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Presentation on technical analysis and 2008 meltdown

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4/15/12

Technical Analysis
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4/15/12

Technical Analysis vs. Fundamental Analysis
Technical analysis involves the development of trading rules based on past price and volume data for individual stocks and the overall stock market.  Fundamental analysis involves economic, industry, and company analysis that lead to valuation estimates for companies, which can then be compared to market prices to aid in investment decisions.

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Introduction
Technical analysis is the attempt to forecast stock prices on the basis of market-derived data.  Technicians (also known as quantitative analysts or chartists) usually look at price, volume and psychological indicators over time.  They are looking for trends and patterns in the data that indicate future price movements.

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What is Technical Analysis? (Continued)  Method of evaluating securities by analyzing statistics generated by ◦ ◦ ◦ Market activity Past Prices Volume  Do not attempt to measure intrinsic value  Instead look for patterns and indicators on charts to determine future performance 4/15/12 .

What is Technical Analysis? (Continued)  Most agree that technical analysis is much more effective when combined with fundamental analysis .

based on which decisions can be made Each bar is composed of 4 elements: ◦ ◦ ◦ ◦ Bar Charts are of two types  Standard Bar Chart  Japanese Candle stick Open High Low Close 4/15/12 .Bar Charts Bar Charts helps us to find the trends in the market plotting the past movements in the stock price.

 Standard Bar Charts  example of a single day standard bar chart where the stock closes higher compared to previous day’s 4/15/12 .

Standard Bar chart showing the stock closes lower from the previous day’s close 4/15/12 .

high. close or OHLC)of AMAT from early July to mid October 2001. . low. Standard Bar chart (open.

Japanese Candle Stick Charting 4/15/12 .

Japanese Candle Stick Charting (Continued)  Been around for hundreds of years Often referred to as “Japanese Candles” because the Japanese would use them to analyze the price of rice contracts Similar to bar chart. but uses color to show if stock was up (green) or down (red) from the previous day’s close 4/15/12 .

The stock opened at (or near) its high and dropped substantially to close near its low . the stock opened at (or near) its low and closed near its high  Red is an example of a bearish pattern.Japanese Candle Stick Charting (Continued)  Green is an example of a bullish pattern.

close) chart of AMAT from early July to mid October 2001 . This is a Japanese Candlestick (open. low. high.

Basic Technical Tools  Trend Lines  Moving Averages  Price Patterns  Technical Indicators 4/15/12 .

. ◦ A Trading Range ( Flat trend / chicken market ).Trend Lines  There are three basic kinds of trends: ◦ An Up trend where prices are generally increasing ( Bullish market ). ◦ A Down trend where prices are generally decreasing ( Bearish trend ).

Trendlines  Draw a trendline through the edges of congestion areas  The most important feature of a trendline is its angle  Trendlines show the action of bulls and bears 4/15/12 .

a sell signal is generated 4/15/12 .Up Trend  Connect two or more daily price lows ◦ Preferably 10 days apart When market closes below an uptrend line.

Up Trend Sell Signal 4/15/12 .

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Down Trend Connect two or more daily price highs ◦ Preferably 10 days apart When market closes above a down. a buy signal is generated 4/15/12 .trend line.

Down Trend 4/15/12 .

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Suppo rt Breako ut Resistanc e .  Support results from the inability to break below to prior lows.Support & Resistance  Support and resistance lines indicate likely ends of trends.  Resistance results from the inability to surpass prior highs.

at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher 4/15/12  Support ◦  Resistance ◦ .Resistance and Support  Price ◦ ◦ levels at which movement should stop and reverse direction. Act as floor and ceiling Different strengths (major and minor) Price level below the current market price at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower Price level above the current market price.

then the back up formerprice rises to abecomes a resistance level When support level resistance level. drops to a support level.Resistance and Support One of two things can happen when stock approaches resistance/support  Can act as a reversal point Support/Resistance reverse ◦ ◦ ◦ penetrated. it will go When price roles once Market price falls below a support level. it will go whendown back the market later trades back up to that level 4/15/12 .

Resistance and Support Resistance Resistance/Supp ort Suppor t 4/15/12 .

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.  They are used to smooth out fluctuations of less than N periods.Simple Moving Averages A moving average is simply the average price (usually the closing price) over the last N periods.

30. 100 and 200 days ◦ The longer the time span. the less sensitive the moving average to daily price changes Moving averages are used to emphasize the direction of a trend 4/15/12 .50.Using the Moving Average  The ◦ most commonly used averages are of 20.

Moving Average 4/15/12 .

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 These patterns are reputed to provide information regarding the size and timing of subsequent price moves.  Price patterns are used to find out the reversals in the trends. 4/15/12 .Price Patterns  Technicians look for many patterns in the historical time series of prices.

The following are the major reversal patterns: • Head & Shoulder • Double top and bottom • Triangles • Rounded Tops and Bottoms 4/15/12 .

meaning that it signifies a change in the trend.  This is a reversal pattern.Head and Shoulders  This formation is characterized by two small peaks on either side of a larger peak. .

Head and Shoulders 4/15/12 .

but there is no head. .  These are reversal patterns with the same measuring implications as the H&S.Double Tops and Bottoms  These formations are similar to the H&S formations.

Double Bottom Example 4/15/12 .

Triangles  Triangles are continuation formations.  Three flavors: ◦ ◦ ◦ Ascending Descending Symmetrical  Typically. . triangles should break out about half to threequarters of the way through the formation.

Rounded Tops & Bottoms  Rounding formations are characterized by a slow reversal of trend. .

Rounded Bottom Chart Example 4/15/12 .

literally. hundreds of technical indicators used to generate buy and sell signals.  We will look at the below indicators : ◦ ◦ Relative Strength Index (RSI) Moving average convergence divergence(MACD) 4/15/12 .Technical Indicators  There are.

Relative Strength Index  Widely used measure of momentum in the market  14 day RSI is the most common  To calculate ◦ ◦ ◦ Record last 14 day price changes (closes) Sum the negative changes and positive changes and divide each by 14 to create (D) down average and (U) up average RSI=U/(U+D) * 100 4/15/12 .

RSI Market Indicator  Ranges ◦ from 0 to 100  RSI > 70 Market is thought to be over bought  RSI ◦ < 30 Market is thought to be over sold  RSI is a rescaled measure of the ratio of average price changes on up days to average price changes on down days 4/15/12 .

RSI Example Chart Overboug ht Oversol d 4/15/12 .

2008 MELTDOWN Click to edit Master subtitle style 4/15/12 .

Houses Families Mortgage lenders Investors Click to edit Master subtitle style Wall street 4/15/12 .

Houses Families Mortgage lenders Investors Click to edit Master subtitle style Wall street 4/15/12 .

Safe AAA Okay BBB Risky no rating 4/15/12 .

 Collateralized debt obligation (CDO)  Credit default swaps (CDS)  CREDIT Ratings 4/15/12 .

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