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Stock Valuation –

Technical Analysis

Essentials of Corporate Finance
Chapters 7 and 10

Materials Created by Glenn Snyder – San Francisco State University
Topics
 What is Technical Analysis?
 How Technical Analysis is Performed
 Technical Analysis vs. Fundamental Analysis
 Weak Form Market Efficiency
 Arguments Against Technical Analysis
 Technical Research
 What is a Chart?
 Moving Averages
 Indicators and Oscillators
 Sources of Data
 Career Advice for a Technical Research Analyst
February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 2
What is Technical Analysis?

 Technical Analysis is a method of analyzing
and evaluating securities by using statistics
generated by market activity
 Historical Prices and Volume

 Technical Analysis analyzes the supply and
demand of the market itself, rather than its
components

February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 3
How Technical Analysis is
Performed
 Technical analysts do not try to determine a
security's value, rather they use charts and
statistical tools to find patterns that may
predict future price movements

 Technical analysts try to identify trends, or
which direction the market is headed
 Who uses Technical Analysis?
 Hedge Funds
 Traders
 Portfolio Managers
February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 4
Technical Analysis vs.
Fundamental Analysis
 Technical Analysis
 Historical Trends
 Market Supply and Demand
 Statistical Analysis
 Short-Term Oriented

 Fundamental Analysis
 Company and Industry Specific
 Specific Company Valuation
 Long-Term Oriented
February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 5
Weak Form Market Efficiency

 Weak Form Market Efficiency
 All past prices of a security are reflected in the
current price
 Weak Form implies “Searching for patterns in
historical prices that are useful in identifying
mispriced stocks will not work.” – Ross, Westerfield,
Jordan (Chapter 10, pg. 318)

 Can charts of historical prices lead to finding good
investments?

February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 6
Arguments Against Technical
Analysis
 If past prices and performance are already
reflected in current prices, then Technical
Analysis cannot predict any future prices
 If Technical Analysis can be used to predict future
price movements, then the efficiency of the
market can be called into question

February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 7
What is a Chart?
 A Chart is simply a graphical representation
of a series of prices or volume plotted over
time

Source:
February Baseline
26, Materials Created by Glenn Snyder – San Francisco State
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Moving Averages

 A moving average is an average of the stock
price plotted over a period of time
 The moving average smoothes out daily price
fluctuations to allow the Technical Analyst to
better understand the trend of the security

February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 9
Technical Research – Moving
Averages
Price
50-Day Moving Average
200-Day Moving Average
51

50

49

48

47

46

45

44

43

42

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Source:
FactSet
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Indicators and Oscillators

 There are two main types of Indicators:
 Leading Indicators - calculations based on prices
and volumes that precede stock price movements
 Lagging Indicators - calculations based on prices
and volumes that confirm stock price movements
 Oscillators are banded ranges within
indicators that reflect overbought and
oversold conditions

February 26, Materials Created by Glenn Snyder – San Francisco State
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Sources of Data
 Investment professionals use sophisticated
tools and databases
 FactSet
 Reuters
 Baseline
 Ned Davis Research

 But individuals can do some of this as well
 Yahoo Finance
 Historical daily prices
February 26, Materials Created by Glenn Snyder – San Francisco State
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Career Advice for a Technical
Research Analyst
 Strong Quantitative Skills
 Statistics

 Mathematics

 Economics

 Strong Communications Skills
 Written – Documentation and Write-ups

 Verbal

 Team Oriented
 Look for companies that have an investment focus
 Insurance Companies

 Asset Management Companies

 Investment Banks

 Investment / Trading Companies

February 26, Materials Created by Glenn Snyder – San Francisco State
2007 University 13