Technical Analysis

• Technical analysis is a method of evaluating securities

by analyzing the statistics generated by market
activity, such as past prices and volume.
• Technical analysts do not attempt to measure a
security's intrinsic value, but instead use charts and
other tools to identify patterns that can suggest future
activity.
 Technical vs Fundamental
Analysis
• Fundamental • Technical
• His perspective is long-term in • His outlook is short-term
nature. He is conservative in his oriented. He is aggressive. He
approach. He acts on ‘What acts on ‘what is’.
should be’.
• He adopts a buy-and hold policy. • He believes in making a quick
He does not usually expect any buck. He snuffles his investments
significant increase in the value quite often recognizing and
of his investments in less than a foresees changes in stock prices.
year.
 Technical vs Fundamental
Analysis
• Fundamental • Technical
• He considers total gain from equity • He does not distinguish between
investment consists of current yield current income and capital
by way of dividends and long-term gains. He is interested in short-
gains by way of capital term profits.
appreciation.
• He forecasts security prices by
• He forecasts stock prices on the
basis of economic, industry and
studying patterns of supply of
company statistics. The principal and demand for securities.
decision variables take the form of Technical analysis is study of
earnings and dividends. He makes stock exchange information.
a judgment of the stock’s value
with a risk return.
 Technical vs Fundamental
Analysis
• Fundamental • Technical
• He uses tools of financial • He uses mainly charges of
analysis and statistical financial variables besides
forecasting techniques some quantitative tools.
Dow Theory
• The Dow theory on stock price movement is a form
of technical analysis that includes some aspects
of sector rotation.
• The theory was derived from 255 editorials in The
Wall Street Journal written by Charles H. Dow (1851–
1902), journalist, founder and first editor of The Wall
Street Journal and co-founder of Dow Jones and
Company.
• The market is always considered as having three movements,
all going at the same time.
• The first is the narrow movement from day-to-day.
• The second is the short swing running from two weeks to a
month or more, the third is the main movement covering at
least four years in duration".
• These movements are called:
1. Daily fluctuations (minor trends)
2. Secondary movements (trends), and
3. Primary trends
• The primary trends are the long range cycle that
carries the entire market up or down (bull or bear
markets).
• The secondary trend acts as a restraining force on the
primary trend.
• It ends to correct deviations from its general
boundaries.
• The minor trends have little analytical value, because
of their short duration and variations in amplitude
Six basic tenets of Dow theory
• The market has three movements
• Market trends have three phases
• The stock market discounts all news
• Stock market averages must confirm each other
• Trends are confirmed by volume
• Trends exist until definitive signals prove that they have
ended
Elliott Wave Theory
• Ralph Nelson Elliott developed the Elliott Wave Theory in the 1930s.
• Elliott believed that stock markets, generally thought to behave in a
somewhat random and chaotic manner, in fact, traded in
repetitive patterns.
• The Elliott Wave Theory is a form of technical analysis that looks for
recurrent long-term price patterns related to persistent changes in
investor sentiment and psychology.
• The theory identifies impulse waves that set up a pattern and
corrective waves that oppose the larger trend.
• Each set of waves is nested within a larger set of waves that adhere to
the same impulse or corrective pattern, which is described as a fractal
approach to investing.
• Elliott's theory somewhat resembles the Dow theory in that
both recognize that stock prices move in waves.
• Because Elliott additionally recognized the "fractal" nature of
markets, however, he was able to break down and analyze
them in much greater detail.
• Fractals are mathematical structures, which on an ever-
smaller scale infinitely repeat themselves.
• Elliott discovered stock index price patterns were structured
in the same way.
• He then began to look at how these repeating patterns could
be used as predictive indicators of future market moves.
• Elliott made detailed stock market predictions based
on reliable characteristics he discovered in the wave
patterns.
• An impulse wave, which net travels in the same
direction as the larger trend, always shows five waves
in its pattern.
• A corrective wave, on the other hand, net travels in the
opposite direction of the main trend. On a smaller
scale, within each of the impulsive waves, five waves
can again be found.
Wave Degrees
Elliott identified nine degrees of waves, which he
labeled as follows, from largest to smallest:
Grand Super Cycle Super Cycle
Cycle Primary
Intermediate Minor
Minute Minuette
Sub-Minuette
Random Walk Hypothesis
• Random walk theory suggests that changes in stock
prices have the same distribution and are independent
of each other.
• It assumes the past movement or trend of a stock price
or market cannot be used to predict its future
movement.
• In short, random walk theory proclaims that stocks
take a random and unpredictable path that makes all
methods of predicting stock prices futile in the long
run.
• Random walk theory suggests that changes in stock
prices have the same distribution and are independent
of each other.
• Random walk theory infers that the past movement or
trend of a stock price or market cannot be used to
predict its future movement.
• Random walk theory believes it's impossible to
outperform the market without assuming additional
risk.
• Random walk theory considers technical analysis
undependable because it results in chartists only
buying or selling a security after a move has occurred.
• Random walk theory considers fundamental analysis
undependable due to the often-poor quality of
information collected and its ability to be
misinterpreted.
• Random walk theory claims that investment
advisors add little or no value to an investor’s
portfolio.
Charts
• Maps price performance

• Sheds light on supply and

demand

• “investment roadmap”

• Price / volume relationship

important
Chart Types - Line Charts
• Most basic of all charts

• Just a line that connects the

closing prices over a time frame

• No trading range
Chart Types – Bar Chart
• Vertical line represents highs/lows of the day
• Horizontal line represents closing price
• Red = down
• Blue/Black = up

Daily High
Closing Price
Daily Low Price Gap
Chart Types – Candlestick Charts

• Vertical line represents the trading

range
• Wide bar represents open and close
• White bar – Up and closes above
opening price
• Red Bar – down
• Black bar – up, but closes below the
opening price
Chart Basics – Time Scale
• Time Scale
• Dates along bottom of chart (varies from seconds to
decades)

• Common Types: intraday, daily, weekly, monthly

• Subtle differences between different time scales

Chart Basics – Time Scale

Daily Chart Weekly Chart

 Volume
• Amount of shares that
trade hands between
seller and buyers

• Price movements more

significant when volume
is above average
Price and Volume

Average
Volume