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Investment Management > Chapter 3 - Technical Analysis > Flashcards

Chapter 3 - Technical Analysis Flashcards

1
Q

Technical Analysis pg.45

A
  • studies market movements ( SP, indices, volumes)
  • determine trends to make predictions and deductions
  • basic philosophy: trends repeat (Dow Theory)
  • MP already reflects realistic value
  • good time to purchase or sell investments
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2
Q

Fundamental analysis

A
  • analysis of financial statements
  • try to determine realistic value for shares
  • compare realistic value to actual MP (over/undervalued)
  • MP< realistic value = BUY
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3
Q

Basic assumptions of TA

A
  1. MP is determined by the interaction of the supply and demand
  2. Supply and demand is influenced by various factors (irrational/ rational).
  3. Prices tend to form certain trends, these trends continue for a reasonably long time.
  4. A trend will change due to changes in supply and demand.
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4
Q

What do the basic assumptions of TA mean for technical and fundamental analysts?

A
  • TA agree on first 2 assumptions
  • Prices move because market participants don’t get information simultaneously
  • TA when price change occurs confirm if there is actually a change
  • FA measure book value (over/under valued)
  • TA interested in past data and impact on future movement of price.
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5
Q

Charle’s H Dow

A
  • Founded in 1890’s share price index
  • birth of technical analysis
  • developed the Dow theory, editor of WSJ
  • invested the Dow Jones industrial average
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6
Q

Share price index

A
  • Take share prices of larger companies and add them together on different days.
  • moves up (+) or down (-)
  • SP culmination of supply and demand
  • purchase share = demand decrease = share price increase
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7
Q

The uses of share price indexes

A
  1. To forecast the economic cycle
  2. The timing of purchases and sales
  3. To evaluate the performance of a portfolio
  4. To quantify risk
  5. To determine speculative activities
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8
Q

Share prices and forecasting the economic cycle

A

an economic indicator (economic upswing)
purchase shares= increasing sales, profits = better dividends.
- increase in demand, forces SP to rise
- stocks exchange = leading indicator with a lead time of 6 months - 2 years.

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9
Q

Share prices and timing purchases and sales

A
  • Purchase when prices are at the bottom

- Sell when prices are peak

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10
Q

Share Prices and evaluating the portfolio performance

A
  • evaluate how well portfolio is doing
  • determine how effective manager of portfolio is
  • compares portfolio growth with market index to indicate if good or bad.
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11
Q

Share prices and quantifying risk

A
  • too much price fluctuation increases risk
  • Beta-analysis: used to quantify the sensitivity or volatility of a SP relative to a sector of the general market
  • Higher beta = Higher risk
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12
Q

Share Prices and determining speculative activities

A

•By viewing the market index along with the volume and Rand-value of shares traded, one can determine if the activities and movement are purely speculative

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13
Q

Techniques for calculating share prices

A

1) price weighting
2) equal weighting
3) market capitalisation

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14
Q

The FTSE/JSE Africa index series

A
  • used to indicate state of SA stock exchange Rand Daily Mail (RDM)(equal weighting) and Financial mail (FM) indexes (price weighting).
  • converted to actuarial index in Sept 1979 (market capitalisation)
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15
Q

Charts and Technical indicators

A
  • chart patterns
  • technical indicators (mathematical calc. based on historic price and volume information)
  • identify trends and assist in trading decisions/ timing.
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16
Q

Dow Theory

A

-founded by Charles Dow
-comparison of SP to the movement of oceans
- 3 types of price movement: primary (tides)
secondary (waves)
thirdly (short term ripples).

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17
Q

Primary trend

A
  • Long term trend

- upwards and downwards price movements in spite of continuous fluctuations.

18
Q

Bull market

A
  • primary trend
  • upward price movement, next high always higher than previous, troughs also higher than previous trough.
  • purchase at start of bull and sell at peak
19
Q

Bear Market

A
  • primary trend

- downward price movement, highs lower than previous, troughs lower than previous.

