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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.

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Beyond the Fundamentals

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  1. Beyond the Fundamentals Technical Analysis

  2. 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

  3. 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

  4. 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)

  5. $/Euro: Weekly data over 3 years

  6. $/Euro: Daily data over 6 months

  7. $/Euro: Hourly data over 5 days What’s this??

  8. $/Euro: minute by minute over 6 hours

  9. 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

  10. Bullish channels tend to have upward breakouts

  11. Find the trend by connecting at least two highs Two lows complete the triangle “Breakout” occurs at the apex, usually with increasing volume

  12. Ascending triangles usually have upward breakouts

  13. 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

  14. 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

  15. What pattern do you see? “Run” “Bump”

  16. Fibonacci Methods • Fibonacci, one of the greatest mathematicians of all time discovered a sequence of numbers which are now used across many disciplines.

  17. 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

  18. Y = Young, M = Mature 3 Months Now 1 Month 2 Months One Pair (M) Two Pair (M, Y) One Pair (Y) Three Pairs (M, M, Y) 4 Months 5 Months 6 Months Five Pairs (M, M,Y,Y,M) Eight Pairs (M,M,M,Y,Y,Y,M,M) Thirteen Pairs (M,M,M,Y,Y,Y,M,M,M,Y,Y,M,M)

  19. 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 ….

  20. 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 5/8 = .625 1/2 = .5 8/13= .615 2/3 = .667 13/21 = .619 3/5 = .6 21/34 = .617

  21. 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 = 1 8/5 = 1.6 2/1 = 1 13/8 = 1.625 3/2 = 1.5 21/13 = 1.615 5/3 = 1.667 34/21 = 1.619 The ratios converge to 1.618 (PHI)

  22. 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)

  23. Draw an initial trend line between two extreme points Fibonacci Arcs Draw arcs that intersect the trend at 61.8%, 50%, and 38.2% of the high The arcs anticipate future support/resistance levels

  24. 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

  25. Fibonacci Retracement Once a reversal occurs, it tends to find support at Fibonacci levels!

  26. Fibonacci times Large price swings tend to occur on “Fibonacci times”! (times could be in days, months, years, etc)

  27. Elliott Waves • Elliot wave theory relies on cycles whithin cycles • 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

  28. Super Cycle Beginning of the next wave Impulse Correction

  29. The Super Cycle comprises the first two movements of the Grand Super Cycle. Impulse (1) Correction (2)

  30. 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!!

  31. Oscillating Indicators • Oscillating Indicators fluctuate between a maximum and a minimum and are used to predict highs as lows

  32. RSI (Relative Strength Indicator) If “Up Points” = 0, RSI = 0 If “Down Points” = 0, RSI = 100 RSI < 30 (Oversold) RSI > 70 (Overbought)

  33. RSI (Relative Strength Indicator) Chart Interval: 15 minutes Period Length: 10 (150 minutes) Total “up” points = 7 Total “down” points = 11

  34. Fast Stochastic Period High: FS = 100 Period Low: FS = 0 Signal < 30 (Oversold) Signal > 70 (Overbought)

  35. Understanding the Lingo • Moving Averages Example: Consider the following monthly Inflation Statistics (Monthly % Changes)

  36. 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.

  37. 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

  38. 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

  39. Punch line • Technical methods are useful for short run prediction • Don’t lose sight of the fundamentals!!!

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