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.
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.
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?
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?
Tools of Technical Analysis
Charts
Trading Information
Volume and Open Interest
Mathematical or Statistical Formulas
or Calculations
Moving Averages and
Oscillators
Charting
P
High
Close
Low
Time
Forecasting Price Changes
Trend = general direction
Types
Rising = Bullish
Falling = Bearish
Change = Reversal
Forecasting Price Changes
Trend Lengths
Minor = 1 month or less
Intermediate = 1 - 6 months
Major = 6 months or more
Magnitude = extent of move
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
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
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.
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.
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
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.
Resistance Line
An excellent spot for a short
position.
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)
Key Reversals
Bullish
Previous
Downtrend
Higher High
Lower Low
Higher Close
Key Reversals
Previous
Uptrend
Higher High
Lower Low
Lower Close
Bearish
Hook Reversals
Bullish
Previous
Downtrend
Lower Low
Higher Close
Hook Reversals
Previous Uptrend
Higher High
Lower Close
Bearish
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
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.
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
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.
Gaps
GAP
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.
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.
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!
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
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)
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
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.
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
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.
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?
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
Assignment 8
Where are futures charts found on
the web? List several??
Report on best technical analysis
site.
Precise address
How its useful
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?
