Transcript Technical Analysis

Technical Analysis
Bar Charts
Point and Figure Charts
Moving Averages
Bar Chart Information
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High
Open
Close
Low
 Daily
 Weekly
 Monthly
Chart formations
 Trends
 Planes
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Other top and bottom formations
Key Reversals
Flags, Triangles and Pennants
Gaps
Up Trend
 Connect two or more daily price lows
 Preferably 10 days apart
 When market closes below an
uptrend line, a sell signal is generated
 Computer trading vs fundamental
 Computers may drive prices lower for a
few days
 If fundamentals don’t support this, then
prices will rally
Up Trend
Sell Signal
Down Trend
 Connect two or more daily price highs
 Preferably 10 days apart
 When market closes above a downtrend line, a buy signal is generated
 Computer trading vs fundamental
 Computers may drive prices higher for a
few days
 If fundamentals don’t support this, then
prices will decline
Down Trend
False Buy
Signal
Trend line market signals
 Speculators
 Buy and sell based on signals
 Hedgers – Short
 Place on sell signal
 May choose to offset on buy signal
 Hedgers – Long
 Place on buy signal
 May choose to offset on sell signal
Trend Line reliability
 A close above a major down trend or
below a major up trend will lead to a
significant price move about 75% of
the time
Resistant Planes
 Life-of-contract highs can be very
difficult for market to penetrate
 Strong Fundamental conditions needed
to move market above resistance
 Sell signal if market fails to take out
resistance
 Buy signal if market closes above
resistance (particularly 2 closes above)
Resistant Planes
 There are also intermediate
resistance planes
 These are not as hard to penetrate as
life-of-contract highs are
Resistance plane
Sell Signal
Resistance plane
Sell Signal
Buy Signal
Support Planes
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The mirror image of Resistance Planes
Life-of-contract lows
Buy signal if market fails to penetrate
Sell signal if low is taken out
Support Planes
Sell Signal
Hedgers and Technical Analysis
 If understand trends and support and
resistance planes:
 Time placement of hedge
 Set realistic market targets
 Perhaps minimize margin calls
Other Bar Chart Formations
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Double Top or Double Bottom
Head and Shoulders
Key Reversal
Flags, Triangles and Pennants
Gaps
 Common, break away, measuring,
exhaustion
Double Top (triple top)
Head and Shoulders
Head
Shoulder
Neck line
Shoulder
Key Reversal
 Higher high
 Lower low
 Close below prior
day close
 Sell signal
 Close above prior
day close
 Buy signal
Flag
Decline
Project =
Decline
Triangle or Pennant
 Buy Signal if
market breaks out
to the top
 Sell signal if
market breaks out
to the bottom
Gaps
Break away
Measuring
Exhaustion
Common
Complements to Chart Patterns
 Trading Volume
 Open Interest
 Relative Strength Index (RSI)
Trading Volume
 Barometer of level of intensity in the
market
 If buy/sell signal occurs on a
relatively high volume day, then it is
more reliable
 High/low volume is relative to past
trading and relative to specific
contract
Guidelines for trading volume
 Look at all months being traded for a
particular commodity
 Interpret volume on limit up/down
days very carefully
 Usually low prior to holiday, 3 day
weekend, or major report
Open Interest
 # of contracts that are outstanding
 Have not been offset
 No binding relationship between Open
Interest and Trading Volume
 Day traders create volume, don’t change
open interest
 Open Interest tends to peak and then
decline prior to an uptrend reversal
 Less reliable on downtrend reversal
Relative Strength Index
 Widely used measure of momentum in
the market
 14 day RSI is the most common
 To calculate
 Record last 14 day price changes (closes)
 Sum the negative changes and positive
changes and divide each by 14 to create
(D) down average and (U) up average
 RSI=U/(U+D) * 100
RSI Market Indicator
 RSI > 70
 Market is thought to be over bought
 RSI < 30
 Market is thought to be over sold
 Numbers vary by commodity
 Major change in Supply or Demand
may keep RSI above 70 or below 30
for an extended period of time
RSI example calculations
 Close 2.40, 2.38, 2.36, 2.38, 2.36,
2.40, 2.44, 2.42, 2.44, 2.48, 2.56,
2.48, 2.52, 2.50, 2.46
 Up .02 .04 .04 .02 .04 .08 .04
 Up sum = 28/14 =2
 Down .02 .02 .02 .02 .08 .02 .04
 Down sum = 22/14=1.57
 RSI = 2/(2+1.57) * 100 = 56
Point and Figure Charts
 2 CRITICAL parameters
 The cell size
 The reversal requirement
 Cell size – The value in terms of price
increment for each cell
 Reversal requirement – Magnitude of
price change required for a reversal
Point and Figure Charts
There is no time on chart
X use to plot uptrending prices
O use to plot downtrending prices
Only use daily high or low, close
doesn’t matter
 Buy/Sell signal generated when new
Higher/Lower X/O is plotted
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Moving Averages
 May be a compliment to bar chart
 Single Moving Average 40-day
 Help signal turning points in market
 May be an alternative to bar chart
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Two moving averages employed
Example 3-day and 10-day
Example 9-day and 18-day
Sell signal when shorter cuts longer from top
Buy signal when shorter cuts longer from
bottom
Buy B and Sell S
Signals using the
4-day & 9-day
Moving Average
S
S
S
B
S
B
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S
B
B
B
Moving Averages
 Advantages
 Provide clear market signals
 No guessing as to chart formation
 Good if there are trends in the data
 Disadvantage
 May generate multiple trades
 Don’t perform well in choppy (sideways)
markets
Moving Average
 Short Hedgers
 Place on Sell signals
 Lift (offset) on Buy signals
 Long Hedgers
 Place on Buy signals
 Lift (offset) on Sell signals
 Speculators
 Buy and Sell and Offset on all signals
Technical Analysis Summary
 Technical Analysis does work
 It requires Work to make it work
 Need to study past technical analysis
for several years worth of data on a
particularly commodity before trading
 For hedgers
 Trends and Support/Resistance Planes
 Moving Averages