Chapter 2: Technical Analysis
(Start: Jan 25 2010 ; End: Feb 7 2010 )
Technical analysis receives quite an "undervalued" attention from the well educated finance professionals probably because it committed the crime of challenging the Efficient Market Hypothesis and market equilibrium assumption. According to the weak form market hypothesis, investors cannot make abnormal profits by observing past price trends. Hence if a market is weak form efficient, then its prices would take into account past information so quickly that no investor should be able to squeeze any profit making strategy out of it. However technical analysis suggests otherwise.
Technical analysis is founded on the belief that the market discovers the "correct" price by iterative movements. Since no investor knows the "correct" price, the market prices will fluctuate around the correct price and eventually converges to it. Hence by studying price movements, it is possible to discover the eventual destination of the price movements. The investor who can thus forecast the eventual price, would be able to profit from arbitrage trading. The existing finance theories however dismiss this possibility because they assume that market prices are at equilibrium at all times. Thus up till now, technical analysis is regarded as more of a "superstition" rather than a science. Stock investment gurus such as Warren Buffet claimed that he never used technical analysis. Nonetheless if you read any financial market news or stock analyst reports, you would usually find quite a fair amount of technical analysis in the reports.
Here is an outdated report using technical analysis: http://www.youtube.com/watch?v=tFcpyAhQN2g Look out for the humor/joke at the end of the report :P
Here is another outdate report using technical analysis: http://www.youtube.com/watch?v=wSpMt0kfTIM In this report the presenter interacts with the chart as he speaks.
Note the speed and great familiarity of the experts as they describe their analysis. The use of selective tools to substantiate their conclusions is excellent. This is the best way to present one’s technical analysis.
Enough is said, it is best to experience technical analysis and decide for yourself. In the past you would need to work through all the technical analysis formulas and models in order to do the analysis. Nowadays many web sites would do the technical analysis for you at the click of a button. In this exercise, your group will go through a guided journey through elementary technical analysis. Here are the required steps.
1) Step 1: Go to http://sg.finance.yahoo.com/ Type your stock symbol, appended by ".SI", into the "Enter symbol(s):" box. For example if my stock is Genting International and its symbol is "G13", then I would type "G13.SI" into the box. Make sure that the "Market:" box have "Singapore" chosen. Then click on the "GO" button. If you do this correctly, you would be able to see a screen similar to the following (but it will be your stock instead):
On the left hand menu, click on "Technical Chart". Then on the loaded screen, on the right of "Size:", click on "L" for a large technical analysis chart. If you do this correctly you should see a chart similar to the following (but it would be your stock instead):
The default is a 1 year chart, with the red line a 50 day moving average and the green line a 200 day moving average. Insert the technical analysis chart of each of your 4 companies into your report.
Alternatively you can go directly to this technical chart via the url: http://sg.finance.yahoo.com/q/ta?t=1y&l=on&z=l&q=l&p=m50,m200&a=&c=&s=G13.SI
Change the last 5 characters “G13.SI” to your stock’s ticker plus “.SI”.
Alternatively you can use the Quote.com via the url: http://www.quote.com/global/stocks/chart.action?chartUi.period=D&chartUi.bardensity=HIGH&chartUi.bartype=LINE&chartUi.size=800x550&chartUi.minutes=&s=S53-SES
Change the last 7 characters “S53-SES” to your stock’s ticker plus “-SES”. Actually the Quote.com gives the most beautiful chart among the mentioned alternatives.
Alternatively you can use the charts at the www.sgx.com via the url: http://www.sgx.com/wps/portal/marketplace/mp-en/investor_centre/investor_tools/chart_viewer
Alternatively you can use the charts at the Bloomberg,com via the url: http://www.bloomberg.com/apps/cbuilder?ticker1=GENS%3ASP
Note however that the stock ticker is different in Bloomberg.
2) Step 2: There are many frameworks available to analyze the chart. The most basic are the trend lines, channel, support and resistance lines. In your report, draw trend lines, channel and support and resistance lines for each of your companies, for both a 1 year chart and a 3 month chart. Speculate on what the next support level and the next resistance level are. Note that drawing of such lines is more of an art rather than a science. Hence you may have different lines and numerical conclusions from that of other groups.
