Moneycontrol Bureau

Hindustan Unilever hit a life high of Rs 632 in morning trade on NSE on Friday, after its Anglo-Dutch parent revealed that it had increased its stake in the company to 67.28 percent via an open offer that closed on Thursday, which is short of its earlier target to raise stake up to 75 percent.

Speaking to CNBC-TV18, economic affairs secretary, Arvind Mayaram said that Unilever's stake-hike in HUL was a statement of faith in the India economy. "We should only look at it as a positive statement of their (Unilevers) faith in the Indian economy. This is something we have been saying. India has a strong economy with a bright future, otherwise companies like Unilever wouldnt be making statements that indicate faith in the economy. I think that is what we need to do."

Unilever earlier had 52.48 percent stake in the India's largest fast moving consumer goods maker.

The London and Rotterdam-based maker of Surf detergent and Lipton tea said in a statement that shareholders of HUL tendered 319,699,278 shares during the tender period for the open offer. The offer price of Rs 600 per share values the transaction at about Rs 19,180 crore or Euro 2.45 billion, it added.

Unilever had first announced the open offer on April 30 as a part of its strategy to raise its stake in fast growing emerging markets.

Paul Polman, Unilever's CEO, said that as a result of the open offer it will significantly increase the stake in HUL, which was an "excellent" Indian business with a potential for "attractive" long-term growth.

MARKET CRICES OF 2008

The widely watched Dow Jones Industrial Average hit its all-time high on October 9, 2007, closing at 14,164.43. Less than 18 months later, it had fallen more than 50% to 6,594.44 on March 5, 2009. This wasn't the largest decline in history -- during the the Great Depression, the stock market took a 90% hit. However, it was more vicious -- it took only 18 months, while the fall during the Depression took over three years. What caused the 2008 stock market crash? Follow this timeline to understand exactly how it happened. 2007 The Dow opened the year at 12,459.54. It rose fairly steadily throughout most of the year, despite concerns about a slowdown in the over-heated housing market. In fact, there had been warning signs as early as 2006 that the housing market was starting to falter thanks to subprime mortgages. However, government officials didn't think the housing slowdown would affect the rest of the economy. By August 2007, the Federal Reserve recognized there was a bank liquidity problem. It began adding liquidity by selling its reserves of Treasuries and accepted subprime mortgages from the banks as collateral. Shortly after the Dow hit it peak, some economists warned about the potential general impact of widespread use of collateralized debt obligations and other derivatives. By late November, Treasury Secretary Hank Paulson launched a bank-funded Superfund to purchase toxic debt. However, as the year drew to a close, the BEA revised its estimate of third quarter GDP growth, (Gross Domestic Product) up to a phenomenal 4.9%. It seemed the healthy U.S. economy could shrug off a housing downturn, and financial market liquidity constraints, as 2007 drew to a close. The Dow ended the year just slightly off its October high, at 13,264.82. 2008 By the end of January, the BEA announced that GDP growth was a paltry .6% for the fourth quarter of 2007. The economy lost 17,000 jobs, the first time since 2004. The Dow shrugged off the news, and hovered between 12,00013,000 until March. On March 17, the Federal Reserve intervened to save the

failing investment bank Bear Stearns, the first casualty of the subprime mortgage crisis. The Dow dropped to an intra-day low of 11,650.44, but seemed to recover. In fact, many thought the Bear Stearns rescue would keep markets from sliding below 20% of the October high, and avoid a bear market. In fact, by May the Dow rose above 13,000 again and it seemed the worst was behind us. However, in July 2008 the subprime mortgage crisis had spread to government sponsored agencies Fannie Mae and Freddie Mac, requiring a Federal government bailout. The Treasury Department guaranteed $25 billion in their loans and bought shares of Fannie's and Freddie's stock, while the FHA to guaranteed $300 billion in new loans. The Dow closed on July 15 at 10,962.54, before bouncing back above 11,000 for the rest of the summer. September 2008 The month started with chilling news -- On Monday, September 15, 2008, Lehman Brothers declared bankruptcy. The Dow dropped 504.48 points. On Tuesday, the Federal Reserve announced it was bailing out insurance giant AIG with an $85 billion "loan" in return for 79.9% equity, effectively taking ownership. AIG had run out of cash in its attempt to pay off credit default swaps it had issued against mortgage-backed securities. On Wednesday, money market funds lost $144 billion as investors panicked, and switched to ultra-safe Treasury notes. The Dow fell 449.36 points. On Thursday, markets rose 400 points as investors learned about a new bank bailout package. On Friday, the Dow ended the week at 11,388.44 -- slightly below its Monday open of 11,416.37. On Saturday, September 20, Hank Paulson and Ben Bernanke sent the $700 billion bailout package to Congress. The Dow bounced around 11,000 until September 29, when the Senate voted against the bailout bill. The Dow fell 777.68 points, the most in any single day in history. (Source: CNN Money, Stocks Crushed, September 29, 2008) October 2008 Congress finally passed the bailout bill in early October, but by now panic had set in. The Labor Department reported that the economy had lost a whopping

159,000 jobs in the prior month. On Monday, October 6, the Dow dropped 800 points, closing before 10,000 for the first time since 2004. The Federal Reserve fought the ongoing banking liquidity crisis by lending $540 billion to money market funds, coordinating a global central bank bailout, and lowering the Fed funds rate to just one percent. However, the LIBOR bank lending rate rose to its high of 3.46%. The Dow responded by plummeting 13% throughout the month. By the end of October, the BEA released more sobering news -- the economy had contracted .3% in the third quarter. The nation was in recession. (Source: CNN Money, The Week That Broke Wall Street, October 6, 2008) November 2008 The Labor Department reported that the economy had lost a staggering 240,000 jobs in October. The month revealed more bad news. The AIG bailout grew to $150 billion, Treasury announced it was using part of the $700 billion bailout to buy preferred stocks in the nations' banks, and the Big 3 automakers asked for a Federal bailout, as well. By November 20, 2008, the Dow had plummeted to 7,552.29, a new low. However, the stock market crash of 2008 was not yet over.
December 2008

The Federal Reserve dropped the Fed funds rate to zero, its lowest level in history. The Dow ended the year at a sickening 8,776.39, down nearly 34% for the year. 2009 The Dow climbed to 9,034.69 on January 2, 2009 in a burst of optimism that the new Obama Administration could tackle the recession with his team of economic advisers. However, continued bad economic news sent the Dow down to 6,594.44 on March 5, 2009 -- its true market bottom. Soon afterwards, Obama's economic stimulus plan started to create the confidence needed to stop the panic. On July 24, 2009, the Dow reached a higher high, closing at 9,093.24 and beating its January high. For most, the stock market crash of 2008 was over.

However, the scars remained and investors remained skittish throughout the next four years. On June 1, 2012, panicked over a poor May jobs report and the eurozone debt crisis, they piled into ultra-safe Treasuries. The Dow dropped 275 points, and the 10-year benchmark Treasury yield dropped to 1.443 during intraday trading. This was the lowest rate in more than 200 years. This indicated that the confidence that eroded during 2008 had not yet returned to Wall Street.

Features The following are the most common features of technical analysis applications. Some software may focus on only one aspect (say back testing) and the combination of more than one software package is often required to build a fully automated trading system. Charting A graphical interface that presents price, volume and technical analysis indicators through a variety of visual interfaces such as line, bar, candlestick and open-high-low-close (OHLC) charts. The chart data is presented as a time series and users typically have the ability to view historical data with varying interval (sampling) periods. Interval periods range from seconds through to months; short term traders tend to use frequent interval periods, such as 1 minute i.e. the price data is updated every 1 minute, whereas longer term traders tend to use daily, weekly or monthly interval periods when trying to identify price and technical analysis trends. Some charting packages enable users to draw support and resistance trend line or for example Fibonacci retracements to help establish trending patterns. Back testing Enables traders to test technical analysis investment timing strategies against historical price movement for one or more specific securities. Strategies are compared to each other using diverse performance measurements such as maximum drawdown, annual profit and Sharpe ratio. The objective is to try and develop a trading strategy based on technical analysis indicator criteria, which will generate a positive return. This concept was computerized and introduced to traders by Louis B. Mendelsohn in 1983 with his ProfitTaker Futures Trading Software (see August 2010 issue of Stocks, Futures & Options Magazine). Optimization A process of testing technical analysis indicator parameters, with the view to developing an investment strategy that generates the maximum return based on historical price movement. The optimization process is achieved through the fine-tuning of the associated technical analysis charting parameters. Typically technical analysis indicators have a range of parameters that can be adjusted, such as the interval period and the technical analysis indicator variables. For example the stochastic indicator has four parameters that effect its results: %k, %d, slowing period, interval period. Optimization must be

