Technical Analysis the complete resource for financial market technicians 2nd

INTRODUCTION TO TECHNICAL ANALYSIS . . . . . . . . . . . . . . .3

2 THE BASIC PRINCIPLE OF TECHNICAL ANALYSIS—

THE TREND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

How Does the Technical Analyst Make Money? . . . . . . . . . . . . . . . . 10

What Is a Trend? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

How Are Trends Identified? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Trends Develop from Supply and Demand . . . . . . . . . . . . . . . . . . . . 14

What Trends Are There? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

What Other Assumptions Do Technical Analysts Make? . . . . . . . . 17

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

HISTORY OF TECHNICAL ANALYSIS ......................................23

Early Financial Markets and Exchanges . . . . . . . . . . . . . . . . . . . . . . 23

Modern Technical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Current Advances in Technical Analysis . . . . . . . . . . . . . . . . . . . . . . 30

4 THE TECHNICAL ANALYSIS CONTROVERSY ..........................33

Do Markets Follow a Random Walk? . . . . . . . . . . . . . . . . . . . . . . . . . 35

Fat Tails ................................................................................................36

Drawdowns...........................................................................................37

Proportions of Scale . ...........................................................................39

Can Past Patterns Be Used to Predict the Future? . . . . . . . . . . . . . . 40

What About Market Efficiency?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

New Information...................................................................................42

Are Investors Rational? . ......................................................................46

Will Arbitrage Keep Prices in Equilibrium?.........................................47

Behavioral Finance and Technical Analysis . . . . . . . . . . . . . . . . . . . . 49

Pragmatic Criticisms of Technical Analysis . . . . . . . . . . . . . . . . . . . . 50

What Is the Empirical Support for Technical Analysis? . . . . . . . . . 52

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Part II: Markets and Market Indicators

5 AN OVERVIEW OF MARKETS . . . . . . . . . . . . . . . . . . . . . . . .57

In What Types of Markets Can Technical Analysis Be Used? . . . . 58

Types of Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Cash Market

How Does a Market Work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Who Are the Market Players?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

How Is the Market Measured? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Price-Weighted Average . .....................................................................70

Market Capitalization Weighted Average . ...........................................71

Equally Weighted (or Geometric) Average . .........................................72

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

6 DOW THEORY .......................................................................75

Dow Theory Theorems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

The Primary Trend. ..............................................................................80

The Secondary Trend ............................................................................81

The Minor Trend...................................................................................81

Concept of Confirmation . ....................................................................82

Importance of Volume. .........................................................................83

Criticisms of the Dow Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

7 SENTIMENT............................................................................89

What Is Sentiment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Market Players and Sentiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

How Does Human Bias Affect Decision Making? . . . . . . . . . . . . . . . 92

Crowd Behavior and the Concept of Contrary Opinion . . . . . . . . . 95

How Is Sentiment of Uninformed Players Measured?. . . . . . . . . . . 96

Sentiment Indicators Based on Options and Volatility .........................97

Polls ....................................................................................................102

Other Measures of Contrary Opinion ................................................107

Unquantifiable Contrary Indicators ..................................................116

Historical Indicators .........................................................................117