beyond the fundamentals technical analysis

7/26/2019 Beyond the Fundamentals Technical Analysis

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Beyond the Fundamentals; Technical

Analysis

FIN 40500: International

Finance


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Fundamental analysisfocuses on economic/financial theory and

various economic indicators to explain market movements

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Trade Balance Approach

Monetary Approach

Interest Rate Approach

Price Level Approach


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Chart Analysis

Quantitative Methods

Technical analysisis not concerned with the causes of market

movements. Instead, technical analysis focuses on the movements

themselves. Is there information in past price movements that can be

used to predict future movements?

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The forecasting equation for a technical analysis would be

something like this


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$/Euro: Weekly data over 3 years

Chart analysis begins with a time series plot of an assets price


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Charts can be hourly, daily,weekly, etc.

Higher frequency data will be

more detailed, but noisier


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A chartist looks for patterns in the to identify resistance (upper bounds)

and support levels (lower bounds)

Old Support

level

New Support

level
http://www.prorealtime.com/common/partner.phtml?from=fxstreet


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A breakout indicatesa new pattern forming

Connect two

consecutive highs to

get the upper

channel

A parallel line through

a recent low becomes

the lower support


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Bullish channels

tend to have

upward breakouts


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Find the trend by connecting at least two highs

Two lows complete

the triangle

Breakout occurs at the apex, usually with increasing volume


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Ascending triangles

usually have

upward breakouts


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Two lows identify the

lead in trend

The Run: A breakout from the lead in trend

The Bump:

Increase in trendby more than 50%


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Two lows identify the lead in trend

The left shoulder is the first high

above the current trend

The head is the first advance past the left shoulder

The right shoulder is the first

high following the reversal

The neckline connects the two shoulders and indicates lower support


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What pattern do you see?

Bump

Run


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Fibonacci, one of the greatest mathematicians of all time discovered

a sequence of numbers which are now used across many disciplines

1 Month

One Pair

(Y)

Now

One Pair

(M)

2 Months

Two Pair

(M, Y)

3 Months

Three Pairs

(M, M, Y)

Y = Young, M = Mature

Suppose that you begin with a pair of rabbits:

Rabbits take one month to mature. Once mature, they can breedoffspring

Offspring come in pairs (one male and one female). A pair ofoffspring are born each month

The rabbits never die


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Can you find the Pattern?

Each number in the Fibonacci sequence is the

sum of the previous two

1+ 1 = 2

1 + 2 = 3

2 + 3 = 5 .

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,

These numbers seem to appear a lot in nature


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One

White Calla Lily Euphorbia

Two

Trillium

Three

Five

Buttercups Bloodroot

Eight

Black-eyed Susan

Thirteen

(By far the most

common)
http://ccins.camosun.bc.ca/~jbritton/fibslide/fib06.jpghttp://ccins.camosun.bc.ca/~jbritton/fibslide/fib05.jpghttp://ccins.camosun.bc.ca/~jbritton/fibslide/fib03.jpghttp://ccins.camosun.bc.ca/~jbritton/fibslide/fib02.jpghttp://ccins.camosun.bc.ca/~jbritton/fibslide/fib01.jpg


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Ordinary field daisies have 34 petalsa fact to

be remembered when playing she loves me,

she loves me not!

(with 34 petals, you will always finish with

she loves me not!)

Take a pineapplehmmmlook at the various spirals formed
http://britton.disted.camosun.bc.ca/fibslide/fib33.gifhttp://britton.disted.camosun.bc.ca/fibslide/fib36.gifhttp://britton.disted.camosun.bc.ca/fibslide/fib35.gifhttp://britton.disted.camosun.bc.ca/fibslide/fib34.gifhttp://britton.disted.camosun.bc.ca/fibslide/fib32.jpghttp://ccins.camosun.bc.ca/~jbritton/fibslide/fib08.jpg


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Every human has 2hands with 5fingers on each. Each finger is made

of3segments connected by 2jointsdont these numbers sound

familiar?

Each section of your index

finger, from the tip to the

base of the wrist, is larger

than the preceding - fitting

the Fibonacci numbers 2, 3, 5

and 8.

By th is scale, you r f ingernai l

is 1 unit in length.

Similar ratios are seen between

your hand and

forearmcoincidence?


