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Technical Analysis Explained

Presented by

Martin J. Pring

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Three Points to Take Home.
1. Prices are determined by psychology,
people’s attitude to the emerging fundamentals
not the fundamentals themselves.

2. Keep things simple and apply common sense


at all times.

3. Only use approaches that make sense to


you.

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Real Earnings are not Correlated to Stock Prices (1870-2013)
4

Inflation Adjusted Equities


3
2

Shiller Real Earnings (10-year MA)


Deflated US Stock Prices versus Shiller P/E Ratio1900-2013

CPI Adjusted
Deflated US StockS&P Composite
Prices

Shiller P/E

??
Definition of Technical Analysis:

The art of identifying a price trend reversal


at a relatively early stage and riding on that
trend until….

….the weight of the evidence

shows or proves that the trend has reversed.

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In technical analysis we are dealing
in probabilities, never certainties.

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The hopes and fears of all market
participants are reflected in one thing ….the
price !!

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Technical analysis assumes that prices
move in trends.

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Trends have a tendency to perpetuate
because...

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Prices in any freely traded market are
determined by the attitude of all market
participants to the underlying fundamentals.

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“A trend is a trend is a trend.”

Always assume
the prevailing trend is in existence.

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There is no known technique for
determining the duration and exact
magnitude of a price move.

We can only recognize a change in


direction.

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It doesn’t matter what time frame you
are following...

…the principles of technical analysis


remain constant.

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The only difference is…

…the longer the time frame, the greater


the significance of any given trend
reversal.

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It doesn’t matter what security you are
following...

…the principles of technical analysis


remain constant.

If human nature ever changes technical


analysis will die!!

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Trends

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What is a trend?

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Market Cycle Model

Short-term trend
2 to 6 weeks

Intermediate trend
6 weeks to 9 months

Primary trend
9 months to 2 years

3-4-years

Source: Yelton Fiscal

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Market Cycle Model

Short-term trend
2-6-
weeks

Now Becomes….

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Intraday Market Cycle Model

Short-term trend
4-12
hours

Intermediate trend
4-12 days

Primary trend
2-6 weeks
Psychology and Momentum

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Keycorp
Keycorp

Earnings up Price down

Earnings

Earnings up
Keycorp

Keycorp

Price down
Earnings up

Earnings

Earnings up
Ebay
Price sideways to down
Ebay

Earnings Up

Ebay Earnings

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Calculating a Price Oscillator
S&P Composite
13-week moving average.

S&P Composite (1/13 Price Oscillator)

Price oscillator appears


on the next chart.
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Stock Sentiment vs Stock Momentum
S&P Composite (1/13 Price Oscillator)

Bullish Advisors 1/13 Price Oscillator*

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* Source Investors Intelligence.com
Stock Sentiment vs Stock Momentum

S&P momentum

Bullish
advisors
momentum

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Bond Sentiment vs Bond Momentum
Govt Bond Prices)

Bond Bulls (10-week MA)*

14-week RSI (10-week MA)

*Source Market Vane www.pring.com


Primary
Primary bear market
bear
lasts 1 to 2 years

Primary bull market


lasts 1 to 2 years

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. . . means that the price
will very likely rally.

Oversold in a
bull market . . .

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. . . probably means
the top of the rally.

Overbought in a
bear market . . .

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Followed by a
trading range

Overbought in
a bull market

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Followed by a trading range

Oversold in a
bear market

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Doesn’t necessarily
result in much of a rally

Oversold in a
bear market
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GoldmanSachs
Goldman SachsCommodity
CommodityIndex
Index
Bull trend

Bear trend
Extreme overbought is a
Bear trend bull market characteristic
30-day ROC

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GoldmanSachs
Goldman SachsCommodity
CommodityIndex
Index

Extreme overbought is a
bull market characteristic
30-day ROC

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Psychology and One and Two Bar Price
Patterns

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Outside bars

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Outside bar

Encompasses
trading range of
previous bar and
then some!!

We want the close to


be in the lower end of
the trading range.

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Close should be in the
upper part of the range.

Encompasses trading
range of previous bar
and then some!!

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Measuring the Significance of Outside Bars

1. The wider the bar and the


wider the difference between
the open and close the better.

2. The sharper the preceding rally (reaction for a down


reversal) the better.

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Bank of India Daily

Bank of India
Outside bar

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Two Bar Reversals
Sharp rally

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Closes near the high

First bar opens


near the low.

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Second bar opens
near the high

Closes near the low

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Resistance zone The lower
the
resistance
zone the
better.

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CRB Composite
Two bar reversal

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Look at Different Time Frames

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December 2006 British Pound IMM

10-minute bar

False breakout

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December 2006 British Pound IMM

Hourly bar

Two bar reversal


signals false
breakout

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December 2006 Dow

30-minute bar

Not much of a
reversal signal.

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December 2006 Dow

Hourly bar

Strong two bar


reversal

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December Australian Dollar 2006

10-minute bar

No reversal signals here!!

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December Australian Dollar 2006

Hourly bar

Instant confirmation

Two bar reversal

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December Australian Dollar 2006

S&P ETF (SPY) Two bar reversal

Outside bar

Outside bar

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Partial Checklist for Identifying a Stock Market
Peak

• Strong economy

• Preceded by rising short-term interest rates.

• Rotation already moved to earnings driven


sectors. RS momentum of leaders rolling over.

• Market breadth leads the way down.

• Net new highs diverge negatively


Partial Checklist for Identifying a Stock Market
Peak

• Long-term momentum peaking.

• Confirmed by trendline breaks and negative 12-


month MA crossovers.

• Bullish sentiment. Question is no longer if, but when


and by how much is the market going higher?
S&P versus the Economy

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S&P versus Bond Yield Momentum

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Sector Momentum Position August 31 2013

Inflation/Deflation Ratio)

Green highlights show when


KST is rising.
KST

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World Stocks versus Long-term Momentum

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S&P versus the Economy

15/16 and 6/6

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