2. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 14 Technical Analysis

3. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Technique Uses historical price and volume data to forecast the direction of stock prices Employs a variety of figures and charts The indicators can be applied to –the market –to individual firms

4. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Dow Theory Emphasizes movements in the industrial and transportation averages Movement in one average confirmed by movement in the other average indicates a trend

5. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Barron’s Confidence Index An indicator based on the difference in the yields paid by –high-quality debt and –low-quality debt Increased spread is bearish

6. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Purchases and Sales of Odd Lots Based on small investors being wrong Increases in odd lot purchases are interpreted as being bearish Increases in odd lot sales are interpreted as being bullish

7. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Investment Advisory Opinions A variation on the odd lot theory –assumes advisory opinions are wrong –requires taking a contrary view of advisory opinions

8. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Advance / Declines Tracks cumulative net advances (the difference between advancing and declining stocks) Increase in cumulative net advances is bullish

9. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Point-and-Figure Charts Identifies price levels that support or resist price changes Breaking support or resistance levels are buy and sell signals

10. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Point-and-Figure Charts

11. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bar Graphs (and Candlesticks) Show similar patterns as point-and- figure charts Use support and resistance Give similar signals

12. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bar Graphs (and Candlesticks)

13. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Moving Averages Compare the stock's current price to a moving average of the stock's price Moving averages may be 50, 100, or 200 days The moving average follows the current price

14. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Moving Averages When the current price crosses the moving average, that is a buy or sell signal

15. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Moving Averages

16. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Other Technical Indicators Volume Short sales by specialists

17. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Verification of Technical Analysis Weak form of the efficient market hypothesis –technical analysis does not lead to superior investment results Most empirical results do not support technical analysis

18. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Verification of Technical Analysis The question of covering the transaction costs May supplement fundamental analysis of financial statements

19. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Dogs of the Dow Determine the ten Dow stocks with the highest dividend yield –hold these stocks for one year –repeat the process

20. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Dogs of the Dow “Small dogs” applies the same strategy to the five lowest priced Dow Dogs