Technical Price AnalysisTechnical Price AnalysisTechnical Price AnalysisTechnical Price Analysis
The analysis of historical prices The analysis of historical prices patterns using charts, diagrams, patterns using charts, diagrams, mathematical equations, etc.mathematical equations, etc.
This approach emphasizes This approach emphasizes howhow prices got to where they are.prices got to where they are.
We’ll only cover few methods.We’ll only cover few methods.
Technical Price AnalysisTechnical Price AnalysisTechnical Price AnalysisTechnical Price Analysis
Two views:Two views:
Prices reflect all available, relevant Prices reflect all available, relevant fundamental information. Random fundamental information. Random prices tomorrow.prices tomorrow.
Price movements are not random. Price movements are not random. Recognizable price patterns or Recognizable price patterns or formations are often repeated.formations are often repeated.
Benefits of ChartingBenefits of ChartingBenefits of ChartingBenefits of Charting
Provide a price history.Provide a price history.
Help identify important fundamental Help identify important fundamental factors; early warning of changes in factors; early warning of changes in process.process.
Help identify repetitive price Help identify repetitive price patterns. Will they repeat in future?patterns. Will they repeat in future?
Benefits of ChartingBenefits of ChartingBenefits of ChartingBenefits of Charting
Can improve the timing of Can improve the timing of purchases or sales.purchases or sales.
Can help one to be more Can help one to be more mechanical and objective (less mechanical and objective (less emotional)emotional)
But, many methods! Which work?But, many methods! Which work?
Tools of Technical AnalysisTools of Technical AnalysisTools of Technical AnalysisTools of Technical Analysis
ChartsCharts
Trading InformationTrading Information
Volume and Open InterestVolume and Open Interest
Mathematical or Statistical Mathematical or Statistical Formulas or CalculationsFormulas or Calculations
Moving Averages and Moving Averages and OscillatorsOscillators
ChartingChartingChartingCharting
PP HighHigh
CloseClose
LowLow
TimeTime
Forecasting Price ChangesForecasting Price ChangesForecasting Price ChangesForecasting Price Changes
Trend = general directionTrend = general direction
TypesTypes
Rising = “Bullish”Rising = “Bullish”
Falling = “Bearish”Falling = “Bearish”
Change = “Reversal”Change = “Reversal”
Forecasting Price ChangesForecasting Price ChangesForecasting Price ChangesForecasting Price Changes
Trend LengthsTrend Lengths
Minor = 1 month or lessMinor = 1 month or less
Intermediate = 1 - 6 monthsIntermediate = 1 - 6 months
Major = 6 months or moreMajor = 6 months or more
Magnitude = extent of moveMagnitude = extent of move
Trend LinesTrend LinesTrend LinesTrend Lines
UPUPShows trend of increasing pricesShows trend of increasing prices
Drawn by connecting ascending Drawn by connecting ascending extreme lowsextreme lows
DOWNDOWNShows trend of decreasing pricesShows trend of decreasing prices
Drawn by connecting descending Drawn by connecting descending extreme highsextreme highs
Channel Lines (Up &Down)Channel Lines (Up &Down)Channel Lines (Up &Down)Channel Lines (Up &Down)
Top line is parallel to bottom lineTop line is parallel to bottom line
Drawn by connecting ascending or Drawn by connecting ascending or descending extreme highs and descending extreme highs and lowslows
Useful in showing likely trading Useful in showing likely trading ranges and possible deviations ranges and possible deviations from up or down trendsfrom up or down trends
Support LineSupport LineSupport LineSupport Line
An apparent lower bound on prices An apparent lower bound on prices which market prices seem to not be which market prices seem to not be able to fall below (due to increased able to fall below (due to increased interest in buying at that price interest in buying at that price level.)level.)
Is a flat line drawn by connecting Is a flat line drawn by connecting “equal” extreme lows.“equal” extreme lows.
Support LineSupport LineSupport LineSupport Line
The greater the number of extreme The greater the number of extreme equal lows, the greater the belief equal lows, the greater the belief that it is a genuine area of support.that it is a genuine area of support.
A close (or two) below the support A close (or two) below the support line indicates that there is no longer line indicates that there is no longer any support at that price level. any support at that price level.
Resistance LineResistance LineResistance LineResistance Line
An apparent upper bound on prices An apparent upper bound on prices which market prices seem to not be which market prices seem to not be able to rise above (due to increased able to rise above (due to increased interest in selling at that price level)interest in selling at that price level)
Is a flat line drawn by connecting Is a flat line drawn by connecting “equal” extreme highs“equal” extreme highs
Resistance LineResistance LineResistance LineResistance Line
The greater the number of extreme The greater the number of extreme equal highs, the greater the belief equal highs, the greater the belief that it is a genuine area of that it is a genuine area of resistance.resistance.
A close (or two) above the A close (or two) above the resistance line indicates that there resistance line indicates that there is no longer any resistance at that is no longer any resistance at that price level.price level.
Resistance LineResistance LineResistance LineResistance Line
An excellent spot for a short An excellent spot for a short position. position.
ReversalsReversalsReversalsReversals
Signal change in direction or trendSignal change in direction or trend
Observable with a single day of Observable with a single day of trading (if there was a previous trend)trading (if there was a previous trend)
Bullish (bearish) reversals indicated Bullish (bearish) reversals indicated that prices are likely to stop that prices are likely to stop decreasing (increasing) & start decreasing (increasing) & start increasing (decreasing)increasing (decreasing)
Key ReversalsKey ReversalsKey ReversalsKey Reversals
BullishBullishPrevious Previous
DowntrendDowntrendHigher HighHigher HighLower LowLower LowHigher CloseHigher Close
Key ReversalsKey ReversalsKey ReversalsKey Reversals
Previous Previous UptrendUptrend
Higher HighHigher HighLower LowLower LowLower CloseLower Close
BearishBearish
Hook ReversalsHook ReversalsHook ReversalsHook Reversals
BullishBullish Previous Previous DowntrendDowntrend
Lower LowLower LowHigher CloseHigher Close
Hook ReversalsHook ReversalsHook ReversalsHook Reversals
Previous UptrendPrevious UptrendHigher HighHigher HighLower CloseLower Close
BearishBearish
Head and ShouldersHead and ShouldersHead and ShouldersHead and Shoulders
A reversal formation in a previous A reversal formation in a previous uptrending market that signals a top uptrending market that signals a top has been reachedhas been reached
Left Shoulder = 1st set of peak pricesLeft Shoulder = 1st set of peak pricesHead = Higher set of peak pricesHead = Higher set of peak pricesRight Shoulder = 3rd set of peak Right Shoulder = 3rd set of peak
prices prices
Head and ShouldersHead and ShouldersHead and ShouldersHead and Shoulders
Neckline =Line thru lows between Neckline =Line thru lows between head and l&r shoulders. Good head and l&r shoulders. Good necklines are fairly flat.necklines are fairly flat.
A close below neckline confirms the A close below neckline confirms the formation.formation.
Belief that prices will decrease below Belief that prices will decrease below neckline by an amt. = distance from neckline by an amt. = distance from top of head to the neckline.top of head to the neckline.
Double TopDouble TopDouble TopDouble Top
Like Head and Shoulders w/o headLike Head and Shoulders w/o headLow between two peaks = valley or Low between two peaks = valley or
fulcrumfulcrumClose below fulcrum confirms formation Close below fulcrum confirms formation
and indicates prices will continue to and indicates prices will continue to decline by an amt. at least equal to the decline by an amt. at least equal to the distance from top of peaks to fulcrumdistance from top of peaks to fulcrum
Also holds for multiple topsAlso holds for multiple tops
GapsGapsGapsGaps
A hole or discontinuous part on a A hole or discontinuous part on a bar chart in looking at the trading bar chart in looking at the trading range for two consecutive days (i.e. range for two consecutive days (i.e. contracts traded at price ranges that contracts traded at price ranges that do not overlap).do not overlap).
Today’s high is below yesterday’s Today’s high is below yesterday’s low or today’s low is above low or today’s low is above yesterday’s high.yesterday’s high.
GapsGapsGapsGaps
GAPGAP
Moving AveragesMoving AveragesMoving AveragesMoving Averages
Calculate the average price in the Calculate the average price in the last several days (e.g. 3,5,7) and plot last several days (e.g. 3,5,7) and plot it.it.
Calculate the average price for a Calculate the average price for a longer price series and plot it.longer price series and plot it.