performed carefully to avoid curve fitting. Back testing of an over-optimized system will perform real-time. One way to diminish over-optimization is by carrying out optimization on historical data and then performing future testing (sometimes referred to as 'out of sample') before making a final evaluation of a trading strategy. Scanner Scanners enable users to 'scan' the market, be it stocks, options, currencies etc., to identify investment opportunities that meet a user's specific investment criteria. Using a technical analysis scanner, a user could, for example, scan the market to identify oversold stocks that have stochastic and RSI value of less than 20% and 30 respectively. Alerts Alert software is used to monitor specific equities, such as stocks, options, currencies, warrants, etc., and provide a notification of when specific price, volume and technical analysis investment conditions are met. As an example, a person who uses technical analysis might want to be notified when the RSI indicator rises above 70, followed by the price falling below its 20 day moving average; using alerting software the user will be able to create an alert, which will provide a notification of when the technical analysis investment conditions are met. When alert conditions are met, a notification is typically communicated via an on screen pop up or sent as an email, instant message or text alert (to a mobile phone). Custom indicators Most technical analysis software includes a library of de facto standard indicators (e.g. moving averages and MACD). Some software will also provide a mean to customize, combine or create new indicators. This is typically achieved with a proprietary scripting or graphical language. Data feed Technical analysis software is typically used with end of day (EOD), delayed or real time data feeds. EOD data feeds provide the end of day closing price for the given equity and is typically updated once a day at market close. Delayed data is typically delayed 15 to 30 minutes depending on the exchange and is the most commonly used data feed type.[citation needed] Real time data feeds provide tick by tick 'real time' data. Real time data is licensed on a per-exchange basis whereas

delayed data is typically purchased on a regional basis, such as US markets, rather than an exchange basis.[citation needed] Broker interface Some technical analysis software can be integrated with brokerage platforms to enable traders to place trades via a user interface that they are familiar with. Typically these software providers try to differentiate themselves from the brokerage software through enhanced features such as automated trading. Platforms Technical analysis software is available in the form of commercial or open source software. Such software may be available on a computer, or on a mobile phone or personal digital assistant (PDA). Mobile phones and PDAs allow a user to access online technical analysis packages when away from their computer. However, packages that require the use of Java applets may not work on older model mobile phones or PDAs. Online technical analysis software packages provide access from any Internet-connected computer (including a suitably equipped mobile or PDA), but may require the user to store their information with the provider. Installed, downloaded software will only be available on the computers that the user has downloaded and installed it on.

Technical analysis
In finance, technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.[1] Behavioral economics and quantitative analysis use many of the same tools of technical analysis,[2][3][4][5] which, being an aspect of active management, stands in contradiction to much of modern portfolio theory. The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis which states that stock market prices are essentially unpredictable.[6]

History
The principles of technical analysis are derived from hundreds of years of financial markets data.[7] Some aspects of technical analysis began to appear in Joseph de la Vega's accounts of the Dutch markets in the 17th century. In Asia, technical analysis is said to be a method developed by Homma Munehisa during early 18th century which evolved into the use of candlestick techniques, and is today a technical analysis charting tool.[8][9] In the 1920s and 1930s Richard W. Schabacker published several books which continued the work of Charles Dow and William Peter Hamilton in their books Stock Market Theory and Practice and Technical Market Analysis. In 1948 Robert D. Edwards and John Magee published Technical Analysis of Stock Trends which is widely considered to be one of the seminal works of the discipline. It is exclusively concerned with trend analysis and chart patterns and remains in use to the present. As is obvious, early technical analysis was almost exclusively the analysis of charts, because the processing power of computers was not available for statistical analysis. Charles Dow reportedly originated a form of point and figure chart analysis. Dow Theory is based on the collected writings of Dow Jones co-founder and editor Charles Dow, and inspired the use and development of modern technical analysis at the end of the 19th century. Other pioneers of analysis techniques include Ralph Nelson Elliott, William Delbert Gann and Richard Wyckoff who developed their respective techniques in the early 20th century. More technical tools and theories have been developed and enhanced in recent

decades, with an increasing emphasis on computer-assisted techniques using specially designed computer software.

General description
Fundamental analysts examine earnings, dividends, new products, research and the like. Technicians employ many methods, tools and techniques as well, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns.[10] Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.[11] Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the relative strength index, and MACD. Other avenues of study include correlations between changes in Options (implied volatility) and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc. There are many techniques in technical analysis. Adherents of different techniques (for example, candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one technique. Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation. Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all such trends before investors are aware of them. Uncovering those trends is what technical indicators are designed to do, imperfect as they may be. Fundamental indicators are subject to the same limitations, naturally. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions.[12]

Characteristics
Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, intermarket and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.

Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis. Technical analysis analyzes price, volume and other market information, whereas fundamental analysis looks at the facts of the company, market, currency or commodity. Most large brokerage, trading group, or financial institutions will typically have both a technical analysis and fundamental analysis team. Technical analysis is widely used among traders and financial professionals and is very often used by active day traders, market makers and pit traders. In the 1960s and 1970s it was widely dismissed by academics. In a recent review, Irwin and Park[13] reported that 56 of 95 modern studies found that it produces positive results but noted that many of the positive results were rendered dubious by issues such as data snooping, so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience.[14] Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the efficient-market hypothesis.[15][16] Users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities.[17] In the foreign exchange markets, its use may be more widespread than fundamental analysis.[18][19] This does not mean technical analysis is more applicable to foreign markets, but that technical analysis is more recognized as to its efficacy there than elsewhere. While some isolated studies have indicated that technical trading rules might lead to consistent returns in the period prior to 1987,[20][21][22][23] most academic work has focused on the nature of the anomalous position of the foreign exchange market.[24] It is speculated that this anomaly is due to central bank intervention, which obviously technical analysis is not designed to predict.[25] Recent research suggests that combining various trading signals into a Combined Signal Approach may be able to increase profitability and reduce dependence on any single rule.[26]

Principles

Stock chart showing levels of support (4,5,6, 7, and 8) and resistance (1, 2, and 3); levels of resistance tend to become levels of support and vice versa.

A fundamental principle of technical analysis is that a market's price reflects all relevant information, so their analysis looks at the history of a security's trading pattern rather than external drivers such as economic, fundamental and news events. Therefore, price action tends to repeat itself due to investors collectively tending toward patterned behavior hence technical analysis focuses on identifiable trends and conditions.[27][28]

Market action discounts everything

Based on the premise that all relevant information is already reflected by prices, technical analysts believe it is important to understand what investors think of that information, known and perceived.

Prices move in trends

See also: Market trend

Technical analysts believe that prices trend directionally, i.e., up, down, or sideways (flat) or some combination. The basic definition of a price trend was originally put forward by Dow Theory.[10] An example of a security that had an apparent trend is AOL from November 2001 through August 2002. A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security. AOL consistently moves downward in price. Each time the stock rose, sellers would enter the market and sell the stock; hence the "zig-zag" movement in the price. The series of "lower highs" and "lower lows" is a tell tale sign of a stock in a down trend.[29] In other words, each time the stock moved lower, it fell below its previous relative low price. Each time the stock moved higher, it could not reach the level of its previous relative high price. Note that the sequence of lower lows and lower highs did not begin until August. Then AOL makes a low price that does not pierce the relative low set earlier in the month. Later in the same month, the stock makes a relative high equal to the most recent relative high. In this a technician sees strong indications that the down trend is at least pausing and possibly ending, and would likely stop actively selling the stock at that point.

