Technical Analysis : The Complete Resource for Financial Market Technicians

by Kirkpatrick, Charles D., II; Dahlquist, Julie R.

• ISBN13: 9780131531130
• ISBN10: 0131531131
• Format: Hardcover
• Copyright: 2006-08-18
• Publisher: FT Press

Summary

"Irs"ve been reading technical analysis works for forty years. This is the first book on the subject worthy of being called both comprehensive and disciplined. It will be a great asset to both practitioners and serious students alike." Phil Roth, CMT, Chief Technical Market Analyst, Miller Tabak + Co. "The authors deftly straddle the divide between the artistic and the rigorous aspects of technical analysis. The publication of this text is an important financial-market event and the authors are to be congratulated." John Bollinger, CFA, CMT, President, Bollinger Capital Management "The authors have done a superb job of making the subject so understandable, setting goals for each chapter, and seeing they are met, with a concise summary at each chapterrs"s end. After four decades of practicing the subject, I am proud to place my colleaguesrs" book in a prominent spot in my technical analysis library." Alan R. Shaw, CMT, former Managing Director, Smith Barney, second President of Market Technicians Association "As both a technical analysis teacher and practitioner, I have long looked for a book that covers the subject from a practitionerrs"s perspective and at the same time meets a studentrs"s need to learn a complete body of knowledge. Kirkpatrickrs"s and Dahlquistrs"s book is the first I have seen that hits the mark on both fronts." Bruce M. Kamich, CMT, Adjunct Professor of Finance, Baruch College, and former President, Market Technicians Association "This book is an excellent contribution to technical analysis literature. The authors are careful not to overstate the powers of technical analysis, and they include an appendix on statistical procedures and end-of-chapter review questions to empower the new technical analysis student. As either a stand-alone text or as a companion to other technical analysis books, this book should appear on every technicianrs"s bookshelf." Hank Pruden, Professor of Business and Executive Director, Institute for Technical Market Analysis, Ageno School of Business, and Golden Gate University Technical Analysis is the first book on the subject suitable for full-length courses taken to achieve the Chartered Market Technician (CMT) designation and Series 86 exam exemption. Individual investors, investment managers, and researchers are increasingly recognizing the value of technical analysis. In fact, the SECrs"s Section 86 requirement for analysts and brokers can now be fulfilled with the Chartered Market Technician designation. Now, for the first time, therers"s a comprehensive, objective, and clearly-written tutorial and reference for the entire technical analysis field. Using more than 200 illustrations, the authors show ways to analyze both markets and individual issues and present complete investment systems and portfolio management plans. Readers can learn ways to use tested sentiment, momentum indicators, seasonal effects, flow of funds, and many other key techniques. The authors reveal which chart patterns and indicators have been reliable, show how to test systems, and demonstrate ways technical analysis can be used to mitigate risk. Charles D. Kirkpatrick, CMT, has spent decades using technical analysis to advise major investing institutions, and currently teaches the subject at the university level. University finance instructor Dr. Julie Dahlquist teaches both graduate and undergraduate courses in technical analysis, is a widely published researcher in the field, and serves on the board of the Market Technicians Association Educational Foundation. Together,

Author Biography

Charles D. Kirkpatrick II, CMT, is president of Kirkpatrick & Company, Inc., a technical analysis research firm. He has appeared on CNBC and Wall Street Week, and has been quoted in Barron’s, Money, and BusinessWeek. An instructor in finance at the School of Business Administration, Fort Lewis College, he is a two-time winner of the Market Technicians Association’s prestigious Charles H. Dow Award for research in technical analysis. He is a Chartered Market Technician, a member of the board of directors of the Market Technicians Association and the Market Technicians Association Educational Foundation, and editor of the Journal of Technical Analysis. He is a graduate of both Harvard (AB) and the Wharton School (MBA).

