFICATION
DIRECTIONS of the trend
i) Uptrend (bull) – buy signal
ii) Downtrend (bear) – sell signal
iii) Channel uptrend or downtrend
REVERSAL of the trend
Head and shoulder -(buy at shoulder and sell at head)
Double and triple tops or bottoms – buy at bottom and sell at top
Rounding top or scalloped bottom
SUPPORT and RESISTANCE level
-Support level – strong buying less selling (support prices from selling
-Resistance level – Strong selling less buying (Resist prices from rising)
CONTINUATION/MOMENTUM of the trend
Sideways – consolidation – stay out of market
Breakouts – to uptrend then buy or downtrend then sell
Ranges from line, bar, candlestick, volume histogram
TECHNIQUE TO CONFIRM ANY MOVEMENT
Moving Averages of prices
A popular technique for analyzing the overall market and individual stocks
Used specifically to detect both the direction and the rate of change
Some number of days (e.g. 50-day average) of closing prices is chosen to calculate a moving average.
2. Relative Strength
The relative strength of a given stock is calculated as the ratio in changes in price to changes in a market index, or an industry index over some previous period.
These ratios can be plotted to form a graph of relative prices across time.
3. Gaps
Gaps are “holes” if there is no trading on those days
Common gap – indicate investors’ lack of interest
Breakaway gap – signal a start of significant market moves.
Runaway gap – signal of continuing trend.
OTHER TECHNICAL INDICATOR
Breath indicators
•The Advance-Decline Line (Breath of the Market) measures, on a cumulative daily basis, the net difference between the number of stocks advancing and those declining in price for a group of stocks.
New Highs and Lows
Many stock exchanges reported the 52-week highand low prices for each stock. Technicians regardthe market as bullish when a significant number ofstocks each day hit the 52-week highs
Volume
High trading volume, other things being equal, isgenerally regarded as bullish sign.
OTHER MARKET ANALYSIS
(Apart From Fundamental & Technical Analysis)
CONTRARY ANALYSIS
•Many investors spend countless hours and money researching trends, patterns, and sentiment.
EFFICIENT-MARKET HYPOTHESIS (EMH)
•Implicate that: technical analysis is a waste of time- Based on analysis of historical data
-Fundamental analysis is mostly a waste of time
Prices already reflect published information
Can make money only if analysis is somehow superior
Semi-strong-form efficiency
•Claims both that share prices reflect all past publicly available information (weak form) and all new public available information
Weak-form efficiency
•Claims that share prices already reflect all past publicly available information.
•Future prices cannot be predicted by analyzing the past
Strong-form efficiency
•Claims that share prices instantly reflect all pastpublicly available information (weak form), all newpublic available information (semi-strong form) andeven hidden or "insider" private information
3. RANDOM WALK ANALYSIS
•Prices already incorporate current information
•Prices change in response to new information
•New information arrives unpredictably
4. RANDOMNESS AND RATIONALITY
•Stock price levels are rational
•Stock price changes are random
•because new information arrives randomly
•The stock price changes to reflect “fair value” given the new information
