Technical Analysis. Technical Analysis. Schools of Thought. Discussion Points. Discussion Points. Schools of thought. Schools of thought

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1 The Academy of Financial Markets Schools of Thought Random Walk Theory Can t beat market Analysis adds nothing markets adjust quickly (efficient) & all info is already in the share price Price lies in future of its current drivers 1

2 Schools of Thought Future lies in past patterns will repeat All info to forecast is in share price Market movements will repeat Investors have same reaction to price changes TA & FA compliment one another FA what to buy TA when to buy of TA Forecasts future prices from past price movements Identification of trend & reversal of trend Price movements & human behaviour are repetitive Not all market participants have equal access to new info Use techniques to identify price movements 2

3 Dow Theory (Page 6 Stages in the market (Page 6 7) The Elliot Wave Theory (Page 7 Fibonacci & Channelling Gann Analysis (Page 9 Geometric design (Page 9 10) (Page 7 9) Identify Turning Points, Troughs, Peaks Highlight trend Eradicate noise (daily fluctuations) Price vs Volume indicators: (Page 6) Bullish Bearish Moderately Bullish Moderately Bearish Chart Types Line Chart Bar Chart Characteristics Charts/ MA s can be used to establish trends/ phases in price cycle: Bottom Upswing Peak Downswing 3

4 Time Frame Daily & Intraday charts forecast ST price movements Weekly & Monthly charts determine LT trends Combination - Levels Support Level during downward trend investors buy at Support level Resistance Level during upward trend investors sell at Resistance level If price penetrates Support or Resistance called Breakout Old resistance = support Old support = resistance Formations Head & Shoulders Forms after UPWARD trend Completion = trend reversal Double Tops Reversal pattern after UPWARD trend Peaks should be separated by about 1 month Low between peaks should decline by 10% Price or time filter Examples Page 13 Moving Ave. Identify trends Simple Moving Average (SMA) Price of share over specific period Shorter (fast) MA crosses longer (slow) MA from below BUY signal Shorter (fast) MA crosses longer (slow) MA from above SELL signal 4

5 EMA Exponential Moving Average (EMA) Weighted average of share price over specific period Decreasing weights to older observations React faster to changes in trends MACD Moving Average Convergence/ Divergence Subtract longer (slower) MA from shorter (faster) MA Result is line that oscillates above & below 0 called MACD Standard MACD = EMA 12 day EMA 26 day Positive & rising MACD 12 day EMA above 26 day BULLISH Negative & declining MACD 12 day EMA below 26 day BEARISH MACD cont. MACD Signals: Crossover a MACD vs trigger/signal line MACD moves above signal line - potential BUY signal MACD moves below signal line - potential SELL signal (signal line = 9 day EMA) Confirmed Signals Centre (zero) line Crossover a MACD vs central (zero) line MACD moves above zero (central) line - confirmed BUY signal MACD moves below zero (central) line - confirmed SELL signal Example Page Bollinger Bollinger Bands (Page 17 19) 3 3 Bands: Middle 20 day SMA Top 20 day SMA + (Std Dev x 2) Lower 20 day SMA (Std Dev x 2) Touches = Tags Gives price strength Potential Buy Signal W-Bottom Potential Sell Signal M-Top 5

6 Momentum Momentum measures rate-of-change of price indicator of change in trend direction Momentum precedes price Momentum hits peak before share price hits high or low Banded oscillators: Relative Strength Indicator & Stochastic Price Indicator. RSI Momentum Relative Strength Index Reading between 0 & 100 Upper band overbought (SELL signal) over 70 Lower band oversold (BUY signal) below 30 If RSI reading between 30 & 70 NO signal RSI = RS x RS RS = days up/ days down Example 2 - Page 25 SPI Momentum Stochastic Price Indicator Reading between 0 & 100 Upper band overbought (SELL signal) over 80 Lower band oversold (BUY signal) below 20 If SPI reading between 20 & 80 NO signal SPI = current close lowest x 100 highest lowest Example 3 - Page 27 OBV On Balance Volume Trends in volume LEAD trends in price Shows accumulation & distribution of shares Method Add volume when price increases Subtract volume when price decreases Changes in OBV precede price changes Rising OBV = money flowing into security (demand) Rising OBV & Price rising BULLISH Falling OBV & Price rising/ flat WARNING SIGNAL Direction NB Example 4 Page 29 6

7 Analyst bias Open to interpretation Too late Always another level Trader s remorse of TA Price lies in future of its drivers Quantitative evaluation of firm s financial condition FINANCIAL STATEMENTS: Balance Sheet Cash Flow Statement Statement of Changes in Equity Income Statement 7

8 - Risks Definition The probability that an event would take place that would result in a business suffering financial loss or closure Firms need to take risks to derive maximum value for shareholders Risk management reduces risk to acceptable levels - Risks Classification & Types of Risks EXTERNAL RISKS Regulated by law, rules and regulations of exchanges, FSB etc INTERNAL RISKS Managed by internal control systems MARKET RISKS Non-diversifiable/ systematic risks - Risks BUSINESS RISK Risk inherent to industry business is in Thank you! COMPANY SPECIFIC RISKS Diversifiable/ unsystematic risks FINANCIAL RISKS Risk when incurring debt/ leverage risk (risk of defaulting on interest or capital repayments) NON-FINANCIAL RISK Operational risk, Policy risk, Reputational risk Opportunities & Threats and Good luck! 8