Technical analysis Flashcards
Principles, application and assumptions underlying technical analysis
- Supply and demand determine prices
- Changes in supply and demand cause changes in prices
- Prices can be projected with charts and other technical tools
Study of investor psychology or sentiment - humans often irrational and behave similarly. Past patterns may predict future patterns of prices. Activity shows intrinsic value. More data driven and grounded than fundamental analysis. Wisdom of the crowd effect.
Construction of different types of technical analysis charts and interpret them
Line charts
Bar charts (high, low, open, close) - show volatility
Candlestick (same as bar but body shaded if price down that day) - look for doji showing balance of open & close
Point & figure (X is increase, O decrease; pile up until reversal - time and volume not represented) - show price levels that might indicate end of decline/advance
Logarithmic (use when data moves through range representing several orders of magnitude)
Volume (conviction of buyers/sellers in setting price; high volume, price up, confirmation; low volume, price up, rally will end soon)
Relative strength analysis (compare asset to benchmark)
Use of trend
Market participants tend to act in herds and trends tend to stay in place for some time. Uptrend line connects lows, downtrend line connects highs.
Use of support
Low price range in which buying activity sufficient to stop decline in price
Use of resistance lines
Price range in which selling sufficient to stop rise in price
Use of change in polarity
Once support level breached, it becomes resistance level; once resistance level breached, it becomes support level
Continuation chart patterns
Triangle patterns. Line connecting highs is horizontal, line connecting lows shows uptrend. Vice-a-versa for downtrend.
Rectangle. Two parallel horizontal lines of highs/lows shows continuation.
Flags/pennants. Minor b/c short-term versions of long-term trends.
Common technical analysis indicators
Price based - moving average (avg closing price - golden or dead cross), bollinger bands (moving avg plus std. deviations)
Momentum oscillators - show extreme highs/lows or overbought/oversold conditions. Shows strength of trend, when oscillators reach highs/lows that may indicate reversal, and in non-trending market they can be used for short-term trading decisions.
Sentiment - investor polls and calculated statistical indices (put/call ratio [contrarian, high value is bearish, low value bullish], VIX, margin debt, short interest [interpreted different ways])
Flow of funds - Arms/TRIN (ratio money moving into/out of rising and declining stocks; 1 is balance, >1 volume in declining issues, <1 volume in rising issues), margin debt, mutual fund cash position (6.8% avg, contrarian view), new equity issuances (up is bearish), secondary offerings (up is bearish)
Use of cycles in technical analysis
Recurring cycles may produce basis of trading decisions and have logical ties to values. K Wave is 54 yr cycle, decennial, presidential.
Tenets of Elliot Wave Theory and importance of Fibonacci numbers
Major to minor cycles that follow Fibonacci sequence ratios, each smaller cycle consists of smaller parts. 50%, 67%, 60%, 62.5%, 62% and 1.68 are the key ratios. Impulse phase is numbered 1-5 and corrective phase is lettered a-c.
Intermarket analysis as it relates to technical analysis and asset allocation
Analysis of major categories of securities to identify market trends. e.g. bond price uptrend is positive for stocks
Reversal patterns
Head and shoulders. Strong volume in left shoulder, lower volume in head with higher spike in price followed by decline to NECKLINE, lower volume in right shoulder.
Close short position at price target = neckline - (head - neckline)
Inverse head and shoulders.
Close long position at price target = neckline + (neckline - head)
Double tops and bottoms. Uptrend or downtrend reverses twice at roughly same price. Longer time between top and deeper sell-off after first, more significant the pattern.
Triple tops and bottoms. More reversals at same level of greater period of time indicates more significance of pattern.
Convergence and divergence
Look for convergence or divergence between oscillators and price
Momentum oscillators
Rate of Change Oscillator - when crosses zero in same direction as trend, buy/sell signal. Ignore divergence.
Relative Strength Index - graphic comparison of gains with losses over period, indicating if overbought. >70 overbought, s historical MACD to determine sentiment range. Crossovers, range, trend lines of MACD.
When technical analysis doesn’t work
constraints on asset being freely traded, large outside manipulation of market, or illiquid markets
