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Technical Analysis
Technical Analysis
Charting
An individual stock's price reflects everything that is known about the security
The First phase is made up of aggressive buying by informed investors in anticipation of economic recovery and
long-term growth.
The Second phase is characterized by increasing corporate earnings and improved economic conditions
The Third phase is characterized by record corporate earnings and peak economic conditions
Ex: The Industrials and Transports must confirm each other in order for a valid change of trend to occur.
2. Bounce
3. Pullback
1. Market low
2. Bounce
1. Market low
3. Pullback
1. Market high
3. Bounce
2. Pullback
4. Break down
1. Market high
2. Pullback
4. Break down
Source: equis.com
Morning star
Hammer
Piercing line
Hanging Man
Evening star
Shooting star
Voo-doo investing
Sentiment Indicators
Trin
Trin = Vol(declining)/Vol(advancing)][Number(declining)/Number(advancing)]
If 1 market is bearish (reported in the Wall Street Journal)
Odd-lot ratio
odd-lot-ratio = odd-lot buys/odd-lot sales
Odd-lot traders are believed to miss key market turning points; hence when they buy it is likely that the bull market has already
missed its course.
A ratio > 1 is a bearish signal. (reported in the Wall-Street Journal)
Put/Call ratio
PCR= outstanding put options/outstanding call options
A ratio over one signals a bearish market
Market breadth
It measures the extent to which movements in the market index is representative of
the individual stock price movements.
MB = Number of advancing - Number of declining.
Relative strength
It measures the extent to which a security has outperformed its industry or the market.
Miscellaneous
The Superbowl Rule:
Rule
In a year that an original NFL team wins the Superbowl the mrket is
likely to rise for the rest of the year. The opposite is true when a AFC
team wins the Superbowl.
The Presidential Cycle Rule:
Rule
In the second year of the presidential term, the market is likely to fall,
and in the third year it is likely to rise.
The Hemline Indicator:
Indicator
The market index tends to rise and descend with the hemline of
women's dresses.
Etc.
Each week, Value Line Investment Survey reviews almost 1,700 traded
companies.
Stocks are ranked into five groups, according to their expected price
appreciation:
group 1: the best expected performers
group 5: the worst expected performers
The ranking is done with a use of a formula that takes into account:
Earnings momentum
Stock's relative price
Relative strength
$1,500,000
(dividends and
transaction costs
excluded).
1965
1990
Fund overhead
However, (transaction costs + fund overhead)
overhead dont add up to
the difference
Group 1 stock
stock price
Group 1 is
being re-
The survey
reaches
the public
Group 1 is
being re-
evaluated
The survey
reaches
the public
evaluated
Wed
Thu
Fri
The VL
Centurion
Fund
rebalances its
portfolio
Sat
Sun
Mo
Tue
Wed
Thu
Fri
The VL
Centurion
Fund
rebalances its
portfolio
The bulk of the price increase in group 1 stocks takes place between Thursday and Friday.
The US Postal Service could be moving fast in some parts of the country;
hence some readers might get their subscription on Thursday.
Smart investors anticipate the change in ranking in advance. They know
the formula and watch closely group 2 stocks. If earning reports come in
better than expected, some of them will move up.
On Friday morning, everyone will want to buy into the same stocks, thus
pushing the price very high.
A dramatization
A stock sells for $ 10 on Wednesday at close.
Value Line forecasts it will rise in value over the next weeks or so.
However, the information does not reach the market effectively until
Friday morning.
At the opening bell, there are hundreds of buy orders for that stock.
As a result, the stock goes to $ 14.
Visualization
The survey
reaches the
public
$14
Some early
birds figure
out group 1
$10
Wed
Thu
Fri
Sat
A dramatization: Summary
Etc.
To learn more:
http://www.equis.com/
[[]] http://www.stockcharts.com/education/What/MarketAnalysis/dowtheory1.html#intro