Category: Your Money

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!

Sunder’s List

The oil market has rediscovered an old foe: Iran. The price of Brent crude, the global benchmark, has rallied to almost $115 a barrel : Iran worries spark fears of $200-a-barrel oil – FT.com
Stuart Gulliver, chief executive of HSBC, warned on Tuesday that Asia is facing the threat of a potential slowdown in the flow of credit: HSBC chief warns of Asia credit crunch – FT.com
With his own new book, Thinking, Fast and Slow, the Nobel Prize-winning Kahneman reveals the built-in kinks in human reasoning: The King of Human Error
The title says it all: End Bonuses for Bankers
It doesn’t make much difference who is in charge of Italy anymore. The country is bust. The only question is when: Italy is bust; it’s just a question of when
Over 50 percent of all mortgaged households in the US are effectively underwater: Half of US Mortgages Are Effectively Underwater
Don’t ignore the recent gains in gold, counsels esteemed commodity investor Dennis Gartman. It signals concern: Dennis Gartman: Gold Gains Suggest More Woes Ahead
It was a possibility feared but unspoken – until last week. Suddenly a Greek exit from the euro was on the table: Greek default within the euro is the only real option – FT.com
Up to a third of Hong Kong’s 50,000 or so factories in China could downsize or shut by the end of the year: Gloomy outlook for China exporters as factory closure wave looms
Chinese gold imports from Hong Kong, a proxy for the country’s overall overseas buying, leapt to a record high in September: China’s gold imports jump sixfold – FT.com
A rant: Experts don’t know jack

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India and China: Gold repertoire

This is the last of three posts by Abhishek Preetam on why he is bullish on the yellow metal. Please welcome him to StockViz and follow him on twitter @AbhiPreetam

The Q2 2011 gold demand trends report from World Gold Council reported a year-on-year volume growth in the total consumer demand of 38% in India and 25% in China, compared to a global growth rate of 7%.

According to the WGC report – India: Heart of gold: Revival and China gold report: Gold in the year of Tiger, China had a total demand of about 200 tonnes of gold in 2000 to around about 450 tonnes in 2009. For India the figures would be 300 tonnes and around 950 tonnes for the respective years. These two economies have always kept the demand primed, even as others were keeping gold at a distance.

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Some of the drivers behind the increasing demand for gold appear to be:

  1. Cultural / Traditional values: Mode of gifts at various occasions and auspicious value related to gold on occasions like marriages (10% – 15% of total marriage expense) and festivals.
  2. Increase in the disposable income of the population.
  3. Economic growth

Other Asian economies like Vietnam, South Korea, Indonesia and Thailand as well are following on the footsteps of neighboring China. The fact that gold has both cultural and economic importance in these countries is the source of their demand. Also the fact that those with not that much spending potential are moving towards a lower carat gold product is again boosting the gold demand quantitatively.

 

Untapped potential

In the webcast – “case for investing in gold” Jason Toussaint of World Gold Council highlighted an interesting fact: Of the roughly 800 tons of gold imported to India each year, only the top 40 percent of Indian households purchase all of the country’s gold, says Toussaint. The other 60 percent of Indians, who may have the same adoration for gold and celebrate Ramadan and Diwali, historically may not have had access to purchase gold. This large population represents a huge untapped market. To fulfill demand, the WGC has created a program with Indian post offices to distribute coins and small pieces of gold. Toussaint says right now there are 700 post offices in the rural areas servicing 90,000 customers and he expects that number to grow. If purchase patterns continue, they expect from 2005 to 2025, a four times larger gold market in India.

Hence restating from the first blog, looking at the current gold price range of 1600 – 1800 $ per ounce, it can be said that it’s a good buying opportunity for the investors. With continuous demand from all across the world economies, both economic and individual interests, it is very likely that there is not going to be a sudden and a drastic decrease in the gold prices. Also the faith of economists all across the world, that this is no where close to the real estate bubble or the IT bubble of the last decade affirms that whether now or in the near future, it would be an intelligent decision to keep some eggs of gold in your investment basket.

 

Sunder’s List

Efforts to solve a growing sovereign debt crisis have failed to quell market unease. Is Italy next? In Europe, Anxious Market Shifts Focus To Italy
As the world shrinks and everyone is connected socially, the line between trading and investing has blurred as well. Investing and Trading….Just Words.
The old empire could teach us a thing or two about the euro and its flaws. All Roads Lead to (Ancient) Rome
Warren Buffett’s Berkshire Hathaway Inc. invested $23.9 billion in the third quarter, the most in at least 15 years. Buffett Broadens Portfolio by Spending $23.9 Billion
I am now much more responsive to long investment ideas. The Bullish Stars Are Aligned – TheStreet
You can’t be sure when stock prices reach their lows or highs for any market cycle: How not to time the market
As much as the ECB resists it now, they have limited choices: monetise or face a global economic collapse. The longer they wait, the worse it will get: What are Gold and the Euro Telling us About the ECB?
European banks are sitting on heaps of exotic mortgage products and other risky assets that predate the financial crisis: Old Debts Dog Europe’s Banks

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Technical Analysis of the Financial Markets

I had done a chapter wise review of Tony Plummer’s Psychology of Technical Analysis a few months ago. Given the amount of interest it generated, I’ve decided to take a crack at reviewing the mother of all Technical Analysis books: John J. Murphy’s Technical Analysis of the Financial Markets.

Here’s how Amazon.com describes the book:

This outstanding reference has already taught thousands of traders the concepts of technical analysis and their application in the futures and stock markets. Covering the latest developments in computer technology, technical tools, and indicators, the second edition features new material on candlestick charting, inter-market relationships, stocks and stock rotation, plus state-of-the-art examples and figures. From how to read charts to understanding indicators and the crucial role technical analysis plays in investing, readers gain a thorough and accessible overview of the field of technical analysis, with a special emphasis on futures markets.

I suggest you get your copy today and join me on this journey toward a better understanding technical analysis!

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