Investments: Analysis and BehaviorChapter 13- Technical Analysis2008 McGraw-Hill/Irwin13-2Learning ObjectivesnLearn the graphing tools of technical analysis.nIdentify stock price patterns.nKnow how trading volume relates to price patterns.nLearn technical indicators for measuring market activity.nUnderstand how investor sentiment is measured and used.13-3nChapter 6 argues that markets are efficient.nChapter 7 illustrates EMH anomalies.nChapter 8 argues that if investors are not always rational, then markets may not be fully efficient.If markets are nearly efficient, what tools may be useful for investors to make money? These tools are detailed in Technical Analysis.Inefficient Markets13-4Supply and DemandnFundamental Analysis: stocks prices are related to the value of the business.nTechnical Analysis: stock prices are the result of supply and demand forces for the stock. Priced more like a commodity.Technicians try to understand and measure the changing supply and demand. Market Technicians Association (www.mta.org)13-5Plotting the Market measuring trendsPrice charts: Resistance lines and Support lines Channels and Breakouts 13-6moving averages13-7Dow Theory Developed by William Hamilton from 1902 to 1929 New primary market trends are confirmed between DJTA and DJIA. Secondary trends Tertiary trends13-813-9Charting Price PatternsnHead and Shoulders13-10Continuation patternsReversal patterns13-1113-12Market CyclesnEconomists talk about the business cycle Technicians look for market cycle Kondratieff, or K-waves 60-year cycle 40-week cycle 80-week cycle13-13Volume and PriceVolume is used to confirm the strength of a trend. Increasing volume supports increasing price trend.Divergence Source: MSN Money13-14nSelling and buying pressure measuresnMoney Flow Dollar value of trades at an uptick less value of trades at a downticknUp/Down Ratio Dollar value of trades at an uptick divided by the value of trades at a downtickMoney Flows-Top GainersCompanyExchLast Price% Chg.Money FlowUptick volumeDowntick volumeRatioBlock TradesUptick volumeDowntick volumeRatio CitigroupNYSE46.120.12126.27182.5156.233.25116.01136.4120.46.69SPDRAMEX126.680.26108.21645.32537.11.2117.69475.88358.191.33MerLynNYSE72.70.660.7118.557.812.0564.8881.7616.884.84HewlettPkNYSE31.650.3158.4684.926.433.2157.5764.897.328.86AmExpressNYSE52.370.9355.0487.3432.32.754.965.4310.536.2113-15TECHNICAL INDICATORSTECHNICAL INDICATORSnCondition of the Market: Breadthhow many firms are participating in the rally.nAdvances and declinesnAdvance/decline ratioOverbought and oversoldTRIN ratio1.85 oversold13-16Market Breadth Measures Data source: http:/finance.yahoo.com/advances (January 24, 2006).NYSEAMEXNASDAQOTC BBAdvancing Issues2,2285832,000761 Declining Issues1,0734081,018785 Unchanged Issues13589162432 Total Issues3,4361,0803,1801,978New Highs24862189161 New Lows362034155Up Volume1,585,999,550243,224,6121,188,539,914505,671,486 Down Volume875,383,650106,015,090805,549,381554,470,602 Unchanged Volume41,660,37031,142,10072,784,810794,041,622 Total Volume2,503,043,570380,381,8022,066,874,1051,854,183,71013-17Momentum IndicatorsRate of Change (ROC): shows the amount prices have changed over a given time period.Moving Average Convergence/Divergence (MACD): Calculated by subtracting the value of a 26-period exponential moving average from a 12-period exponential moving average. Then take a 9-day exponential moving average of the MACD. The MACD trading rule is to sell when it falls below its 9-day signal line and to buy when the MACD rises above the 9-day signal line. 13-18Sentiment IndicatorsSentiment: The mood of investors drive markets.Investor actionsnOdd lot trades (contrary indicator)nMutual fund flownBroker account credit and debit balancesnShort interestnPut/call ratioSurveys13-19AAII Investor Sentiment Survey Measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market in the short term: weekly. Consumer Confidence Survey The survey of 5,000 households is conducted for the Conference Board by NFO WorldGroup: monthly. University of Michigan Consumer Sentiment The Index of Consumer Sentiment (ICS) is based upon consumer responses to each of five survey questions on spending plans. ABC News/Money Magazine Consumer Comfort Index The index is based on ratings of the economy, buying climate, and personal finances: rolling 4-week sample of 1,000 adults. Investors Intelligence Newsletter reviews other investment newsletters and reports the percentage that is bullish on a weekly basis. (www.investorsintelligence.com) Merrill Lynch Sell Side Indicator This indicator is based on a survey of Wall Street Strategist asset allocation recommendations: monthly. Robert Shillers Stock Market Confidence Indices Yale Professor Rober Shiller compiles four different indices based upon surveys of individual and institutional investors: