Asset Management

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Asset Management

• Lecture 21

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Outline

• Technical analysis
• Bar Charts and Japanese Candlestick Charts
• Major Chart Patterns
• Price-based Indicators
• Volume-based Indicators

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(No Transcript)
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Introduction

• Technical analysis is the attempt to forecast
  stock prices on the basis of market data.
• Technicians usually look at price, volume and
  psychological indicators over time.
• Focus on trends and patterns in the data that
  indicate future price movements.
• Strict chartists dont care about fundamentals at
  all.
• Focus on short-term forecasts

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Drawing Bar (OHLC) Charts

• Each bar is composed of 4 elements
• Open
• High
• Low
• Close
• Note that the candlestick body is empty (white)
  on up days, and filled (some color) on down days

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Types of Charts Bar Charts

• This is a bar (open, high, low, close or OHLC)
  chart of AMAT from early July to mid October
  2001.

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Types of Charts Japanese Candlesticks

• This is a Japanese Candlestick (open, high, low,
  close) chart of AMAT from early July to mid
  October 2001

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Basic Technical Tools

• Trend Lines
• Moving Averages
• Price Patterns
• Indicators

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Trend Lines

• There are three basic kinds of trends
• An Up trend where prices are generally
  increasing.
• A Down trend where prices are generally
  decreasing.
• A Trading Range.

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Support Resistance

• Support and resistance lines indicate likely ends
  of trends.
• Resistance results from the inability to surpass
  prior highs.
• Support results from the inability to break below
  to prior lows.
• What was support becomes resistance, and
  vice-versa.

Breakout
Support
Resistance
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Simple Moving Averages

• SMA over the last N periods.

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Interactive Example

• finance.yahoo.com
• Ticker GOOG
• Charts basic tech. analysis

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Head and Shoulders

• Two small peaks on either side of a larger peak.
• Reversal pattern

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Head Shoulders Example
Sell Signal
Minimum Target Price Based on measurement rule
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Double Tops and Bottoms

• Similar to the HS formations, but withough head.
• Reversal patterns

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Double Bottom Example
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Triangles

• Continuation formations.
• Three flavors
• Ascending
• Descending
• Symmetrical
• Typically break out about half to three-quarters
  of the way through the formation.

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Rounded Tops Bottoms

• Slow reversal of trend.

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Rounded Bottom Chart Example
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Broadening Formations

• Reverse triangles.
• Usually signal a reversal of the trend.

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DJIA Oct 2000 to Oct 2001 Example
What could you have known, and when could you
have known it?
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DJIA Oct 2000 to Oct 2001 Example
Nov to Mar Trading range
Descending triangles
Gap, should get filled
Double bottom
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Technical Indicators

• Moving Average Convergence/Divergence (MACD)
• Relative Strength Index (RSI)
• Bollinger Bands

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MACD

• A moving average crossover system.
• The difference between a 12-day and 26-day moving
  average.
• A 9-day moving average of this difference is used
  to generate signals.
• Bullish this signal line goes from negative to
  positive
• Bearish the signal line goes from positive to
  negative

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MACD Example Chart
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Relative Strength Index (RSI)

• To indicate overbought/oversold levels.
• RSI compares the magnitude of a stock's recent
  gains to the magnitude of its recent losses and
  turns that information into a number that ranges
  from 0 to 100.
• Overbought RSIgt70
• Oversold RSIlt30
• Stocks can remain overbought or oversold for long
  periods of time.

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RSI Example Chart
Overbought
Oversold
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Bollinger Bands

• Bollinger Bands Upper and lower bands defined by
  two standard deviations above and below the
  moving average.
• Bullish The stock price closes below the lower
  band
• Bearish The stock price closes above the upper
  band.
• When the bands contract, that is a signal that a
  big move is coming, but it is impossible to say
  if it will be up or down.

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Bollinger Bands Example Chart
Sell signal
Buy signals
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On Balance Volume

• Volume precedes price
• Adding volume on up days, and subtracting volume
  on down days.
• Look for OBV to show a change in trend that is
  diverging from the price trend.

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OBV Example Chart