History tends to repeat itself

Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.[10] Recognition of these patterns can allow the technician to select trades that have a higher probability of success.[30] Technical analysis is not limited to charting, but it always considers price trends.[1] For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment[31] Surveys that show overwhelming bullishness, for example, are evidence that an

uptrend may reverse; the premise being that if most investors are bullish they have already bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.[32] Recently, Kim Man Lui, Lun Hu, and Keith C.C. Chan have suggested that there is statistical evidence of association relationships between some of the index composite stocks whereas there is no evidence for such a relationship between some index composite others. They show that the price behavior of these Hang Seng index composite stocks is easier to understand than that of the index.[33]

Industry
The industry is globally represented by the International Federation of Technical Analysts (IFTA), which is a Federation of regional and national organizations. In the United States, the industry is represented by both the Market Technicians Association (MTA) and the American Association of Professional Technical Analysts (AAPTA). The United States is also represented by the Technical Security Analysts Association of San Francisco (TSAASF). In the United Kingdom, the industry is represented by the Society of Technical Analysts (STA). In Canada the industry is represented by the Canadian Society of Technical Analysts.[34] In Australia, the industry is represented by the Australian Technical Analysts Association (ATAA),[35] (which is affiliated to IFTA) and the Australian Professional Technical Analysts (APTA) Inc.[36] Professional technical analysis societies have worked on creating a body of knowledge that describes the field of Technical Analysis. A body of knowledge is central to the field as a way of defining how and why technical analysis may work. It can then be used by academia, as well as regulatory bodies, in developing proper research and standards for the field.[37] The Market Technicians Association (MTA) has published a body of knowledge, which is the structure for the MTA's Chartered Market Technician (CMT) exam.[38]

Systematic trading

Neural networks
Since the early 1990s when the first practically usable types emerged, artificial neural networks (ANNs) have rapidly grown in popularity. They are artificial intelligence adaptive software systems that have been inspired by how biological neural networks work. They are used because they can learn to detect complex patterns in data. In mathematical terms, they are universal function approximators,[39][40] meaning that given the right data and configured correctly, they can capture and model any input-output relationships. This not only removes the need for human interpretation of charts or the series of rules for generating entry/exit signals, but also provides a bridge to fundamental analysis, as the variables used in fundamental analysis can be used as input. As ANNs are essentially non-linear statistical models, their accuracy and prediction capabilities can be both mathematically and empirically tested. In various studies, authors have claimed that neural networks used for generating trading signals given various technical

and fundamental inputs have significantly outperformed buy-hold strategies as well as traditional linear technical analysis methods when combined with rule-based expert systems.[41][42][43] While the advanced mathematical nature of such adaptive systems has kept neural networks for financial analysis mostly within academic research circles, in recent years more user friendly neural network software has made the technology more accessible to traders. However, large-scale application is problematic because of the problem of matching the correct neural topology to the market being studied.

Backtesting
Systematic trading is most often employed after testing an investment strategy on historic data. This is known as backtesting. Backtesting is most often performed for technical indicators, but can be applied to most investment strategies (e.g. fundamental analysis). While traditional backtesting was done by hand, this was usually only performed on humanselected stocks, and was thus prone to prior knowledge in stock selection. With the advent of computers, backtesting can be performed on entire exchanges over decades of historic data in very short amounts of time. The use of computers does have its drawbacks, being limited to algorithms that a computer can perform. Several trading strategies rely on human interpretation,[44] and are unsuitable for computer processing.[45] Only technical indicators which are entirely algorithmic can be programmed for computerised automated backtesting.

Combination with other market forecast methods

John Murphy states that the principal sources of information available to technicians are price, volume and open interest.[10] Other data, such as indicators and sentiment analysis, are considered secondary. However, many technical analysts reach outside pure technical analysis, combining other market forecast methods with their technical work. One advocate for this approach is John Bollinger, who coined the term rational analysis in the middle 1980s for the intersection of technical analysis and fundamental analysis.[46] Another such approach, fusion analysis,[47] overlays fundamental analysis with technical, in an attempt to improve portfolio manager performance. Technical analysis is also often combined with quantitative analysis and economics. For example, neural networks may be used to help identify intermarket relationships.[48] A few market forecasters combine financial astrology with technical analysis. Chris Carolan's article "Autumn Panics and Calendar Phenomenon", which won the Market Technicians Association Dow Award for best technical analysis paper in 1998, demonstrates how technical analysis and lunar cycles can be combined.[49] Calendar phenomena, such as the January effect in the stock market, are generally believed to be caused by tax and accounting related transactions, and are not related to the subject of financial astrology. Investor and newsletter polls, and magazine cover sentiment indicators, are also used by technical analysts.[50]

Empirical evidence
Whether technical analysis actually works is a matter of controversy. Methods vary greatly, and different technical analysts can sometimes make contradictory predictions from the same data. Many investors claim that they experience positive returns, but academic appraisals often find that it has little predictive power.[51] Of 95 modern studies, 56 concluded that technical analysis had positive results, although data-snooping bias and other problems make the analysis difficult.[13] Nonlinear prediction using neural networks occasionally produces statistically significant prediction results.[52] A Federal Reserve working paper[21] regarding support and resistance levels in short-term foreign exchange rates "offers strong evidence that the levels help to predict intraday trend interruptions," although the "predictive power" of those levels was "found to vary across the exchange rates and firms examined". Technical trading strategies were found to be effective in the Chinese marketplace by a recent study that states, "Finally, we find significant positive returns on buy trades generated by the contrarian version of the moving-average crossover rule, the channel breakout rule, and the Bollinger band trading rule, after accounting for transaction costs of 0.50 percent."[53] An influential 1992 study by Brock et al. which appeared to find support for technical trading rules was tested for data snooping and other problems in 1999;[54] the sample covered by Brock et al. was robust to data snooping. Subsequently, a comprehensive study of the question by Amsterdam economist Gerwin Griffioen concludes that: "for the U.S., Japanese and most Western European stock market indices the recursive out-of-sample forecasting procedure does not show to be profitable, after implementing little transaction costs. Moreover, for sufficiently high transaction costs it is found, by estimating CAPMs, that technical trading shows no statistically significant riskcorrected out-of-sample forecasting power for almost all of the stock market indices."[16] Transaction costs are particularly applicable to "momentum strategies"; a comprehensive 1996 review of the data and studies concluded that even small transaction costs would lead to an inability to capture any excess from such strategies.[55] In a paper published in the Journal of Finance, Dr. Andrew W. Lo, director MIT Laboratory for Financial Engineering, working with Harry Mamaysky and Jiang Wang found that " Technical analysis, also known as "charting," has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution conditioned on specific technical indicators such as head-and-shoulders or double-bottoms we find that over the 31year sample period, several technical indicators do provide incremental information and may have some practical value.[56]

In that same paper Dr. Lo wrote that "several academic studies suggest that ... technical analysis may well be an effective means for extracting useful information from market prices."[57] Some techniques such as Drummond Geometry attempt to overcome the past data bias by projecting support and resistance levels from differing time frames into the near-term future and combining that with reversion to the mean techniques.[58]

Efficient market hypothesis

The efficient-market hypothesis (EMH) contradicts the basic tenets of technical analysis by stating that past prices cannot be used to profitably predict future prices. Thus it holds that technical analysis cannot be effective. Economist Eugene Fama published the seminal paper on the EMH in the Journal of Finance in 1970, and said "In short, the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse."[59] Technicians say[who?] that EMH ignores the way markets work, in that many investors base their expectations on past earnings or track record, for example. Because future stock prices can be strongly influenced by investor expectations, technicians claim it only follows that past prices influence future prices.[60] They also point to research in the field of behavioral finance, specifically that people are not the rational participants EMH makes them out to be. Technicians have long said that irrational human behavior influences stock prices, and that this behavior leads to predictable outcomes.[61] Author David Aronson says that the theory of behavioral finance blends with the practice of technical analysis: By considering the impact of emotions, cognitive errors, irrational preferences, and the dynamics of group behavior, behavioral finance offers succinct explanations of excess market volatility as well as the excess returns earned by stale information strategies.... cognitive errors may also explain the existence of market inefficiencies that spawn the systematic price movements that allow objective TA [technical analysis] methods to work.[60] EMH advocates reply that while individual market participants do not always act rationally (or have complete information), their aggregate decisions balance each other, resulting in a rational outcome (optimists who buy stock and bid the price higher are countered by pessimists who sell their stock, which keeps the price in equilibrium).[62] Likewise, complete information is reflected in the price because all market participants bring their own individual, but incomplete, knowledge together in the market.[62] Random walk hypothesis The random walk hypothesis may be derived from the weak-form efficient markets hypothesis, which is based on the assumption that market participants take full account of any information contained in past price movements (but not necessarily other public information). In his book A Random Walk Down Wall Street, Princeton economist Burton Malkiel said that technical forecasting tools such as pattern analysis must ultimately be self-defeating: "The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future."[63] Malkiel has stated that while momentum may explain some stock price movements, there is not enough momentum to make excess profits. Malkiel has compared technical analysis to "astrology".[64]

In the late 1980s, professors Andrew Lo and Craig McKinlay published a paper which cast doubt on the random walk hypothesis. In a 1999 response to Malkiel, Lo and McKinlay collected empirical papers that questioned the hypothesis' applicability[65] that suggested a non-random and possibly predictive component to stock price movement, though they were careful to point out that rejecting random walk does not necessarily invalidate EMH, which is an entirely separate concept from RWH. In a 2000 paper, Andrew Lo back-analyzed data from U.S. from 1962 to 1996 and found that "several technical indicators do provide incremental information and may have some practical value".[57] Burton Malkiel dismissed the irregularities mentioned by Lo and McKinlay as being too small to profit from.[64] Technicians say[who?] that the EMH and random walk theories both ignore the realities of markets, in that participants are not completely rational and that current price moves are not independent of previous moves.[29][66] Some signal processing researchers negate the random walk hypothesis that stock market prices resemble Wiener processes, because the statistical moments of such processes and real stock data vary significantly with respect window size and similarity measure.[67] They argue that feature transformations used for the description of audio and biosignals can also be used to predict stock market prices successfully which would contradict the random walk hypothesis. The random walk index (RWI) is a technical indicator that attempts to determine if a stocks price movement is random in nature or a result of a statistically significant trend. The random walk index attempts to determine when the market is in a strong uptrend or downtrend by measuring price ranges over N and how it differs from what would be expected by a random walk (randomly going up or down). The greater the range suggests a stronger trend.[68]

