Top Down Approach

Company Analysis Technical Analysis

Technical Analysis Introduction
‡ Two major types of analysis for predicting the performance of a company¶s stock
± fundamental ± technical

‡ Technical
± looks for peaks, bottoms, trends, patterns, and other factors affecting a stock¶s price movement ± makes a buy/sell decision based on those factors

Technical Analysis Introduction (Continued)
‡ The world of technical analysis is huge ‡ Hundreds of different patterns and indicators investors claim to be successful

What is Technical Analysis?
‡ Method of evaluating securities by analyzing statistics generated by
± Market activity ± Past Prices ± Volume

‡ Do not attempt to measure intrinsic value ‡ Instead look for patterns and indicators on charts to determine future performance

price levels are predictable .What is Technical Analysis? (Continued) ‡ Technicians believe that securities move in very predictable trends and patterns ‡ Trends continue until something happens to change the trend ‡ Until that change takes place.

What is Technical Analysis? (Continued) ‡ Most agree that technical analysis is much more effective when combined with fundamental analysis .

The Bar Chart .

The Bar Chart (Continued) ‡ Some of the most popular type of charts ‡ Advantage is that it show the high. low. open and close for each day .

The Bar Chart (Continued) .

Candle Stick Charting .

but uses color to show if stock was up (green) or down (red) over the day ‡ More than 20 patterns are used by technicians for candlestick charting. . Some of the most popular include the following.Candle Stick Charting (Continued) ‡ Been around for hundreds of years ‡ Often referred to as ³Japanese Candles´ because the Japanese would use them to analyze the price of rice contracts ‡ Similar to bar chart.

Candle Stick Charting (Continued) .

the stock opened at (or near) its low and closed near its high ‡ Red is an example of a bearish pattern. The stock opened at (or near) its high and dropped substantially to close near its low .Candle Stick Charting (Continued) ‡ Green is an example of a bullish pattern.

. ± Theory is that pattern indicates a reversal ‡ Bottom is an example of a star. typically indicating a reversal and/or indecision.Candle Stick Charting (Continued) ‡ Top example is called a hammer and is a bullish pattern only if it occurs after the stock price has dropped for several days.

only closing prices will be used .Point and Figure Chart ‡ ‡ ‡ ‡ ‡ ‡ Somewhat rare Plots day-to-day increases and declines in price. A rising stack of XXXX¶s represents increases A rising stack of OOOO¶s represents decreases. Typically used for intraday charting If used for multi-day study.

Point and Figure Chart .

Point and Figure Chart (continued) ‡ Helps to filter out less-significant price movements allowing analyst to focus on most important trends ‡ Used to keep track of emerging price patterns ± No time dimension ‡ Two attributes affecting the appearance of a point & figure chart ± Box size ± Reversal amount .

100 and 200 days ± The longer the time span.50.30. the less sensitive the moving average to daily price changes ± Moving averages are used to emphasize the direction of a trend and smooth out price and volume fluctuations (³noise´).Using the Moving Average ‡ Shows the average value of a security¶s price over a period of time ± Using compared or used in conjunction with EMA (see discussion below) ‡ The most commonly used averages are of 20. .

Moving Average .

above it is a good sign . ± Bearish signal ‡ February it rose above its 50-day average and continued to rise for several weeks ± Bullish signal ‡ Typically. when a stock moves below its moving average it is a bad sign.Moving Average (Continued) ‡ Notice in April when the stock price dropped well below its 5-day average (the green line).

smooth line.similar to 20 day but provides a bit more certainty for the trend. but is probably the most useful for short term traders. ± 200 day . it is less volatile.moving averages provide a much less volatile. This can be used to detect somewhat longer term trends. It isn't the most accurate. ± 30 day . ± 50 day .choppy line.Moving Averages (Continued) ‡ What do the different days mean? ± 20 days . . It doesn't react to quick movements in the stock price therefore it is rarely used. more of a rolling chart or smooth line. and one of the most widely used for long term trends.even less volatile.similar to the 50 day. ± 100 day .