 

Julie R. Dahlquist, Ph.D., received her B.B.A. in economics from University of Louisiana at Monroe, her M.A. in theology from St. Mary’s University, and her Ph.D. in economics from Texas A&M University. Currently, she is a senior lecturer, Department of Finance, at the University of Texas at San Antonio College of Business. Dr. Dahlquist serves on the UTSA Executive-MBA faculty and is a frequent presenter at national and international conferences. She is the coauthor (with Richard Bauer) of Technical Market Indicators: Analysis and Performance (John Wiley & Sons, 1999). Her research has appeared in Financial Analysts Journal, Journal of Technical Analysis, Managerial Finance, Applied Economics, Working Money, Financial Practices and Education, and the Journal of Financial Education. She serves on the board of the Market Technicians Association Educational Foundation, on the editorial board of the Southwestern Business Administration Journal, and as a reviewer for a number of journals, including the Journal of Technical Analysis.

 

Table of Contents

Acknowledgments	xxv
About the Authors	xxvii
Part I: Introduction	1	(52)
Introduction to Technical Analysis	3	(6)
The Basic Principle of Technical Analysis---The Trend	9	(12)
How Does the Technical Analyst Make Money?	10	(1)
What Is a Trend?	11	(1)
How Are Trends Identified?	12	(1)
Why Do Markets Trend?	13	(2)
What Trends Are There?	15	(2)
What Other Assumptions Do Technical Analysts Make?	17	(2)
Conclusion	19	(1)
Review Questions	19	(2)
History of Technical Analysis	21	(10)
Early Financial Markets and Exchanges	21	(2)
Modern Technical Analysis	23	(5)
Current Advances in Technical Analysis	28	(3)
The Technical Analysis Controversy	31	(22)
Do Markets Follow a Random Walk?	33	(6)
Fat Tails	33	(2)
Drawdowns	35	(2)
Proportions of Scale	37	(2)
Can Past Patterns Be Used to Predict the Future?	39	(1)
What About Market Efficiency?	39	(10)
New Information	41	(4)
Are Investors Rational?	45	(1)
Will Arbitrage Keep Prices in Equilibrium?	46	(3)
Behavioral Finance and Technical Analysis	49	(1)
Pragmatic Criticisms of Technical Analysis	49	(1)
What Is the Empirical Support for Technical Analysis?	50	(1)
Conclusion	51	(1)
Review Questions	51	(2)
Part II: Markets and Market Indicators	53	(136)
An Overview of Markets	55	(18)
In What Types of Markets Can Technical Analysis Be Used?	56	(1)
Types of Contracts	57	(6)
Cash Market	58	(2)
Futures Markets	60	(3)
Options Markets	63	(1)
How Does a Market Work?	63	(3)
Who Are the Market Players?	66	(1)
How Is the Market Measured?	67	(3)
Price-Weighted Average	67	(1)
Market Capitalization Weighted Average	68	(1)
Equally Weighted (or Geometric) Average	69	(1)
Conclusion	70	(1)
Review Questions	70	(3)
Dow Theory	73	(12)
Dow Theory Theorems	76	(7)
The Primary Trend	78	(1)
The Secondary Trend	79	(1)
The Minor Trend	79	(1)
Concept of Confirmation	80	(2)
Importance of Volume	82	(1)
Criticisms of the Dow Theory	83	(1)
Conclusion	83	(1)
Review Questions	84	(1)
Sentiment	85	(40)
What Is Sentiment?	86	(1)
Market Players and Sentiment	87	(1)
