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Stock Data Cycle Sine Wave - PowerPoint

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									Technical Analysis

      Bill Pope
        Fundamental Analysis
• The study of:
  – Company,
     • Products, Management
     • Sales, Earnings, Cash Flow, Debt,
     • Stock Price to Book Ratio, Stock Price to Earnings
       Ratio
  – Demographic trends, potential demand for products
  – Monetary policy, etc
  To determine what a stock should sell for.
         Fundamental Analysis
• Problems:
  – Getting all the necessary data.
  – Analyzing all the data
  – Predicting the future
  – Efficient Market Theory
     • “Current price reflects all currently known
       information and expectations.”
  – So you must also predict the future better than
    others.
     Efficient Market Theory
• If Efficient Market Theory were true:

  – P/E Ratio would always be the same
    as long as Bond yields remained constant.


  – A quarterly graph of P/E Ratio would be
    straight line.
 But P/E Ratio isn’t flat!




So there must be another reason stock prices
 go up and down.
             Market Principles
• What makes a stock price rise?
  – A new product? – Maybe
  – New management? – Sometimes
  – Low Debt? – Not Generally
  – Low Price to Book Ratio? – Not By Itself
  – Higher profits? – You would think so, but no.
         – Internet stocks rose 1000% on no profits.
         – Stocks often drop on higher earnings announcements.

  – More buyers than sellers at a given price? – Yes
         Market Principles
• The Demand / Supply graph
               Market Principles
• What makes more Buyers than Sellers?
  – A positive change in investor sentiment about fundamentals.
      • Why trends start, But….
      • Must have all the data,
      • Know how to analyze the company, the economy and
        Fed Monetary Policy.
      • Predict the future … better than others
  – Greed - Fear of missing a move that has already started.
      • Why Trends continue beyond reasonable values.
  – Desire to play like the Big Boys (The Follow-the-Leader game)
      • Why fundamentally weaker stocks rise with others in their
        sector.
            Technical Analysis
• The study of current and historic Price and
  Volume action to:

  – Discover what a stock, fund or index is doing right now.
  – Note the current/prior range of Trader Greed and Fear.
  – Watch for changes in Investor Sentiment and Emotion.
  – Detect when a Trend or Trading Range has probably
    started or ended.
  – Predict what a security is likely to do continue doing
    in the near term. [Inertia]
  Technical Vs. Fundamental Analysis

Fundamental Analysis studies
 Company Facts and Future Predictions.

Technical Analysis studies
 Investor & Trader Sentiment and Emotion.
 Premise of Technical Analysis

• All known Fundamental Information are
  shown in Price.

• All changes in Emotion and Sentiment
  are shown in Price and Volume action.
Basic Tool of Technical Analysis
• The Chart
  – A picture of changes in Investor Sentiment and
    Emotions over time.
  – Shows where Trader Greed became excessive and
    turned to Fear – “Resistance”
  – Shows where Trader Fear became excessive and
    turned to Greed – “Support”
  – Shows when Investor Sentiment has changed. –
    “Breakouts” above Resistance or below Support
  – Show Investor Commitment – Big Volume Breakout
  – Shows when the Public is jumping in – Up trends
  – Shows when the Pros are bailing out – Down trends
        Charts Shows Where:
                            INDEXFAM NASDAQ 100 Index (1,440.00, 1,440.00, 1,440.00, +8.87000)   2200
• Investor Sentiment:                                                                            2100
  – Turned Negative                                                                              2000

  – Turned Positive                                                                   Break
                                                                                                 1900
                                                                                                 1800
• Pros bailing out                                                                    Down
                                                                                                 1700
• Public jumping in                                                                              1600

• Trader Emotion:                                               Breakout                         1500
                           Resistance
                                                                                                 1400
  – Greed turned to Fear
                                                                                                 1300
  – Fear turned to Greed                                                                         1200
                             Support                                                             1100


                                                                                                 10000
       Chart Presentation Styles
Bar Chart          Line Chart




Candlestick        Total Return or Comparative
           Chart Timeframes
• Monthly

• Weekly

• Daily

• Intra-day
  – Hourly
  – 10 minute
  – 2 minute,

            Is the Market Fractal? Yes and No.
                    Market Participants
  Participant        Time in Position      Selection Decision    Timing Decision
                                               Based on:            Based on:


Long Term (LT)       Months to Years     Company Fundamentals        Charts
   Investor                               Fund Manager History


Intermediate (IT)    Weeks to Months        Market Rankings          Charts
     Trader


Short Term (ST)        3 – 10 Days              Charts               Charts
“Swing” Trader


