 Hello and welcome to this session. This is Professor Farhad in which you would look at technical analysis. What is technical analysis? It's basically attempt to exploit reoccurring and predictable pattern and a stock price to generate superior investment performance. Simply put, look at stock prices and in the hope of finding some sort of a trend, some predictable pattern that's gonna create superior return to your portfolio. Now, now technicians, people that use technical analysis, they don't basically throw fundamental information out of the window, but they believe that prices move slowly to their intrinsic value. Therefore, if they can see a trend before the price actually react, then they are ahead of the game, whether the stock is going up or the stock is going down. So much of the technical analysis, they'll try to uncover trends in the market prices and basically they're searching for momentum. If they see prices going up, up, up or down, down, down, they'll try to make some sense out of it. So momentum can be absolute, in which case one searches for upward price trends or relative. How's your stock doing to other similar stocks or how your stock doing to other to the industry or how your stock performing toward the market overall? So let's take a look at momentum and specifically move in averages. What is the move in average? Basically, looking at the price of the stock or the price of an index for this matter and averaging the price over a given interval where that interval is updated as time passes. For example, if we're looking at a 50-day moving average, first we compute the 50-day averages for the stock for over a period of time, which is 50 days, then the average is recomputed each day by dropping the oldest observation and adding the newest one. So once we get the day 51, day one is out of the computation and will add 51 becomes the day 50. And the best way to look at this is to look at an actual graph. This is the 50-day moving average for Intel and this is the line I'm going to market in red. This is the moving average and obviously you can see the stock prices fluctuation in the darker blue. And what does it tell us? Basically, one way to utilize this 50-day moving average is once the stock price drops below. For example, if you look at point B here, drops below the 50-day moving average, that's a bearish sign. Therefore, we sell once the stock price as in point A here rises above the 50-day moving average. It's a bullish sign. Therefore, we buy. Now, is this scientifically proven? Absolutely not. This is very subjective. This is very subjective and I'm going to be using the word subjective many times because some people look at the 100-day and 200-day. So depending what period you are looking at, when that you start your day one to day 50, you could also do 100-day and 200-day. And some people what they do, they use 50 and 100 and 200 all in conjunction together. So you're not really bullish until you move above 100 and you're bearish when you dip below 100. So there are many, many usage of these averages. It's just an idea, one way to look at momentum, to look at. This is a good example because it shows you that once we reach B, the stock reaches B price, which is around 36, it drops and it kept dropping. So that was a good selling signal. So this is a kind of a chart that really illustrates the concept that it doesn't mean it works all the time. So we have to be aware of that. It doesn't mean it's going to work all the time. And what happened with these moving averages? We spoke about algorithmic trading and also doesn't have to be algorithmic trading. Even if you have some time with your brokerage account, you can program your account or you can program your software that's provided by Schwab or any other brokerage house to execute those trades. For example, you tell the system once Amazon crosses the 50-day moving average, up, you buy, down, you sell, and it will automatically generate those buying and selling. And as a result, sometime you hear a complaining in the market that those are all algorithmic trading. So basically, once it hits below 50, everyone is aware of it. They will trigger selling orders. Again, how true is that? Again, because you have different ones, 100-day, 200-day, it's really subjective. But this is how it works. This is another example of it. Here we are looking at the weekly. This is for an index, the Dow Jones Industrial, the weekly. And notice the movement, it's up and down, up and down, up and down. But notice the average is pretty flat in a sense that it doesn't, that's the purpose of an average, is to flatten things out. But notice here also at week 16, the Dow fells below. It is moving average, weekly moving average, I guess. And notice the stock kept on dropping. Point and figure chart. This is one of the oldest chart on Wall Street. It was created in 1898. And you're going to see why in a moment it was created during that time. This chart has no time divention. Therefore, you're not looking over a particular period of time. It simply traces significant upward or downward movement in stock prices. Now, how do we define significant? We're going to see in a moment without regard to their timing. So what's going to happen, we're going to build a chart and we're going to place an X. Every time we have an increase by a certain increment, N and O. Every time we have a decrease by certain increment. And this chart can be created by hand. And that's why it was created in 1898 because back then they did not have data analytics tool or software to process this. So basically this is a completed chart. But let's take a look at how it works. For example, for this series of prices for a particular stock price, we're starting January 2nd at $40. And now we're going to trace, we're going to start to fill out