mta educational foundation half-day college level presentation – introduction to technical...

MTA Educational Foundation Half-Day College Level Presentation – INTRODUCTION TO TECHNICAL ANALYSIS ©2010

This lecture series is produced by the Market Technicians Association Educational Foundation

based on the detailed class notes of

Charles Kirkpatrick II, CMT Copyright © 2010.

All rights are reserved.

1

1. Trend & Momentum

“The Trend is Your Friend”






2

Viewing the Company versus the Stock

A. Philosophy of Supply and Demand






3

Support and Resistance







4

S&P 500 Stock Index - Weekly H,L,C

Cyclical bull market

Cyclical bear market

S&P 500 - Weekly

StockCharts.com







5

NASDAQ 100 Index - Weekly H,L,C

Secondary trend

NASDAQ - Weekly

StockCharts.com







6

Top

Bottom

Uptrend

Downtrend

Dow Theory and the Ideal Marketplace







7

Dow Theory of “Confirmation” DJIA and DJTA - Weekly - May 2002-May 2005

Confirmation of New High

in Transports

New High

DJ Industrials - Weekly

DJ Transports - Weekly

StockCharts.com







8

Sideways Trend

Horizontal Peaks

Horizontal Troughs

Uptrend

Higher Peaks

Higher Troughs

Lower Peaks

Lower Troughs

Downtrend

The Trend







9

Disney - Daily

StockCharts.com

Line Chart of Daily Close for Walt Disney Co.2003 - 2007

B. Chart Construction






10

Krispy Kreme - Weekly

StockCharts.com

Weekly Bar Chart for Krispy Kreme DoughnutsDecember 1, 2002 - August 22, 2007







11

StockCharts.com

Cisco - CSCO

Monthly Bar Chart for Cisco Systems, Inc.1995-2005 (logarithmic scale)







12

Drawing the Candle Lines

Definition of Candle Terms







13

Alleghany Technologies, Inc.One point ($1) box and 3 box reversal







14

StockCharts.com

S&P 500 SPDRs (SPY)1 pt/box; 1 box reversal chart - daily







15

Support and Resistance ZonesFebruary 7, 2005 - April 22, 2005

StockCharts.com

Walt Disney - Daily

DB

C

A

E

F

C. Trend Analysis






16

High-Volume ReversalJuly 2, 2003 - August 27, 2003

StockCharts.com

One-Day Reversal

High Volume

Resistance Stops Rally

Walt Disney - Daily

C. Trend Analysis






17

StockCharts.com

Walt Disney - Daily

Regression Line from Low to High+/- One Standard Deviation Channel

C. Trend Analysis

Regression Line and One Standard DeviationFebruary 26, 2003 - September 11, 2003






18

StockCharts.com

Walt Disney - Daily

Uptrend Line

Trend LineFebruary 26, 2003 - September 11, 2003

C. Trend Analysis






19

StockCharts.com

Walt Disney - Daily

A

B

Uptrend Line with Channel Line

Trend Line with Channel LineFebruary 26, 2003 - September 11, 2003

C. Trend Analysis






20

Walt Disney - Daily

60-Day MA

Regression Line

One Std. Dev. about Regression Line

StockCharts.com

C. Trend Analysis

Simple Moving AverageFebruary 26, 2003 - September 15, 2003






21

StockCharts.com

Walt Disney - Daily

60-Day MA

20-Day MA

Cross-Over

Crossover is a Signal in a Trending Market

Where moving averages cross is often a Support and Resistance area

C. Trend Analysis

2 Moving Averages - Crossover @ Support & Resistance ZoneFebruary 26, 2003 - September 19, 2003






22

Entry

Breakout

Pullback

Double Top with Breakout Down

D. Chart Patterns






23

Triple Bottom with Breakout Up

Entry Breakout

Throwback

D. Chart Patterns






24

Descending Triangle with Breakout Up

Entry

Breakout

Throwback

D. Chart Patterns






25

Diamond Pattern with Breakout Down

Entry Breakout

Pullback

D. Chart Patterns






26

Entry Breakout

Handle

Throwback

Cup or Bowl and Handle Variety of a Rounding Bottom with Breakout Up

D. Chart Patterns






27

Head and Shoulders Top with Breakout Down

Entry

Breakout

Pullback

Right Shoulder

Head

Left Shoulder

D. Chart Patterns






28

Spinning Top Can Be Black or White

Harami Candlestick Pattern

D. Chart Patterns






29

Evening Star and Morning Star Candlestick Patterns

Spinning Top Can Be Black or White

Evening Star (top) Morning Star (bottom)

