Chapter 3 - Technical Analysis Flashcards
Technical Analysis pg.45
- 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
Fundamental analysis
- analysis of financial statements
- try to determine realistic value for shares
- compare realistic value to actual MP (over/undervalued)
- MP< realistic value = BUY
Basic assumptions of TA
- MP is determined by the interaction of the supply and demand
- Supply and demand is influenced by various factors (irrational/ rational).
- Prices tend to form certain trends, these trends continue for a reasonably long time.
- A trend will change due to changes in supply and demand.
What do the basic assumptions of TA mean for technical and fundamental analysts?
- 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.
Charle’s H Dow
- Founded in 1890’s share price index
- birth of technical analysis
- developed the Dow theory, editor of WSJ
- invested the Dow Jones industrial average
Share price index
- 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
The uses of share price indexes
- To forecast the economic cycle
- The timing of purchases and sales
- To evaluate the performance of a portfolio
- To quantify risk
- To determine speculative activities
Share prices and forecasting the economic cycle
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.
Share prices and timing purchases and sales
- Purchase when prices are at the bottom
- Sell when prices are peak
Share Prices and evaluating the portfolio performance
- 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.
Share prices and quantifying risk
- 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
Share Prices and determining speculative activities
•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
Techniques for calculating share prices
1) price weighting
2) equal weighting
3) market capitalisation
The FTSE/JSE Africa index series
- 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)
Charts and Technical indicators
- chart patterns
- technical indicators (mathematical calc. based on historic price and volume information)
- identify trends and assist in trading decisions/ timing.
Dow Theory
-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).
Primary trend
- Long term trend
- upwards and downwards price movements in spite of continuous fluctuations.
Bull market
- 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
Bear Market
- primary trend
- downward price movement, highs lower than previous, troughs lower than previous.
secondary trend
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
Short term fluctuations
daily fluctuations
eventually build up to longer trends
Bar charts
- express price movements visually
- SP = vertical axis
- Time = horizontal axis
Point and figure chart
- 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
point and figure chart scale and point indication
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