Scientific Technical Analysis

Caginalp and Balenovich in 1994[69] used their asset-flow differential equations model to show that the major patterns of technical analysis could be generated with some basic assumptions. Some of the patterns such as a triangle continuation or reversal pattern can be generated with the assumption of two distinct groups of investors with different assessments of valuation.The major assumptions of the models are that the finiteness of assets and the use of trend as well as valuation in decision making. Many of the patterns follow as mathematically logical consequences of these assumptions. One of the problems with conventional technical analysis has been the difficulty of specifying the patterns in a manner that permits objective testing. Japanese candlestick patterns involve patterns of a few days that are within an uptrend or downtrend. Caginalp and Laurent[70] were the first to perform a successful large scale test of patterns. A mathematically precise set of criteria were tested by first using a definition of a short term trend by smoothing the data and allowing for one deviation in the smoothed trend. They then considered eight major three day candlestick reversal patterns in a non-parametric manner and defined the patterns as a set of inequalities. The results were positive with an overwhelming statistical confidence for each of the patterns using the data set of all S&P 500 stocks daily for the five year period 1992-1996. Among the most basic ideas of conventional technical analysis is that a trend, once established, tends to continue. However, testing for this trend has often led researchers to conclude that stocks are a random walk. One study, performed by Poterba and Summers,[71]

found a small trend effect that was too small to be of trading value. As Fisher Black noted,[72] "noise" in trading price data makes it difficult to test hypotheses. One method for avoiding this noise was discovered in 1995 by Caginalp and Constantine[73] who used a ratio of two essentially identical closed-end funds to eliminate any changes in valuation. A closed-end fund (unlike an open-end fund) trades independently of its net asset value and its shares cannot be redeemed, but only traded among investors as any other stock on the exchanges. In this study, the authors found that the best estimate of tomorrow's price is not yesterday's price (as the efficient market hypothesis would indicate), nor is it the pure momentum price (namely, the same relative price change from yesterday to today continues from today to tomorrow). But rather it is almost exactly halfway between the two. A survey of modern studies by Park and Irwin[74] showed that most found a positive result from technical analysis. In recent years, Caginalp and DeSantis[75] have used large data sets of closed-end funds, where comparison with valuation is possible, in order to determine quantitatively whether key aspects of technical analysis such as trend and resistance have scientific validity. Using data sets of over 100,000 points they demonstrate that trend has an effect that is at least half as important as valuation. The effects of volume and volatility, which are smaller, are also evident and statistically significant. An important aspect of their work involves the nonlinear effect of trend. Positive trends that occur within approximately 3.7 standard deviations have a positive effect. For stronger uptrends, there is a negative effect on returns, suggesting that profit taking occurs as the magnitude of the uptrend increases. For downtrends the situation is similar except that the "buying on dips" does not take place until the downtrend is a 4.6 standard deviation event. These methods can be used to examine investor behavior and compare the underlying strategies among different asset classes.

Day trading in stocks is risky, more so if you are untrained. However, if you have an eye for spotting market trends, you can make a neat pile in quick intra-day deals. There was a time not long ago when trading was a simple game of buying and selling stocks based on one's conviction. Now, technical analysis- a science of predicting future prices from historical price data-has given investors new tools. "Technical analysis increases the probability of your call being right," says Abhijit Paul, assistant vice president, technicals, BRICS Securities. But, we reiterate what we mentioned in our report, "The Kick of Quick Bucks," in the October 2011 issue, though day trading looks easy, nobody can take the right call every time and there will be days when one loses money, at times a lot of it.

Howitworks Technical analysis is done on the basis of historical price movement plotted on a twodimensional chart. One reason it has become popular is that anybody can look at the chart and see how prices have moved. For example, in the chart, Easy Reading, you can see open, high, low and closing prices of the Bombay Stock Exchange Sensex on July 7, 2011. How to pick a stock Good volume and volatility are a must to gain from trading. While volume should ideally be at least 500,000 shares, the stock should have a high beta, or volatility. This means if the index rises 1%, the stock should rise by more than 1%. Those who don't understand the concept should see to it that the difference between intra-day high and intra-day low prices of a stock is at least Rs 10. Identifying the right stock and fixing a stop-loss level is a must, says Paul. One must stick to the stop-loss. Generally, stop-loss is fixed at 1.5-2%, which means the stock is sold if it falls 1.5-2% below the purchase price. Big traders generally fix stop-loss at about one-third of the expected profit. For example, if they expect a stock to rise 10% in three days, they set a stoploss at a point the price falls by 3%. Once you zero in on the stock, look at its volumes and price trends. Generally, higher volumes with higher price rise indicate an uptrend, but it should not be considered a thumb rule. "Volume is misread by a lot of people," says John Barrett, an instructor at Online Trading Academy, which teaches stock trading. Big volumes and large moves sometimes throw up big tops and bottoms, says Barrett. This means if both volumes and prices are increasing, it may be the last leg of the rally. Stock Trends Identifying trends is important. But how do you spot a trend? It's difficult, as the market never moves in a straight line. A stock will never fall continuously on a given day and rise on another. "Generally, higher highs and higher lows indicate an uptrend, whereas lower highs and lower lows mean a downtrend," says Shrikant Chouhan, senior vice president, technical research, Kotak Securities. "Look at the trend. Look at news related to the stock," says Chouhan. For example, if the rupee is falling against the US dollar, it's common knowledge that technology companies will gain. Analysts and market experts take the help of various parameters to confirm if a stock is a trade pick. The most used are available in any technical analysis software. These include 200-day moving average, relative strength index, moving average convergence divergence, or MACD, Fibonacci retracement and candle stick price chart. The terms may sound daunting, but software available nowadays makes technical analysis easy.
Click here to Enlarge

Moving Averages One of the widely used tools is the 200-day moving average. You simply have to plot the 200-day moving average on the price chart. When the price of the stock rises above the moving average line, it's a buy signal, and when the price falls below the moving average line, it is a sell signal. One can also look the 50-day moving average or the 10-day moving average. Trading is a game of probability. So, you have to arrive at your own methods to decide which parameters suit you the best. In the graph, Moving Averages, you can see the Sensex movement compared to the 200-day moving average of the Sensex. The brown line is the moving average line. In February, the line went above the price bars and the Sensex started falling. When the 200-day moving average fell below the price bars in April, the markets started going up. In thegraphic, the Sensex is below the moving average, indicating bearishness. But this is just one parameter.

Relative Strength Index (RSI) RSI compares the magnitude of recent gains to recent losses to see if an asset is oversold or overbought. RSI is plotted on a scale of 0-100. Generally, if it is above 70, the stock is considered overbought and so one can look to sell it. Similarly, an RSI of less than 30 indicates the stock is oversold and can be bought. In the chart, Relative Strength Index, you can see that RSI was near 20 in October 2011, signaling that L&T's shares were oversold. It reversed from 20 and the stock moved up.
Click here to Enlarge Moving average convergence divergence (MACD) This is a very important tool used by technical experts. You just have to select the MACD and plot it on a chart. The MACD comprises two lines, fast and slow. The fast line is the difference between the 26-day exponential moving average and the 12 day-exponential moving average. The slow line, also called the signal line, is the nine-day moving average. So, the blue line in the chart, MACD, is the fast line and the brown line is the slow line. With technology, these calculations are automated and a graph gets plotted at the click on the mouse.

When the fast line crosses above the slow line, it's a buy signal, and when the slow line crosses the fast line, it's a sell signal. The chart shows that the MACD is the best way to predict the movement of a stock. Fibonacci Retracement
Click here to Enlarge Fibonacci retracement is based on the assumption that the markets retrace by a few predictable percentages, the best known of which are 38.2%, 50% and 61.8%. So, when the market retraces 38%, it will generate either a sell or a buy call depending on the trend.

