1. Alexandros Dimitriadis (adimitriadis@univ-catholyon.fr)
Investment Analysis
Alexandros Dimitriadis

2. Technical Analysis
Technical Analysis is the study of the various forces at work in the marketplace and their affect on stock prices.
Focus is on trends in a business’ stock price and the overall stock market
Stock prices are a function of supply and demand for shares of stock
Used to get a general sense of where the stock market is going in the next few months
Several technical indicators may be used together

3. Technical Analysis Data
Charting
Shows visual summary of stock activity over time
Easy to use and to understand
Use to spot developing trends
Major types
Moving Averages
Bar Charts
Point-and-Figure Charts

4. A Stock Chart

5. Technical Analysis Data (cont’d)
Moving Averages
Tracks data (usually stock price) as average value over time
Used to “smooth out” daily fluctuations and focus on underlying trends
Usually calculated over periods ranging from 10 to 200 days

6. A 100-Day Moving Average Line

7. Technical Analysis Data (cont’d)
Bar Charts
Shows changes in stock price over period of time
Often used to compare current stock price with moving average
When current price goes above or below a moving average, indicates significant price change

8. A Bar Chart (HLC)

9. Technical Analysis Data (cont’d)
Point-and-Figure Charts
Only shows significant changes in stock price patterns
Does not correctly take into consideration the passage of time
Up patterns are shown as an “X” and down patterns are shown as an “O”

10. A Point-and-Figure Chart

11. Using Technical Analysis Data
Chart Formations
Looking for patterns, or formations, that historically meant that stocks were going up or down
Buy when stocks break through a “line of resistance”
Sell when stocks break through a “line of support”

12. Some Popular Chart Formations

13. Applying Technical Analysis
Before financial data/financial statements were required to be disclosed, investors could only watch the stock market itself to determine buy-or-sell decisions
Investors began keeping “charts” of stock market movements to look for patterns, or “formations” that indicated whether to buy or sell
Studies have shown that anywhere from 20% to 50% of the price behavior of a stock can be traced to overall market forces

14. Technical Indicators: economic outlook
The Dow Theory
Market’s performance is based upon long-term price trend (primary trend) in overall market
Considers industrial and transport averages
Used to signal end of both bull and bear markets
An after-the-fact measure with no predictive power

15. Technical Indicators: economic outlook (cont’d)
Trading Action
Looks at minor trading characteristics in market over long periods of time
Assumes the market moves in cycles and these cycles repeat themselves
Trading rules are formed from patterns:
January indicator
Presidential election indicator
Super Bowl indicator

16. Technical Indicators: economic outlook (cont’d)
Confidence Index
Looks at ratio between yields on high-grade corporate bonds compared to low-grade corporate bonds
Optimism and pessimism about the future outlook is reflected in the bond yield spread
Trend of “smart money” is revealed in bond market before it shows up in stock market

17. Market Technical Indicators
Market Volume
Pure supply and demand analysis for common stocks
Strong market when volume goes up
Weak market when volume goes down

18. Market Technical Indicators (cont’d)
Breadth of the Market
Looks at number of stock prices that go up (advances) versus number of stock prices that go down (declines)
Strong market when advances outnumber declines
Weak market when declines outnumber advances

19. Market Technical Indicators (cont’d)
Short Interest
Looks at number of stocks that have been sold short at any given time
Can give two different interpretations:
Measure of Future Demand for Stock
Strong market when short sales are high since guarantees future stock sales to cover the short positions
Measure of Present Market Optimism or Pessimism
Weak market when short sales are high since professional short sellers think stocks will decline

20. Market Technical Indicators (cont’d)
Contrary Opinion and Odd-Lot Trading
Measures the volume of small traders
Assumes that small traders will do just the opposite of what should be done
Panic and sell when market is low
Speculate and buy when market is high
Bull market when odd-lot sales significantly outnumber odd-lot purchases
Bear market when odd-lot purchases significantly outnumber odd-lot sales

21. Trading Rules and Measures
Advance-Decline Line
Measures the difference between stocks closing higher and stocks closing lower than previous day
Difference is plotted on graph to view trends
Used as signal to buy or sell stocks
Bull market when advances outnumber declines
Bear market when declines outnumber advances

22. Trading Rules and Measures (cont’d)
New Highs–New Lows
Measures the difference between stocks reaching a 52-week high and stocks reaching a 52-week low
10-day moving average is plotted on graph to view trends
Used as signal to buy or sell stocks
Bull market when highs outnumber lows
Bear market when lows outnumber highs

23. Trading Rules and Measures (cont’d)
The Trading Index (TRIN)
Combines advance-decline line with trading volume
Used as signal to buy or sell stocks
Bull market when TRIN values are lower
Bear market when TRIN values are higher

24. Trading Rules and Measures (cont’d)
Mutual Fund Cash Ratio (MFCR)
Tracks cash position of mutual funds
High cash positions in mutual funds provides liquidity for future stocks purchases or protection from future mutual fund withdrawals
Bull market when MFCR values are higher
Bear market when MFCR values are lower

25. Trading Rules and Measures (cont’d)
On Balance Volume
Tracks the volume to price change relationship as a running total
Up-volume occurs when stock closes higher and is added to running total; down-volume occurs when stock closes lower and is subtracted from running total
Direction of indicator is more important than actual value
Used to confirm price trends
Bull market when OBV values are higher
Bear market when OBV values are lower

26. Efficient Markets
Efficient Market: a market in which securities reflect all possible information quickly and accurately
Efficient Market Hypothesis: markets have a large number of knowledgeable investors who react quickly to new information, causing securities prices to adjust quickly and accurately

27. Efficient Markets (cont’d)
To have an efficient market, you must have:
Many knowledgeable investors active in analyzing and trading stocks
Information is widely available to all investors and is free/easy to obtain
Events, such as labor strikes or accidents, tend to happen randomly
Investors react quickly and accurately to new information, causing prices to adjust

28. Technical vs. Fundamental: So Who is Right?
There is growing consensus that markets may not be perfectly efficient, but they may be at least reasonably efficient
Individual investor must determine which approach has merits for their investing decisions