D. Chart Patterns






30

Apple Computer - Daily

On-Balance Volume (OBV)

StockCharts.com

E. Mechanical Momentum Indicators

On-Balance VolumeJuly 22 - October 15, 2005






31


Chaikin Money Flow

StockCharts.com

Chaiken Money FlowJuly 22 - October 15, 2005







32


MACD

StockCharts.com

MACDSignal LineOverbought Line


Moving Average Convergence-Divergence (MACD) July 18 - October 17, 2005






33


14-Day Rate of Change (ROC)

StockCharts.com


Rate of Change (ROC)July 18 - October 17, 2005






34


14-Day Relative Strength Index (RSI)

Swing Failure Breakout Triangle

StockCharts.com


Relative Strength Index (RSI)July 19 - October 15, 2005






35


14-3-3 Slow Stochastic

Overbought Down-ward Crossover

Oversold Upward Crossover

Swing Failure and Breakup

Swing Failure and Breakdown

StockCharts.com


StochasticJuly 19 - October 15, 2005






36 E. Mechanical Momentum Indicators - continued

Expanding volume confirms rising prices

Breakout confirmed by expanding volume

Royal Gold - Daily

Volume

Positive Volume ConfirmationRoyal Gold - Daily

StockCharts.com







Negative Volume DivergencePepsico - Daily

Pepsico - Daily

Uptrend Broken

StockCharts.com







S&P 500 - Daily

Positive Divergence

On-Balance Volume

StockCharts.com

On-Balance Volume ConfirmationS&P 500 - Daily







Price

Open Interest

Volume

Open InterestCopper Futures December 2005 Contract






40 F. Relative Strength

1 1 1

2 2 2

3 3 3

1 2 3

1 2 3

1 2 3

PRICE

TREND

1 = Up 2 = Neutral 3 = Down

Price Trend versus Relative Strength

RELATIVE STRENGTH






41

International Flavors & Fragrances

Relative Strength - International Flavors & Fragrances : S&P500

StockCharts.com

International Flavors & Fragrances

F. Relative Strength






42

International Paper

Relative Strength - International Paper : S&P500

International Paper

StockCharts.com







43

Dow Jones US Food & Beverage Index

Relative Strength - DJ Food & Beverage Index : S&P500

Dow Jones US Food & Beverage Index - MACD

StockCharts.com

Dow Jones US Food & Beverage Index







44

Dow Jones Industrial Average

Capital Goods : Consumer GoodsCapital Goods

Outperformance Consumer Goods Outperformance

StockCharts.com

Dow Jones Industrial Average







45

Portfolio Management

• Asset Allocation– How much in stocks

• Security Selection– What to buy– When to buy– When to sell

• Technical analysis is critical to answering “when?”

G. Money Management






46

“Almost all of the really big trouble that you’re going to experience in the next year is in your portfolio right now; if you could reduce some of these really big problems, you might come out the winner in the Loser’s Game.”

