Page 178 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 6: Technical Analysis

1. This topic is a hot one in the investment community. National conferences have been Notes
organized dealing exclusively with this topic, and the trade literature publishes many
articles upon this. A problem with concept of a neutral network is that the stock market is
seldom deterministic. Situations constantly change, and what may have been true a few
years ago will not necessarily prevail tomorrow. Financial academics are especially leery
of back-tests, or research that tests a hypotheses using past data. Mining the data will
almost always result in some apparent cause and effect between past events and stock
market performance. Research that tests a hypothesis using subsequent data is much more
useful. An article in the popular press describes Wall Street's response to this criticism.
2. One way to get around this hazard is to build something called a genetic algorithm into
your neutral network. A sexy term that currently causes Wall Street rocket scientists to
swoon, genetic algorithms enable neutral nets to adapt to the future buy spawning schools
of baby nets, each of which is sent to swim against the changing flow of data, where only
the fittest survive to take over the role of the mother.
3. No matter what someone's field of study, they are interested in the search for a better
mousetrap. Essentially, what all security analysts seek to do is to find improvements in
their methodology for security selection.

6.6 Tools of Technical Analysis

The technician must (1) identify the trend, (2) recognize when one trend comes to an end and
prices set off in the opposite direction. His central problem is to distinguish between reversals
within a trend and real changes in the trend itself. This problem of sorting out price changes is
critical, since prices do not change in a smooth, uninterrupted fashion.
The two variables concerning groups of stocks or individual stocks are:
1. Behaviour of prices, and

2. Volume of trading contributing to and influenced by changing prices.
Table 6.3: Tools of Technical Analysis

Category Market Indicators Market and individual
stock indicators
Price indicators Dow Theory – Breadth of Line, bar and point and figure
market indicators charges
o Plurality Moving averages. Relative
o Market breadth index strength
o Advance –Declines
o New highs and new lows
o The most active list
o Confidence indicator
(Disparity index)
Volume New York and American Resistance and support charts
indicators Exchange volume Contrary Price volume bar charts
Opinion Theories
o Short selling
o Odd Lot trading
Other indicators Mutual fund activity
Credit balance theory

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