3) Step 3: The next most popular methodology in technical analysis involves using simple moving averages. In the chart of Step 1, you have already encountered a chart with moving averages in it. In your report, insert moving averages in the stock chart of each of your companies, including a RSI graph at the bottom of the chart, for 1 year duration and 3 months duration and include them in your report. State clearly the moving average duration you used. Based on the charts state when the most recent moving average buy or sell signal is (you only need to state a buy signal or a sell signal for each company). Speculate, by extending the graphs if necessary, on when the next moving average buy signal or sell signal for each of the companies is. Does the RSI support the buy and/or sell signals?
4) Step 4: A technical analysis indicator closely related to moving averages is called the MACD (Moving Average Convergence Divergence). Describe in your report what is MACD and what are its buy and sell signals. Describe also what is MACD histogram and MACD signal. Insert MACD charts in your report for each company and for 1 year and for 3 months duration. State when the most recent buy or sell signal (you only need to state a buy signal or a sell signal) of each company based on MACD is.
5) Step 5: Pick one more technical analysis indicator that you find at the chart web site. For example you may choose MFI, ROC, Slow Stoch, Fast Stoch, Bollinger Bands (one of my favorites), or Parabolic SAR, etc. Be creative. Then describe in your report what that analysis indicator is intuitively, what are its formulas, and what are its buy and sell signals. Insert the analysis indicator charts in your report for each company and for 1 year and for 3 months duration. State when the most recent buy or sell signal (you only need to state a buy signal or a sell signal) of each company based on that indicator.
6) Step 6: For each of your four stocks, make a conclusion based on your technical analysis above:
a) Should you buy or sell the stock now? If not now, then roughly or intuitively at what price level should you buy or sell?
b) Is the stock currently over-bought or over-sold? Is it currently in a bullish trend, bearish trend or simply drifting sideways?
c) Is there any similarity or differences in (a) and (b) among the four stocks? Can you rationalize (no need to prove) the similarity and differences?
7) Step 7: Discuss your group's view on technical analysis:
a) What does your group learn from this exercise?
b) Is technical analysis an effective tool for timing when to buy or sell stocks and why?
c) How may this exercise change the way you buy or sell stocks in the future?
Limit your essay to about 1000 words. Submit your essay in Word format or Acrobat (pdf) format through the link below. Only one member of each group need to submit the report. State the name of your group and your members clearly on the report. The deadline is Feb 7 11:59pm . Please note that the Turnitin.com will automatically check your submission for plagiarism. Plagiarized work is liable for disqualification and disciplinary action by the university.
Additional notes:
1) You can report step 1 and 2 together since the step 2 charts repeats the step 1 charts.
2) Drawing of lines: after copying the price charts from Yahoo, you can paste them into your favorite graphics program to draw in the line. For example you can use photoshop, paint, Powerpoint, Word, etc to draw your lines.
3) The "next support/resistance line" is the next support line when the current support line is crossed; or the next resistance line when the current resistance line is crossed. Please draw these lines in your chart. The determination of such lines is more of an art, so you will need to use your judgment rather than mathematics to draw these lines.
4) Yes, resistance lines and resistance levels are the same.
5) Support lines and resistance lines need not be parallel.
6) Technically there can be more than 1 channel on the same graph, because each channel represents a different perspective. In this exercise, you only need to give 1 channel for each graph.
7) Trend lines need not be one of the lines making up the channel, though you can use trend lines to be the lines making up the channel.
8) How many moving average lines do you need to insert? Only 2. Try to make one consisting of a small number of days (e.g. 5 days) and one consisting of a large number of days (e.g. 12 days, 30 days, 100 days or 200 days). The number of days is up to you. Note that you do not need to draw these lines yourselves, just use the Yahoo facility that would draw for you.
9) Do not use specialized technical analysis software such as Metastock or ChartNexus to draw the trend lines, support levels, and resistance levels. The objective of this exercise is to give you a hands-on feel of technical analysis, which charting softwares would immune you from. Hence the usage of any chart produced from such specialized trading software would be disqualified.
10) Please constrain yourself in the use of colors. I shall be laser-printing all your reports in black and white. Hence please make sure that your charts and graph lines are distinguishable among each other when printed in black and white. This is a very real constrain in the industry because not only clients laser-print, some of them are color-blind as well.