Strategies for Moving Averages ‡ Filters ± Used to increase confidence about an indicator ‡ No set rules or things to look out for when filtering. this can be used to make sure that the rise in the security isn't a fluke or unsustained. ± Again. ± Remember. the downside is if you wait too long then you could end up missing some big profits. . ‡ Another filter is to wait a day or two after the security crosses over. setting the percentile too high could result in "missing the boat" and buying the stock at its peak. just whatever makes you confident enough to invest your money ‡ For example you might want to wait until a security crosses through its moving average and is at least 10% above the average to make sure that it is a true crossover.

Strategies for Moving Averages (Continued) ‡ Crossovers ± Not as easy as filtering ± Several different types of crossover's. but all of them involve two or more moving averages. ‡ In a double crossover you are looking for a situation where the shortest MA crosses through the longer one. ‡ Notice this happened in May for APPX . ‡ For extra insurance you can use a triple crossover. This is considered to be an even stronger buying indicator. whereby the shortest moving average must pass through the two higher ones. This is almost always considered to be a buying signal since the longer average is somewhat of a support level for the stock price.

‡ Use an exponential moving average to place more weight on recent prices.Exponential Moving Averages (EMA) ‡ Calculated by applying a percentage of today's closing price to yesterday's moving average value. .

Relative Strength Index (RSI) ‡ A comparison between the days a stock finishes up against the days it finishes down. ‡ Big tool with momentum trading ‡ Ranges from 0 to 100 ± Stock considered overbought around the 70 level ± Stock considered oversold around 30 ‡ The shorter the number of days used to calculate the more volatile .

Relative Strength Index (RSI) .

Money Flow Index ‡ Measures the strength of money flowing into and out of a stock ‡ Difference between money flow index and RSI is that RSI only looks at prices. Money Flow also looks at volume ‡ Ranges from 0 to 100 ± Overbought at 70 ± Oversold at 30 .

Money Flow Index .

lower. the more oversold . the more overbought ‡ Closer to lower band. and the simple moving average that is between the two ± Upper/lower bands are plotted two standard deviations away from a simple moving average ± Bands widen when markets are more volatile and contract during less chaotic periods ‡ Closer price moves to upper band.Bollinger Bands ‡ Three lines used for Bollinger band indicator: the upper.

Bollinger Bands .

at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher .Resistance and Support ‡ Price levels at which movement should stop and reverse direction. ± Act as floor and ceiling ± Different strengths (major and minor) ‡ Support ± Price level below the current market price at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower ‡ Resistance ± Price level above the current market price.

it will go back down ‡ Support/Resistance reverse roles once penetrated. it will go back up ± When price rises to a resistance level. then the former support level becomes a resistance level when the market later trades back up to that level .Resistance and Support One of two things can happen when stock approaches resistance/support ‡ Can act as a reversal point ± When price drops to a support level. ± Market price falls below a support level.

Resistance and Support Resistance Resistance/Support Support .

the stock will incur selling pressure by the people who bought at or near the old high ± Selling pressure will take the stock price sideways for 4 days to 4 weeks. Handle has a slight downward drift ± Right hand side of pattern has low trading volume ± As the stock comes up to test old highs. then it takes off .Charting Patterns ‡ Cup and Handle ± Pattern on bar chart as short as 7 weeks or as long as 65 weeks ± Cup in the shape of a U.

Charting Patterns .

Head and Shoulders ‡ Resembles an ³M´ in which a stock¶s price ± Rises to a peak and then declines. and the second peak forms the head. then ± Rises above the former peak and again declines. and then ± Rises again but not the second peak and again declines ‡ The first and third peaks are shoulders. ‡ Very bearish indicator .

Head and Shoulders .

Double Bottom ‡ Occurs when a stock price drops to a similar price level twice within a few weeks or months ‡ The double-bottom pattern resembles a ³W´ ‡ Buy when the price passes the highest point in the handle. ‡ This is a very bullish indicator . the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors ‡ The middle point of the ³W´ should not go into new high ground. ‡ In a perfect double bottom.

Double Bottom .

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