You have to plot Fibonacci retracement from the peak price. The software will give the above mentioned retracement levels. When the price reaches the 38.2% level and bounces, it means the price of the stock at which the chart plots the 38.2% retracement is the support level and you can buy. However, if the price falls below the 38.2% level, you may look at the price at 50% retracement level as your next support. The chart, Fibonacci Retracement, shows how the 38.2% retracement is working well for the Ranbaxy stock. Support and Resistance You may hear or read technical experts recommending support and resistance levels. But plotting support and resistance and finding it yourself is a simple job. As you know, prices move in a zig-zag fashion and form lows and highs. A support is plotted at the daily low price and resistance at the daily high price. For example, in the given chart, Chouhan says he sees support of 4,700 for the Nifty and if the index falls below this, it may fall further to 4,300. He has plotted resistance at 5,177 levels. Take a look at how he managed to get support and resistance for the Nifty from the October 7 graph, Support and Resistance.

Stochastic Oscillator
The Stochastic Oscillator was developed by Dr. George Lane to track market momentum.

The indicator consists of two lines:

%K compares the latest closing price to the recent trading range. %D is a signal line calculated by smoothing %K.

The number of periods used in the indicator can be varied according to the purpose for which the Stochastic Oscillator is used:
Purpose: %K Periods 5 to 10 days %D Periods Overbought level Oversold level Comments:

Combine with trend indicator Stand-alone or trade longer cycles

3 days

80%

20%

Very sensitive

14 or 21 days

3 days

70%

30%

Only shows important turning points

Slow Stochastic incorporates further smoothing and is often used to provide a more reliable signal.

Stochastic Oscillator Trading Signals

If the Stochastic Oscillator hovers near 100 it signals accumulation. Stochastic lurking near zero indicates distribution. The shape of a Stochastic bottom gives some indication of the ensuing rally. A narrow bottom that is not very deep indicates that bears are weak and that the following rally should be strong. A broad, deep bottom signals that bears are strong and that the rally should be weak.

The same applies to Stochastic tops. Narrow tops indicate that the bulls are weak and that the correction is likely to be severe. High, wide tops indicate that bulls are strong and the correction is likely to be weak.

Ranging Markets
Signals are listed in order of their importance:
1. Go long on bullish divergence (on %D) where the first trough is below the Oversold level. 2. Go long when %K or %D falls below the Oversold level and rises back above it. 3. Go long when %K crosses to above %D.

Short signals:
1. Go short on bearish divergence (on %D) where the first peak is above the Overbought level. 2. Go short when %K or %D rises above the Overbought level then falls back below it. 3. Go short when %K crosses to below %D.

Place stop-losses below the most recent minor Low when going long (or above the most recent minor High when going short). %K and %D lines pointed in the same direction are used to confirm the direction of the shortterm trend. Lane also used Classic Divergences, a type of triple divergence.

Trending Markets
Only take signals in the direction of the trend and never go long when the Stochastic Oscillator is overbought, nor short when oversold. Use trailing buy- and sell-stops to enter trades and protect yourself with stop-losses.

Long: If %K or %D falls below the Oversold line, place a trailing buy-stop. When you are stopped in, place a stop loss below the Low of the recent down-trend (the lowest Low since the signal day). Short: If Stochastic Oscillator rises above the Overbought line, place a trailing sell-stop. When you are stopped in, place a stop loss above the High of the recent up-trend (the highest High since the signal day). Exit: Use a trend indicator to exit.
Stochastic Example

The Slow Stochastic Example illustrates the trading signals. This study focuses on the trailing stop entry technique used in a trending market. Intel Corporation is shown with a 21 day exponential moving average (MA) and 7 day Stochastic %K and %D. The MA is used as the trend indicator with closing price as a filter.

Mouse over chart captions to display trading signals.

1. %K falls below 20. Place a trailing buy-stop just above the day's High of $33 1/2. 2. Move the buy-stop down to $33, above the High of day 2.

3. Move the stop down to above the High of day 3. 4. Move the stop down to $32 1/2 - one tick above the High on day 4. 5. The day opens with a new Low of $31 3/8 and then rises until we are stopped in at $32 1/2. Place a stop-loss below the Low (i.e.. the lowest Low since day [1]). Thereafter, price falls back to the day's Low, but fails to activate the stop-loss one tick below. 6. Exit when price closes below the MA.

Stochastic Oscillator Setup

See Indicator Panel for directions on how to set up an indicator. The default settings are:

%K - 5 days %D - 3 days Both are calculated using simple moving averages overbought level - 70% oversold level - 30%

Stochastic Oscillator Formula

To calculate the Stochastic Oscillator:
1. The first step is to decide on the number of periods (%K Periods) to be included in the calculation. The norm is 5 days, but this should be based on the time frame that you are analyzing. 2. Then calculate %K, by comparing the latest Closing price to the range traded over the selected period: CL = Close [today] - Lowest Low [in %K Periods] HL =Highest High [in %K Periods] - Lowest Low [in %K Periods] %K = CL / HL *100 3. Calculate %D by smoothing %K. The original formula used a 3 period simple moving average, but this can be varied, based on the time frame that you are analyzing.

Stochastics and rsi indicator

Stochastic RSI
The Stochastic RSI combines two very popular technical analysis indicators, Stochastics and the Relative Strength Index (RSI). Whereas Stochastics and RSI are based off of price, Stochastic RSI derives its values from the Relative Strength Index (RSI); it is basically the Stochastic indicator applied to the RSI indicator. As will be shown below in the chart of the S&P 500 E-mini Futures contract, the Stochastic RSI gives more profitable buy and sell signals and overbought and oversold readings, than the Relative Strength Index:

In the chart above of the E-mini S&P 500 Futures contract, the RSI indicator spent most of its time between overbought (70) and oversold (30), giving no buy or sell signals. However, the Stochastic RSI used the RSI indicator to uncover many profitable buy and sell signals. How to interpret the buy and sell signals of the Stochastic RSI is given next in the chart of the S&P 500 E-mini:

Stochastic RSI Buy Signal

Buy when the Stochastic RSI crosses above the Oversold Line (20).

Stochastic RSI Sell Signal

Sell when the Stochastic RSI crosses below the Overbought Line (80). The Stochastic RSI is an effective and potentially profitable use of the popular Stochastic indicator and RSI indicator. To read more about the Stochastic indicator and the RSI indicator, click the links below:

The Great Recession[1] (also referred to as the Lesser Depression, [2] the Long Recession,[3] or the global recession of 2009[4][5]) is a marked global economic decline that began in December 2007 and took a particularly sharp downward turn in September 2008. The initial phase of the ongoing crisis, which manifested as a liquidity crisis, can be dated from August 7, 2007, when BNP Paribas, citing a "complete evaporation of liquidity," terminated withdrawals from three hedge funds.[6] The bursting of the U.S. housing bubble, which peaked in 2006,[7] caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.[8][9]

The global recession has affected the entire world economy, with greater detriment to some countries than others. It is a major global recession characterised by various systemic imbalances and was sparked by the outbreak of the U.S. subprime mortgage crisis and financial crisis of 200708. The economic side effects of the European sovereign debt crisis,[10] austerity, high levels of household debt, trade imbalances, high unemployment, and limited prospects for global growth in 2013 and 2014[11][12] continue to provide obstacles to full recovery from the Great Recession.[13][14][15]

Overview
According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in the United States in December 2007 and became international in September 2008 and is still ongoing.[16][17] US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices.[18][19] The bad financial situation was made more difficult by a sharp increase in oil and food prices. The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined, many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance. A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices. In December 2008, the National Bureau of Economic Research (NBER) declared that the United States had been in recession since December 2007.[20] Several economists predicted that recovery might not appear until 2011 and that the recession would be the worst since the Great Depression of the 1930s.[21][22] Paul Krugman, who won the Nobel Memorial Prize in Economics, once commented on this as seemingly the beginning of "a second Great Depression."[23] The conditions leading up to the crisis, characterised by an exorbitant rise in asset prices and associated boom in economic demand, are considered a result of the extended period of easily available credit[24] and inadequate regulation and oversight.[25]

The recession has renewed interest in Keynesian economic ideas on how to combat recessionary conditions. Fiscal and monetary policies have been significantly eased to stem the recession and financial risks. Economists advise that the stimulus should be withdrawn as soon as the economies recover enough to "chart a path to sustainable growth".[26][27][28]

Causes
Main article: Causes of the Great Recession

The great asset bubble:[29] * Central banks' gold reserves $0.845 tn. * M0 (paper money) $3.9 tn. * traditional (fractional reserve) banking assets $39 tn. * shadow banking assets $62 tn. * other assets $290 tn. * Bail-out money (early 2009) $1.9 tn. Further information: Financial crisis of 200708

Overview
The immediate or proximate cause of the crisis in 2008 was the failure or risk of failure at major financial institutions globally, starting with the rescue of investment bank Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008. Many of these institutions had invested heavily in risky securities that lost much or all of their value when U.S. and European housing bubbles began to deflate during the 2007-2009 period. Further, many institutions had become dependent on short-term (overnight) funding markets subject to disruption.[30][31] The origin of these housing bubbles involved two major factors: 1) low interest rates in the U.S. and Europe following the 2000-2001 U.S. recession; and 2) significant growth in savings available from developing nations due to ongoing trade imbalances.[32] These factors drove a large increase in demand for high-yield investments. Large investment banks connected the housing markets to this large supply of savings via innovative new securities, fueling housing bubbles in the U.S. and Europe.[33]