this chart. Once we have a $2 increment, now this $2 increment, you set it. Usually when it's less than 100, the price of a stock is less than $100. They use a dollar increment. If it's more than 100, they use $2 increment, but it doesn't matter. This is for the purpose of illustration. So we're starting at January 2nd, $40. January 3rd, the stock price is $40.50. We don't do anything. January 4th, $41. January 5th, the price hit $42, which is a $2 increment. What we do is we think of this chart was empty. Now we place an ax here. Now we wait. It could have took maybe five, six, seven days until we hit $42. We just wait until that happens. Then January 8th, $41. January 9th, $42.50. $43.75. January 12th, it hits $44. That's a $2 increment increase. There you go. Now we wait. We're looking to go on $46, or we're going to go down to $42. The next step after $44, we're either going to be here, or if the stock dropped by $2, we're going to go down to $42. Let's see what happened next. $45, $44, $41.50. It drops by $2 more than $2, but it drops by our increment. Therefore, we place an O here. $41.40. It drops by $2 increment from the original increase. That's another O. Then it went down to $39, $39.50, $39.75, $38. That's $2 from $40. $35. That's another decrease right there. Now each column will either have an increases or a decreases, and you just keep on filling this out until you have a big picture, something that looks like this. Again, this is very subjective, but here's what they do. Once you look at this picture, well, you can draw a support line here, a resistance line here, a resistance line there, and basically what you say if the stock price dropped below my support, it's a signal to sell. If it can penetrate resistance, it's a signal to buy. Here you have congestion, basically the same amount, almost the same amount of increases or decreases. But again, how you interpret this, you could interpret it in so many different ways. It's very subjective, but this is what it should look like. It should give you a picture. Some people believe in those charts and they use them properly. Some people, they adjust them. Why not draw the resistance line, for example, here? It's very subjective. This picture looks better because it's designed to look better. But again, how long it took? We started in 1993. How long is this time period? No one knows. If you start in 1990, it might look different. If you extended it three more years, the whole picture would look different. So that's why you use it with your own risk, basically. Another momentum in the market is the breadth of the market. The breadth of the market is the measure of the extent to which movement in the market indexes is reflected widely in the price movement of all stocks in the market. So how well the overall everyone is doing, not only the index itself. The most common measure of the breadth, I mean, how spread it is, is the spread between the, how spread is the increase or the decrease, is the spread between the number of stocks that advance and decline in price. And if you listen to CNBC, they usually mention those terms constantly. If advances outnumber declines by a wide margin, then the market viewed as being stronger because the rally is widespread. It means everybody is participating in the rally. Everyone believes all the companies are doing well. These numbers are reported on a daily basis in the Wall Street Journal. And basically, this is a sample from May 25, 2017. For example, NYSE, we have 1569 advances and 1423 stocks that declined that day, not 5050, but slightly the advances are more. We can see the same thing for NASDAQ and how many did not change, and this is the total. So if you really want to see a rally, we want to see more of advances and less of declineers. For example, here, we also look at the new 52-week high. If they are more than the new 52-week lows, that's another positive sign. It means investors are bidding the prices up. Why? Because in anticipation of better growth in the future. Also, you would look at the volume, share volume. This is also another indicator of the breadth of the market. We look at the advances by the value, by the number of shares versus the declineers. Here, we see that more shares were sold as the stock price is declining than advances. And here's the number of unchanged. Again, those are a little bit subjective as well. But nevertheless, it shows you some momentum about the stock market. Relative strength is how well you are doing it out at someone else. Measures the extent to which a security, a stock, has outperformed or underperformed either the market as a whole or a particular industry. Or sometimes you could see how well it's doing relative to another stock. So the relative strength is computed by calculating the ratio of the price of the security to a price index for the industry. For example, you can take the relative strength of Toyota versus the auto industry. This would be measured by movement and the ratio of the price of the Toyota divided by the level of the auto industry. So if Toyota is beating on a relative basis, the auto industry, then it must be a buy. It's doing better than the industry itself. So horizon ratio implies Toyota is outperforming the rest of the industry. If relative strength can be assumed to be persistent over time, then this would be a signal to buy Toyota. So this is what you're looking for. In the next session, I would look at sentiment indicators. At the end of this session, I'm going to remind you that if you like this recording, please like it and share it. Connect with me on LinkedIn. Subscribe to my YouTube. And don't forget to visit my website, farhatlectures.com, if you are looking for additional resources for this course as well as other accounting and finance courses. Good luck and stay safe.