1. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-1 Chapter 16

2. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-2 Chapter Summary  Objective: To examine the basic principles of technical analysis and show how they relate to the efficient market hypothesis. Charting Technical indicators

3. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-3  An attempt to exploit recurring and predictable patterns in stock prices  Technicians’ beliefs: Shifts in market fundamentals can be discerned before their impact is fully reflected in prices Market fundamentals can be perturbed by irrational factors  These presumptions are in contradiction with the weak form of the EMH Technical Analysis

4. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-4  The Dow theory Primary trend Secondary or intermediate trends Tertiary or minor trends Support and resistance levels  Recent variations The Elliot wave theory The theory of Kondratieff waves Charting

5. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-5  Point and figure charts The figure has no time dimension It traces significant upward or downward moves in stock prices  Candlestick charts Used to summarize price data Aid in identification of trends Other Charting Techniques

6. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-6 Summary Reminder  Objective: To examine the basic principles of technical analysis and show how they relate to the efficient market hypothesis. Charting Technical indicators

7. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-7  Sentiment indicators  Flow of funds indicators  Market structure indicators Technical Indicators

8. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-8 Trin statistic Sentiment indicators or:

9. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-9  Odd-Lot trading  Confidence Index  Put/Call ratio  Mutual fund cash position Sentiment Indicators (cont’d)

10. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-10  Short interest – total number of shares of stock currently sold short in the market Some technicians interpret high levels of short interest as bullish, some as bearish  Credit balances in brokerage accounts Flow of Funds Indicators

11. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-11  Moving averages  Breadth The most common measure – the spread between the number of stocks that advance and decline in price  Relative strength The ratio of the price of the security to a price index for the industry Market Structure Indicators

12. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-12  Value Line ranks 1,700 publicly traded stocks according to their anticipated 12 months price appreciation.  Components of the stock ranking procedure: Relative earnings momentum Earnings surprise A value index The Value Line System

13. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 16-13  Self-destructing patterns Once a useful technical rule is discovered, it ought to be invalidated once the mass of traders attempts to exploit it  A new view of technical analysis Brown and Jennings propose a more complex framework than the EMH They envision an economy where many investors have private information regarding the value of a stock Can Technical Analysis Work?