Many institutions lowered credit standards to continue feeding the global demand for mortgage securities, generating huge profits while passing the risk to investors. However, while the bubbles developed, household debt levels rose sharply after the year 2000 globally. Households became dependent on being able to refinance their mortgages. Further, U.S. households often had adjustable rate mortgages, which had lower initial interest rates and payments that later rose. When global credit markets essentially stopped funding mortgagerelated investments in the 2007-2008 period, U.S. homeowners were no longer able to refinance and defaulted in record numbers, leading to the collapse of securities backed by these mortgages that now pervaded the system.[33][34] The failure rates of subprime mortgages were the first symptom of a credit boom turned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses.[35]

Panel reports
The majority report of the U.S. Financial Crisis Inquiry Commission (supported by 6 Democrat appointees without Republican participation) reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserves failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.[30] In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15 November 2008, leaders of the Group of 20 cited the following causes:
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.[36]

Trade imbalances and debt bubbles

The Economist wrote in July 2012 that the inflow of investment dollars required to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade

deficit, less than 1% of GDP in the early 1990s, hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result."[37] In May 2008, NPR explained in their Peabody Award winning program "The Giant Pool of Money" that a vast inflow of savings from developing nations flowed into the mortgage market, driving the U.S. housing bubble. This pool of fixed income savings increased from around $35 trillion in 2000 to about $70 trillion by 2008. NPR explained this money came from various sources, "[b]ut the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it."[38] Describing the crisis in Europe, Paul Krugman wrote in February 2012 that: "What were basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe."[39]

Monetary policy
Another narrative about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standards and risky lending.[9] While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of the Federal funds rate to 1% for more than a year which, according to Austrian theorists, allowed huge amounts of "easy" credit-based money to be injected into the financial system and thus create an unsustainable economic boom),[40] there is also the argument that Greenspan's actions in the years 20022004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of the dot-com bubblealthough by doing so he did not help avert the crisis, but only postpone it.[41][42]

High private debt levels

US Household debt relative to disposable income and GDP.

Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.[43][44] Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless. High private debt levels also impact growth by making recessions deeper and the following recovery weaker.[45][46] Robert Reich claims the amount of debt in the US economy can be traced to economic inequality, assuming that middle-class wages remained stagnant while wealth concentrated at the top, and households "pull equity from their homes and overload on debt to maintain living standards."[47] The International Monetary Fund (IMF) reported in April 2012: "Household debt soared in the years leading up to the Great Recession. In advanced economies, during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. The concurrent boom in both house prices and the stock market meant that household debt relative to assets held broadly stable, which masked households growing exposure to a sharp fall in asset prices. When house prices declined, ushering in the global financial crisis, many households saw their wealth shrink relative to their debt, and, with less income and more unemployment, found it harder to meet mortgage payments. By the end of 2011, real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds the house value), foreclosures, and fire sales are now endemic to a number of economies. Household deleveraging by paying off debts or defaulting on them has begun in some countries. It has been most pronounced in the United States, where about twothirds of the debt reduction reflects defaults."[48][49]

Pre-recession economic imbalances

The onset of the economic crisis took most people by surprise. A 2009 paper identifies twelve economists and commentators who, between 2000 and 2006, predicted a recession based on the collapse of the then-booming housing market in the United States:[50] Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Steve Keen, Jakob Brchner Madsen, Jens Kjaer Srensen, Kurt Richebcher, Nouriel Roubini, Peter Schiff, and Robert Shiller.[50]

Housing bubbles

Housing price appreciation in selected countries, 2002-2008 Further information: Real estate bubble

By 2007, real estate bubbles were still under way in many parts of the world,[51] especially in the United States,[9] France, United Kingdom, Italy, Spain, The Netherlands, Australia, United Arab Emirates, New Zealand, Ireland, Poland,[52] South Africa, Israel, Greece, Bulgaria, Croatia,[53] Norway, Singapore, South Korea, Sweden, Finland, Argentina,[54] Baltic states, India, Romania, Ukraine, and China.[55] U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' [in the U.S. housing market]...it's hard not to see that there are a lot of local bubbles".[56] The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history".[57] Real estate bubbles are (by definition of the word "bubble") followed by a price decrease (also known as a housing price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).

Increases in Uncertainty
Increases in uncertainty can depress hiring, investment, or consumption. The 2007-09 recession represents the most striking episode of heightened uncertainty since 1960.,[58][59]

Ineffective or inappropriate regulation

Regulations encouraging lax lending standards Several analysts, such as Peter Wallison and Edward Pinto of the American Enterprise Institute, have asserted that private lenders were encouraged to relax lending standards by government affordable housing policies.[60][61] They cite The Housing and Community Development Act of 1992, which initially required that 30 percent or more of Fannies and Freddies loan purchases be related to affordable housing. The legislation gave HUD the power to set future requirements, and eventually (under the Bush Administration) a 56 percent minimum was established.[62] To fulfil the requirements, Fannie Mae and Freddie Mac established programs to purchase $5 trillion in affordable housing loans,[63] and encouraged lenders to relax underwriting standards to produce those loans.[62] These critics also cite, as inappropriate regulation, The National Homeownership Strategy: Partners in the American Dream (Strategy), which was compiled in 1995 by Henry Cisneros, President Clintons HUD Secretary. In 2001, the independent research company, Graham Fisher & Company, stated: While the underlying initiatives of the [Strategy] were broad in content, the main theme ... was the relaxation of credit standards.[64] The Community Reinvestment Act (CRA) is also identified as one of the causes of the recession, by some critics. They contend that lenders relaxed lending standards in an effort to meet CRA commitments, and they note that publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007.[65] However, the Financial Crisis Inquiry Commission (FCIC) concluded that Fannie & Freddie "were not a primary cause" of the crisis and that CRA was not a factor in the crisis.[30]

Further, since housing bubbles appeared in multiple countries in Europe as well, the FCIC Republican minority dissenting report also concluded that U.S. housing policies were not a robust explanation for a wider global housing bubble.[30] Derivatives Author Michael Lewis wrote that a type of derivative called a credit default swap (CDS) enabled speculators to stack bets on the same mortgage securities. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS protection were betting that significant mortgage security defaults would occur, while the sellers (such as AIG) bet they would not. An unlimited amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found.[66] When massive defaults occurred on underlying mortgage securities, companies like AIG that were selling CDS were unable to perform their side of the obligation and defaulted; U.S. taxpayers paid over $100 billion to global financial institutions to honor AIG obligations, generating considerable outrage.[67] Derivatives such as CDS were unregulated or barely regulated. Several sources have noted the failure of the US government to supervise or even require transparency of the financial instruments known as derivatives.[68][69][70] A 2008 investigative article in the Washington Post found that leading government officials at the time (Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt) vehemently opposed any regulation of derivatives. In 1998 Brooksley E. Born, head of the Commodity Futures Trading Commission, put forth a policy paper asking for feedback from regulators, lobbyists, legislators on the question of whether derivatives should be reported, sold through a central facility, or whether capital requirements should be required of their buyers. Greenspan, Rubin, and Levitt pressured her to withdraw the paper and Greenspan persuaded Congress to pass a resolution preventing CFTC from regulating derivatives for another six months when Born's term of office would expire.[69] Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crisis of 2008.[70] Shadow banking system

Securitisation markets were impaired during the crisis.

Paul Krugman wrote in 2009 that the run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realised that they were re-creating the kind of financial vulnerability that made the Great Depression possible and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect."[71][72] During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch). The investment banks were not subject to the more stringent regulations applied to depository banks. These failures augmented the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, potentially facing failure, opted to become commercial banks, thereby subjecting themselves to more stringent regulation but receiving access to credit via the Federal Reserve.[73][74] Further, American International Group (AIG) had insured mortgage-backed and other securities but was not required to maintain sufficient reserves to pay its obligations when debtors defaulted on these securities. AIG was contractually required to post additional collateral with many creditors and counterparties, touching off controversy when over $100 billion of U.S. taxpayer money was paid out to major global financial institutions on behalf of AIG. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was used to bailout banks.[67] Economist Gary Gorton wrote in May 2009: "Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms running on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin (haircut), forcing massive deleveraging, and resulting in the banking system being insolvent."[75] The Financial Crisis Inquiry Commission reported in January 2011: "In the early part of the 20th century, we erected a series of protections the Federal Reserve as a lender of last resort, federal deposit insurance, ample regulations to provide a bulwark against the panics that had regularly plagued Americas banking system in the 20th century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system opaque and laden with short term debt that rivaled the size of the traditional banking system. Key components of the market for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards."[30]

Effects

Terminology
There are two senses of the word "recession": a less precise sense, referring broadly to "a period of reduced economic activity",[76] and the academic sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of negative GDP growth. If one analyses the event using the economics-academic definition of the word, the recession ended in the United States in June or July 2009.[77][78] However, in the broader, lay sense of the word, many people use the term to refer to the ongoing hardship (in the same way that the term "Great Depression" is also popularly used).[79][80][81][82][83][84]

Effect on the U.S.

