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					    Technical Analysis
• The use of price charts and
  price indicators to predict price
  direction.
  –Chart Formations
  –Indicators
           Oct 2000 Feeder Cattle Futures
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     1/6    2/3   3/2   3/30   4/27   5/25   6/22   7/20   8/17   9/14
         Chart Formations
• Trendlines                  • Channels
• Support & Resistance        • Triangles
• Head & Shoulders            • Pennants
• Double/triple tops &        • And others…
  bottoms
• Key and hook reversals
• Island reversals
• Gaps
• Speedlines
• Bull/Bear Flag Formations
       Chart Formations
• Trendlines A line that is drawn between two or
  more prominent points on a chart.
• Rising trends are defined by a trendline that is
  drawn between two or more troughs (low points) to
  identify price support.
• Falling trends are defined by trendlines that are
  drawn between two or more peaks (high points) to
  identify price resistance.
• Once a trend has been formed (two or more
  peaks/troughs have touched the trendline and
  reversed direction) it will remain intact until broken.
        Oct 2000 Feeder Cattle Futures
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81

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         Downtrend line acts          Prices penetrate downtrend
78
         as Price Resistance          line. Signals a change in
77                                    market direction.

76

75

74

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 1/19   2/16   3/16   4/13     5/11   6/8   7/6    8/3   8/31      9/28
        Oct 2000 Feeder Cattle Futures
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79                                  Price Resistance

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                                Uptrend line acts as Price Support
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 1/19   2/16   3/16   4/13   5/11   6/8    7/6    8/3    8/31   9/28
        Oct 2000 Feeder Cattle Futures
82

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80                           Broken Resistance Line Becomes
                             Market Support Line
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                                    Uptrend line acts as Price Support
72
 1/19   2/16   3/16   4/13   5/11      6/8    7/6    8/3    8/31   9/28
      Chart Formations
• Head and Shoulders
       A
                          •Market Rallies
                          •Market Rallies Higher
                          •Market Rallies, but Fails to take
                          out old highs.
      B                   •Look for confirmation with
                          Lower Volume on each
             “Neckline”   successive peak.
                          Indication market will move
                          lower
                          Should fall the Distance from
                          Point A to B
      Chart Formations
• Head and Shoulders

                       •Look for confirmation with
                       Lower Volume on each
                       successive peak.
                       Indication market will move
             B         higher
                       Should rise the Distance from
                       Point A to B


         A
76
            May 1999 Feeder Cattle Futures
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 6/30         8/9   9/18   10/28   12/7   1/16   2/25   4/6   5/16

                           Declining Trading Volume
                           Confirms Head & Shoulders




     6/30     8/9   9/18   10/28   12/7   1/16   2/25   4/6   5/16
              Chart Formations
     • Double/Triple Top or Bottom Two (or three)
       clustered highs or lows.
     • Penetration of support (or resistance) in the pattern
       will lead to a change in trend.
     • The price objective is measured by the distance from
       the support (resistance) line to the top (bottom) of
       the price pattern.
76


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                  Top 1   Top 2
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 1/15      1/29    2/12   2/26    3/12   3/26   4/9   4/23   5/7   5/21
       Chart Formations
• Reversals Signal change in trend from one day’s
  trading activity.
• Key Reversal market makes higher high and lower
  low compared to previous day. Closes below(above)
  previous day’s low (high).

