Technical Price Analysis

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Technical Price Analysis

• The analysis of historical prices patterns using
  charts, diagrams, mathematical equations, etc.
• This approach emphasizes how prices got to where
  they are.
• Well only cover few methods.

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Technical Price Analysis

• Two views
• Prices reflect all available, relevant
  fundamental information. Random prices tomorrow.
• Price movements are not random. Recognizable
  price patterns or formations are often repeated.

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Benefits of Charting

• Provide a price history.
• Help identify important fundamental factors
  early warning of changes in process.
• Help identify repetitive price patterns. Will
  they repeat in future?

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Benefits of Charting

• Can improve the timing of purchases or sales.
• Can help one to be more mechanical and objective
  (less emotional)
• But, many methods! Which work?

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Tools of Technical Analysis

• Charts
• Trading Information
• Volume and Open Interest
• Mathematical or Statistical Formulas or
  Calculations
• Moving Averages and Oscillators

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Charting

• P High
• Close
• Low
• Time

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VOLUME
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WEEKLY CONTINUATION CHART
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MONTHLY CONTINUATION CHART
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Forecasting Price Changes

• Trend general direction
• Types
• Rising Bullish
• Falling Bearish
• Change Reversal

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Forecasting Price Changes

• Trend Lengths
• Minor 1 month or less
• Intermediate 1 - 6 months
• Major 6 months or more
• Magnitude extent of move

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Trend Lines

• UP
• Shows trend of increasing prices
• Drawn by connecting ascending extreme lows
• DOWN
• Shows trend of decreasing prices
• Drawn by connecting descending extreme highs

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UP TREND
VOLUME
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DOWN TREND
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Channel Lines (Up Down)

• Top line is parallel to bottom line
• Drawn by connecting ascending or descending
  extreme highs and lows
• Useful in showing likely trading ranges and
  possible deviations from up or down trends

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CHANNEL
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Support Line

• An apparent lower bound on prices which market
  prices seem to not be able to fall below (due to
  increased interest in buying at that price
  level.)
• Is a flat line drawn by connecting equal
  extreme lows.

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Support Line

• The greater the number of extreme equal lows, the
  greater the belief that it is a genuine area of
  support.
• A close (or two) below the support line indicates
  that there is no longer any support at that price
  level.

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RESISTANCE
SUPPORT
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Resistance Line

• An apparent upper bound on prices which market
  prices seem to not be able to rise above (due to
  increased interest in selling at that price
  level)
• Is a flat line drawn by connecting equal
  extreme highs

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Resistance Line

• The greater the number of extreme equal highs,
  the greater the belief that it is a genuine area
  of resistance.
• A close (or two) above the resistance line
  indicates that there is no longer any resistance
  at that price level.

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Resistance Line

• An excellent spot for a short position.

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Inside Day not very significant
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Outside Day More significant
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Reversals

• Signal change in direction or trend
• Observable with a single day of trading (if there
  was a previous trend)
• Bullish (bearish) reversals indicated that prices
  are likely to stop decreasing (increasing)
  start increasing (decreasing)

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Key Reversals

• Bullish

• Previous Downtrend
• Higher High
• Lower Low
• Higher Close

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Bull Key Reversal
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Key Reversals

• Bearish

• Previous Uptrend
• Higher High
• Lower Low
• Lower Close

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Hook Reversals

• Bullish

• Previous Downtrend
• Lower Low
• Higher Close

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Hook Reversals

• Bearish

• Previous Uptrend
• Higher High
• Lower Close

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Bear Hook Reversal
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Head and Shoulders

• A reversal formation in a previous uptrending
  market that signals a top has been reached
• Left Shoulder 1st set of peak prices
• Head Higher set of peak prices
• Right Shoulder 3rd set of peak prices

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Head and Shoulders
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Head and Shoulders

• Neckline Line thru lows between head and lr
  shoulders. Good necklines are fairly flat.
• A close below neckline confirms the formation.
• Belief that prices will decrease below neckline
  by an amt. distance from top of head to the
  neckline.

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Double Top

• Like Head and Shoulders w/o head
• Low between two peaks valley or fulcrum
• Close below fulcrum confirms formation and
  indicates prices will continue to decline by an
  amt. at least equal to the distance from top of
  peaks to fulcrum
• Also holds for multiple tops

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Double Top
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Gaps

• A hole or discontinuous part on a bar chart in
  looking at the trading range for two consecutive
  days (i.e. contracts traded at price ranges that
  do not overlap).
• Todays high is below yesterdays low or todays
  low is above yesterdays high.

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Gaps

• GAP

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GAP
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CONSOLIDATION FORMATIONS
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TRIANGLES
DESCENDING
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TRIANGLES
Symmetrical
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Moving Averages

• Calculate the average price in the last several
  days (e.g. 3,5,7) and plot it.
• Calculate the average price for a longer price
  series and plot it.

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Moving Averages

• Where the short series average crosses the longer
  average, that is a
• buy signal if prices have been moving up
  recently,
• sell signal if they have been moving down.

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Moving Averages

• Where the short series average crosses the longer
  average, that is a
• buy signal if prices have been moving up
  recently,
• sell signal if they have been moving down.

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Moving Averages

• The shorter the short series, the more frequent
  buy or sell signals.
• What is the right length of series to use?
• Differs by commodity?
• Seems to keep changing!

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Relative Strength Index

• An overbought or oversold indicator
• Calculate the sum of the positive price changes
  and the sum of the negative price changes for the
  number of days you select

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Relative Strength Index
Sum price increases RS _________________
Sum price decreases
If 1.5 (prices up)
RSI 100 RS/(1 RS) then RSI 60 If RSI gt
70 overbought (SELL) If RSI lt 30 oversold (BUY)
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Technical analysis

• If technical signal is linked with high trading
  volume, signal is often considered stronger
• Advanced traders test historical fits, and use
  the one or combinations that work best recently
  in each market

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Reasons for Nonrandom Futures Price Behavior

• Risk premium (return for taking risk) is required
  by speculators to encourage them to take
  positions.
• If hedges are primarily short, then current
  futures should be below later expiration price.

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Overreaction Hypothesis

• Traders overreact to new market information if
  so, trend following techniques will work for a
  while. If enough traders are trend followers,
  may be self fulfilling forecast

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Overreaction Hypothesis

• Traders may not be able to accurately evaluate
  impacts of new information, and perceive
  substantial risk in taking a position contrary to
  present trends, so price moves (overreactions)
  will persist longer.

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Success?

• Will the return be better than other investments,
  adjusted for risk?
• Expected futures price
• minus current futures price
• minus transaction costs
• Profit
• but how risky vs. alternatives?

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Success?

• Prevailing wisdom suggests
• 80 percent of small speculators lose money
• But new sheep come to be shorn!
• 10 (professionals) make money
• Commodity trading funds--highly variable results