Beyond the Beyond the FundamentalsFundamentals

Technical AnalysisTechnical Analysis

Technical Analysis vs. Technical Analysis vs. Fundamental AnalysisFundamental Analysis

Fundamental analysis focuses on Fundamental analysis focuses on economic/financial theory and economic/financial theory and various economic indicators to various economic indicators to explain market movementsexplain market movements Purchasing Power ParityPurchasing Power Parity Interest ParityInterest Parity Trade BalancesTrade Balances Balance of PaymentsBalance of Payments

Technical Analysis vs. Technical Analysis vs. Fundamental AnalysisFundamental Analysis

Technical analysis is not concerned with Technical analysis is not concerned with the the causes of market movements. of market movements. Instead, technical analysis focuses on Instead, technical analysis focuses on the the movements themselves. Is there . Is there information in past price movements information in past price movements that can be used to predict future that can be used to predict future movements?movements? Chart Analysis Chart Analysis Quantitative MethodsQuantitative Methods

Chart Analysis Chart Analysis

Chart analysis begins with a time Chart analysis begins with a time series plot of an asset’s priceseries plot of an asset’s price

Charts can be hourly, daily, weekly, Charts can be hourly, daily, weekly, etc.etc.

Higher frequency data will be more Higher frequency data will be more detailed, but noisier.detailed, but noisier.

Chart looks for patterns in the chart Chart looks for patterns in the chart to identify resistance (upper bounds) to identify resistance (upper bounds) and support levels (lower bounds)and support levels (lower bounds)

$/Euro: Weekly data over 3 years

$/Euro: Daily data over 6 months

$/Euro: Hourly data over 5 days

What’s this??

$/Euro: minute by minute over 6 hours

                                                                                                                                                                                    

A “breakout” indicates a new pattern forming

Connect two consecutive highs to get the upper channel

A parallel line through a recent low becomes the lower support

                                                                                                                                                                                    

Bullish channels tend to have upward breakouts

                                                                                                                                                

Find the trend by connecting at least two highs

Two lows complete the triangle“Breakout” occurs at the apex, usually with increasing volume

Ascending triangles usually have upward breakouts

                                                                                                                                                

Two lows identify the “lead in” trend

The “Run”: A breakout

from the lead in trend

The “Bump”: Increase in

trend by more than 50%

                                                                                                                                                                                    

Two lows identify the “lead in” trend

The left shoulder is the first high above the current trend

The head is the first advance past the left shoulder

The right shoulder is the first high following the reversal

The neckline connects the two shoulders and indicates lower support

What pattern do you see?What pattern do you see?

“Bump”“Run”

Fibonacci MethodsFibonacci Methods

Fibonacci, one of the greatest Fibonacci, one of the greatest mathematicians of all time mathematicians of all time discovered a sequence of numbers discovered a sequence of numbers which are now used across many which are now used across many disciplines. disciplines.

The Fibonacci SequenceThe Fibonacci Sequence

Suppose you begin with a pair of Suppose you begin with a pair of rabbits.rabbits. Rabbits take one month to mature (M)Rabbits take one month to mature (M) Only Mature rabbits can have Only Mature rabbits can have

offspring. Once mature, a pair offspring. Once mature, a pair offspring are born every monthoffspring are born every month

The rabbits never dieThe rabbits never die

1 Month

One Pair (Y)

Y = Young, M = Mature

Now

One Pair (M)

2 Months

Two Pair (M, Y)

3 Months

Three Pairs (M, M, Y)

4 Months

Five Pairs (M, M,Y,Y,M)

5 Months

Eight Pairs (M,M,M,Y,Y,Y,M,M)

6 Months

Thirteen Pairs (M,M,M,Y,Y,Y,M,M,M,Y,Y,M,M)

Can you find the Pattern?Can you find the Pattern?

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, … …

Each number in the Fibonacci sequence is the sum of the previous two

1+ 1 = 2

1 + 2 = 3

2 + 3 = 5 ….

The Golden NumberThe Golden Number

Suppose that we divide each number into the Suppose that we divide each number into the previous numberprevious number

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………

1/1 = 11/1 = 1 5/8 = .6255/8 = .625

1/2 = .5 1/2 = .5 8/13= .6158/13= .615

2/3 = .6672/3 = .667 13/21 = .61913/21 = .619

3/5 = .63/5 = .6 21/34 = .61721/34 = .617

The Golden NumberThe Golden Number

Suppose that we divide each number into the Suppose that we divide each number into the following numberfollowing number

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………

1/1 = 11/1 = 1 8/5 = 1.68/5 = 1.6

2/1 = 12/1 = 1 13/8 = 1.62513/8 = 1.625

3/2 = 1.53/2 = 1.5 21/13 = 1.61521/13 = 1.615

5/3 = 1.6675/3 = 1.667 34/21 = 1.61934/21 = 1.619

The ratios converge to 1.618 (PHI)The ratios converge to 1.618 (PHI)

The Golden Number (.618, The Golden Number (.618, 1.618)1.618)

Note that 1 + phi = PHINote that 1 + phi = PHI However, we also have that However, we also have that

1/phi = PHI1/phi = PHI .618 is the basis for Fibonacci .618 is the basis for Fibonacci

methodsmethods The important numbers are The important numbers are

.618.618 .382 ( = .618*.618).382 ( = .618*.618) .236 (= .618*.618*.618).236 (= .618*.618*.618)

Fibonacci Fibonacci ArcsArcs

Draw an initial trend line between two extreme points

Draw arcs that intersect the trend at 61.8%, 50%, and 38.2% of the high

The arcs anticipate future support/resistance levels

Fibonacci Fibonacci RaysRays

Draw an initial trend line between two extreme points

At the second extreme point, draw a vertical line

Draw rays that intersect at 61.8%, 50%, and 38.2%

Fibonacci Fibonacci RetracementRetracement

Once a reversal occurs, it tends to find support at Fibonacci levels!