Further information: Unemployment in the United States and National debt of the United States

Sectoral financial balances in U.S. economy 19902012. By definition, the three balances must net to zero. Since 2009, the U.S. capital surplus and private sector surplus have driven a government budget deficit.

In the U.S., persistent high unemployment remains as of December 2012, along with low consumer confidence, the continuing decline in home values and increase in foreclosures and personal bankruptcies, an increasing federal debt, inflation, and rising petroleum and food prices. In fact, a 2011 poll found that more than half of all Americans think the U.S. is still in recession or even depression, although economic data show a historically modest recovery.[85] This could be due to the fact that both private and public levels of debt are at historic highs in the U.S. and in many other countries, and a number of economists believe that excessive debt plays a role in causing bank crises and sovereign default.[86][87][88][89]

Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010.[90] CBO estimated in February 2013 that real U.S. GDP remained 5.5% below its potential level, or about $850 billion. CBO projected that GDP would not return to its potential level until 2017.[91] The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by March 2013.[92] The number of unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009, then declined to 12 million by early 2013.[93] Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to $400 billion by mid-2009 and has remained depressed at that level. Nonresidential investment (mainly business purchases of capital equipment) peaked at $1,700 billion in 2008 pre-crisis and fell to $1,300 billion in 2010, but by early 2013 had nearly recovered to this peak.[94] Housing prices fell approximately 30% on average from their mid-2006 peak to mid-2009 and remained at approximately that level as of March 2013.[95] Stock market prices, as measured by the S&P 500 index, fell 57% from their October 2007 peak of 1,565 to a trough of 676 in March 2009. Stock prices began a steady climb thereafter and returned to record levels by April 2013.[96] The net worth of U.S. households and non-profit organisations fell from from a peak of approximately $67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%. It began to recover thereafter and was $66 trillion by Q3 2012.[97] U.S. total national debt rose from 66% GDP in 2008 pre-crisis to over 103% by the end of 2012.[98] Martin Wolf and Paul Krugman argued that the rise in private savings and decline in investment fueled a large private sector surplus, which drove sizeable budget deficits.[99][100]

For the majority, income levels have dropped substantially with the median male worker making $32,137 in 2010, and an inflation-adjusted income of $32,844 in 1968.[101] The recession of 20072009 is considered to be the worst economic downturn since the Great Depression.[102] and the subsequent economic recovery one of the weakest. The weak economic performance since 2000 has seen the percentage of working age adults actually employed drop from 64% to 58% (a number last seen in 1984), with most of that drop occurring since 2007.[103] Approximately 5.4 million people have been added to federal disability rolls as discouraged workers give up looking for work and take advantage of the federal program.[104] The United States has seen an increasing concentration of wealth to the detriment of the middle class and the poor with the younger generations being especially affected. The middle class dropped from 61% of the population in 1971 to 51% in 2011 as the upper class increased its take of the national income from 29% in 1970 to 46% in 2010. The share for the middle class dropped to 45%, down from 62% while total income for the poor dropped to 9% from 10%. Since the number of poor increased during this period the smaller piece of the pie (down to 9% from 10%) is spread over a greater portion of the population.[105] The portion of national wealth owned by the middle class and poor has also dropped as their portion of the national income has dropped, making it more difficult to accumulate wealth. The younger generation, which would be just starting their wealth accumulation, has been the most hard hit. Those under 35 are 68% less wealthy than they were in 1984, while those over 55 are 10% wealthier.[106] Much of this concentration has happened since the start of the Great Recession. In 2009, the wealthiest 20% of households controlled 87.2% of all wealth, up from 85.0% in 2007. The top 1% controlled 35.6% of all wealth, up from 34.6% in 2007.[107] The share of the bottom 80% fell from 15% to 12.8%, dropping 15%. Inflation-adjusted median household income in the United States peaked in 1999 at $53,252 (at the peak of the Internet stock bubble), dropped to $51,174 in 2004, went up to 52,823 in 2007 (at the peak of the housing bubble), and has since trended downward to $49,445 in 2010. The last time median household income was at this level was in 1996 at $49,112, indicating that the recession of the early 2000s and the 20082012 global recession wiped out all middle class income gains for the last 15 years.[108] This income drop has caused a dramatic[citation needed] rise in people living under the poverty level and has hit suburbia particularly hard. Between 2000 and 2010, the number of suburban households below the poverty line increased by 53 percent, compared to a 23 percent increase in poor households in urban areas.[109]

Effects on Europe
Further information: European sovereign-debt crisis and Austerity

Public Debt to GDP Ratio for Selected European Countries - 2008 to 2011. Source Data: Eurostat

Relationship between fiscal tightening (austerity) in Eurozone countries with their GDP growth rate, 20082012[110]

The crisis in Europe generally progressed from banking system crises to sovereign debt crises, as many countries elected to bailout their banking systems using taxpayer money.[citation needed] Greece was different in that it concealed large public debts in addition to issues within its banking system. Several countries received bailout packages from the "troika" (European Commission, European Central Bank, International Monetary Fund), which also implemented a series of emergency measures. Many European countries which embarked on austerity programs, reducing their budget deficits relative to GDP from 2010 to 2011. For example, according to the CIA World Factbook Greece improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from 2010 to 2011 relative to GDP.[111][112] However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from 2010 to 2011, as indicated in the chart at right. Greece's public-debt-to-GDP ratio increased from 143% in 2010 to 165% in 2011.[111] This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries together was 70.1% in 2008, 79.9% in 2009, 85.3% in 2010, and 87.2% in 2011.[112][113] According to the CIA World Factbook, from 2010 to 2011, the unemployment rates in Spain, Greece, Ireland, Portugal, and the UK increased. France and Italy had no significant changes, while in Germany and Iceland the unemployment rate declined.[111] Eurostat reported that Eurozone unemployment reached record levels in September 2012 at 11.6%, up from 10.3% the prior year. Unemployment varied significantly by country.[114] Economist Martin Wolf analysed the relationship between cumulative GDP growth from 2008-2012 and total reduction in budget deficits due to austerity policies (see chart at right) in several European countries during April 2012. He concluded that: "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) explained approximately

53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.[110] Economist Paul Krugman analysed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: "... this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."[115]

Countries that avoided recession

Poland is the only member of the European Union to have avoided a decline in GDP, meaning that in 2009 Poland has created the most GDP growth in the EU. As of December 2009 the Polish economy had not entered recession nor even contracted, while its IMF 2010 GDP growth forecast of 1.9 per cent is expected to be upgraded.[116][117][118] Analysts have identified several causes: Extremely low levels of bank lending and a relatively very small mortgage market; the relatively recent dismantling of EU trade barriers and the resulting surge in demand for Polish goods since 2004; the receipt of direct EU funding since 2004; lack of over-dependence on a single export sector; a tradition of government fiscal responsibility; a relatively large internal market; the free-floating Polish zloty; low labour costs attracting continued foreign direct investment; economic difficulties at the start of the decade which prompted austerity measures in advance of the world crisis.[citation needed] While China, India, and Iran have experienced slowing growth, they have not entered recession. South Korea narrowly avoided technical recession in the first quarter of 2009.[119] The International Energy Agency stated in mid September that South Korea could be the only large OECD country to avoid recession for the whole of 2009.[120] It was the only developed economy to expand in the first half of 2009. Australia avoided a technical recession after experiencing only one quarter of negative growth in the fourth quarter of 2008, with GDP returning to positive in the first quarter of 2009.[121][122] The financial crisis did not affect developing countries to a great extent. Experts see several reasons: Africa was not affected because it is not integrated in the world market. Latin America and Asia seemed better prepared, since they experienced crisis before. In Latin America for example banking laws and regulations are very stringent. Bruno Wenn of the German DEG even suggests that Western countries could learn from these countries when it comes to regulations of financial markets.[123]