  Day Trader              Hours                 Charts               Charts



 Micro Trader       Seconds to Minutes          Charts               Charts
Chart Timeframes by Market Participant
Market Participant   Time in Position           Chart Used for:
                                            Trend            Entry and
                                        Determination        Exit Points

   Long Term         Months to Years      Monthly            Weekly
    Investor

Intermediate Term Weeks to Months          Weekly             Daily
      Trader

 Swing Traders         3 – 10 Days          Daily             Hourly


   Day Trader             Hours            Hourly           10 Minute


  Micro Trader         Seconds to         5-Minute           1 Minute
                        Minutes


                        The “Factor of 5” Rule.
            The Pope’s Opinion
• Technical Analysis works best:
  – Short Term (“Swing”) Trading
     • Large-cap mature Stocks .
     • Asset Class Indices using Closed End or ETF Funds.
  – Intermediate Term Trading
     • Small-cap new High Growth Stock.
     • Asset Class Funds.
  – Long Term Trading
     • Mutual Funds on Weekly Chart
           (due to Redemption Fees).
                  Asset Classes
• Asset Categories: Stocks, Bonds, Cash
• Sub Category Characteristics:
  – Capitalization: Large, Middle, Small
  – Objective:      Growth, Value
  – Geography:
     • Region:      US, Europe, Asia, Latin American
     • Country:     US, Germany, Japan, Mexico, etc.
  – Yield:          High, Medium, Low
  – Risk (Volatility): High, Medium, Low
                  Asset Class
– Securities with similar characteristics and behavior.
– Example:
   Stocks + Small Capitalization + High Volatility + Growth
   = Small Cap Growth Stocks.
– Why similar Behavior? – Follow the Leader game.
– Factors influencing a security’s performance:
   • The General Market              50% factor
   • The security’s Asset Class      30%           (80%)
   • The security itself             20%
Asset Classes (Of Interest)
And Now Back to Charts
What Questions can Charts Answer?
• Universe Selection Questions.
• Individual Security Selection Questions.
• Timing Questions.
    Universe Selection Questions?
(For IT Sector or Asset Class Rotators)
• What Sectors or Asset Classes should I watch?
  – Which markets fit my trading style and time?
  – Which are too volatile for my risk tolerance (fear)?
  – Which are too slow for my needs (greed)?
• Who trades the securities in this Sector/Class?
  – Do they have a shorter time-horizon than the one I can trade?
  – Can I out trade them?
Total Return Comparison Chart
Universe Selection Questions:
(For ST Swing and Day Traders)

• Which Securities have tradable patterns?
Short Term Tradable Patterns
Swing Tradable Patterns
Security Selection Questions:
(For IT Sector or Asset Class Rotators)
• What should I Buy?
  – What are the Markets doing right now?
  – Which are in Up Trends?
  – Which has the steepest trend?
  – Which has the best trend?
  – Which are attracting Investors?
  – Which are attracting Money?
Steepest TREND?
             How Indicators Help




A Cycle Indicator
Steepest TREND!
BEST Trend?
BEST Trend !
Security Selection Questions:
(For Stock Pickers)

• Which Stock just brokeout on Big Volume?
Big Volume Breakout
Big Volume Breakout
    Entry Timing Questions:
(For IT Traders, Rotators, Stock Pickers:)
  – Has Investor sentiment recently changed?
     • To positive = Breakout
     • To negative = Breakdown
  – Are Institutions coming in?
     • = Big Volume
     • = Accumulation Pattern
  – Is the Public being drawn in?
     • = Up Trend
  – Have weak players pulled out?
     • = Pull-back (“Buyer Remorse”)
Breakout and Pull-back Patterns




          Breakout    Pull-back
Up Trend Patterns
                             Higher High

                        Higher High Higher Low
                  Higher High      Higher Low
             Higher High      Higher Low
           Higher High     Higher Low
    Higher High
                    Higher Low
           Higher Low
      Exit Timing Questions
(For All)
• Has Investor Sentiment become Negative?
  – Up Trend Line Broken
  – Support Breakdown
  – Lower High, Lower Low Pattern
• Has Trader Emotion turned to Fear
  – Big Volume Breakdown
  – Extreme Momentum Reversal
Big Volume Breakdown
Topping Patterns
           How Indicators Help




