Technical analysis By Kamran Ahmad Kami Cell: Web: oly.com.pk

Underlying assumptions of of technical analysis Technical analyst base trading decisions on examination of prior price and volume of data to determine past market trends from which they predict future behavior of market as a whole and for individual securities. Certain aspects of these assumptions are controversial, leading fundamental analysis and advocates of efficient markets to question their validity. We have initialed those aspects on our list…..

1-The market value of any goods or services is determine solely by the interaction of supply and demand. 2- supply and demand are governed by numerous rational or irrational factors. included these factors are those economic variables relied on the fundamental analyst as well as opinions, moods, and guesses. The market weights all factors continually and automatically.

3- disregarding minor fluctuations, the price for individual securities and the overall value of the market tend to move in trends,which persist for appreciable length of time. 4-prevailing trends change in reaction to shift in supply and demand relationships. The shifts, no matter why they occur, can be detected sooner or later in the action of the market itself.

Advantages of technical analysis Most technical analyst admit that a fundamental analyst with a good information, good analytical ability, and a keen sense of information requires qualification. According to technical analysts, it is important to recognize that the fundamental analysts can experience superior return only if they obtain new information before other investors and process it correctly and quickly.

The technical analysts claim that major adv of there is that it is not heavily dependent on financial statements, the major source of information about the past performance of the firm or industry.

The technician contends that there are several problems with accounting statements: 1-the lack of great deal of info needed by security analysts, such as a info related to sales, earning, and capital utilized by product line and customers. 2-according to GAAP corporations may choose among several procedures for reporting expenses, assets, or liabilities. 3- many psychological factors do not appear in financial statements. Investor attitude could be important when investors become concerned about the risk from restrictions or taxes on products such as a tobacco or alcohol and political risk.

CHALLENGES to Technical trading Rules Those who doubt the value of technical analysis for investment decisions question the usefulness of this technique in two areas. 1- challenges on basic assumptions 2- challenges on specific technical trading rule

Challenges on technical analyst assumptions The major challenges to technical analyst is based on the results of empirical tests of the efficient market hypotheses. The technical trading rules to generate superior risk adjustment after taking account of transaction cost, the market would have to be slow to adjust prices to the arrival of new information; that is, it would have to be inefficient.

Challenges to technical trading rules An obvious challenge to technical analysis is that the past price pattern or relationships b/w specific market variables and stock prices may not be repeated. The result, a technique that previously work might miss subsequent market turns. This possibly leads most technicians to follow several trading rules and to seek consensus of all of them to predict to future market pattern.

Technical Trading Rules & Indicators

Technical Terminologies Bull (Bullish Market) Bear (Bearish Market) Bid/ Ask Spread Breakeven Broker Bullion (Gold & Silver) Limit Order

Technical Terminologies Day Order Day Trading Futures Contract Futures Exchange Hedging ( Minimize the risk) Market Order Overbought Over Sold

Technical Terminologies Quotation ( Bid, Ask, Volume, High, Low) Support Resistance Sell Stop Entry ( sold at below mkt rate) Buy Stop Entry ( buy at above mkt rate) Settlement Price ( closing price) Stop Loss Order Volume

Trends in market Raising Trend Flat Trend Declining Trend

Downward Trend ◦ Every next bottom is lower at Previous one Upward Trend ◦ Every next Bottom is high at Previous one Flat Trend ◦ Prices in Narrow Range

How we make trend line Flat trend line created by joining both bottoms and highs Upward trend line Created by joining bottom points Downward trend line Created by joining highest points

Next buy? We’ll wait for trough again and when It reached and we are also expecting, raising trend on that stock, that would be our buying point

Four Groups based on the attitudes of Technical Analyst Contrary Opinion Smart Money Momentum Indicators Stock Price & volume Techniques

Contrary opinion Mutual Fund Cash Position Credit Balances in Brokerage Accounts (+) Investment Advisory Option OTC versus NYSE Volume Futures Traders Bullish on Stock Index Futures

Credit Balances in Brokerage Accounts If increases, It shows upward trends into the market ◦ Credit balances result when investors sell stocks and leave the proceeds with their brokers, expecting to reinvest them shortly

Follow the Smart Money Confidence Index T-Bill Euro Dollar yield Spread Debit Balances in Brokerage Accounts ( Margin Debt)

A confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. A rising ratio indicates investors are demanding a lower premium in yield for increased risk and so are showing confidence in the economy.

The theory is that if investors are optimistic they are more likely to invest in the more speculative grade of bonds, driving yields downwards and the confidence index upwards. The opposite is true if investors are pessimistic.

T-Bill-Eurodollar Yield Spread Measure the spread b/w T-Bill yield & Euro Dollar Rates. ◦ Reason: At time of International Crisis, this spread widens as the smart money flows to safe-heaven U.S. ◦ T-bills causes a decline in this ratio. It’s contended that the stock market typically experience a trough shortly thereafter.

Debit Balances in Brokerage Accounts ( Margin Debt)

Momentum Indicators Breadth of Market Stock above their 200-day Moving Average

Breadth of Market

Stocks above their 200-Day Moving Average Market is considered to be overbought and subject to a negative correction when more than 80 percent of the stocks are trading above their 200-day moving average If less than 20 percent of the stocks are selling above their 200 day moving average, the market is considered to be oversold, means investor’s should expect positive correction.

Stocks above their 200-Day Moving Average

Stock Price and Volume Techniques Dow Theory Importance of volume Support & Resistance Level Moving Average Lines Relative Strength Bar Charting Multiple-Indicators Candle Stick Chart

Dow Theory Three Types of Price Movements Major Trends that are like tides in the ocean Intermediate Trends that resemble waves Short-run movements that are like ripples

Dow Theory

Importance of Volume Volume changes along with price movement as an indicator of changes in supply and demand. ◦ A price movement in one direction means that the net effect on price is in that direction but the price change alone doesn’t indicate the breadth of the excess demand or supply.

Support and Resistance Level

Moving Average Line

Relative Strength Technicians believe that once a trend begins, It will continue until some major event causes a change in direction. They believe this is also true of relative performance. If an individual stock or an industry group is outperforming the market, technicians believe it will continue to do so.

Bar Charting

Multiple-Indicate Charts Combination of several indicators like two MA lines (50 and 200 day) and RS lines.

Candle Stick Chart