20
Q

secondary trend

A

Long term trend interrupted by periods in which price moves in the opposite direction
- profit taking / taking a breather
- a secondary trend during bull market = reasonable period of prices declining
- Guidelines that will confirm a secondary trend:
o 3 weeks - 3 months
o must cancel at least one-third of previous price movement

21
Q

Short term fluctuations

A

daily fluctuations

eventually build up to longer trends

22
Q

Bar charts

A
  • express price movements visually
  • SP = vertical axis
  • Time = horizontal axis
23
Q

Point and figure chart

A
  • oldest charting technique
  • track movements in SP
  • one dimensional graph only indicates price or index value on the vertical axis
  • Chart used by technical analysts to assist them in analysing price trends of shares
  • consecutive price increase = same column
  • reversal = new column
24
Q

point and figure chart scale and point indication

A

1c-scale - each block represents 1c (most sensitive)
5c scale
PI- 1,2,multiple point = no.of cells price must reverse before indicated
1c= 3 point reversal

25
Q

Point and figure : double top formation

A

SP rises to certain level, drops for certain period, rises back up to already reached level (2 occasions where it has risen = double top)
- if price breaks through double top TA see as buy signal
if treble or quadruple top = breakthrough = much stronger buy signal (upward sloping ceiling = stronger than downward)

26
Q

Point and figure: double bottom

A

SP drops to certain level, rises and then drops again
if breaks through price floor = sell signal
quadruple = stronger sell signal

27
Q

Bullish signal formation

A

falling price trend is reversed after at least one effort succeeds in breaking through upwards.
consecutive highs are higher than previous
- at least 4 columns wide
-reversal in bear price trend must switch to bull price trend

28
Q

Bearish signal formation

A

rising price trend reversed after at least one effort of dropping prices fall through the bottom
consecutive highs are lower than previous
- at least 4 columns wide
-reversal in bull market must switch to bear market

29
Q

Bullish symmetrical triangle formation

A

rising price trend where price forms a triangular formation and continues on upward journey.

  • at least 5 columns wide
  • higher troughs in column 2 and 4
  • higher peaks in columns 3 and 5
30
Q

Bearish symmetrical triangle formation

A

falling price trend forms a triangular formation and continues on a downward journey

  • 5 columns wide
  • lower peaks in 2 and 4
  • lower troughs in 3 and 5
31
Q

Trend lines

A

indicate long term price trends/ movement of shares
(bear, bull phase, lateral)
- support lines
-resistance lines

32
Q

support lines

A

develops at bottom of formation

  • after price has risen for a period it experiences a brief drop due to profit taking
  • after brief profit decline more SH will get on board
  • price rise
  • price falls through support line = sell signal
  • price will stabilise at lower level
33
Q

resistance lines

A

appear at top of formation
- reasonable period of price decline = price rise of share
- investors will get rid of share to use temporary better price to sell
-price will drop again
- also develops during price increase
- investors will take profits and sell shares = price drop
price breaks through resistance = purchase signal
- price stabilise at higher level

34
Q

Moving averages pg59-60

A

indicate whether a trend has been reversed

  • useful when share prices are volatile
  • smooth price fluctuations
  • provide clear view of LT price trend
35
Q

Purchase signal

A
  • If the 200-day average flattens or starts rising after a decline, and the daily share price breaks through the average line in its upward movement.
  • If the share price is above the 200-day line and starts to drop towards the average line but does not cross it, and then starts rising again.

*share price below MA

36
Q

Sell signal pg 60

A
  • If the 200-day average flattens or starts declining after a rise, and the daily share price breaks through the average line in its downward movement (see point A in Figure 3.12 for an illustration).
  • If the share price is below the 200-day line and starts to rise towards the average line but does not cross it, and then starts dropping again.
  • share price above MA
37
Q

Market Breadth

A
  • measures direction of overall market
  • Some indices (like the DJIA) reflect only the price movement of a small number of selected companies.
  • Even in Market Cap Indices, bigger companies influence the value of the index much more than the small companies.
  • JSE = 60 % of market capitalisation
38
Q

Relative strength index (RSI)

A
  • momentum indicator
  • measures speed and change of price movements
  • fluctuates between 0 and 100
  • internal measure of price strength
  • identify SP trends and buy and sell signals
  • over bought (RSI= 70) or over sold ( RSI= 30) = possible reversal in share price.
39
Q

RSI formula

A

100 - (100/ (1 + RS))

40
Q

RS

A

average gain on up periods / average loss on down periods

Investment Management (6 decks)

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