asset management lecture 21. outline technical analysis bar charts and japanese candlestick charts...
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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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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 don’t 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
Open
Close
High
Low
StandardBar Chart
JapaneseCandlestick
Open
Close
High
Low
StandardBar Chart
JapaneseCandlestick
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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.
Support Resistance
Breakout
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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
Head
Head
Left Shoulder
Left Shoulder
Right Shoulder
Right Shoulder
Neckline
Neckline
H&S Top
H&S Bottom
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Head & Shoulders Example
Sell Signal
Minimum Target PriceBased on measurement rule
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Double Tops and Bottoms
• Similar to the H&S formations, but withough head.
• Reversal patterns
Target
Double Top
Double Bottom
Target
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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.
Ascending
Descending
Symmetrical
Symmetrical
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Rounded Tops & Bottoms
• Slow reversal of trend.
Rounding Top
Rounding Bottom
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Rounded Bottom Chart Example
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Broadening Formations
• Reverse triangles.
• Usually signal a reversal of the trend.
Broadening Tops
Broadening Bottoms
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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
Double bottomGap, should getfilled
Nov to Mar Trading range
Descendingtriangles
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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: RSI>70• Oversold: RSI<30 • Stocks can remain overbought or oversold for long periods
of time.
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RSI Example Chart
OversoldOverbought
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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