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Technical Price Analysis

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. We’ll only cover few methods. Technical Price Analysis. Two views:

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Technical Price Analysis

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  1. 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. • We’ll only cover few methods.

  2. 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.

  3. 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?

  4. 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?

  5. Tools of Technical Analysis • Charts • Trading Information • Volume and Open Interest • Mathematical or Statistical Formulas or Calculations • Moving Averages and Oscillators

  6. Charting P High Close Low Time

  7. Forecasting Price Changes • Trend = general direction • Types • Rising = “Bullish” • Falling = “Bearish” • Change = “Reversal”

  8. Forecasting Price Changes • Trend Lengths • Minor = 1 month or less • Intermediate = 1 - 6 months • Major = 6 months or more • Magnitude = extent of move

  9. 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

  10. 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

  11. 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.

  12. 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.

  13. 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

  14. 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.

  15. Resistance Line • An excellent spot for a short position.

  16. 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)

  17. Bullish Previous Downtrend Higher High Lower Low Higher Close Key Reversals

  18. Previous Uptrend Higher High Lower Low Lower Close Bearish Key Reversals

  19. Bullish Previous Downtrend Lower Low Higher Close Hook Reversals

  20. Previous Uptrend Higher High Lower Close Bearish Hook Reversals

  21. 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

  22. Head and Shoulders • Neckline =Line thru lows between head and l&r 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.

  23. 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

  24. 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). • Today’s high is below yesterday’s low or today’s low is above yesterday’s high.

  25. Gaps GAP

  26. 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.

  27. 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.

  28. 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!

  29. 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

  30. 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 > 70; overbought (SELL) If RSI < 30; oversold (BUY)

  31. 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

  32. 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.

  33. 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

  34. 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.

  35. 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?

  36. 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

  37. Assignment 8 • Where are futures charts found on the web? List several?? • Report on best technical analysis site. • Precise address • How it’s useful

  38. Assignment 9 • Find one or more commodity forecast newsletter (or similar source). • Report briefly: • Where to get forecast(s)? • Key factors they consider in their price forecast process? • Does it look useful? At what cost?

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