ACE 427
Spring 2010
Lecture 11
Technical Analysis
by
Professor Scott H. Irwin
Required Reading:
“Technical Analysis.” Wikipedia. [http://en.wikipedia.org/wiki/Technical_analysis]
Purcell, W.D. and S.R. Koontz. “Ch. 4: Technical Analysis: The Bar Chart, Ch. 5:
Technical Analysis: Alternatives to Bar Charts,” Agricultural Futures and Options:
Principles and Strategies, Second Edition, Prentice Hall: Upper Saddle River, New
Jersey. (ACE 427 Class Website)
Ch. 5: Technical Analysis: Alternatives to Bar Charts,” Agricultural Futures and
Options: Principles and Strategies, Second Edition, Prentice Hall: Upper Saddle
River, New Jersey. (ACE 427 Class Website)
Purcell, W.D. and S.R. Koontz. “Ch. 6: Psychology of the Markets,” Agricultural
Futures and Options: Principles and Strategies, Second Edition, Prentice Hall:
Upper Saddle River, New Jersey. (ACE 427 Class Website)
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Introduction
Fundamental analysis:
 Definition: An assessment of _____ based on the
underlying ______ and _______ factors and the
changes in those relationships
 Goal: Estimate ____________________ and
compare to _______________
 Bullish: Value > Price
 Bearish: Value < Price
Technical analysis:
 A forecasting method for price movements
using ______________________________
 No explicit use of the “fundamentals”
 Typically based on _____________ arguments
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Pring (2002, p. 2), a leading technical analyst,
provides a more specific definition:
The technical approach to investment is
essentially a reflection of the idea that prices
move in trends that are determined by the
changing attitudes of investors toward a variety
of economic, monetary, political, and
psychological forces. The art of technical
analysis, for it is an art, is to identify a trend
reversal at a relatively early stage and ride on
that trend until the weight of the evidence shows
or proves that the trend has reversed.
Technical analysis includes a variety of forecasting
techniques






_______ analysis
_________ recognition analysis
___________________ indicators
Seasonal tendencies
_______ analysis
Computerized ______________
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Numerous surveys indicate that market practitioners
attribute a ______________ to technical analysis
Smidt
 Surveyed trading activities of amateur traders
in the US commodity futures markets in 1961
 About _____ of respondents claimed that they
used _____ either exclusively or moderately in
order to identify ________
Group of Thirty
 Surveyed the views of market participants on
the functioning of the foreign exchange market
in 1985
 Results indicated that ______ of bank
respondents and _____ of the securities houses
believed that the use of technical analysis had
a significant impact on the market
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More recent surveys:
 Commodity trading advisors and hedge fund
managers rely heavily on computer-guided
__________________
 About ______________ of foreign exchange
traders around the world believe that technical
analysis is the major _________ determining
exchange rates in the short-run up to six
months
Technical methods are highly ______________!
 Group of Thirty study conclusion: “Technical
trading systems, involving computer models
and charts, have become the vogue, so that the
market reacts more sharply to short term
trends and less attention is given to basic
factors”
 In this lecture we will focus only on learning
the technical methods
 Assessment of their usefulness is left to the
next lecture
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Charting
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Overbought/Oversold Indicators
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SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
SX04
4/2/2004
4/5/2004
4/6/2004
4/7/2004
4/8/2004
4/12/2004
4/13/2004
4/14/2004
4/15/2004
4/16/2004
4/19/2004
4/20/2004
4/21/2004
4/22/2004
4/23/2004
Closing
Price
784.5
782.5
779
786
778.5
752
738
765.5
717
732.5
735.25
734.75
721
734.5
739.75
Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Positive Negative
Price
Price
Price
Change Change Change
-2
-3.5
7
-7.5
-26.5
-14
27.5
-48.5
15.5
2.75
-0.5
-13.75
13.5
5.25
2
3.5
7
7.5
26.5
14
27.5
48.5
15.5
2.75
0.5
13.75
13.5
5.25
5.1
RSI
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13.4
0.38
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Contrary Opinion Indexes
 Another form of overbought/oversold indicator
 Designed to measure the ____________ of
market participants regarding future price
trends
 Various _____________ indicators are widely
followed in financial markets
 Bullish Consensus
 Market Vane
Construction of Consensus Indicators
 A sample of market analysts, traders, or
investors is surveyed for their __________ on
price trends
 Reading newsletters, conducting mail surveys,
or by personal interview
 Each of the individuals surveyed is then placed
in a category indicating the _____________
______________of their market view
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 The rating scale can be as simple as either
bullish or bearish, or some type of numerical
scale of the degree of bullishness
 In the first case, the consensus indicator is
simply the ___________ of individuals with a
bullish market view
 In the second case, the consensus indicator is
the ____________ of the individual ratings.
Use of Contrary Opinion Indicators
 ______________________________
 High percentage of traders ________________
 High percentage of traders ________________
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AgMAS Consensus View Indicators
 For about 3 years, each Wednesday, after the
close of market trading, each advisory service
in the AgMAS study was rated as to the _____
__________________ for a commodity
 Five categories: 0-bearish, 25-bearish-neutral,
50-neutral, 75-bullish-neutral, and 100-bullish
 Rating is based on _______________ and
current recommendations regarding market
positions
 Ratings refer to ___________ over a relatively
short time-horizon, in the range of two to six
weeks into the future.
 Ratings for individual advisory services
averaged for a commodity
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Example
Advisor
1
2
3
4
5
6
7
8
9
10
Rating
100
100
75
75
50
25
75
75
100
25
Average
70
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AgMAS Consensus View Indicator for Corn
100
90
Consensus View Level
80
70
60
50
40
30
20
10
0
7/17/96 12/17/96 5/17/97 10/17/97 3/17/98
8/17/98
1/17/99
Date
AgMAS Consensus View Indicator for Soybeans
100
90
Consensus View Level
80
70
60
50
40
30
20
10
0
7/17/96 12/17/96 5/17/97 10/17/97 3/17/98
8/17/98
1/17/99
Date
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AgMAS Consensus View Indicator for Wheat
100
90
Consensus View Level
80
70
60
50
40
30
20
10
0
7/17/96 12/17/96 5/17/97 10/17/97 3/17/98
8/17/98
1/17/99
Date
AgMAS Consensus View Indicator for Live Cattle
100
90
Consensus View Level
80
70
60
50
40
30
20
10
0
7/17/96 12/17/96 5/17/97 10/17/97 3/17/98
8/17/98
1/17/99
Date
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Trading Systems
A technical trading system consists of a set of _____
that result from parameterizations, and each trading
rule generates _____________ (long, short, or out of
the market) according to their parameter values
Popular technical trading systems include
 Moving averages
 Channels
 Momentum oscillators
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Literally thousands of technical trading systems!
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