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CHAPTER 1 - Introduction

The document discusses different time frames that technical analysis can be applied to, ranging from intraday to secular trends over decades. It outlines the characteristics of primary trends lasting 9 months to 2 years, intermediate trends lasting a few months, and short-term trends lasting 3-6 weeks. The document also discusses how trends are identified through a progression of rising peaks and troughs, and what constitutes a legitimate reversal of those trends.

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Hirai Gary
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180 views

CHAPTER 1 - Introduction

The document discusses different time frames that technical analysis can be applied to, ranging from intraday to secular trends over decades. It outlines the characteristics of primary trends lasting 9 months to 2 years, intermediate trends lasting a few months, and short-term trends lasting 3-6 weeks. The document also discusses how trends are identified through a progression of rising peaks and troughs, and what constitutes a legitimate reversal of those trends.

Uploaded by

Hirai Gary
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INTRODUCTION

• Technical analysis was defined as the art of identifying trend


changes at an early stage and to maintain an investment or trading
posture until the weight of the evidence indicates that the trend
has reversed.
TIME FRAMES
• We have already established the link between psychology and
prices. It is also a fact that human nature (psychology) is more or
less constant. This means that the principles of technical analysis
can be applied to any time frame, from one-minute bars to weekly
and monthly charts.
THREE IMPORTANT TRENDS
• The three most widely followed trends are primary, intermediate,
and short-term.

PRIMARY
• The primary trend generally lasts between 9 months and 2 years,
and is a reflection of investors’ attitudes toward unfolding
fundamentals in the business cycle.
INTERMEDIATE
• Intermediate trends are typically very deceptive, often being
founded on very believable but false assumptions. For example, an
intermediate rally during a bear market in equities may very well be
founded on a couple of unexpectedly positive economic numbers,
which make it appear that the economy will avoid that much-
feared recession.
SHORT-TERM TRENDS
• Short-term trends typically last 3 to 6 weeks, sometimes shorter
and sometimes longer. They interrupt the course of the
intermediate cycle, just as the intermediate-term trend interrupts
primary price movements.
MAJOR TECHNICAL PRINCIPLE
• As a general rule, the longer the time span of a trend, the easier it
is to identify. The shorter the time span, the more random it is
likely to be.
THE MARKET CYCLE MODEL
• Long-term investors are principally concerned with the direction of
the primary trend, and, thus, it is important for them to have some
perspective on the maturity of the prevailing bull or bear market.
However, long-term investors must also be aware of intermediate
and, to a lesser extent, short-term trends.
• Short-term traders are principally concerned
with smaller movements in price, but they also
need to know the direction of the intermediate
and primary trends. This is because of the
following principle.
TWO SUPPLEMENTARY TRENDS

INTRADAY
• The principles of technical analysis apply equally to these very short-
term movements, and are just as valid. There are two main
differences. First, reversals in the intraday charts only have a very
short-term implication and are not significant for longer-term price
reversals. Second, extremely short-term price movements are
much more influenced by psychology and instant reaction to news
events than are longer-term ones.
THE SECULAR TREND
• The primary trend consists of several intermediate cycles, but the
secular, or very long-term, trend is constructed from a number of
primary trends. This “super cycle,” or long wave, extends over a
substantially greater period, usually lasting well over 10 years, and
often as long as 25 years, though most average between 15 and 20
years.
PEAK-and-TROUGH PROGRESSION

• The “evidence” is the objective element in technical analysis. It


consists of a series of scientifically derived indicators or techniques
that work well most of the time in the trend-identification process.
The “art” consists of combining these indicators into an overall
picture and recognizing when that picture resembles a market
peak or trough.
MAJOR TECHNICAL PRINCIPLE

• Never go for perfection; always shoot for consistency.


• This principle reflects Charles Dow’s original observation that a
rising market moves in a series of waves, with each rally and
reaction being higher than its predecessor. When the series of
rising peaks and troughs is interrupted, a trend reversal is signaled.
• In Figure 1.3, the price has been advancing in a series of waves,
with each peak and trough reaching higher than its predecessor.
Then, for the first time, a rally fails to move to a new high, and the
subsequent reaction pushes it below the previous trough. This
occurs at point X, and gives a signal that the trend has reversed.
• Figure 1.4 shows a similar situation, but this time, the trend
reversal is from a downtrend to an uptrend.
MAJOR TECHNICAL PRINCIPLE
• The significance of a peak-and-trough reversal is determined by
the duration and magnitude of the rallies and reactions in question.
A PEAK-and-TROUGH DILEMMA
• Occasionally, peak-and-trough progression becomes more
complicated than the examples shown in Figures 1.3 and 1.4. In
Figure 1.5, example a, the market has been advancing in a series of
rising peaks and troughs, but following the highest peak, the price
declines at point X to a level that is below the previous low. At this
juncture, the series of rising troughs has been broken, but not the
series of rising peaks. In other words, at point X, only half a signal
has been generated. The complete signal of a reversal of both
rising peaks and troughs arises at point Y, when the price slips
below the level previously reached at point X.
Figure 1.5, example b, shows this type of situation for a reversal from a bear to bull
trend. The same principles of interpretation apply at point X as in Figure 1.5, example
a. Occasionally, determining what constitutes a rally or reaction becomes a subjective
process. One way around this problem is to choose an objective measure, such as
categorizing rallies greater than, say, 5 percent. This can be a tedious process, but
some software programs (such as MetaStock with its zig-zag tool) enable the user to
establish such benchmarks almost instantly in graphic format.
WHAT CONSTITUTES A LEGITIMATE
PEAK AND TROUGH?

• Most of the time, the various rallies and reactions are self-evident,
so it is easy to determine that these turning points are legitimate
peaks and troughs. Technical lore has it that a reaction to the
prevailing trend should retrace between one-third and two-thirds
of the previous move. Thus, in Figure 1.6, the first rally from the
trough low to the subsequent peak is 100 percent. The ensuing
reaction appears to be just over half, or a 50 percent retracement of
the previous move. Occasionally, the retracement can reach 100
percent.
In Figure 1.7, the time distance between the low and the high for the
move represents 100 percent. The consolidation prior to the
breakout should constitute roughly two-thirds, or 66 percent, of the
time taken to achieve the advance, ample time to consolidate gains
and move on to a new high. These are only rough guidelines, and in
the final analysis, it is a judgment call based on experience; common
sense; a bit of intuition; and perhaps most important of all, a review
of other factors such as volume, support and resistance principles,
etc.

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