Fibonacci Fibonacci timestimes

Large price swings tend to occur on “Fibonacci times”! (times could be in days, months, years, etc)

Elliott WavesElliott Waves

Elliot wave theory relies on cycles Elliot wave theory relies on cycles whithin cycleswhithin cycles Grand Super cycleGrand Super cycle Super cycleSuper cycle CycleCycle

Each cycle consists of 5 moves with the Each cycle consists of 5 moves with the trend (1,3,5 are impulse, 2,4 are trend (1,3,5 are impulse, 2,4 are corrective) and 3 that are against the corrective) and 3 that are against the trend. A “5-3” wavetrend. A “5-3” wave

Super CycleSuper Cycle

Impulse

Correction

Beginning of the next wave

Impulse (1)

Correction (2)

The Super Cycle comprises the first The Super Cycle comprises the first two movements of the Grand Super two movements of the Grand Super Cycle.Cycle.

The Super Cycle has an underlying The Super Cycle has an underlying cycle of its own!cycle of its own!

Note that the grand super cycle has two movements, the super cycle Note that the grand super cycle has two movements, the super cycle has 8 movements, the cycle has 34……Fibonacci numbers!!has 8 movements, the cycle has 34……Fibonacci numbers!!

Oscillating IndicatorsOscillating Indicators

Oscillating Indicators fluctuate Oscillating Indicators fluctuate between a maximum and a minimum between a maximum and a minimum and are used to predict highs as lowsand are used to predict highs as lows

RSI (Relative Strength RSI (Relative Strength Indicator)Indicator)

points "down" Total points Up"" Total1

100100RSI

If “Up Points” = 0, RSI = 0

If “Down Points” = 0, RSI = 100

RSI < 30 (Oversold)

RSI > 70 (Overbought)

RSI (Relative Strength RSI (Relative Strength Indicator)Indicator)

points "down" Total points Up"" Total1

100100RSI

Chart Interval: 15 minutes Period Length: 10 (150 minutes) Total “up” points = 7 Total “down” points = 11

89.38

1

100100

636.11

7

RSI

RSRSI

RS

Fast StochasticFast Stochastic

FS of Average Moving Period Y

Length Period X ,100*Low(X) - High(X)

Low(X)-Close(X)

Signal

FS

Period High: FS = 100

Period Low: FS = 0

Signal < 30 (Oversold)

Signal > 70 (Overbought)

Understanding the LingoUnderstanding the Lingo

Moving AveragesMoving Averages

Example: Consider the following monthly Example: Consider the following monthly

Inflation Statistics (Monthly % Changes)Inflation Statistics (Monthly % Changes)

MayMay June June JulyJuly Aug.Aug. Sept.Sept. OctOct..

Nov.Nov. Dec.Dec.

.6.6 .3.3 -.1-.1 .1.1 .2.2 .6.6 .2.2 .2.2

Understanding the LingoUnderstanding the Lingo

Moving AveragesMoving Averages

A moving average takes out the volatility by averaging A moving average takes out the volatility by averaging several observations. For example, a several observations. For example, a MA(3) would average would average the current observation with the previous 2 observations.the current observation with the previous 2 observations.

MAMA MayMay June June JulyJuly Aug.Aug. Sept.Sept. Oct.Oct. Nov.Nov. Dec.Dec.

11 .6.6 .3.3 -.1-.1 .1.1 .2.2 .6.6 .2.2 .2.2

22 .45.45 .1.1 00 .15.15 .4.4 .4.4 .2.2

3 .27 .10 .07 .3 .33 .33

44 .3.3 .17.17 .2.2 .275.275 .3.3

Moving Average Moving Average Convergence/Divergence Convergence/Divergence (MACD)(MACD)

The MACD indicator calculates the The MACD indicator calculates the difference between moving averages of difference between moving averages of two different lengths (usually, 12 two different lengths (usually, 12 periods and 26 periods)periods and 26 periods)

The signal is typically a 9 period moving The signal is typically a 9 period moving average of the differenceaverage of the difference

A divergence means that “something is A divergence means that “something is happening”happening”

Positive to Negative = Sell SignalPositive to Negative = Sell SignalNegative to Positive = Buy SignalNegative to Positive = Buy Signal

MACDMACDSuppose that the longer run moving average has a length equal to the number of observations – the series average

MA

Time

MA(N)

MA(10)

- To + : Buy point

+ To - : Sell point

- To + : Buy point

Punch linePunch line

Technical methods are useful for Technical methods are useful for short run predictionshort run prediction

Don’t lose sight of the Don’t lose sight of the fundamentals!!!fundamentals!!!