- Charles D. Ellis

Investment Policy - Why It Matters

G. Money Management






47

C-A-N-S-L-I-M

C = Current EPS growth – should be a

minimum of 20%

A = Annual EPS growth – should be at least

15-20% for 3 years

N = New. The greatest winners had a major new

product, new management, or new industry

conditions

A new high in price can alert you to new

fundamental developments

G. Money Management






48

S = Shares outstanding – past winners

have had an average of less than 25 million

L = Leadership – demonstrated by high relative

strength for the stock and the stock’s industry

group

I = Institutional sponsorship – good stocks are

owned by institutions

M = Market – even good stocks go down in a

bear market

C-A-N-S-L-I-M

G. Money Management






49

2. Sentiment(Behavioral Finance Analysis)

“The Little Guy is Not Always Wrong”






50 A. Transactional Indicators

ISE 10-Day Put/Call Ratio

Ind

ex

Rat

ioS&P 500

10-Day Ratio






51

Options Clearing Corp. (OCC) Index Options Premium Put/Call Ratio

4-Wk. Moving AverageS&P 500

Bearish

Bullish

Ind

ex

Rat

io

A. Transactional Indicators






52

Bearish

S&P 500

Bullish

4-Week Moving Average

Ind

ex

Per

ce

nt

Consensus Inc. Bullish Percentage: Equities

B. Sentiment Polls






53

S&P 500 Dividend Yield vs. Price / Earnings Ratio

Dividend YieldP/E Ratio

Rat

io

Per

ce

nt

P/E Ratio 142.30 - October 2009

C. Valuations






54

3. Supply/Demand(Quantitative Analysis,

Flow of Funds)

“Investors Make Bottoms and Traders Make Tops”






55

Flow of Funds: Net Change in Supply of Stock

Ind

ex

$B

illi

on

s

Quarterly, SAAR

S&P 500

A. Investor vs. Trader Participation






56

Flow of Funds: Households

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

1800.00

Equity Percent

Total Financial Assets

Per

ce

nt

60000

50000

40000

30000

20000

10000

0

S&P 500

60

50

40

30

20

10

0

$B

illi

on

s







57

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

1800.00

S&P 500

Equity Percent

Total Financial Assets

Per

ce

nt

$B

illi

on

s

Flow of Funds: State & Local Government Employee Retirement Funds







58

300

250

200

150

100

50

Monthly

$B

illi

on

s

60

50

40

30

20

10

0

New Equity Financing

12-Month Total

$B

illi

on

s







59

% of Market Value

Margin DebtPrior to January 1997,

NYSE figures only$

Bil

lio

ns

Margin Debt versus % of Market Value







60

Insider Activity

Ind

ex

S&P 500

Bearish

8-Week Moving Average

Bullish







61 B. Cash & Cash Flows

Equity Mutual Funds: Cash Percentage of Net Assets

Per

ce

nt

Ind

ex

S&P 500

Cash Percentage (Monthly)






62

S&P 500

Net Sales (Monthly)

60

40

20

0

-20

-40

-60

Net Sales of Equity Mutual Funds (Including Reinvested Dividends)

$B

illi

on

s

Ind

ex

B. Cash & Cash Flows






63

$B

illi

on

s

Ind

ex

S&P 500

Quarterly net flows

Net Purchases of U.S. Equities by Foreign Investors minus Net Purchases of Foreign Equities by U.S. Investors

C. International Flows






64

4. Intermarket(Economic Analysis)

“Bonds Don’t Lead; Stocks Lead”






65

The Stock Cycle versus The Bond Cycle

Stocks lead interest rates. Interest rates = the inverse of bond prices.

A. Stocks vs. Commodities vs. Interest Rates






66

Bonds and Stocks Move in the Same Direction Some Times and in the Opposite Direction Other Times

S&P 500

30-Year Treasuries

StockCharts.com







67

CRB Index

30-Year Treasuries

Treasury Bonds and the CRB Index

StockCharts.com







68

Source: “Technical Analysis Explained,” Martin Pring*Gold - used as a proxy for all commodities

B

B

S

S

G

G

Expansion

Recession

B = Bonds

S = Stocks

G = Gold*

Hypothetical Business Cycle Showing Peaks & Troughs

B. Stocks, Commodities, and Interest Rates vs. The Economic Cycle






69

Bond Market

Stock Market

Gold*

Business cycle trough

Business cycle peak

Source: “Technical Analysis Explained,” Martin Pring*Gold - used as a proxy for all commodities

Interaction of Financial Markets During a Typical Business Cycle

B. Stocks, Commodities, and Interest Rates vs. The Economic Cycle

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