QUANTITATIVE METHODS: APPLICATIONS

TECHNICAL ANALYSIS
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PRINCIPLES OF TECHNICAL ANALYSIS, ITS APPLICATIONS, AND ITS UNDERLYING ASSUMPTIONS

 Technical analysis is a set of methods used for analysis of financial assets prices
using only past market data (volume, prices, etc.).

 Technical analysts believe that the market prices follow patterns that tend to
repeat over time.

 According to them, market prices reflect true opinion of market participants,

point where supply and demand are in equilibrium.

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 QUESTION

What information is more likely used by a technical analyst?

A) Last year net income of Company A.

B) Yesterday trading volume for Company B’s stock.

C) P/E coefficient of Company C.

A and C are examples of fundamental analysis data.

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 THE CONSTRUCTION OF DIFFERENT TYPES OF TECHNICAL ANALYSIS CHARTS
AND THEIR INTERPRETATION

 Line chart

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 THE CONSTRUCTION OF DIFFERENT TYPES OF TECHNICAL ANALYSIS CHARTS
AND THEIR INTERPRETATION

 Candlestick chart includes information about open/high/low/close

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 THE CONSTRUCTION OF DIFFERENT TYPES OF TECHNICAL ANALYSIS CHARTS
AND THEIR INTERPRETATION

 Volume chart

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 USES OF TREND, SUPPORT, RESISTANCE LINES, AND CHANGE IN POLARITY

 Support line is a price level that is considered as temporary lower boundary.

 Resistance line is a price level that is considered as temporary upper boundary.

 Change in polarity – broken support/resistance line becomes new

resistance/support line.

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 USES OF TREND, SUPPORT, RESISTANCE LINES, AND CHANGE IN POLARITY

 Trendline is a graphical representation of a marker tendency.

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 QUESTION

It is believed that broken resistance line becomes a:

A) Trendline

B) Resistance line

C) Support line

Change in polarity principle

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 COMMON CHART PATTERNS

 Reversal patterns(RP) – change of a trend.

 Continuation patterns(CP) – trend becomes weaker but continues.

 Neck-and-shoulders (RP) – drop to (2∙neckline - head)

head

neckline

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 COMMON CHART PATTERNS

 Triple/double top (RP) – three/two upward triangles.

 If a tendency changes from downtrend to uptrend – the above patterns are

called inverse RP.

 Triangle (CP) – price chart hits lower highs/upper lows converging to some level
after which the trend will continue.

 Rectangle (CP) – price chart is bounded by two levels.

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 QUESTION

Which of the following patterns is an example of a continuation pattern?

A) Double top

B) Neck-and-shoulders

C) Triangle

Double top and neck-and-shoulders are examples of a reversal pattern.

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 COMMON TECHNICAL ANALYSIS INDICATORS
(PRICE-BASED, MOMENTUM OSCILLATORS, SENTIMENT, AND FLOW OF FUNDS)

 Price-based indicators
Moving average (MA) – average of last 𝑛 prices
Bollinger bands – moving average 𝑛-period ± 𝑘 ∙ standard deviation of
prices over the same period

 Oscillators
Relative Strength Index – ratio of price increases to price decreases
Rate of change – difference between price at period 𝑛 and price
at period 𝑛 − 𝑘

 Non-price-based indicators
Any indicator of sentiment
VIX – volatility index
Short interest ratio – number of sold short stocks
Mutual fund cash position – funds cash to total assets

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 TECHNICAL ANALYSIS AND CYCLES

 Technical analysis relies on the assumption that patterns tend to repeat over
time. Hence technical analysts are interested in how often do these patterns
repeat (e.g. every day, year – cycles).

 Kondratieff cycle – every 54 years.

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 KEY TENETS OF ELLIOTT WAVE THEORY AND THE IMPORTANCE OF FIBONACCI NUMBERS

 Elliott Wave Theory – part of an uptrend can be decomposed into 5 up moves

and 3 down moves (waves)

part of a downtrend can be decomposed into 5 down

moves and 3 up moves (waves)

 Fibonacci numbers follow the next formula 𝐹 𝑛 = 𝐹 𝑛 − 1 + 𝐹 𝑛 − 2

where 𝐹 0 = 0 and 𝐹 1 = 1

 Size of Elliott waves can be described by these numbers.

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 QUESTION

Which of the following indicators is an example of an oscillator?

A) MA

B) RSI

C) VIX

VIX – volatility index, MA – price-based indicator

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 INTERMARKET ANALYSIS IN TECHNICAL ANALYSIS AND ASSET ALLOCATION

 Intermarket analysis takes into account information about several markets at

the same time.

 By analyzing several markets/assets together a researcher can decide which

market/asset is currently outperforming/supposed to outperform and allocate
investments accordingly.

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 HOMEWORK ASSIGNMENT
READING
CFA® Level I Curriculum (2019) Volume I  Reading 13

PRACTICE PROBLEMS
CFA® Level I Curriculum (2019) Volume I  Reading 13  PRACTICE PROBLEMS
MOODLE  CFA® Level I 2019  TESTS  QM #4

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