1 Bodie Kane Marcus Essentials of Investments Fourth
1 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Chapter 15 Technical Analysis Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
2 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Assumptions & Tools Used in Technical Analysis • Assumptions – Trends in prices can be exploited – Markets are somewhat inefficient • Tools – Charting – Technical Indicators • Evidence - very limited support of superior performance Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
3 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Charting • Price movements - (open, high, low and close) – Reoccurring trends • Point and figure charts – Support & resistance levels – Signals when support and resistance levels are confirmed Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
4 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Sample Price Chart Price High Close Low Days Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
5 Bodie • Kane • Marcus Point and Figure Chart Price x Fourth Edition Congestion areas x x o o x x o x o o Sell o x Irwin / Mc. Graw-Hill Essentials of Investments x o o o o o © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
6 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Sentiment Indicators Trin Statistics # Advancing / # Declining Volume Advancing / Volume Declining # Declining / Volume Declining # Advancing / Volume Advancing If Trin > 1. 0 bearish signal Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
7 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Sentiment Indicators • Put / Call Ratio – Historical value 65% – When higher than 65% a signal occurs • Bearish view • Bullish view • Mutual Fund Cash Position – Cash levels are low - bearish sign – Cash levels are high - bullish sign Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
8 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Sentiment Indicators Odd - Lot Trading • Ratio of odd-lot purchases to odd-lot sales • When ratio exceeds 1. 0, bearish sign • Contrarian logic - small investors are the last to buy in bull markets Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
9 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Flow of Funds Indicators • Short Interest - total number of shares that are sold short – When short sales are high a signal occurs – Bullish interpretation – Bearish interpretation • Credit Balances in Brokerage Accounts – Investor leave balances when they plan to invest in the future – When levels are high a bullish sign Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
10 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Market Structure Indicators Moving Averages • Average price over some historical period (5 weeks or 200 days) • When current price crosses the average a trading signal occurs • Bullish signal when the current price rises above the moving average • Bearish sign when the current price falls below the moving average Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
11 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Market Structure Indicators Breadth • The extent to which movements in a broad index are reflected widely in movements of individual stocks • Spread between advancing stocks and declining stocks • Also used in industry indexes Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
12 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Value Line System • Widely followed with some evidence of superior performance • Value Line System is predominately a technical system – Earnings momentum – Relative stock prices – Ratios of moving averages Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
13 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Value Line System • Paper vs actual performance indicates that the system is difficult to implement – Value Line Fund has not shown superior performance – High turnover costs are associated with the strategy • Evidence shows prices react quickly to reported ranking changes Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
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