1
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Chapter 15
Technical Analysis
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
2
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Assumptions & Tools Used in
Technical Analysis
• Assumptions
– Trends in prices can be exploited
– Markets are somewhat inefficient
• Tools
– Charting
– Technical Indicators
• Evidence - very limited support of
superior performance
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
3
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Charting
• Price movements - (open, high, low and
close)
– Reoccurring trends
• Point and figure charts
– Support & resistance levels
– Signals when support and resistance levels
are confirmed
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
4
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Sample Price Chart
Price
High
Close
Low
Days
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
5
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Point and Figure Chart
Price
x
Congestion areas
x
x o x
o
o x
x o x o
x o
o
x
o x
o
o
Sell
o x o x
Irwin / McGraw-Hill
x o
o x o
o
o
o
o
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
6
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Sentiment Indicators
Trin Statistics
# Advancing / # Declining
Volume Advancing / Volume Declining
# Declining / Volume Declining
# Advancing / Volume Advancing
If Trin > 1.0 bearish signal
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
7
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Sentiment Indicators
• Put / Call Ratio
– Historical value 65%
– When higher than 65% a signal occurs
• Bearish view
• Bullish view
• Mutual Fund Cash Position
– Cash levels are low - bearish sign
– Cash levels are high - bullish sign
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
8
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Sentiment Indicators
Odd - Lot Trading
• Ratio of odd-lot purchases to odd-lot
sales
• When ratio exceeds 1.0, bearish sign
• Contrarian logic - small investors are
the last to buy in bull markets
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
9
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Flow of Funds Indicators
• Short Interest - total number of shares that
are sold short
– When short sales are high a signal occurs
– Bullish interpretation
– Bearish interpretation
• Credit Balances in Brokerage Accounts
– Investor leave balances when they plan to invest
in the future
– When levels are high a bullish sign
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
10
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Market Structure Indicators
Moving Averages
• Average price over some historical
period (5 weeks or 200 days)
• When current price crosses the average
a trading signal occurs
• Bullish signal when the current price
rises above the moving average
• Bearish sign when the current price falls
below the moving average
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
11
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Market Structure Indicators
Breadth
• The extent to which movements in a
broad index are reflected widely in
movements of individual stocks
• Spread between advancing stocks and
declining stocks
• Also used in industry indexes
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
12
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Value Line System
• Widely followed with some evidence of
superior performance
• Value Line System is predominately a
technical system
– Earnings momentum
– Relative stock prices
– Ratios of moving averages
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
13
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Value Line System
• Paper vs actual performance indicates
that the system is difficult to implement
– Value Line Fund has not shown superior
performance
– High turnover costs are associated with the
strategy
• Evidence shows prices react quickly to
reported ranking changes
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.