Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 15 Technical Analysis

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 2 Assumptions & Tools Used in Technical Analysis Assumptions –Trends in prices can be exploited –Markets are somewhat inefficient Tools –Charting –Technical Indicators Evidence - very limited support of superior performance

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 3 Charting Price movements - (open, high, low and close) –Reoccurring trends Point and figure charts –Support & resistance levels –Signals when support and resistance levels are confirmed

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 4 High Low Close Price Days Sample Price Chart

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 5 oooooo oooooooooo oooo oooooooooo oooo oooo Congestion areas Sell Point and Figure Chart Price xxxxxxxx xxxxxx xxxx xxxx xxxx x

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 6 Sentiment Indicators Trin Statistics # Advancing / # Declining Volume Advancing / Volume Declining # Declining / Volume Declining # Advancing / Volume Advancing If Trin > 1.0 bearish signal

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 7 Sentiment Indicators Put / Call Ratio –Historical value 65% –When higher than 65% a signal occurs Bearish view Bullish view Mutual Fund Cash Position –Cash levels are low - bearish sign –Cash levels are high - bullish sign

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 8 Sentiment Indicators Odd - Lot Trading Ratio of odd-lot purchases to odd-lot sales When ratio exceeds 1.0, bearish sign Contrarian logic - small investors are the last to buy in bull markets

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 9 Flow of Funds Indicators Short Interest - total number of shares that are sold short –When short sales are high a signal occurs –Bullish interpretation –Bearish interpretation Credit Balances in Brokerage Accounts –Investor leave balances when they plan to invest in the future –When levels are high a bullish sign

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 10 Market Structure Indicators Moving Averages Average price over some historical period (5 weeks or 200 days) When current price crosses the average a trading signal occurs Bullish signal when the current price rises above the moving average Bearish sign when the current price falls below the moving average

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 11 Market Structure Indicators Breadth The extent to which movements in a broad index are reflected widely in movements of individual stocks Spread between advancing stocks and declining stocks Also used in industry indexes

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 12 Value Line System Widely followed with some evidence of superior performance Value Line System is predominately a technical system –Earnings momentum –Relative stock prices –Ratios of moving averages

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 13 Value Line System Paper vs actual performance indicates that the system is difficult to implement –Value Line Fund has not shown superior performance –High turnover costs are associated with the strategy Evidence shows prices react quickly to reported ranking changes