How Does Human Bias Affect Decision Making?	88	(2)
Crowd Behavior and the Concept of Contrary Opinion	90	(2)
How Is Sentiment of Uninformed Players Measured?	92	(22)
The Concept of Sentiment Indicators	92	(1)
Sentiment Indicators Based on Options and Volatility	92	(6)
Polls	98	(5)
Other Measures of Contrary Opinion	103	(9)
Unquantifiable Contrary Indicators	112	(1)
Historical Indicators	113	(1)
How Is the Sentiment of Informed Players Measured?	114	(6)
Insiders	114	(6)
Sentiment in Other Markets	120	(3)
Treasury Bond COT Data	120	(1)
Treasury Bond Primary Dealer Positions	121	(1)
Bond Market Fear Index	122	(1)
T-Bill Rate Expectations by Money Market Fund Managers	122	(1)
Conclusion	123	(1)
Review Questions	123	(2)
Measuring Market Strength	125	(30)
Market Breadth	127	(15)
The Breadth Line or Advance-Decline Line	128	(4)
The Advance-Decline Line Moving Average	132	(1)
One-Day Change in the Advance-Decline Line	133	(2)
Breadth Differences	135	(3)
Breadth Ratios	138	(4)
Breadth Thrust	142	(1)
Summary of Breadth Indicators	142	(1)
Up and Down Volume Indicators	142	(4)
The Arms Index	143	(2)
Ninety Percent Downside Days (NPDD)	145	(1)
Net New Highs and Net New Lows	146	(2)
New Highs Versus New Lows	147	(1)
High Low Logic Index	148	(1)
Hindenburg Omen	148	(1)
Number of Stocks Above Their 30-Week Moving Average	148	(2)
Very Short-Term Indicators	150	(2)
Breadth and New Highs to New Lows	150	(1)
Arms Index	151	(1)
Net Ticks	152	(1)
Conclusion	152	(2)
Review Questions	154	(1)
Temporal Patterns and Cycles	155	(14)
Periods Longer than Four Years	156	(3)
Kondratieff Waves, or K-Waves	156	(3)
34-Year Historical Cycles	159	(1)
Decennial Pattern	160	(1)
Periods of Four Years or Less	161	(4)
Four-Year or Presidential Cycle	161	(2)
Election Year Pattern	163	(1)
Seasonal Patterns	164	(1)
January Signals	165	(1)
January Barometer	165	(1)
January Effect	165	(1)
Events	165	(1)
Conclusion	166	(1)
Review Questions	166	(3)
Flow of Funds	169	(20)
Funds in the Marketplace	170	(3)
Money Market Funds	170	(1)
Margin Debt	171	(1)
Public Offerings	172	(1)
Funds Outside the Security Market	173	(4)
Household Financial Assets	173	(1)
Money Supply	174	(2)
Bank Loans	176	(1)
The Cost of Funds	177	(3)
Short-Term Interest Rates	177	(1)
Misery Index	178	(1)
Boucher's T-Bill Rate of Change Rule	179	(1)
Zweig's Prime Rate Indicator	180	(1)
Fed Policy	180	(6)
Predicting Federal Reserve Policy Changes	181	(1)
Zweig's Fed Indicator	182	(1)
Three Steps and a Stumble	183	(1)
Two Tumbles and a Jump	183	(1)
Long-Term Interest Rates (or Inversely, the Bond Market)	184	(1)
Yield Curve	185	(1)
Conclusion	186	(1)
Review Questions	186	(3)
Part III: Trend Analysis	189	(110)
History and Construction of Charts	191	(24)
History of Charting	193	(3)
What Data Is Needed to Construct a Chart?	196	(2)
What Types of Charts Do Analysts Use?	198	(7)
Early Charts	198	(1)
Line Charts	198	(3)
Bar Charts	201	(2)
Candlestick Charts	203	(2)
What Type of Scale Should Be Used?	205	(2)
Arithmetic Scale	205	(1)
Semi-Logarithmic Scale	206	(1)
Point-and-Figure Charts	207	(5)
One-Box (Point) Reversal	208	(1)
Box Size	209	(1)
Multi-Box Reversal	210	(1)
Time	211	(1)
Arithmetic Scale	212	(1)
Logarithmic Scale	212	(1)
Conclusion	212	(1)
Review Questions	213	(2)
Trends---The Basics	215	(32)
Trend---The Key to Profits	216	(1)
Trend Terminology	217	(1)
Basis of Trend Analysis---Dow Theory	217	(2)
How Does Investor Psychology Impact Trends?	219	(1)
How Is the Trend Determined?	219	(3)
Peaks and Troughs	220	(2)
Determining a Trading Range	222	(8)
What Is a Trading Range?	222	(1)
What Is Support and Resistance?	222	(1)
Why Do Support and Resistance Occur?	222	(2)
What About Round Numbers?	224	(1)
How Are Important Reversal Points Determined?	224	(5)
How Do Analysts Use Trading Ranges?	229	(1)
Directional Trends (Up and Down)	230	(8)
What Is a Directional Trend?	230	(2)
How Is an Uptrend Spotted?	232	(5)
Channels	237	(1)
Internal Trend Lines	238	(1)
Retracements	238	(2)
Pullbacks and Throwbacks	240	(1)
Other Types of Trend Lines	241	(3)
Trend Lines on Point-and-Figure Charts	241	(1)
Speed Lines	242	(1)
Andrews Pitchfork	243	(1)
Conclusion	244	(1)
Review Questions	244	(3)
Breakouts, Stops, and Retracements	247	(24)
Breakouts	248	(8)
What Is a Breakout?	248	(1)
How Is Breakout Confirmed?	248	(1)
Techniques	248	(7)
Can a Breakout Be Anticipated?	255	(1)
Stops	256	(11)
What Are Entry and Exit Stops?	256	(1)
Changing Stop Orders	257	(1)
What Are Protective Stops?	257	(1)
What Are Trailing Stops?	258	(4)
What Are Time Stops?	262	(1)
What Are Money Stops?	262	(1)
How Can Stops Be Used with Breakouts?	263	(1)
Using Stops When Gaps Occur	263	(1)
Waiting for Retracement	264	(1)
Calculating a Risk/Return Ratio for Breakout Trading	265	(1)
Placing Stops for a False (or ``Specialist'') Breakout	265	(2)
Conclusion	267	(1)
Review Questions	268	(3)
Moving Averages	271	(28)
What Is a Moving Average?	272	(1)
How Is a Simple Moving Average Calculated?	272	(7)
Length of Moving Average	276	(2)
Using Multiple Moving Averages	278	(1)
What Other Types of Moving Averages Are Used?	279	(4)
The Linearly Weighted Moving Average (LWMA)	279	(1)
The Exponentially Smoothed Moving Average (EMA)	280	(2)
Wilder Method	282	(1)
Geometric Moving Average (GMA)	282	(1)
Triangular Moving Average	282	(1)
Variable EMAs	283	(1)
Strategies for Using Moving Averages	283	(3)
Determining Trend	283	(1)
Determining Support and Resistance	284	(1)
Determining Price Extremes	284	(2)
Giving Specific Signals	286	(1)
What Is Directional Movement?	286	(3)
Constructing Directional Movement Indicators	287	(1)
Using Directional Movement Indicators	287	(2)
What Are Envelopes, Channels, and Bands?	289	(7)
Percentage Envelopes	290	(1)
Bands	291	(2)
Trading Strategies Using Bands and Envelopes	293	(2)
Channel	295	(1)
Conclusion	296	(1)
Review Questions	297	(2)
Part IV: Chart Pattern Analysis	299	(110)
Bar Chart Patterns	301	(40)
What Is a Pattern?	302	(3)
Common Pattern Characteristics	302	(3)
Do Patterns Exist?	305	(2)
Behavioral Finance and Pattern Recognition	306	(1)
Computers and Pattern Recognition	307	(1)
Market Structure and Pattern Recognition	308	(1)
Bar Charts and Patterns	309	(1)
How Profitable Are Patterns?	310	(1)
