Transcript Beyond the Fundamentals

Beyond the Fundamentals
Technical Analysis
Technical Analysis vs.
Fundamental Analysis

Fundamental analysis focuses on
economic/financial theory and various
economic indicators to explain market
movements
Purchasing Power Parity
 Interest Parity
 Trade Balances
 Balance of Payments

Technical Analysis vs.
Fundamental Analysis

Technical analysis is not concerned with the
causes of market movements. Instead,
technical analysis focuses on the movements
themselves. Is there information in past price
movements that can be used to predict future
movements?


Chart Analysis
Quantitative Methods
Chart Analysis
Chart analysis begins with a time series
plot of an asset’s price
 Charts can be hourly, daily, weekly, etc.
 Higher frequency data will be more
detailed, but noisier.
 Chart looks for patterns in the chart to
identify resistance (upper 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
Connect two
consecutive highs to
get the upper
channel
A parallel line through a recent low
becomes the lower support
A “breakout” indicates a new pattern forming
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
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 head is the first advance past
the left shoulder
The right shoulder is the first
high following the reversal
The left shoulder is the first high
above the current trend
The neckline connects the two shoulders
and indicates lower support
Two lows identify the “lead in”
trend
What pattern do you see?
“Run”
“Bump”
Fibonacci Methods

Fibonacci, one of the greatest
mathematicians of all time discovered a
sequence of numbers which are now
used across many disciplines.
The Fibonacci Sequence

Suppose you begin with a pair of
rabbits.
Rabbits take one month to mature (M)
 Only Mature rabbits can have offspring.
Once mature, a pair offspring are born
every month
 The rabbits never die

Y = Young, M = Mature
Now
1 Month
2 Months
One Pair
(Y)
One Pair
(M)
Two Pair
(M, Y)
4 Months
Five Pairs
(M, M,Y,Y,M)
5 Months
Eight Pairs
(M,M,M,Y,Y,Y,M,M)
3 Months
Three Pairs
(M, M, Y)
6 Months
Thirteen Pairs
(M,M,M,Y,Y,Y,M,M,M,Y,Y,M,M)
Can you find the Pattern?

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 Number

Suppose that we divide each number into the previous
number
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………
1/1
1/2
2/3
3/5
=
=
=
=
1
.5
.667
.6
5/8 = .625
8/13= .615
13/21 = .619
21/34 = .617
The Golden Number

Suppose that we divide each number into the following
number
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………
1/1
2/1
3/2
5/3
=
=
=
=
1
1
1.5
1.667
8/5 = 1.6
13/8 = 1.625
21/13 = 1.615
34/21 = 1.619
The ratios converge to 1.618 (PHI)
The Golden Number (.618, 1.618)
Note that 1 + phi = PHI
 However, we also have that

1/phi = PHI
.618 is the basis for Fibonacci methods
 The important numbers are

.618
 .382 ( = .618*.618)
 .236 (= .618*.618*.618)

Fibonacci
Arcs
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
Rays
Draw an initial trend line between two
extreme points
Draw rays that
intersect at 61.8%,
50%, and 38.2%
At the second extreme point, draw a vertical
line
Fibonacci
Retracement
Once a reversal occurs, it
tends to find support at
Fibonacci levels!
Fibonacci
times
Large price swings tend to
occur on “Fibonacci times”!
(times could be in days,
months, years, etc)
Elliott Waves

Elliot wave theory relies on cycles whithin
cycles

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Grand Super cycle
Super cycle
Cycle
Each cycle consists of 5 moves with the trend
(1,3,5 are impulse, 2,4 are corrective) and 3
that are against the trend. A “5-3” wave
Super Cycle
Beginning of the next
wave
Impulse
Correction
The Super Cycle comprises the first two
movements of the Grand Super Cycle.
Impulse (1)
Correction (2)
The Super Cycle has an underlying cycle
of its own!
Note that the grand super cycle has two movements, the super cycle
has 8 movements, the cycle has 34……Fibonacci numbers!!
Oscillating Indicators

Oscillating Indicators fluctuate between
a maximum and a minimum and are
used to predict highs as lows
RSI (Relative Strength Indicator)


RSI  100  

1 

100
Total "Up" points
Total "down" points
If “Up Points” = 0, RSI = 0
If “Down Points” = 0, RSI = 100
RSI < 30 (Oversold)
RSI > 70 (Overbought)






RSI (Relative Strength Indicator)

RSI  100  
1 

100
Total "Up" points
Total "down" points
Chart Interval: 15 minutes
Period Length: 10 (150 minutes)
Total “up” points = 7
Total “down” points = 11




7
RS     .636
 11 
 100 
RSI  100  

1  RS 
RSI  38.89
Fast Stochastic
 Close(X) - Low(X) 
FS  
 *100, X  Period Length
 High(X) - Low(X) 
Signal  Y Period Moving Average of FS
Period High: FS = 100
Period Low: FS = 0
Signal < 30 (Oversold)
Signal > 70 (Overbought)
Understanding the Lingo

Moving Averages
Example: Consider the following monthly
Inflation Statistics (Monthly % Changes)
May
.6
June July
.3
-.1
Aug. Sept. Oct. Nov. Dec.
.1
.2
.6
.2
.2
Understanding the Lingo

Moving Averages
A moving average takes out the volatility by averaging several
observations. For example, a MA(3) would average the current
observation with the previous 2 observations.
MA
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
1
.6
.3
-.1
.1
.2
.6
.2
.2
.45
.1
.27
0
.10
.3
.15
.07
.17
.4
.3
.2
.4
.33
.275
.2
.33
.3
2
3
4
Moving Average
Convergence/Divergence (MACD)
The MACD indicator calculates the difference
between moving averages of two different
lengths (usually, 12 periods and 26 periods)
 The signal is typically a 9 period moving
average of the difference
 A divergence means that “something is
happening”
Positive to Negative = Sell Signal
Negative to Positive = Buy Signal

MACD
Suppose that the longer run moving
average has a length equal to the
number of observations – the series
average
MA
MA(10)
MA(N)
Time
- To + :
Buy point
+ To - :
Sell point
- To + :
Buy point
Punch line
Technical methods are useful for short
run prediction
 Don’t lose sight of the fundamentals!!!
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