Category: Your Money

Sunder’s List

Essential reading to start your day

While the world waits for Europe to make up its mind, catastrophe is in the air. Staring into the abyss

An interesting technical treatment of Apple: Apple: Relative to the S&P 500, It Looks Even Worse

ROMER: Europe Is A Train-Wreck And Leaders Are Still In Denial

How Silvio Berlusconi fcuked Italy: Ciao 

France is drawing up plans to create a breakaway organisation of eurozone countries with its own treaty, parliament and headquarters: Telegraph

Cogs of China’s credit machine are grinding more slowly

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Sunder’s List

TGIF! Here’s today’s must reads:

Sell in May and go away till November? Rotate in May, redux

Greece and Commodities: What Are the Right Questions?

Natural gas epitomized the “widow maker” trade of the 2000s after a series of big bets went wrong in the notoriously volatile commodity. Cotton seems to have taken its place: FT.com

China’s imports of raw materials leveled off in October, underlining a slight slowdown in growth for the world’s second-largest economy: FT.com

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Technical Analysis of the Financial Markets: Ch 2

This is a review of the second chapter of John J. Murphy’s Technical Analysis of the Financial Markets.

Dow Theory

Most of what we call technical analysis today has its foundations in what Charles Dow proposed around the turn of the 19th century. His primary goal was to predict the course of the economy by looking at the stock market index he had created.

Basic Tenets

The averages discount everything

The sum of the transactions of the stock exchange represent the sum of all Wall Street’s knowledge of the past, present and distant, applied to the discounting of the future. The markets reflect every knowable factor that affects over all supply and demand.

The market has three trends

A trend has three parts:

  • primary (tides)
  • secondary (waves)
  • minor (ripples)

The direction of a tide can be determined by noting the highest point reached by successive waves. When the highpoint of each successive wave recedes, the tide has turned out and is ebbing. Dow opined that market tides last for more than a year and typically run for several years.

The secondary trends last three weeks to three months. These intermediate corrections retrace 1/3rd to 2/3rds of the previous trend movement and most frequently about 1/2 of the previous move.

The minor trends last for less than three weeks and represent fluctuations in the intermediate trend.

Major trends have three phases

Major trends go through distinct phases:

  1. accumulation: when informed buyers accumulate the stock
  2. public participation: when technical trend followers start buying
  3. distribution: when newspapers start printing the bullish case and informed buyers begin to “distribute”

This is similar to the Elliot Wave Principle we discussed earlier.

The averages must confirm each other

Dow would look for confirmation of a bull or bear signal from both the Industrial and Rail Averages.

Volume must confirm the trend

Volume should expand or increase in the direction of the major trend.

In a major uptrend, volumes increase as prices move higher and decrease as prices fall. In a downtrend, volumes increase as prices fall and decrease as prices rise.

A trend is assumed to be in effect until it gives definite signals that it has reversed

Newton’s law of motions: inertial drives trends.

Conclusion

Dow relied exclusively on closing prices. He believed that averages had to close higher than the previous peak or lower than the previous trough to have significance.

From 1920 to 1975, Dow Theory signals captured 68% of the moves in the Industrial and Transportation Averages and 67% of those in the S&P 500 index. An understanding of the Dow Theory provides a solid foundation for further studies in technical analysis.

Sunder’s List

European Union

Image by erjkprunczyk via Flickr

German and French officials have discussed plans for a radical overhaul of the European Union: French, Germans explore idea of core euro zone

Krugman: This Is The Way The Euro Ends

Technical signals are indicating that Wednesday’s slump could stick around awhile longer: Analyst Sees 3% More Downside On Dow As Cyclicals Lose Momentum

America and China must crush Germany into submission

Greek default, Italian banks, etc. 65% Chance of Banking Crisis by End November

As the debt crisis deepens, few countries would escape unscathed if Italy implodes: Chart: How Italy could drag down Europe

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Technical Analysis of the Financial Markets: Ch 1

This is the review of the first chapter of John J. Murphy’s Technical Analysis of the Financial Markets.

Philosophy of Technical Analysis

Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.

It is based on the rationale that:

  1. Market action discounts everything. Anything that can possible affect the price – fundamentally, politically, psychologically, or otherwise – is actually reflected in the price.
  2. Prices move in trends. The purpose of charting price action is to identify and follow trends. Once a trend is setup, it is more likely to continue than to reverse.
  3. History repeats itself. Much of technical analysis is based on the study of human psychology, which tends not to change. The key to understanding the future lies in a study of the past.

Market price tends to lead the known fundamentals. Fundamental analysis is more of an explanation of why the price action occurred while technical analysis tries to predict that price action.

Technical analysis is rooted in statistics. It is a combination if descriptive statistics (graphical representation of data: a candlestick chart, for example) and inductive statistics (generalizations or predictions extrapolated from that data: indicators, for example).

Stay tuned for more!