Technical Price Analysis

The analysis of historical prices

patterns using charts, diagrams,

mathematical equations, etc.
This approach emphasizes how

prices got to where they are.

Well only cover few methods.

Technical Price Analysis

Two views:
Prices reflect all available, relevant

fundamental information. Random

prices tomorrow.
Price movements are not random.

Recognizable price patterns or

formations are often repeated.

Benefits of Charting
Provide a price history.
Help identify important fundamental

factors; early warning of changes in

process.
Help identify repetitive price

patterns. Will they repeat in future?

Benefits of Charting
Can improve the timing of

purchases or sales.
Can help one to be more

mechanical and objective (less

emotional)
But, many methods! Which work?

Tools of Technical Analysis

Charts
Trading Information

Volume and Open Interest

Mathematical or Statistical Formulas

or Calculations
Moving Averages and
Oscillators

Charting
P

High
Close
Low
Time

Forecasting Price Changes

Trend = general direction
Types

Rising = Bullish
Falling = Bearish
Change = Reversal

Forecasting Price Changes

Trend Lengths

Minor = 1 month or less

Intermediate = 1 - 6 months
Major = 6 months or more
Magnitude = extent of move

Trend Lines
UP

Shows trend of increasing prices

Drawn by connecting ascending
extreme lows
DOWN

Shows trend of decreasing prices

Drawn by connecting descending
extreme highs

Channel Lines (Up &Down)

Top line is parallel to bottom line
Drawn by connecting ascending or

descending extreme highs and

lows
Useful in showing likely trading

ranges and possible deviations

from up or down trends

Support Line
An apparent lower bound on prices

which market prices seem to not be

able to fall below (due to increased
interest in buying at that price
level.)
Is a flat line drawn by connecting

equal extreme lows.

Support Line
The greater the number of extreme

equal lows, the greater the belief

that it is a genuine area of support.
A close (or two) below the support

line indicates that there is no longer

any support at that price level.

Resistance Line
An apparent upper bound on prices

which market prices seem to not be

able to rise above (due to increased
interest in selling at that price level)
Is a flat line drawn by connecting

equal extreme highs

Resistance Line
The greater the number of extreme

equal highs, the greater the belief

that it is a genuine area of
resistance.
A close (or two) above the resistance
line indicates that there is no longer
any resistance at that price level.

Resistance Line
An excellent spot for a short

position.

Reversals
Signal change in direction or trend
Observable with a single day of

trading (if there was a previous trend)

Bullish (bearish) reversals indicated

that prices are likely to stop

decreasing (increasing) & start
increasing (decreasing)

Key Reversals

Bullish

Previous

Downtrend
Higher High
Lower Low
Higher Close

Key Reversals

Previous

Uptrend
Higher High
Lower Low
Lower Close

Bearish

Hook Reversals

Bullish

Previous

Downtrend
Lower Low
Higher Close

Hook Reversals

Previous Uptrend
Higher High
Lower Close

Bearish

Head and Shoulders

A reversal formation in a previous

uptrending market that signals a top

has been reached
Left Shoulder = 1st set of peak prices
Head = Higher set of peak prices
Right Shoulder = 3rd set of peak

prices

Head and Shoulders

Neckline =Line thru lows between

head and l&r shoulders. Good

necklines are fairly flat.
A close below neckline confirms the
formation.
Belief that prices will decrease below
neckline by an amt. = distance from
top of head to the neckline.

Double Top
Like Head and Shoulders w/o head
Low between two peaks = valley or

fulcrum
Close below fulcrum confirms formation
and indicates prices will continue to
decline by an amt. at least equal to the
distance from top of peaks to fulcrum
Also holds for multiple tops

Gaps
A hole or discontinuous part on a bar

chart in looking at the trading range

for two consecutive days (i.e.
contracts traded at price ranges that
do not overlap).
Todays high is below yesterdays
low or todays low is above
yesterdays high.

Gaps

GAP

Moving Averages
Calculate the average price in the

last several days (e.g. 3,5,7) and plot

it.
Calculate the average price for a

longer price series and plot it.

Moving Averages
Where the short series average

crosses the longer average, that is a

buy signal if prices have been
moving up recently,
sell signal if they have been
moving down.

Moving Averages
The shorter the short series, the

more frequent buy or sell signals.

What is the right length of series to

use?
Differs by commodity?
Seems to keep changing!

Relative Strength Index

An overbought or oversold indicator
Calculate the sum of the positive

price changes and the sum of the

negative price changes for the
number of days you select

Relative Strength Index

Sum price increases
RS = _________________
Sum price decreases

If 1.5
(prices up)

RSI = 100 [RS/(1 + RS)] then RSI = 60

If RSI > 70; overbought (SELL)
If RSI < 30; oversold (BUY)

Technical analysis
If technical signal is linked with high

trading volume, signal is often

considered stronger
Advanced traders test historical fits,
and use the one or combinations
that work best recently in each
market

Reasons for Nonrandom

Futures Price Behavior
Risk premium (return for taking

risk) is required by speculators to

encourage them to take
positions.
If hedges are primarily short, then

current futures should be below

later expiration price.

Overreaction Hypothesis
Traders overreact to new market

information; if so, trend following

techniques will work for a while. If
enough traders are trend followers,
may be self fulfilling forecast

Overreaction Hypothesis
Traders may not be able to

accurately evaluate impacts of new

information, and perceive
substantial risk in taking a position
contrary to present trends, so price
moves (overreactions) will persist
longer.

Success?
Will the return be better than other

investments, adjusted for risk?

Expected futures price
minus current futures price
minus transaction costs
= Profit
but how risky vs. alternatives?

Success?
Prevailing wisdom suggests:
80+ percent of small speculators

lose money
But new sheep come to be shorn!
10% (professionals) make money
Commodity trading funds--highly
variable results

Assignment 8
Where are futures charts found on

the web? List several??

Report on best technical analysis
site.
Precise address
How its useful

Assignment 9
Find one or more commodity forecast

newsletter (or similar source).

Report briefly:
Where to get forecast(s)?
Key factors they consider in their

price forecast process?

Does it look useful? At what cost?