A Momentum Indicator
 ST Trader Timing Questions:
(In Addition to the above:)
  – Where are other Traders likely to buy and sell?
     (Where is Support and Resistance?)
  – What is the measuring objective from the last
    pattern?
  – Has the trend on 1, 5, 10 Minute Charts reversed?
    Technical Analysis Aids
• Chart Patterns
• Mathematical Indicators
        Chart Price Patterns
    Type Pattern                      Examples
Trading Range or        Saucer
Basing Patterns         Cup and Handle
Trending Patterns       Stairs (High Low progression)
Continuation Patterns   Flags and Penants
                        Rising Right Triangle in Uptrends
                        Falling Right Triangle in Downtrends
Reversal Patterns       Head and Shoulders Top
                        Inverted Head and Shoulders Bottom
                        M’s and W (Double Tops and
                        Bottoms)
                        Wedges in uptrends (Tops)
False Reversal Patterns Head Shakes
Indecision              Equalaterial Triangles,
    Chart Volume Patterns
  Situation              Volume Behavior (Theory)

True Breakout            > 150% Average

Up Trends                Higher on up days than
                         down days
Down Trends              Higher on down days than
                         up days
Distribution near Tops   Higher but no significant
                         price gain
Accumulation near        Higher but no significant
Bottoms                  price loss
     Mathematical Indicators
Transforms of Price and/or Volume action
• Remove Noise through smoothing (averaging).
  – Smoothing introduces lag.
• Needed for Computerized investing.
  – Moving Average = Computerized Trend Line
• Generate mechanical Buy and Sell Signals.
  – An attempt to remove subjectiveness and emotion.
  – Most created as a stand-alone trading system.
  – All have strong points and weak points. [Over 180 cataloged
    by International Federation of Technical Analysts.]
• Best to use a combination.
          Types of Indicators
•   Trading Range
•   Trend Following
•   Momentum
•   Cycle
•   Volatility
•   Risk Return
•   Most are graphical, some are Statistical
      Trading Range Indicators
•   Aroon
•   Directional Movement System
•   Chande Momentum Oscillator
•   Commodity Selection Index
•   MESA Sine Wave
•   Polarized Fractal Efficiency
•   Random Walk Index
    Trend Following Indicators
•   Moving Averages
•   Linear Regression Line
•   Parabolics
•   Channels
•   Price Channels
•   Andrew’s Pitchfork
•   Envelops
•   Bollinger Bands
•   Average True Range Bands
     Momentum Indicators
• Momentum
• Moving Average Convergence Divergence
  (MACD)
• Relative Strength Index (RSI)
• Stochastic
• Williams %R
            Cycle Indicators
•   Commodity Channel Index
•   Detrended Price Oscillator
•   MESA Sine Wave
•   Stochastic
       Volatility Indicators
• Standard Deviation
• Bollinger Bands and Average True Range
  Bands
• Chakin Volatility Index
• Commodity Selection Index
• Ulcer Index
• Accumulation Pattern Indicator – Pope
      Risk Adjusted Return
• Sharpe’s Ratio- William Sharpe
• Ulcer Performance Index – Martin and
  McCann
• Retracement Adjusted Return - Pope
• Targeted Retracement Adjusted Return –
  Pope
Market Health Indicators
           Indicator Usage
•   Universe Selection
•   Security Selection
•   Timing Non-Volatile Markets
•   Timing Volatile Markets
•   Assessing General Market Health
Universe Selection
Security Selection - UPI
Security Selection – RAR (Pope)
“And The Winners Are”
 Timing Non-Volatile Markets
• Non-Volatile Markets can be timed with:
  – Single Moving Average
  – Filtered Moving Average (Percent Bands/Envelope)
Single Moving Average
Single Moving Average
Filtered Moving Average
  Timing Volatile Trending Markets
Volatile Markets are Volatile because
Traders play in them!

We can either:
• Smooth out the Trader’s action, or

• Trade only when Traders and Investors
  Confirm each other’s direction.
  Dual MA Crossover System
• Uses two Moving Averages:
  – Shorter MA smoothes Trader’s Price Fluctuations.
  – Longer MA represents the Trend.
• Works better on volatile securities than:
  – Single MA,
  – Filtered MA.
Dual MA Crossover System
Dual MA Crossover System
Dual MA Confirmation System
Dual MA Confirmation System
   Cycles and Momentum Studies
• Adding Cycle and Momentum Indicators
  can improve your decision making.
• Cycle Indicators
  – Commodity Channel Index
  – Stochastic
  – Etc.
• Momentum Indicators
  – Moving Average Convergence Divergence
  – Relative Strength Index
  – Etc.
    Adding Cycles Studies




Don’t Buy when Over Bought! Don’t Sell when Over Sold!
Momentum Divergences
Momentum Divergences & Reversals
Trading Non-Trending Markets
Trending Vs. Non-Trending Indicators
SUMMARY and
CONCLUSION
The Magic of Technical Analysis
             is not in
Charts, Indicators, or Computers.

     It’s in what the above
        enable you to do
           in your Mind!

								
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