Classic Bar Chart Patterns	311	(20)
Double Top and Double Bottom	311	(2)
Rectangle (Also ``Trading Range'' or ``Box'')	313	(3)
Triple Top and Triple Bottom	316	(2)
Standard Triangles---Descending, Ascending, and Symmetrical	318	(1)
Descending Triangle	319	(2)
Ascending Triangle	321	(1)
Symmetrical Triangle (Also ``Coil'' or ``Isosceles Triangle'')	322	(2)
Broadening Patterns	324	(1)
Diamond Top	325	(2)
Wedge and Climax	327	(4)
Patterns with Rounded Edges---Rounding and Head and Shoulders	331	(6)
Rounding Top, Rounding Bottom (Also ``Saucer,'' ``Bowl,'' or ``Cup'')	331	(1)
Head and Shoulders	332	(3)
Shorter Continuation Trading Patterns---Flags and Pennants (Also ``Half-Mast Formation'')	335	(2)
Long-Term Bar Chart Patterns with the Best Performance and the Lowest Risk of Failure	337	(2)
Conclusion	339	(1)
Review Questions	339	(2)
Point-and-Figure Chart Patterns	341	(24)
What Is Different About a Point-and-Figure Chart?	342	(1)
Time and Volume Omitted	342	(1)
Continuous Price Flow Necessary	342	(1)
``Old'' and ``New'' Methods	343	(1)
History of Point-and-Figure Charting	343	(2)
One-Box Reversal Point-and-Figure Charts	345	(6)
Consolidation Area on the One-Box Chart (Also ``Congestion Area'')	345	(1)
Trend Lines in One-Box Charts	346	(1)
The Count in a One-Point Chart	347	(2)
Head and Shoulders	349	(1)
The Fulcrum	350	(1)
Action Points	350	(1)
Three-Point (or Box) Reversal Point-and-Figure Charts	351	(12)
Trend Lines with Three-Box Charts	352	(1)
The Count Using Three-Box Reversal Charts	353	(2)
The Eight Standard Patterns for Three-Box Reversal Charts	355	(5)
Other Patterns	360	(3)
Conclusion	363	(1)
Review Questions	364	(1)
Short-Term Patterns	365	(44)
Pattern Construction and Determination	368	(1)
Traditional Short-Term Patterns	368	(26)
Gaps	369	(7)
Spike (or Wide-Range or Large-Range Bar)	376	(1)
Dead Cat Bounce (DCB)	376	(3)
Island Reversal	379	(1)
One- and Two-Bar Reversal Patterns	379	(8)
Multiple Bar Patterns	387	(3)
Volatility Patterns	390	(2)
Intraday Patterns	392	(2)
Summary of Short-Term Patterns	394	(1)
Candlestick Patterns	395	(12)
One- and Two-Bar Candlestick Patterns	397	(5)
Multiple Bar Patterns	402	(5)
Conclusion	407	(1)
Review Questions	407	(2)
Part V: Trend Confirmation	409	(44)
Confirmation	411	(42)
Volume Confirmation	412	(19)
What Is Volume?	412	(1)
How Is Volume Portrayed?	412	(3)
Do Volume Statistics Contain Valuable Information?	415	(1)
How Are Volume Statistics Used?	416	(1)
Which Indexes and Oscillators Incorporate Volume?	417	(5)
Volume-Related Oscillators	422	(6)
Volume Spikes	428	(1)
Examples of Volume Spikes	429	(2)
Open Interest	431	(2)
What Is Open Interest?	431	(1)
Open Interest Indicators	431	(2)
Price Confirmation	433	(15)
What Is Momentum?	433	(1)
How Successful Are Momentum Indicators?	434	(1)
Specific Indexes and Oscillators	435	(13)
Conclusion	448	(1)
Review Questions	449	(4)
Part VI: Other Technical Methods and Rules	453	(56)
Cycles	455	(30)
What Are Cycles?	458	(6)
Other Aspects of Cycle Analysis	461	(3)
How Can Cycles Be Found in Market Data?	464	(11)