Moving AveragesMoving AveragesMoving AveragesMoving Averages
Where the short series average Where the short series average crosses the longer average, that is a crosses the longer average, that is a
buy signal if prices have been buy signal if prices have been moving up recently,moving up recently,
sell signal if they have been sell signal if they have been moving down.moving down.
Moving AveragesMoving AveragesMoving AveragesMoving Averages
The shorter the short series, the The shorter the short series, the more frequent buy or sell signals.more frequent buy or sell signals.
What is the right length of series to What is the right length of series to use?use?
Differs by commodity?Differs by commodity?
Seems to keep changing!Seems to keep changing!
Relative Strength IndexRelative Strength IndexRelative Strength IndexRelative Strength Index
An overbought or oversold indicatorAn overbought or oversold indicator
Calculate the sum of the positive Calculate the sum of the positive price changes and the sum of the price changes and the sum of the negative price changes for the negative price changes for the number of days you selectnumber of days you select
Relative Strength IndexRelative Strength IndexRelative Strength IndexRelative Strength Index
If 1.5 (prices up)
RSI = 100 [RS/(1 + RS)] then RSI = 60RSI = 100 [RS/(1 + RS)] then RSI = 60
If RSI > 70; overbought (SELL)If RSI > 70; overbought (SELL)If RSI < 30; oversold (BUY)If RSI < 30; oversold (BUY)
Sum price increasesRS = _________________
Sum price decreases
Technical analysisTechnical analysisTechnical analysisTechnical analysis
If technical signal is linked with high If technical signal is linked with high trading volume, signal is often trading volume, signal is often considered strongerconsidered stronger
Advanced traders test historical fits, Advanced traders test historical fits, and use the one and use the one or combinations or combinations that work best recently in each that work best recently in each marketmarket
Reasons for Nonrandom Reasons for Nonrandom Futures Price BehaviorFutures Price BehaviorReasons for Nonrandom Reasons for Nonrandom Futures Price BehaviorFutures Price Behavior
Risk premium (return for taking Risk premium (return for taking risk) is required by speculators to risk) is required by speculators to encourage them to take encourage them to take positions.positions.
If hedges are primarily short, then If hedges are primarily short, then current futures should be below current futures should be below later expiration price.later expiration price.
Overreaction HypothesisOverreaction HypothesisOverreaction HypothesisOverreaction Hypothesis
Traders overreact to new market Traders overreact to new market information; if so, trend following information; if so, trend following techniques will work for a while. If techniques will work for a while. If enough traders are trend followers, enough traders are trend followers, may be self fulfilling forecastmay be self fulfilling forecast
Overreaction HypothesisOverreaction HypothesisOverreaction HypothesisOverreaction Hypothesis
Traders may not be able to Traders may not be able to accurately evaluate impacts of new accurately evaluate impacts of new information, and perceive information, and perceive substantial risk in taking a position substantial risk in taking a position contrary to present trends, so price contrary to present trends, so price moves (overreactions) will persist moves (overreactions) will persist longer.longer.
Success?Success?Success?Success?
Will the return be better than other Will the return be better than other investments, adjusted for risk? investments, adjusted for risk?
Expected futures priceExpected futures price
minusminus current futures price current futures price
minus transaction costs minus transaction costs
= Profit = Profit
but how risky vs. alternatives?but how risky vs. alternatives?
Success?Success?Success?Success?
Prevailing wisdom suggests:Prevailing wisdom suggests:80+ percent of small speculators 80+ percent of small speculators
lose moneylose moneyBut new sheep come to be shorn!But new sheep come to be shorn!10% (professionals) make money10% (professionals) make moneyCommodity trading funds--highly Commodity trading funds--highly
variable resultsvariable results
Assignment 8Assignment 8Assignment 8Assignment 8
Where are futures charts found on Where are futures charts found on the web? List several??the web? List several??
Report on best technical analysis Report on best technical analysis site.site.Precise addressPrecise addressHow it’s usefulHow it’s useful
Assignment 9Assignment 9 Assignment 9Assignment 9
Find one or more commodity forecast Find one or more commodity forecast newsletter (or similar source).newsletter (or similar source).
Report briefly:Report briefly:Where to get forecast(s)?Where to get forecast(s)?Key factors they consider in their Key factors they consider in their
price forecast process?price forecast process?Does it look useful? At what cost?Does it look useful? At what cost?