technical analysis explained - mta.org · pdf file1. prices are determined by psychology,...

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Technical Analysis Explained

Martin J. Pring

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1. Prices are determined by psychology, people’s attitude to the emerging fundamentals not the fundamentals themselves.

2. Keep things simple and apply common sense at all times.

3. Only use approaches that make sense to you.

Three Points to Take Home.

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Real Earnings are not Correlated to Stock Prices (1870-2013)

Inflation Adjusted Equities

Shiller Real Earnings (10-year MA)

CPI Adjusted S&P Composite

Shiller P/E

Deflated US Stock Prices versus Shiller P/E Ratio1900-2013

??

Deflated US Stock Prices

Definition of Technical Analysis:

The art of identifying a price trend reversal at a relatively early stage and riding on that trend until….

….the weight of the evidence

shows or proves that the trend has reversed.

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In technical analysis we are dealing in probabilities, never certainties.

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The hopes and fears of all market participants are reflected in one thing ….the price !!

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Technical analysis assumes that prices move in trends.

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Trends have a tendency to perpetuate because...

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Prices in any freely traded market are determined by the attitude of all market participants to the underlying fundamentals.

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“A trend is a trend is a trend.”

Always assume the prevailing trend is in existence.

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There is no known technique for determining the duration and exact magnitude of a price move. We can only recognize a change in direction.

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It doesn’t matter what time frame you are following...

…the principles of technical analysis remain constant.

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The only difference is…

…the longer the time frame, the greater the significance of any given trend reversal.

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It doesn’t matter what security you are following...

…the principles of technical analysis remain constant.

If human nature ever changes technical analysis will die!!

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Trends

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What is a trend?

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Primary trend 9 months to 2 years

Short-term trend 2 to 6 weeks

Intermediate trend 6 weeks to 9 months

Market Cycle Model

Source: Yelton Fiscal

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3-4-years

Short-term trend 2-6-weeks

Now Becomes….

Market Cycle Model

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Short-term trend 4-12 hours

Intermediate trend 4-12 days

Primary trend 2-6 weeks

Intraday Market Cycle Model

Psychology and Momentum

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Keycorp

Earnings up

Earnings up

Earnings

Keycorp

Price down

Earnings up

Earnings

Keycorp

Price down

Earnings up

Keycorp

Ebay

Ebay Earnings

Price sideways to down

Earnings Up

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Ebay

S&P Composite (1/13 Price Oscillator)

S&P Composite 13-week moving average.

Calculating a Price Oscillator

Price oscillator appears on the next chart.

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Bullish Advisors 1/13 Price Oscillator*

S&P Composite (1/13 Price Oscillator)

* Source Investors Intelligence.com

Stock Sentiment vs Stock Momentum

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S&P momentum

Bullish advisors momentum

Stock Sentiment vs Stock Momentum

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Govt Bond Prices)

Bond Bulls (10-week MA)*

14-week RSI (10-week MA)

Bond Sentiment vs Bond Momentum

*Source Market Vane www.pring.com

Primary bear market lasts 1 to 2 years

Primary bear

Primary bull market lasts 1 to 2 years

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Oversold in a bull market . . .

. . . means that the price will very likely rally.


Overbought in a bear market . . .

. . . probably means the top of the rally.


Followed by a trading range

Overbought in a bull market


Followed by a trading range

Oversold in a bear market


Doesn’t necessarily result in much of a rally

Oversold in a bear market


Goldman Sachs Commodity Index Bull trend

Bear trend 30-day ROC

Bear trend Extreme overbought is a bull market characteristic


Goldman Sachs Commodity Index


30-day ROC

Extreme overbought is a bull market characteristic



Psychology and One and Two Bar Price Patterns

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Outside bars

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Encompasses trading range of previous bar and then some!!

We want the close to be in the lower end of the trading range.

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Outside bar

Encompasses trading range of previous bar and then some!!

Close should be in the upper part of the range.

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Measuring the Significance of Outside Bars

1. The wider the bar and the wider the difference between the open and close the better.

2. The sharper the preceding rally (reaction for a down reversal) the better.

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Bank of India Outside bar

Bank of India Daily

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Two Bar Reversals

Sharp rally

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Closes near the high

First bar opens near the low.

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Second bar opens near the high

Closes near the low

Resistance zone The lower the resistance zone the better.

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CRB Composite Two bar reversal


Look at Different Time Frames

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December 2006 British Pound IMM

10-minute bar

False breakout


December 2006 British Pound IMM

Hourly bar

Two bar reversal signals false breakout


December 2006 Dow

30-minute bar

Not much of a reversal signal.


December 2006 Dow

Hourly bar

Strong two bar reversal


December Australian Dollar 2006

10-minute bar

No reversal signals here!!



Hourly bar

Two bar reversal

Instant confirmation



S&P ETF (SPY) Two bar reversal

Outside bar

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Outside bar

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• Strong economy

• Preceded by rising short-term interest rates.

• Rotation already moved to earnings driven sectors. RS momentum of leaders rolling over. • Market breadth leads the way down.

• Net new highs diverge negatively

Partial Checklist for Identifying a Stock Market Peak

• Long-term momentum peaking.

• Confirmed by trendline breaks and negative 12-month MA crossovers.

• Bullish sentiment. Question is no longer if, but when and by how much is the market going higher?

Partial Checklist for Identifying a Stock Market Peak

S&P versus the Economy


S&P versus Bond Yield Momentum


Inflation/Deflation Ratio)

KST

Sector Momentum Position August 31 2013

Green highlights show when KST is rising.

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World Stocks versus Long-term Momentum

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S&P versus the Economy


15/16 and 6/6

The End

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technical analysis explained - mta.org · pdf file1. prices are determined by psychology,...

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