Fourier Analysis (Spectral Analysis)	464	(1)
Maximum Entropy Spectral Analysis	465	(1)
Simpler (and More Practical) Methods	466	(9)
Projections	475	(8)
Projecting Period	475	(1)
Projecting Amplitude	476	(7)
Conclusion	483	(1)
Review Questions	483	(2)
Elliott, Fibonacci, and Gann	485	(24)
Elliott Wave Theory (EWT)	485	(16)
Ralph Nelson Elliott	486	(1)
Basic Elliott Wave Theory	486	(2)
Impulse Waves	488	(3)
Corrective Waves	491	(4)
Guidelines and General Characteristics in EWT	495	(1)
Projected Targets and Retracements	496	(2)
Alternatives to EWT	498	(2)
Using EWT	500	(1)
The Fibonacci Sequence	501	(5)
Fibonacci	501	(1)
The Fibonacci Sequence	501	(1)
The Golden Ratio	501	(1)
Price and Time Targets	501	(4)
W. D. Gann	505	(1)
Conclusion	506	(1)
Review Questions	507	(2)
Part VII: Selection	509	(28)
Selection of Markets and Issues: Trading and Investing	511	(26)
Which Issues Should I Select for Trading?	511	(3)
Choosing Between Futures Markets and Stock Markets	512	(2)
Which Issues Should I Select for Investing?	514	(1)
Top-Down Analysis	515	(11)
Secular Emphasis	515	(4)
Cyclical Emphasis	519	(5)
Stock Market Industry Sectors	524	(2)
Bottom Up---Specific Stock Selection and Relative Strength	526	(4)
Relative Strength	527	(1)
Academic Studies of Relative Strength	527	(1)
Measuring Relative Strength	528	(2)
Examples of How Selected Professionals Screen for Favorable Stocks	530	(4)
The William O'Neil CANSLIM Method	530	(1)
James P. O'Shaughnessy Method	531	(1)
Charles D. Kirkpatrick Method	531	(1)
Value Line Method	532	(1)
Richard D. Wyckoff Method	532	(2)
Conclusion	534	(1)
Review Questions	534	(3)
Part VIII: System Testing and Management	537	(54)
System Design and Testing	539	(32)
Why Are Systems Necessary?	540	(2)
Discretionary Versus Nondiscretionary Systems	540	(2)
How Do I Design a System?	542	(6)
Requirements for Designing a System	543	(1)
Understanding Risk	543	(1)
Initial Decisions	544	(1)
Types of Technical Systems	545	(3)
How Do I Test a System?	548	(9)
Data	548	(9)
Optimization	557	(11)
Measuring System Results for Robustness	560	(8)
Conclusion	568	(1)
Review Questions	568	(3)
Money and Risk Management	571	(20)
Risk and Money Management	572	(1)
Testing Money Management Strategies	573	(1)
Money Management Risks	574	(10)
Defining Risk	574	(1)
Concepts	575	(1)
Reward to Risk	576	(1)
Normal Risks	576	(6)
Unusual Risks	582	(2)
Money Management Risk Strategies	584	(4)
Exit Strategies	584	(4)
Monitoring Systems and Portfolios	588	(1)
If Everything Goes Wrong	589	(1)
Conclusion	589	(1)
Review Questions	590	(1)
Part IX: Appendices	591	(2)
A. Basic Statistics	593	(28)
Returns	594	(1)
Probability and Statistics	594	(1)
Descriptive Statistics	595	(8)
Measures of Central Tendency	596	(1)
Measures of Dispersion	597	(2)
Relationships Between Variables	599	(4)
Inferential Statistics	603	(4)
Modern Portfolio Theory	607	(6)
Performance Measurement	613	(2)
Advanced Statistical Methods	615	(1)
Artificial Intelligence	616	(2)
Review Questions	618	(3)
B. Types of Orders and Other Trader Terminology	621	(4)
An Order Ticket	623	(2)
Bibliography	625	(20)
Index	645