                        Bearish
Bullish                 Key
Key                     Reversal
Reversal
       Chart Formations
• Gaps when the trading range (high, low) is outside
  the previous day's trading range.
• Occur in highly volatile markets, not in slow moving
  sideways trends.
• Gaps occur when the market is about to make or
  end a major move.
                                   •“The market always
                                   tries to fill gaps."
                    Gap in
                    Trading        •Sooner or later prices
                    Range          will trade in the range
                                   left open by the price
                                   gap.
       Oct 2000 Feeder Cattle Futures
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87                                Price objective of Gap

                                   Gap
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                                                 Bullish
                                                 Reversal
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     7/3   7/17   7/31   8/14   8/28   9/11    9/25    10/9   10/23
       Oct 2000 Feeder Cattle Futures
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     7/3   7/17   7/31   8/14   8/28   9/11   9/25   10/9   10/23
        Technical Indicators
•   Indices or indicators that are used to identify
    price trends.
•   Examples: Moving Averages, RSI (Relative
    Strength Index), Stochastics
•   RSI – Index value from 0 to 100. Measures
    price strength (100 Up Market; 0 Down
    Market)
•   RSI – Identify markets that are overbought
    (RSI>80) or oversold (RSI<20).
       Mar 2001 KCBT Wheat Futures
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  6/1            7/1     8/1             9/1            10/1   11/1   12/1
                               RSI (Relative Strength
100                            Index)
 90         Overbought
 80
 70
 60
 50
 40
 30
 20
 10          Oversold
  0
      6/1         7/1    8/1             9/1            10/1   11/1   12/1
   Technical Indicator – Divergence
         from Price Behavior

          Bullish Divergence                   Bearish Divergence
 Prices                                         Prices

                                                                      New high in prices,
                        New low in prices,                            but indicator high is
                        but indicator low is                          lower.
                        higher.
Indicator                                      Indicator




  Prices make new lows, but                    Prices make new high, but
  indicator trending higher.                   indicator trending lower.
  Market losing momentum to the                Market losing momentum to the
  downside                                     upside
  Sign that prices will move higher            Sign that prices will move lower
      Mar 2001 KCBT Wheat Futures
350
                                            Bearish
340

330

320

310
            Bullish Divergence
300
   6/1      7/1            8/1             9/1             10/1       11/1       12/1
                                 RSI (Relative Strength Index)
100
 90                                              Bearish Divergence
 80                                                                      Bearish Divergence
 70
 60
 50
 40
 30
 20
 10                        Bullish
  0
      6/1   7/1            8/1             9/1             10/1       11/1       12/1
       Technical Analysis?
• What technical indicators can you use with
  confidence?
• Use multiple sources of analysis which are
  independent.
• Technical Analysis is not a perfect science.
• Know the limits of your analysis and make
  back-up decisions in case you are wrong.
• Charting Resources on the Internet:
  – MontanaMarketManager.org
  – TradingCharts.com
Putting it To a Test. Dec. 2010
KCBOT Futures
             Dec. 2010 KCBOT Prices

  6.4


  6.2


   6


  5.8


  5.6                                 Futures Close


  5.4


  5.2


   5
What Patterns Do you See?
             Dec. 2010 KCBOT Prices

 6.4
                                                      • Trends?
 6.2
                                                      • Support and
  6                                                     Resistance?
 5.8                                                  • Head and
                                                        Shoulders?
                                      Futures Close
 5.6


 5.4


 5.2


  5
  9/1/2009    10/1/2009   11/1/2009
Trends, Resistance, and Support
                        Dec. 2010 KCBOT Prices

6.4
                                  Support
6.2


 6


5.8


5.6        Resistance                            Futures Close


5.4


5.2
      Support
 5
      Head and Shoulders
        Dec. 2010 KCBOT Prices

6.4


6.2


 6


5.8


5.6                              Futures Close


5.4


5.2


 5
Head and Shoulders and Trading Volume
                    Dec. 2010 KCBOT Prices
 6.4
 6.2
   6
 5.8
 5.6
 5.4
 5.2
   5
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             Dec. 2010 KCBOT Trading Volume
6000
5000
4000
3000
                                  Trading Volume Evidence Weak
2000
1000
   0
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Your Professor’s $.02
Technical Analysis [Charting]
 • There are many services that will sell
   you their charting analysis
 • If they had the answers, why tell you?
 • The methods are justified in hindsight
 • The approach is highly Subjective

				
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