Chapter Nine.ppt

A Basic View of Technical Analysis and Market Efficiency Technical Analysis: The Use of Charting Key Indicator Series Efficient Market Hypothesis Weak Form of the Efficient Market Hypothesis Semistrong Form of the Efficient Market Hypothesis Strong Form of the Efficient Market Hypothesis The Technical Approach to Investment Timing A gap exists between the practices of brokerage houses and Wall Street (charting and other technical analyses) and the beliefs held in the academic community (such as in the efficient market hypothesis) Since a consensus does not exist, it may pay to consider many schools of thought in valuing a security Technical Analysis Examines prior price and volume data and other market-related indicators to determine past trends hoping this will help forecast future trends Emphasis on charts and graphs of internal market data Less emphasis on fundamental factors Technical Analysis Belief that the discovery of fundamental information may not lead to profitable trading because of timing considerations and market imperfections Market Imperfections: ability of the market to adjust rapidly to the supply of new information in valuing a security Technical Analysis Efficient Market Hypothesis: “All securities are correctly priced at any point in time” Implies neither fundamental analysis nor technical analysis work to profitably predict security valuation Technical Analysisassumes: 1. Market value is determined solely by the interaction of demand and supply 2. Although there are minor fluctuations in the market, stock prices tend to move in trends that persist for long periods Continued Technical Analysisassumes: 3. Reversals in trends are caused by shifts in demand and supply 4. Shifts in demand and supply can be detected sooner or later in charts 5. Many chart patterns tend to repeat themselves Technical AnalysisMost Significant Assumptions: Stock price