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Investment Analysis: Technical analysis

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by

Federico Panzitta

on 31 October 2013

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Transcript of Investment Analysis: Technical analysis

Security Price
FUNDAMENTAL FACTORS
TECHNICAL
FACTORS
MARKET
SENTIMENT
+
Level of Earnings Base (EPS, Dividends/Share, CF/Share)

Growth of Earnings Base (Dividend growth models)

Discount rate (function of inflation)

Perceived risk of the stock (CAPM, volatility models)
Inflation (Consumer purchasing power, markets tend do well on high inflation, and not so well in low inflation periods)
Economic Strength of Markets and Peers (Industry & Markets)
Substitutes (other companies or asset classes)
Incidental Transactions (not motivated by intrinsic value)
Demographics (age of investors)
Trends (short term momentum)
Liquidity (large-cap vs small-cap)
Market Sentiment (psychology of market players) - studied in new field of behavioral finance.
Chart Reading
Easy to read and understand
Superficial information
Very difficult to identify trends
No trading range

AGENDA
MARKETS & PLAYERS
2
CHART READING
3
4
1
What is Technical Analysis?
"Technical analysis is the analysis of human mass psychology."
Plays into human "Greed" and "Fear"
Finding the turning points
Very useful for Shorter Time Horizons
Advanced Charts:
Japanese Candlestick
Intraday

Monthly




Number of exchanged shares for the period
Prices change abruptly on above-average volume days
"Volume precedes prices"
Good measure of liquidity of the stock
TECHNICAL ANALYSIS TOOLS & INDICATORS
TECHNICAL ANALYSIS
Technical Analysis
Further Explained
TECHNICAL ANALYSIS
TECHNICAL ANALYSIS TOOLS & INDICATORS
ANSWERS
Ashwin Pachori
Nilaykumar Patel
Federico Panzitta

Markets & Players
Exchanges of financial securities where buyers and sellers meet

Bulls are optimistic market players

Bears are pesimistic market players
Markets & Players
Would you pay the same for a share of Blackberry (BBRY) than for a share of Apple (APPL) Today?
Why does the Price of a stock can change so much in so little time?
What factors determine security prices?
Markets are said to be bulls or bears depending on the overall market sentiment
Effective tool for timing and analysis
Enhances other Technical Analysis tools
Time Frequency (2 min, 30 min, Daily)
Patterns are the key to visually identifying short-term trends (1-10 days) and current market psychology
1 month time horizon
Daily Frequency
10 days time horizon
30 min frequency
" Markets are naturally volatile in their eternal journey to equilibrium"

Gregory J. Millman: "Day traders are like a swarm of maggots, though they may be loathsome, they do a good job at eating away at the market's diseased tissue, those
inefficiencies
that
slow
and
sicken markets
"

Day trading and Technical Analysis, impact on volatility, liquidity, and equilibrium prices
Basic Line Chart
Markets & Players
Market Psychology
4 Major emotions impacting player's decisions
Greed
Fear
Hope
Regret
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.
Fundamentally, Market Player's
Demand and Supply
for a given security at any given time determines its
Price
Market consideration:
Size of the Markets
Nature of the exchanges (Automated vs live)
Exchange order execution speed (HFT)


How many transactions can Nasdaq process in a blink of an eye?

Trivia questions for the audience:
Wouldn't some warning be nice?
How long does it take a broker like Schwab to execute a transaction for a retail investor like you?
Apple stock on 10/25/2013
Example:
Disney Stock in 2001
Technical Analysis Vs Fundamental Analysis
SOURCES
Technical Analysis
Fundamental Analysis
-Charts
-Technical Indicators
-Shorter Time Horizon
-Better for Trading
-Financial Statements
-Performance Indicators
-Longer Time Horizon
-Better for investing
Invented by rice traders in the 16th century
Volume Chart
Conclusions: Does Technical Analysis Work?
Technical Analysis is contested in some
circles
M.I.T. Study by Dr. Andrew W. Lo
Drummond Geometry - Eliminating Bias
http://www.usnews.com/opinion/blogs/economic-intelligence/2013/10/18/how-high-frequency-trading-is-taking-over-markets

http://ir.nasdaqomx.com/releasedetail.cfm?ReleaseID=753526

http://www.schwab.com/public/schwab/active_trader/what_you_can_trade/stocks

http://www.investopedia.com/articles/basics/04/100804.asp

https://eresearch.fidelity.com/eresearch/gotoBL/evaluate/chart/chartAdvanced.jhtml?symbols=MSFT

http://finance.yahoo.com/echarts?s=MSFT+Interactive#symbol=msft;range=1m;compare=;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

http://commons.wikimedia.org/wiki/File:Candlestick_chart_scheme_03-en.svg

http://www.swing-trade-stocks.com/stock-chart-volume.html

http://www.africansea.org/(S(s2e2gl3dygg15x55nc2y3pqm))/Library/What%20is%20Technical%20Analysis.pdf

Candlestick Charting Expanded. Timeless Techniques for Trading Stocks and Futures. Gregory L. Morris. 1995. McGraw-Hill

http://www.forbes.com/sites/greatspeculations/2013/04/15/technical-analysis-indicator-that-works-turns-positive-for-these-stocks/

Asia Pacific Journal of Financial Studies. Day Trader's impact on volatility. http://apjfs.org/data/articles/173.pdf

http://ecommerce.hostip.info/pages/300/Day-Trading-IMPACT-DAY-TRADING.html

http://www.investopedia.com/university/technical/techanalysis2.asp

https://www.credit-suisse.com/legal/pb_research/technical_tutorial_en.pdf

David Keller, "Breakthroughs in Technical Analysis; New Thinking from the World's Top Minds," New York, Bloomberg Press, 2007

Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation, with Harry Mamaysky and Jiang Wang, Journal of Finance 55(2000), 1705-1765.











Technical Analysis Tools and Indicators
Technical Analysis Tools and Indicators
Moving Average Indicator
Stochastic Oscillator Indicator
Does not predict price direction, but defines current definition with a lag
MA Preference depends on objective, analytical style, and time horizon
5-20 periods is best for short-term trends and trading
100+ periods is best for long-term investors
200-day moving average is the most popular
Simple Moving Average (SMA)
Exponential Moving Average (EMA)
Time periods employed (n) are equal in weight

True Average of prices for the entire time period

Useful to identify Support and Resistance Levels

Most Technical Indicators are a variation or use WMA as their base

More sensitive then SMA and turns faster with changes in prices

Assigns higher weight to most recent prices, and lower weight to older prices
Predicts the momentum before a price
change


The change in momentum gives an
indication of when to act.
Benefit to the market as a whole
Benefits to Individual market players
Technical Analysis offers very useful and
valuable tools that can and should be used by
any investor, in any market, for any time horizon
Conclusions: Does Technical Analysis Work?
How can we make money in the market?
Full transcript