Stock Valuation – Technical
Analysis
Essentials of Corporate Finance
Chapters 7 and 10
Materials Created by Glenn Snyder – San Francisco State University
Topics
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What is Technical Analysis?
How Technical Analysis is Performed
Technical Analysis vs. Fundamental Analysis
Weak Form Market Efficiency
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Technical Research
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Arguments Against Technical Analysis
What is a Chart?
Moving Averages
Indicators and Oscillators
Sources of Data
Career Advice for a Technical Research Analyst
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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What is Technical Analysis?
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Technical Analysis is a method of analyzing
and evaluating securities by using statistics
generated by market activity
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Historical Prices and Volume
Technical Analysis analyzes the supply and
demand of the market itself, rather than its
components
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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How Technical Analysis is Performed
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Technical analysts do not try to determine a
security's value, rather they use charts and
statistical tools to find patterns that may
predict future price movements
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Technical analysts try to identify trends, or
which direction the market is headed
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Who uses Technical Analysis?
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February 26, 2007
Hedge Funds
Traders
Portfolio Managers
Materials Created by Glenn Snyder – San Francisco State University
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Technical Analysis vs. Fundamental
Analysis
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Technical Analysis
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Historical Trends
Market Supply and Demand
Statistical Analysis
Short-Term Oriented
Fundamental Analysis
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Company and Industry Specific
Specific Company Valuation
Long-Term Oriented
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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Weak Form Market Efficiency
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Weak Form Market Efficiency
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All past prices of a security are reflected in the
current price
Weak Form implies “Searching for patterns in
historical prices that are useful in identifying
mispriced stocks will not work.” – Ross, Westerfield,
Jordan (Chapter 10, pg. 318)
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Can charts of historical prices lead to finding good
investments?
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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Arguments Against Technical Analysis
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If past prices and performance are already
reflected in current prices, then Technical
Analysis cannot predict any future prices
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If Technical Analysis can be used to predict future
price movements, then the efficiency of the
market can be called into question
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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What is a Chart?
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A Chart is simply a graphical representation
of a series of prices or volume plotted over
time
Source: Baseline
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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Moving Averages
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A moving average is an average of the stock
price plotted over a period of time
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The moving average smoothes out daily price
fluctuations to allow the Technical Analyst to better
understand the trend of the security
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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Technical Research – Moving Averages
Price
50-Da y Mov ing A v erage
200-D ay Mov ing Av erage
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Materials Created by Glenn Snyder – San Francisco State University
Apr
Source:
FactSet
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Indicators and Oscillators
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There are two main types of Indicators:
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Leading Indicators - calculations based on prices
and volumes that precede stock price movements
Lagging Indicators - calculations based on prices
and volumes that confirm stock price movements
Oscillators are banded ranges within
indicators that reflect overbought and
oversold conditions
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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Sources of Data
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Investment professionals use sophisticated
tools and databases
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FactSet
Reuters
Baseline
Ned Davis Research
But individuals can do some of this as well
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Yahoo Finance
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February 26, 2007
Historical daily prices
Materials Created by Glenn Snyder – San Francisco State University
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Career Advice for a Technical Research
Analyst
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Strong Quantitative Skills
 Statistics
 Mathematics
 Economics
Strong Communications Skills
 Written – Documentation and Write-ups
 Verbal
Team Oriented
Look for companies that have an investment focus
 Insurance Companies
 Asset Management Companies
 Investment Banks
 Investment / Trading Companies
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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