Chapter 6: Technical Analysis

FROM CLASSROOM TO BURSA MALAYSIA

What is Technical Analysis?
The study of charts and patterns of price movements in an attempt to forecast future market
price (or market movement).
Use past (historical) stock prices, trading volumes and other market data ( may sourced from
fundamental analysis).
Technicians (chartists) believe on the recurring patterns of price.
TA: Answering the question of “when to buy or sell”.
FA: Answering the question of “what to buy or sell”. (Stock selection)
The Philosophy
 Market discounts everything
Market prices reflect all material information available in the market.
Fundamental, psychological, political, social and anything that may have influence on the stock markets.

 Price moves in trends (The Dow Theory)

Need to identify the trend as early as possible.
 The Dow Theory; using stock market averages to predict future movements in the market.
Target Price.

 History repeats itself

Bull and bear are the market trends that are repetitive and evolves overtime.
The Tools
1. Bar charts
2. Line charts
3. Point-and-Figure charts
4. Japanese Candlesticks Charts
https://bursaacademy.bursamarketplace.com/en/article/equities/kepentingan-naked-chart-seba
gai-asas-kepada-trader-pemula-webinar
The Trends
Trading=psychology=emotion!

rebound

“Fear”: SELL
correction

“Greedy”: BUY

“Hope”: wait & see

How to determine the Buy or Sell
signals?:
Resistance, Support, Volume
Support: Temporary floor
Resistance: Temporary ceiling
Situation to relate: Ball bouncing on the floor, taking lift to ride the floors.

Rule: Once a support zone has been violated (breakout), its become the resistance zone.
Conversely, once a resistance zone is violated (breakout), its becomes the support zone of a price.
DEMO ON SUPPORT &
RESISTANCE

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support-dan-resistance
1. Moving Average
• Most popular and easy to use technical indicators (tools).
• It smoothes out data series make it easier to identify the price trend (direction).
• For example, 10-days MA is calculated by averaging day-1 to day-10 stock prices; X figures. Next
figures, is by averaging day-2 to day-11 prices’, and so on i.e n th prices. So, when you join the figures
(points), u will get a line or a trend line, based on series of 10-days moving average.
• Price data; moving average- lagging, trend-following indicators. MA will not predict change in trend,
rather follow behind the trend. Thus, best suited for trend identification/ following purposes, not for
prediction. Often used together with other technical indicators to give sufficient signals for investment
decision.
• Two types of MA; Exponential MA and Simple MA.
• Option: 10-day & 20-day MA, 20-day & 50-day MA, 50-day & 200-day MA. Right combination? Time
frame, nature of stock, and past price trend. Trial-error for the best combination for a particular stock.
Technical Indicators
1. Moving Average
2. Moving Average Convergence Divergence (MACD)
3. Stochastic Oscillator
4. Relative Strength Index (RSI)
•Buy Signal: 10-day MA crosses over (above) 20-day MA, followed by expanded volume.
• Sell Signal: 10-day MA crosses below 20-day MA.
 2. Moving Average
Convergence Divergence
(MACD)
• MACD measures the momentum of price movements. It is
constructed by using two Exponential Moving Average (EMA),
shorter (12-day EMA) and longer term EMA (26-day EMA).
• The value of MACD is calculated by subtracting the longer EMA with
shorter EMA. Then, signal line is computed using the 9-day EMA of
the MACD.
Buy signal: (i) MACD crosses above the signal line (grey)
(ii) MACD is above the zero line (oscillator)
Sell signal: (i) MACD crosses below the signal line (grey)
(ii) MACDis below the zero line (oscillator)
3. Stochastic Oscillator
• Momentum indicator that tracks the closing prices, whether close high or close low for the day.
• It is used to identify a possible trend reversal based on the belief that when the stock is
consistently near the low, it indicates that the stock is under selling pressure. Vice-versa.
• Two types of Stochastic Oscillator: Fast and Slow.
• Fast Stochastic Oscillator is more sensitive, prone to false signal. Thus, focus on Slow Stochastic
Oscillator.
• There are two lines % D (dotted line) and % K ( straight line).
• %D is slower line of those two lines. Derived by applying a 3-day SMA to the %K line.
• Stochastic Oscillator has a range of 0 to 100. Above 80 is considered overbought and below 20
is considered over sold.
Buy Signal: (i) when %K line (Straight line) is above %D line (dotted line).
(ii) more significant, when % K crosses the %D from the right hand side of the through.
This signal over sold: BUY. Enhance rebound of the stock.
Sell Signal: (i) when the %K line is below the %D line.
(ii) More significant, when %K crosses the %D from the right side of the peak. This signal over bought: SELL
4. Relative Strength Index (RSI)
• Momentum indicator that measures the speed and change of price movements.
• Measures the strength of the security’s recent up moves compared to the strength of its recent
down moves. This helps to indicate whether a security has seen more buying or selling pressure
over a trading period.
• Its plotted a range of between 0 (highest oversold condition) to 100 (highest overbought
condition).
• Commonly:
• when RSI goes above 70; over bought SELL signal.
• When RSI goes below 30; over sold  BUY signal.
Buy signal: RSI below 30, and then moves down and crosses below over sold line; BUY signal.
This indicates the stock has reversed its prior bear trend, correction, and move back to normal range.

Sell signal: RSI above 70, and then moves down and crosses below the over bought line; SELL signal.
This indicates the stock has reversed its prior bull trend, correction, and move back to normal range.
Technical Analysis: A note!
• MACD line is above the zero line; BUY signal
•Stochastic indicator shows %K line below %D line; SELL signal
• What if it reversal?
• Technical analysis is not foolproof!
• Too much indicators is too crowd, identify a few that works well most of the time.
Key Driver?: Market
Information!
ONLINE PLATFORM TO SUPPORT
FUNDAMENTAL & TECHNICAL ANALYSIS: MARKET NEWS AND UPDATES:
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TRADE WISELY!
FUNDAMENTAL + TECHNICAL ANALYSIS = SUSTAINABLE
INVESTMENT STRATEGY FOR A WISE INVESTOR.