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Technical Price Analysis

 The analysis of historical prices

patterns using charts, diagrams,
mathematical equations, etc.
 This approach emphasizes how

prices got to where they are.
 We’ll only cover few methods.

Technical Price Analysis
Two views:
Prices reflect all available, relevant

fundamental information. Random
prices tomorrow.
Price movements are not random.

Recognizable price patterns or
formations are often repeated.

Benefits of Charting
 Provide a price history.
 Help identify important fundamental

factors; early warning of changes in
process.
 Help identify repetitive price

patterns. Will they repeat in future?

many methods! Which work? .Benefits of Charting  Can improve the timing of purchases or sales.  Can help one to be more mechanical and objective (less emotional)  But.

Tools of Technical Analysis  Charts  Trading Information Volume and Open Interest  Mathematical or Statistical Formulas or Calculations Moving Averages and Oscillators .

Charting P High Close Low Time .

Forecasting Price Changes  Trend = general direction  Types Rising = “Bullish” Falling = “Bearish” Change = “Reversal” .

Forecasting Price Changes  Trend Lengths Minor = 1 month or less Intermediate = 1 .6 months Major = 6 months or more  Magnitude = extent of move .

Trend Lines  UP Shows trend of increasing prices Drawn by connecting ascending extreme lows  DOWN Shows trend of decreasing prices Drawn by connecting descending extreme highs .

Channel Lines (Up &Down)  Top line is parallel to bottom line  Drawn by connecting ascending or descending extreme highs and lows  Useful in showing likely trading ranges and possible deviations from up or down trends .

)  Is a flat line drawn by connecting “equal” extreme lows. .Support Line  An apparent lower bound on prices which market prices seem to not be able to fall below (due to increased interest in buying at that price level.

.Support Line  The greater the number of extreme equal lows. the greater the belief that it is a genuine area of support.  A close (or two) below the support line indicates that there is no longer any support at that price level.

Resistance Line  An apparent upper bound on prices which market prices seem to not be able to rise above (due to increased interest in selling at that price level)  Is a flat line drawn by connecting “equal” extreme highs .

. the greater the belief that it is a genuine area of resistance.Resistance Line  The greater the number of extreme equal highs.  A close (or two) above the resistance line indicates that there is no longer any resistance at that price level.

.Resistance Line An excellent spot for a short position.

Reversals Signal change in direction or trend Observable with a single day of trading (if there was a previous trend) Bullish (bearish) reversals indicated that prices are likely to stop decreasing (increasing) & start increasing (decreasing) .

Key Reversals Bullish  Previous Downtrend  Higher High  Lower Low  Higher Close .

Key Reversals  Previous Uptrend  Higher High  Lower Low  Lower Close Bearish .

Hook Reversals Bullish  Previous Downtrend  Lower Low  Higher Close .

Hook Reversals  Previous Uptrend  Higher High  Lower Close Bearish .

Head and Shoulders  A reversal formation in a previous uptrending market that signals a top has been reached  Left Shoulder = 1st set of peak prices  Head = Higher set of peak prices  Right Shoulder = 3rd set of peak prices .

= distance from top of head to the neckline. . Belief that prices will decrease below neckline by an amt. A close below neckline confirms the formation.Head and Shoulders Neckline =Line thru lows between head and l&r shoulders. Good necklines are fairly flat.

Double Top  Like Head and Shoulders w/o head  Low between two peaks = valley or fulcrum  Close below fulcrum confirms formation and indicates prices will continue to decline by an amt. at least equal to the distance from top of peaks to fulcrum  Also holds for multiple tops .

 Today’s high is below yesterday’s low or today’s low is above yesterday’s high.e. contracts traded at price ranges that do not overlap). .Gaps  A hole or discontinuous part on a bar chart in looking at the trading range for two consecutive days (i.

Gaps GAP .

5.Moving Averages  Calculate the average price in the last several days (e.g.7) and plot it. .  Calculate the average price for a longer price series and plot it. 3.

sell signal if they have been moving down.Moving Averages  Where the short series average crosses the longer average. that is a buy signal if prices have been moving up recently. .

the more frequent buy or sell signals.  What is the right length of series to use? Differs by commodity? Seems to keep changing! .Moving Averages  The shorter the short series.

Relative Strength Index  An overbought or oversold indicator  Calculate the sum of the positive price changes and the sum of the negative price changes for the number of days you select .

overbought (SELL) If RSI < 30.5 (prices up) RSI = 100 [RS/(1 + RS)] then RSI = 60 If RSI > 70. oversold (BUY) .Relative Strength Index Sum price increases RS = _________________ Sum price decreases If 1.

signal is often considered stronger  Advanced traders test historical fits. and use the one or combinations that work best recently in each market .Technical analysis  If technical signal is linked with high trading volume.

Reasons for Nonrandom Futures Price Behavior Risk premium (return for taking risk) is required by speculators to encourage them to take positions.  If hedges are primarily short. then current futures should be below later expiration price. .

may be self fulfilling forecast . if so. If enough traders are trend followers.Overreaction Hypothesis  Traders overreact to new market information. trend following techniques will work for a while.

and perceive substantial risk in taking a position contrary to present trends. .Overreaction Hypothesis  Traders may not be able to accurately evaluate impacts of new information. so price moves (overreactions) will persist longer.

Success? Will the return be better than other investments. alternatives? . adjusted for risk? Expected futures price minus current futures price minus transaction costs = Profit but how risky vs.

Success?  Prevailing wisdom suggests: 80+ percent of small speculators lose money But new sheep come to be shorn! 10% (professionals) make money Commodity trading funds--highly variable results .

Assignment 8  Where are futures charts found on the web? List several??  Report on best technical analysis site. Precise address How it’s useful .

 Report briefly: Where to get forecast(s)? Key factors they consider in their price forecast process? Does it look useful? At what cost? .Assignment 9  Find one or more commodity forecast newsletter (or similar source).