Practical Investment Management by Robert.A.Strong slides ch09

8/14/2019 Practical Investment Management by Robert.A.Strong slides ch09

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CHAPTER NINE

Practical Investment Management

Robert A. Strong

TECHNICAL ANALYSIS


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South-Western / Thomson Learning 2004 9 - 2

Outline

Charting The Underlying Logic

Types of Charts

Other Chart Annotations

Technical Indicators Indicators with Economic Justification

Indicators of the Witchcraft Variety


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Outline

Old Puzzles and New Developments Fibonacci Numbers

Dow Theory

Kondratev Wave Theory

Chaos Theory

Neural Networks

The Future of Technical Analysis


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Charting: The Underlying Logic

The technical analyst believesthat charts can be used to

predict changes in supply and

demand and investor behavior.

Market participants seldom wait

for things to completely unfold.

They try to anticipate events

rather than merely react tothem.


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Charting: Types of Charts

The technical analyst uses many types ofcharts:

line charts

bar charts point and figure charts

candlestick charts


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Linear Scale Line Chart

Insert Figure 9-1 here.


7/38South-Western / Thomson Learning 2004 9 - 7

Logarithmic Y-Axis Line Chart




Bar Chart




Point and Figure Chart




Candlestick Chart



Charting: Other Chart Annotations

support level

resistance level

congestion area

breakout

Chartists believe investors remember missedopportunities and look for them to return.



Charting: Other Chart Annotations




Technical Indicators

These statistics, either calculated or directly

observed, are alleged to have a relationshipwith the future direction of the overall stock

market or with an individual security.

Indicators with economic justification arebased on economic activities that are

measurable and observable.

Indicators of the witchcraft varietyhave no

logical connections between the

measurements and what the

measurements purport to show.



Indicators with Economic Justification

The higher the short interestfigure, thelarger is the potential demand for the

shares.


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Short Interest

Insert Table 9-1 here.


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Increased margin buyinghas historicallybeen associated with rising markets.


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Margin Loans


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Cash held by mutual funds representspotential demand for stock.


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Mutual Fund Cash Position

Insert Figure 9-8 (Mutual Fund

Cash Position Rule) here.


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Mutual Fund Cash Position


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When the confidence indexgets closer to1.0, investors are more likely to be bullish

about the economy, and therefore about

corporate earnings.


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Confidence Index



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An advance-decline line is a graphicalrepresentation of the net advances over a

period of time.


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Advance-Decline Line

Insert Figure 9-11 (Market Breadth)

here.


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A high relative strength ratio, such as ahigh relative PE, means that investors are

willing to pay more for the past earnings of

a company than average.


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Relative Strength Ratio

Insert Table 9-3 here.


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Advocates ofmoving averages in stockselection believe that changes in the slope

of the line are important.

Market indicators can help present data ina more intuitive way and may suggest

areas for further investigation. However,

they cannot always predict the future

movements of a stock or of the overallmarket.


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The super bowl indicatorstates that thestock market will advance the following

year if the super bowl football game is won

by a team from the original National

Football League.


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The Super Bowl Indicator


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Increased sunspot activityevery elevenyears leads to better weather for an

improved harvest, leading in turn to a

stronger economy, and finally to higher

stock prices.

Hemline indicator: As shorter dresses for

women become the fashion, the market

advances, and vice versa.


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Old Puzzles and New Developments

Fibonacci numbers occur frequently and

inexplicably in nature.

1.618, the golden mean of the numbers,

is used to calculate the Fibonacci ratios.

Many Fibonacci advocates in the investment

business use the first two ratios, 0.382 and

0.618, to compute the retracement

levels of a previous move.

Fibonacci Numbers

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,

233, ...


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Dow Theory

The Dow theory holds that there are three

components in the movement of stock

prices:

The primary trend is the long-term direction ofthe market and is the most important.

The secondary trend refers to a temporary

reversal in the primary trend.

Daily fluctuations in the stock price aremeaningless and contain no useful information.



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Insert Figure 9-12 (The Dow Theory) here.


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The Kondratev wave theorystates there is a50-60 year business cycle.

The Chaos theorysees systematic behavior

amidst apparent randomness. A neural networkis a trading system in which

a forecasting model is trained to find a desired

output from past trading data.


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Insert Figure 9-13 (Investment-

Style Topography) here.


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Technical analysis has persisted for morethan 100 years, and it is not likely to

disappear from the investment scene

anytime soon.

Improved quantitative methods coupled

with improved behavioral research will

continue to generate ideas for analysts to

test.


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Review

Charting The Underlying Logic

Types of Charts

Other Chart Annotations

Technical Indicators Indicators with Economic Justification



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Review

Old Puzzles and New Developments Fibonacci Numbers

Dow Theory

Kondratev Wave Theory

Chaos Theory

Neural Networks


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Practical Investment Management by Robert.A.Strong slides ch09

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