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Suppose that we divide each number into the following number

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,

1/1 = 1 8/5 = 1.6

2/1 = 1 13/8 = 1.625

3/2 = 1.5 21/13 = 1.615

5/3 = 1.667 34/21 = 1.619

The ratios converge

to 1.618

Now, suppose that we divide each number into the previous number

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,

1/1 = 1 5/8 = .625

1/2 = .5 8/13= .615

2/3 = .667 13/21 = .619

3/5 = .6 21/34 = .617

The ratios converge

to .618

AND618.1618.1 618.1618.

1
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Suppose that

we begin with a

1X1 square

Put another 1X1

square next to itNow, put a 2X2

underneath

Now, add a 3X3 square


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Connect the corners of the squares and you get the golden

spirallook familiar??


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Math is everywhere!!


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Anyways, back to technical analysis. Many of the technical methods are

based on PHI (.618)and powers of .618

.618

.382 = .618*.618

.236 = .618*.618*.618 First, draw a trend line

Draw arcs

that

intersect the

trend at61.8%, 50%,

and 38.2%

of the high

(these will

indicate

future

supports)


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Draw an initial trend line between two extreme points

At the second extreme point, draw a vertical line

Draw rays

that intersect

at 61.8%,50%, and

38.2%


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Once a reversal occurs, it tends to find support at

Fibonacci levels!


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Large price swings tend to occur on Fibonacci times!

(times could be in days, months, years, etc)


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Elliott Waves

Elliot wave theory relies on cycles within cycles

Grand Super cycle

Super cycle

Cycle

Each cycle consists of 5 moves with the trend (1,3,5are impulse, 2,4 are corrective) and 3 that are

against the trend. A 5-3 wave


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Impulse

Correction

Beginning of the next

wave

Elliott Waves consist of 5 moves

with the trend (1,3,5 are impulse, 2,4

are corrective) and 3 that are against

the trend. A 5-3 wave cycle


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Impulse (1)

Correction (2)

The 5-3 wave cycles actually oscillate around a larger super-cycle The

super-cycle is also a 5-3 wave.


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Note that the grand super cycle has two movements, the super cycle

has 8 movements, the cycle has 34Fibonacci numbers!!

Finally, the super-cycle oscillates around a grand super-cycle


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RSI (Relative Strength Indicator)

points"down"Total

pointsUp""Total1

100100RSI

If Up Points = 0, RSI = 0

If Down Points = 0, RSI = 100

RSI < 30 (Oversold)

RSI > 70 (Overbought)


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RSI (Relative Strength Indicator)

points"down"Total

pointsUp""Total1

100100RSI

Chart Interval: 15 minutes

Period Length: 20 (300 minutes)

Total up points = 7

Total down points = 11

89.38

1

100100

636.11

7

RSI

RSRSI

RS


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Fast Stochastic

FSofAverageMovingPeriodY

LengthPeriodX,100*Low(X)-High(X)Low(X)-Close(X)

Signal

FS

Period High: FS = 100

Period Low: FS = 0

Signal < 30 (Oversold)

Signal > 70 (Overbought)


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May June July Aug. Sept. Oct. Nov. Dec.

.6 .3 -.1 .1 .2 .6 .2 .2

MA May June July Aug. Sept. Oct. Nov. Dec.

1 .6 .3 -.1 .1 .2 .6 .2 .2

2 .45 .1 0 .15 .4 .4 .2

3 .27 .10 .07 .3 .33 .334 .3 .17 .2 .275 .3

A moving average takes out the volatility by averaging severalobservations. For example, a MA(3)would average the currentobservation with the previous 2 observations.

Data


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Moving Average Convergence/Divergence

(MACD)

The MACD indicator calculates the differencebetween moving averages of two different lengths(usually, 12 periods and 26 periods)

The signal is typically a 9 period moving average of

the difference A divergence means that something is happening

Positive to Negative = Sell Signal

Negative to Positive = Buy Signal


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MACD Suppose that the longer run movingaverage has a length equal to the number ofobservationsthe series average

MA

Time

MA(N)

MA(10)

- To + :

Buy point

+ To - :

Sell point

- To + :

Buy point


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Punch line

Technical methods are useful for short runprediction

Dont lose sight of the fundamentals!!!

beyond the fundamentals technical analysis

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