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Prudential Equity Group, LLC

Introduction To Technical Analysis

RALPH J. ACAMPORA, CMT

MTA Education Seminar 2005


May 19-21, 2005
Hotel Pennsylvania, New York City

Prudential Equity Group, LLC z One New York Plaza z 15th Floor z New
York, NY 10292
TECHNICAL ANALYSIS
• History
• Dow Theory

THE THREE LOGICAL ASSUMPTIONS:


1. The stock market is a discounter: Price movement precedes the actual
event.
2. Accumulation versus distribution: This is the constant battle between
sellers and buyers (supply and demand).
3. Relativity: The amount of buying or selling activity over a designated
period of time indicates the magnitude of upside or downside potential. Major
buying (basebuilding) precedes a major advance; a minor top (distribution)
foreshadows a minor decline, and vice versa.
MOTTO:
“In price there is knowledge.”
TOOLS:
4 Types of charts:
1. Line – simply plot and connect the closing prices.
2. Bar – a vertical line (bar) represents the high and low of price, whereas a
small tick on the right side of this bar is the closing price. A second bar,
directly below the price, corresponds to volume. There are three types of bar
charts: daily, weekly, and monthly (with the H/L/C and volume for each
period).
3. Candlestick—A thick vertical bar represents the open, high, low and close
in price. When the bar is clear that means it was a positive day, week or
month (close is above the open). When the bar is dark it means that it was a
down day, week or month (close is below the open). A second bar, directly
below the price, corresponds to volume.
4. Point and Figure – every sequential trade of one full point or more is
recorded on an intra-day basis and plotted with a small ‘x.’

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Prudential Equity Group, LLC z One New York Plaza z 15th Floor z New York, NY
10292
TECHNICAL ANALYSIS
ELEMENTS FOUND IN BAR CHART:
•Price - high, low, close
•Volume
•Time
•Moving averages
•Relative strength
•Price gaps

ELEMENTS FOUND IN LINE CHART:


•Price
•Time
•Moving averages
•Relative strength

ELEMENTS FOUND IN POINT AND FIGURE


CHART:
•No high/low/close
•No volume
•No time
•No moving averages
•No relative strength
•No price gaps
•Intra-day price reversals
•A more accurate assessment of accumulation versus
distribution during consolidation phases
•Intermediate-to-long-term price objectives

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Prudential Equity Group, LLC z One New York Plaza z 15th Floor z New York, NY
10292
TECHNICAL ANALYSIS

CONSTRUCTION OF ONE-UNIT POINT AND


FIGURE CHART – THINGS TO REMEMBER:
1. Each input (x) is equal to one full point, with no
fractions
2. Zeros (0) will appear only on the “ten” lines- for
example, 10, 20, 30, etc.
3. In order to give direction to a column, there must be
two or more entries, as in Figure 1.
4. Once the direction of a column has been established, it
will continue to move in that direction, in increments of
one full point. For example, in Figure 2, the stock has
moved up another four full points.
5. A one-point reversal is recorded by simply moving
down one full point. In Figure 3, however, note that this
new column has no direction because there is only one
entry.
6. The newest column can also move up as in Figure 4 or
move down as in Figure 5.
Figure I Figure II Figure III Figure IV Figure V
30 30 30 30 30
25 25 25 25 25

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Prudential Equity Group, LLC z One New York Plaza z 15th Floor z New York, NY
10292
TECHNICAL ANALYSIS

WHAT TO LOOK FOR IN A CHART:


•Price trends- up, down, neutral
•Support levels- potential demand
•Resistance levels- potential supply
•Moving averages
•Relative strength

Neutral Trend
Uptrend Downtrend
Resistance

Support

Neutral Trend
Uptrend Resistance Downtrend

Support

PHASES OF PRICE ACTIVITY


Our schematic represents the long-term rise and fall of a
stock’s price. This hypothetical diagram contains four
primary moves and two secondary reactions. The stock
commences with a major base (#1) - a zone of
accumulation that takes months, if not years to form. In
technical analysis, price movement is relative: the bigger
the base, the bigger the eventual upside move (#2). The
same holds true for the distribution areas (#4) - the
greater the top, the greater the downside plunge (#5).
Like the perennial changing of seasons, the cycle begins
once again the another major bottom (#1).
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10292
PHASES OF PRICE ACTIVITY (cont.)
The pattern we just described refers to primary behavior.
There are also periods of time when counter-trend
(secondary) activity will occur. During the mark-up
phase, (#2) stocks will undergo some consolidation,
near-term profit-taking (#3) before resuming their long-
term uptrends. In the mark-down phase (#5) stocks will
experience near-term stabilization or rallies (#6) before
continuing their major downtrends.
4

5
2
6
3
5
1
2
1

1 Neutral Price Trend 4 Neutral Price Trend


Area of Consolidation Area of Consolidation
Zone of Accumulation Zone of Distribution
Greater On-Balance Buying Increased On-Balance Selling
Level of Demand Level of Supply
Base Building Top
Bottom
2 Make-Up 5 Mark-Down
Up Trend Down Trend
3 Neutral Price Trend 6 Neutral Price Trend
Area of Consolidation Area of Consolidation
Re-Accumulation Zone Re-Distribution Zone

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10292
Intra-Day Bar Chart Of Boeing

Source: Reuters.

Daily Bar Chart Of Boeing

Source: Reuters.
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Weekly Bar Chart Of Boeing

Source: Reuters.

Monthly Bar Chart Of Boeing

Source: Reuters.

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Daily Bar Chart Of Boeing With
Comparative Relative Strength
Comparative
Relative Strength

Source: Reuters.

Weekly Bar Chart Of Boeing With


Comparative Relative Strength
Comparative
Relative Strength

Source: Reuters.
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10292
Monthly Bar Chart Of Boeing With Comparative
Relative Strength

Comparative
Relative Strength

Source: Reuters.

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10292
Daily Candlestick Chart Of Boeing

Source: Bloomberg L.P.

Weekly Candlestick Chart Of Boeing

Source: Bloomberg L.P.


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Prudential Equity Group, LLC z One New York Plaza z 15th Floor z New York, NY
10292
Monthly Candlestick Chart Of Boeing

Source: Bloomberg L.P.

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Point & Figure (3-Box Reversal) Chart Of Boeing

Source:Dorsey, Wright & Associates.

Equity Research 13
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10292

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