Timing the Markets with

Technical Analysis

Michael Lee
Applications Specialist
Bloomberg
 Agenda
• Market trends
• Moving Average Convergence‐Divergence MACD
• Relative Strength Index  RSI
• Directional Movement Index DMI
• Bollinger’s Band
• Demark Wave
• Fibonacci retracement
 Market Trends
• Up trend is consisted of successive waves of higher highs and
higher lows

• Down trend is made up of successive waves of lower lows and lower highs

• Sideway trend displays neither higher highs/higher lows or lower 
lows/lower highs
What is the current trend of the Hang Seng Index?
The use of moving averages to depict
smoothed trends
 Moving Average Convergence-Divergence
• MACD is a trend following system derived essentially with exponential moving 
averages (EMA)
• Common parameters are 12‐day and 26‐day EMA for MACD1 line and 9‐day EMA 
of MACD1 for signal line
• The MACD1 indicator is the difference between 26‐day EMA and 12‐day EMA
• A positive MACD1 value indicates the 26‐day EMA is above the 12‐day EMA and it 
reflects an up trend
• A negative MACD1, on the other hand, indicates the 26‐day EMA is below the 12‐
day EMA and reflects a down trend
• The crossing over of MACD1 with the zero line indicates a change in trend and 
some traders use the cross‐overs with the zero line as buy/sell signals
• The buy/sell signals, however, often come with a big time‐lag. To improve the 
timing of the signals, a 9‐day EMA of MACD1 is calculated and plotted as the signal 
line overlaying the MACD1 line. If MACD1 crosses up the signal line, it’s a buy 
signal. If MACD1 crosses down the signal line, it’s a sell signal.
• MACD2 is the difference between MACD1 and the signal line, often displayed as a 
histogram. If MACD2 is positive, it means MACD1 is above the Signal line. If 
MACD2 is negative, that means MACD1 is below the Signal line.
MACD for Spot Gold
XAU<CURNCY>MACD<GO>
MACD for Spot Euro Currency
EUR<CURNCY>MACD<GO>
 Relative Strength Index (RSI)
• RSI belongs to a class of technical indicators known as “Oscillators” or “Overbought/Oversold 
Indicators”
• RSI is calculated from closing prices and takes on a value from 0 to 100
• Common parameters for RSI are 9‐day or 14‐day
• Usually, for 9‐day RSI, 20 represents extremely oversold and 80 extremely overbought; for 
14‐day RSI, oversold level is 30 and overbought level is 70
• If RSI is above the 50 level, it indicates a bullish market; conversely, RSI below 50 points to a 
bearish market
• RSI works well in non‐trending or sideway markets. The strategy is to sell when RSI 
approaches overbought level and buy when it approaches oversold level
• RSI  performs poorly in trending markets. In an up trend, RSI can remain overbought for a 
sustained period of time and in a downtrend RSI can remain oversold for a long time.
• In trending markets, it would be better to use the divergence to spot the market tops or 
bottoms
• A bullish divergence occurs when the market reaches lower lows but the RSI goes to higher 
lows. Bullish divergence suggests the market has reached a bottom
• A bearish divergence, on the other hand, occurs when the market reaches higher highs but 
the RSI has lower highs. Bearish divergence suggests the market has reached a top
RSI for Hang Seng China Enterprise Index ‐ Daily
HSCEI<EQUITY>RSI<GO>
RSI for Hang Seng China Enterprise Index ‐ Weekly
HSCEI<EQUITY>RSI W<GO>
RSI Divergences

Higher highs on Price; lower highs on RSI (Bearish Divergence)

Lower lows on price; higher lows on RSI (Bullish Divergence)
 Directional Movement Index (DMI)
• DMI is another trend following indicator
• DMI is typically made up of 3 lines: +DMI, -DMI and ADX
• Typical parameter for DMI is 14-day
• +DMI measures “buying power”; a rising DMI indicates buying is gathering
pace and a falling DMI indicates buying is subsiding
• -DMI measures “selling power”, a rising –DMI indicates selling is gathering
momentum and a falling –DMI indicates selling is subsiding
• When +DMI crosses up –DMI, it is a buy signal. It indicates buying has
overcome selling and the market trend is heading up.
• When –DMI crosses up +DMI, it is a sell signal. It indicates selling has
overcome buying and the market trend is heading down.
• ADX line measures trend strength. A rising ADX line tell us the prevailing
trend as indicated by the cross-overs of +DMI with –DMI is gaining strength.
A falling ADX line indicates the prevailing trend is weakening and the
market is becoming non-trending.
• ADX is often used as a filter for technical buy/sell signals
DMI for Hang Seng China Enterprise Index
HSCEI<INDEX>DMI<GO>
 Bollinger’s Band
• Bollinger’s band is a variable price envelope helping users to identify 
resistance and support levels
• Bollinger’s band is made of 3 lines – a N‐day exponential moving average, 
a +X standard deviation line above the EMA line and a –X standard 
deviation lin below the EMA line
• Typical parameters for Bollinger’s band are 20‐day EMA with +2 standard 
deviation and ‐2 standard deviation for the bands
• One common trading rule for Bollinger’s band is to sell when price 
penetrates the upper band but later fall back into the band. An even 
stronger signal occurs when the price moves up again the new high after 
falling back but fails to penetrate the upper envelope again
• Bollinger’s band is very often used in conjunction with RSI divergences. If 
the price is approaching the Bollinger’s band top but RSI shows a bearish 
divergence, it is a very reliable signal that the market has topped. 
Bollinger’s Band for Hang Seng China Enterprise Index
HSCEI<INDEX>BOLL<GO>
Elliot Waves
Demark Wave count for Hang Seng Index
G<GO> to set up Demark Wave
Demark Wave count for Spot Euro currency
G<GO>
 Fibonacci Retracement
• The corrective wave 2 retraces part of the gains made by the impulse 
wave 1
• The corrective wave 4 retraces part of the gains made by the impulse 
wave 3
• Wave A‐B‐C retraces the gains made by the impulse waves 1‐2‐3‐4‐5
• Typical Fibonacci retracement ratios are 38.2% , 50% and 61.8% 
• 23.6% and 76.4% also Fibonacci retracement levels though they occur less 
often
• Fibonacci retracements can help us determine the major supports or 
resistances of the corrections
The move from 2 to 3 retraces 50% of the move from 1 to 2

1
End of Presentation
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