Technical Analysis

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Technical Analysis
California Investment Association Exclusive
Partners With Russell Investments. University of
California, Berkeley Haas School of
Business March 4, 2008
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Introduction

• Fundamental vs. Technical Analysis
• Basic Assumptions
• Trends
• Support and Resistance
• Price and Volume
• Charts
• Moving Averages
• Market Update

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Fundamental vs. Technical Analysis

• Fundamental
• Gauges the health and intrinsic value of a
  company
• Requires research into the firm (growth
  potential) and industry (competitors, markets)
• Looks at historical data to predict future
  performance
• Technical
• Concerned with price behaviors in the market
• Relies on charts to study past prices and trading
  history and to make prediction about future

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Differences

• Financial Statements vs. Charts
• Time Horizon
• Investing vs. Trading

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Basic Assumptions

• 1. The market discounts everything.
• 2. Price moves in trends.
• 3. History tends to repeat itself.

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Trends

• What is a trend?
• A trend is the general direction a security or
  market is heading.

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Types of Trends

• Upward Trend higher highs and higher lows.
• Downward Trend lower highs and lower lows.
• Neutral/Sideways/Horizontal Trend when there is
  little movement of the highs and lows in any
  direction. It is the lack of a defined trend in
  either direction.

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Graphs of Trends
These graphs show the 3 trends.
This is an up trend into a down trend.
This is an up trend.
This is a sideways trend.
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Trend Lengths

• Long Term lasting longer than a year
• Intermediate Term lasting between 1 and 3
  months.
• Short Term lasting less than a month.

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Support and Resistance

• Support level a price point where a securitys
  price changes direction lowest price a security
  trades at over a period of time
• Resistance level a price level where price cant
  continue to move up because selling pressure is
  greater than buying pressure
• What do these mean?

There is no definite value of support and
resistance level, only a price range.
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Support and ResistanceRole Reversal
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Trendlines and Channels

• A Trendline is simplyA line on the price or
  value chart of a security depicting the general
  direction in which the security is headed.
• A channel, or channel lines, is the addition of
  two parallel trendlines that act as strong areas
  of support and resistance.
• Upper trendline connects a series of highs, lower
  trendline connects a series of lows.
• Channel can slope upward, downward or sideways.

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Major Components

• Price
• Monetary value of stock in market
• Looks at fluctuations and trends in past and
  present
• Volume
• Shows strength of trend
• Indicator of buyer attitudes

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Price Volume

• Volume the number of shares or contract trading
  hands between buyers and sellers price movements
  are more significant when volume is above
  average.
•  
• Price Moves in Trends In technical analysis,
  price movements are believed to follow trends.
  This means that after a trend has been
  established, the future price movement is more
  likely to be in the same direction as the trend
  than to be against it.

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Patterns
Head and Shoulder
Triangle
Flag
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Chart Properties

• Time Scale
• intraday, daily, weekly, monthly, quarterly,
  annually
• Price Scale
• Linear vs. Logarithmic

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Chart Types

• Line Chart
• Bar Chart
• Candlestick Chart
• Point and Figure Chart
• obsolete

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Line Charts

• Most basic chart
• Line connecting closing prices over a period of
  time

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Bar Charts

• Expands on line chart
• Vertical line - shows high and low for the
  trading period
• Opening price - dash on the left side of the line
• Red bars down Blue bars up

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Candlestick Chart

• It takes into account the emotions of the traders
  as well as the basic concepts of supply and
  demand.
• Charts the divergence of value and price of a
  stock.

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Examining the Candlestick
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More on Candlestick Charts

• Red down
• White up and above opening price
• Black up but closes below opening price
• Diagram courtesy of investopedia.com

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Basics of Moving Averages

• Used to smooth out day-to-day trends in order
  to assess long term trends
• Removes large price fluctuations, also known as
  noise
• Why called moving? Because the data used to
  calculate the average is consistently changing,
  old data is dropped for newer data

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Chart courtesy of investopedia.com
Moving Averages (contd)

• Taken from investopedia, this picture illustrates
  a simple example of a moving average. The number
  in parentheses, shows how many previous days it
  is averaging.

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Example of Moving Average

• Here the number 15 is old data and is replaced by
  new data and a new average is calculated

• Here the data includes the number 15

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How do I read this?

• MA (Moving Averages) are lagging trends and only
  confirm trends once they have been established,
  they do not predict new trends
• What can I gauge with my data?
• Short-term momentum, 20 days or less
• Medium-term momentum, 20-100 days
• Long-term momentum 100 days or more
• Stop-losses are strategic places where traders
  will cut off a losing position before it gets
  worse

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Stop-Losses

• These are strategic places where traders cut a
  losing position in order to prevent more loss

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Support/Resistance

• Price will often not go below a moving average
• Price will often not go above a moving average

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What do these look like?

• Shorter term averages located above longer term
  averages in an upward momentum
• Conversely short term averages are located below
  long term averages in downward slope momentum

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When are they used and what the different moving
averages?

• They are used as a risk management tool to
  identify areas to stop losses
• Simple moving average (SMA) vs. exponential
  moving average (EMA)
• SMA is taking the arithmetic mean given a set of
  data
• EMA is the same, only giving more weight to more
  recent data

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Conclusion

• What have we learned?
• Basic Assumptions, Technical vs. Fundamental
  Analysis
• Trends
• Support and Resistance
• Price and Volume
• Charts, Price Scales
• Moving Averages
• Caveats

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Market Update

• Visa announced an IPO to sell 406 million shares
  to the public at prices from 37-42.
• According to Bernanke, at last weeks
  congressional hearing, Downside risks to growth
  remainbut nation isnt near stagflation of
  1970s.
• New home sales fell to lowest level since 1995
• Billion dollar losses at Fannie Mae, Freddie Mac

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Market Update (contd)

• Consumer confidence decreased in January
  (Expectation index at 17 year low)
• Big losses. Sprint Nextel and AIG lost 29 billion
  and 5.9 billion, respectively.
• Record high for oil (103 barrel) and Gold
  futures neared the 1000 mark.
• Berkshire Hathaways net income down 18