Lecture 7: Technical Analysis - Intro & basic concepts

Question 1

Murphy (1999) defines:
“Technical analysis is the study of ??, primarily through the use of ?, for the purpose of ? future price ?.”

Murphy defines market action in terms of three principal sources of information available to technical analysts:
?
?
??

Answer 1

Murphy (1999) defines:
“Technical analysis (TAs) is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.”

Murphy defines market action in terms of three principal sources of information available to technical analysts:
Price
Volume
Open Interest

Question 2

Technical Analysts (TAts) look for ? and ? trends in stock prices. 
Fundamentally, TAs is just a study of ? & ? to determine direction of trend.

Answer 2

Technical Analysts (TAts) look for recurrent and predictable trends in stock prices. 
Fundamentally, TAs is just a study of supply & demand to determine direction of trend.

Question 3

Assumptions of TAs:

1. ? discounts everything
2. prices move in ?
3. ? tends to repeat itself

Answer 3

Assumptions of TAs:

1. market discounts everything
2. prices move in trends
3. history tends to repeat itself

Question 4

Benefits of TAs:

1. only use ? data
2. ?-based
3. ? stocks found by Fundamental analysis may adjust slowly to correct mispricing
4. depending on rules, TAts may trade when a ‘correction’ is already under way.

Answer 4

Benefits of TAs:

1. only use price data
2. rule-based
3. undervalued stocks found by Fundamental analysis may adjust slowly to correct mispricing
4. depending on rules, TAts may trade when a ‘correction’ is already under way.

Question 5

Problems with TAs (academic viewpoint):

• TAs contradicts ?-form Efficient Market Hypothesis => TAs shouldn’t generate any income & can’t beat the market => academic viewpoint contradicts practitioners.
• Do prices really move in ??
• Does ?really repeat itself?
• Do patterns become ??? ?
• How ? are TA rules and patterns?
• Once a trend is identified, are gains subsequently ? away?

Answer 5

Problems with TAs (academic viewpoint):

• TAs contradicts weak-form Efficient Market Hypothesis => TAs shouldn’t generate any income & can’t beat the market => academic viewpoint contradicts practitioners.
• Do prices really move in trends?
• Does history really repeat itself?
• Do patterns become self-fulfilling prophecies?
• How subjective are TA rules and patterns?
• Once a trend is identified, are gains subsequently arbitraged away?

Question 6

Theoretical basis for TAs: ??:
- posits three forces simultaneously affecting stock prices:
Primary trend – ‘?’ – one or more years
Intermediate trend – ‘?’ – 3 weeks to 3 months
Minor trend – ‘?’ –less than 3 weeks

Answer 6

Theoretical basis for TAs: Dow Theory:
- posits three forces simultaneously affecting stock prices:
Primary trend – ‘tide’ – one or more years
Intermediate trend – ‘waves’ – 3 weeks to 3 months
Minor trend – ‘ripples’ –less than 3 weeks

Question 7

Dow Theory: 
3 phases within each trend
? – informed buying
?? – buying by trend-following investors
? – investors buying at high point – informed investors sell

Answer 7

Dow Theory:
3 phases within each trend
Accumulation – informed buying
Public participation – buying by trend-following investors
Distribution – investors buying at high point – informed investors sell

Question 8

Dow Theory

Primarily a model of ?? through its emphasis on identifying the ? point of the long-term trend.

Answer 8

Dow Theory:

Primarily a model of market timing through its emphasis on identifying the turning point of the long-term trend.

Question 9

Trends are important in technical analysis - most of technical analysis aims to help us identify a trend or changes in a trend.

Answer 9

Trends are important in technical analysis - most of technical analysis aims to help us identify a trend or changes in a trend.

Question 10

When we have sideways/horizontal trends, i.e. not have a strong trend, TAs becomes ? efficient.

Answer 10

When we have sideways/horizontal trends, i.e. not have a strong trend, TAs becomes less efficient.

Question 11

? is seen to be a particular level or area on a chart where buyers overwhelm sellers. Price may return to such a level a number of times and ‘test’ support

Answer 11

SUPPORT is seen to be a particular level or area on a chart where buyers overwhelm sellers. Price may return to such a level a number of times and ‘test’ support

Question 12

? areas or price levels where sellers tend to repeatedly overcome buyers, holding prices back from rising further

Answer 12

Resistance areas or price levels where sellers tend to repeatedly overcome buyers, holding prices back from rising further