Technical Analysis: The Complete Resource for Financial Market Technicians

724 Pages·2015·35.699 MB·English

by  Charles D. Kirkpatrick II, Julie R. Dahlquist

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2
T A
ECHNICAL NALYSIS
THE COMPLETE RESOURCE FOR
FINANCIAL MARKET TECHNICIANS
THIRD EDITION
Charles D. Kirkpatrick II, CMT
Julie Dahlquist, Ph.D., CMT
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Publisher: Paul Boger
Editor-in-Chief: Amy Neidlinger
Executive Editor: Jeanne Levine
Editorial Assistant: Kristen Watterson
Cover Designer: Chuti Prasertsith
Managing Editor: Kristy Hart
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Compositor: Nonie Ratcliff
Manufacturing Buyer: Dan Uhrig
© 2016 by Pearson Education, Inc.
Publishing as FT Press
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Printed in the United States of America
First Printing October 2015
ISBN-10: 0-13-413704-3
ISBN-13: 978-0-13-413704-9
Pearson Education LTD.
Pearson Education Australia PTY, Limited
Pearson Education Singapore, Pte. Ltd.
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Pearson Education Asia, Ltd.
Pearson Education Canada, Ltd.
Pearson Educación de Mexico, S.A. de C.V.
Pearson Education—Japan
Pearson Education Malaysia, Pte. Ltd.
Library of Congress Control Number: 2015946164
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To Ellie—my precious wife, long-term love, companion, and best friend.
—Charlie
To Richard, Katherine, and Sepp.
—Julie
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Contents
Part I: Introduction
1 Introduction to Technical Analysis
2 The Basic Principle of Technical Analysis—The Trend
Chapter Objectives
How Does the Technical Analyst Make Money?
What Is a Trend?
How Are Trends Identified?
Trends Develop from Supply and Demand
What Trends Are There?
What Other Assumptions Do Technical Analysts Make?
Conclusion
Review Questions
3 History of Technical Analysis
Chapter Objectives
Early Financial Markets and Exchanges
Modern Technical Analysis
Current Advances in Technical Analysis
4 The Technical Analysis Controversy
Chapter Objectives
Do Markets Follow a Random Walk?
Fat Tails
Large Unexpected Drawdowns
Proportions of Scale
Can Past Patterns Be Used to Predict the Future?
What About Market Efficiency?
New Information
Are Investors Rational?
Will Arbitrage Keep Prices in Equilibrium?
Behavioral Finance and Technical Analysis
Pragmatic Criticisms of Technical Analysis
What Is the Empirical Support for Technical Analysis?
Conclusion
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Review Questions
Part II: Markets and Market Indicators
5 An Overview of Markets
Chapter Objectives
In What Types of Markets Can Technical Analysis Be Used?
Types of Contracts
Cash Market
Derivative Markets
Swaps and Forwards
How Does a Market Work?
Who Are the Market Players?
How Is the Market Measured?
Price-Weighted Average
Market Capitalization Weighted Average
Equally Weighted (or Geometric) Average
Conclusion
Review Questions
6 Dow Theory
Chapter Objectives
Dow Theory Theorems
The Primary Trend
The Secondary Trend
The Minor Trend
Concept of Confirmation
Importance of Volume
Criticisms of the Dow Theory
Conclusion
Review Questions
7 Sentiment
Chapter Objectives
What Is Sentiment?
Market Players and Sentiment
How Does Human Bias Affect Decision Making?
Crowd Behavior and the Concept of Contrary Opinion
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How Is Sentiment of Uninformed Players Measured?
Sentiment Indicators Based on Options and Volatility
Polls
Other Measures of Contrary Opinion
Unquantifiable Contrary Indicators
Historical Indicators
Unusual Indicators
How Is the Sentiment of Informed Players Measured?
Insiders
Sentiment in Bonds
Treasury Bond Futures Put/Call Ratio
Treasury Bond COT Data
Treasury Bond Primary Dealer Positions
T-Bill Rate Expectations by Money Market Fund Managers
Gold Sentiment
Conclusion
Review Questions
8 Measuring Market Strength
Chapter Objectives
Market Breadth
The Breadth Line or Advance-Decline Line
Double Negative Divergence
Traditional Advance-Decline Methods That No Longer Are Profitable
Advance-Decline Line to Its 32-Week Simple Moving Average
Breadth Differences
Breadth Ratios
Breadth Thrust
Summary of Breadth Indicators
Up and Down Volume Indicators
The Arms Index
Volume Thrust with Up Volume and Down Volume
Ninety Percent Downside Days (NPDD)
10-to-1 Up Volume Days and 9-to-1 Down Volume Days
Net New Highs and Net New Lows
New Highs Versus New Lows
High Low Logic Index
Hindenburg Omen
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Using Moving Averages
Coppock Curve
Number of Stocks Above Their 30-Week Moving Average
Very Short-Term Indicators
Breadth and New Highs to New Lows
Net Ticks
Conclusion
Review Questions
9 Temporal Patterns and Cycles
Chapter Objectives
Periods Longer Than Four Years
Kondratieff Waves, or K-Waves
Population Waves
17–18-Year Alternating Stock Market Cycles
Decennial Pattern
Periods of Four Years or Less
Four-Year or Presidential Cycle
Election Year Pattern
Seasonal Patterns
January Signals
January Barometer
January Effect
Events
Conclusion
Review Questions
10 Flow of Funds
Chapter Objectives
Funds in the Marketplace
Money Market Funds
Margin Debt
Funds Outside the Security Market
Household Financial Assets
Money Supply (M1 & M2)
Money Velocity
Yield Curve
Bank Liquidity
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