Timeline of effects

Denmark went into recession in the first quarter of 2008, but came out again in the second quarter.[125] Iceland fell into an economic depression in 2008 following the collapse of its banking system. (see 20082011 Icelandic financial crisis) By mid-2012 Iceland is regarded as one of Europe's recovery success stories largely as a result of a currency devaluation that has effectively reduced wages by 50%--making exports more competitive.[126] The following countries went into recession in the second quarter of 2008: Greece, Estonia,[127] Latvia,[128] Ireland[129] and New Zealand.[130] The following countries/territories went into recession in the third quarter of 2008: Japan,[131] Sweden,[132] Hong Kong,[133] Singapore,[134] Italy,[135] Turkey[124] and Germany.[136] As a whole the fifteen nations in the European Union that use the Euro went into recession in the third quarter,[137] and the United Kingdom. In addition, the European Union, the G7, and the OECD all experienced negative growth in the third quarter.[124] The following countries/territories went into technical recession in the fourth quarter of 2008: United States, Switzerland,[138] Spain,[139] and Taiwan.[140] South Korea "miraculously" avoided recession with GDP returning positive at a 0.1% expansion in the first quarter of 2009.[141] Of the seven largest economies in the world by GDP, only China and France avoided a recession in 2008. France experienced a 0.3% contraction in Q2 and 0.1% growth in Q3 of 2008. In the year to the third quarter of 2008 China grew by 9%. Until recently Chinese officials considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.[142] This figure may more accurately be considered to be 5 7% now that the main growth in working population is receding. Ukraine went into technical depression in January 2009 with a nominal annualised GDP growth of 20%.[143] Japan was in recovery in the middle of the decade 2000s but slipped back into recession and deflation in 2008.[144] The recession in Japan intensified in the fourth quarter of 2008 with a nominal annualized GDP growth of 12.7%,[145] and deepened further in the first quarter of 2009 with a nominal annualised GDP growth of 15.2%.[146]

Political instability related to the economic crisis

On February 26, 2009, an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of U.S. intelligence agencies that the global financial crisis presents a serious threat to international stability.[147]

Business Week stated in March 2009 that global political instability is rising fast due to the global financial crisis and is creating new challenges that need managing.[148] The Associated Press reported in March 2009 that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations."[149] Even some developed countries are seeing political instability.[150] NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off."[151] Globally, mass protest movements have arisen in many countries as a response to the economic crisis. Additionally, in some countries, riots and even open revolts have occurred in relation to the economic crisis. In January 2009 the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police due to the government's handling of the economy.[150] Hundreds of thousands protested in France against President Sarkozy's economic policies.[152] Prompted by the financial crisis in Latvia, the opposition and trade unions there organised a rally against the cabinet of premier Ivars Godmanis. The rally gathered some 1020 thousand people. In the evening the rally turned into a Riot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. In late February many Greeks took part in a massive general strike because of the economic situation and they shut down schools, airports, and many other services in Greece.[153] Police and protesters clashed in Lithuania where people protesting the economic conditions were shot with rubber bullets.[154] In addition to various levels of unrest in Europe, Asian countries have also seen various degrees of protest.[155] Communists and others rallied in Moscow to protest the Russian government's economic plans.[156] Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment has increased. Beyond these initial protests, the protest movement has grown and continued in 2011. In late 2011, the Occupy Wall Street protest took place in the United States, spawning several offshoots that came to be known as the Occupy movement. In 2012 the economic difficulties in Spain have caused support for secession movements to increase. In Catalonia support for the secession movement exceeded 50%, up from 25% in 2010. On September 11, a pro-independence march, which in the past has never drawn more than 50,000 people, pulled in a crowd estimated by city police at 1.5 million.[157]

Policy responses
Main article: National fiscal policy response to the Great Recession See also: 200809 Keynesian resurgence

The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States, and the European Union.[158] Bailouts of failing

or threatened businesses were carried out or discussed in the USA, the EU, and India.[159] In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a focus of economic and financial crisis management.

United States policy responses

Main article: United States policy responses to the Great Recession

Federal Reserve Holdings of Treasury and Mortgage-Backed Securities

The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $50 billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program.[160][161] Part of the announcements included temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board.[162] The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.[163] In May 2013 as the stock market was hitting record highs and the housing and employment markets were improving slightly[164] the prospect of the Federal Reserve beginning to decrease its economic stimulus activities began to enter the projections of investment analysts and affected global markets.[165]

Asia-Pacific policy responses

On September 15, 2008, China cut its interest rate for the first time since 2002. Indonesia reduced its overnight repo rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to 10.25 percent. The Reserve Bank of Australia injected nearly $1.5 billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $1.32 billion, through a refinance operation, its biggest in at least a month.[166] On November 9, 2008, the Chinese economic stimulus program is a RMB 4 trillion ($586 billion) stimulus package announced by the central government of the People's Republic of China in its biggest move to stop the global financial crisis from hitting the world's second largest economy. A statement on the government's website said the State Council had

approved a plan to invest 4 trillion yuan ($586 billion) in infrastructure and social welfare by the end of 2010. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance. China's export driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion. On November 28, 2008, the Ministry of Finance of the People's Republic of China and the State Administration of Taxation jointly announced a rise in export tax rebate rates on some labour-intensive goods. These additional tax rebates will take place on December 1, 2008.[167] The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilise the global economy. News of the announcement of the stimulus package sent markets up across the world. However, Marc Faber claimed that he thought China was still in recession on January 16. In Taiwan, the central bank on September 16, 2008, said it would cut its required reserve ratios for the first time in eight years. The central bank added $3.59 billion into the foreigncurrency interbank market the same day. Bank of Japan pumped $29.3 billion into the financial system on September 17, 2008, and the Reserve Bank of Australia added $3.45 billion the same day.[168] In developing and emerging economies, responses to the global crisis mainly consisted in low-rates monetary policy (Asia and the Middle East mainly) coupled with the depreciation of the currency against the dollar. There were also stimulus plans in some Asian countries, in the Middle East and in Argentina. In Asia, plans generally amounted to 1 to 3% of GDP, with the notable exception of China, which announced a plan accounting for 16% of GDP (6% of GDP per year).

European policy responses

Until September 2008, European policy measures were limited to a small number of countries (Spain and Italy). In both countries, the measures were dedicated to households (tax rebates) reform of the taxation system to support specific sectors such as housing. The European Commission proposed a 200 billion stimulus plan to be implemented at the European level by the countries. At the beginning of 2009, the UK and Spain completed their initial plans, while Germany announced a new plan. On September 29, 2008, the Belgian, Luxembourg and Dutch authorities partially nationalised Fortis. The German government bailed out Hypo Real Estate. On 8 October 2008 the British Government announced a bank rescue package of around 500 billion[169] ($850 billion at the time). The plan comprises three parts. The first 200 billion would be made in regard to the banks in liquidity stack. The second part will consist of the state government increasing the capital market within the banks. Along with this, 50 billion will be made available if the banks needed it, finally the government will write away any eligible lending between the British banks with a limit to 250 billion.

In early December German Finance Minister Peer Steinbrck indicated a lack of belief in a "Great Rescue Plan" and reluctance to spend more money addressing the crisis.[170] In March 2009, The European Union Presidency confirmed that the EU was at the time strongly resisting the US pressure to increase European budget deficits.[171]

Global responses

Responses by the UK and United States in proportion to their GDPs.

Most political responses to the economic and financial crisis has been taken, as seen above, by individual nations. Some coordination took place at the European level, but the need to cooperate at the global level has led leaders to activate the G-20 major economies entity. A first summit dedicated to the crisis took place, at the Heads of state level in November 2008 (2008 G-20 Washington summit). The G-20 countries met in a summit held on November 2008 in Washington to address the economic crisis. Apart from proposals on international financial regulation, they pledged to take measures to support their economy and to coordinate them, and refused any resort to protectionism. Another G-20 summit was held in London on April 2009. Finance ministers and central banks leaders of the G-20 met in Horsham, England, on March to prepare the summit, and pledged to restore global growth as soon as possible. They decided to coordinate their actions and to stimulate demand and employment. They also pledged to fight against all forms of protectionism and to maintain trade and foreign investments. They also committed to maintain the supply of credit by providing more liquidity and recapitalising the banking system, and to implement rapidly the stimulus plans. As for central bankers, they pledged to maintain low-rates policies as long as necessary. Finally, the leaders decided to help emerging and developing countries, through a strengthening of the IMF.

Policy recommendations

IMF recommendation
The IMF stated in September 2010 that the financial crisis would not end without a major decrease in unemployment as hundreds of millions of people were unemployed worldwide. The IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending. Governments should also invest in skills training for the unemployed and even governments of countries like Greece with major debt risk should first focus on long-term economic recovery by creating jobs.[172]

Raising interest rates

The Bank of Israel was the first to raise interest rates after the global recession began.[173] It increased rates in August 2009.[173] On October 6, 2009, Australia became the first G20 country to raise its main interest rate, with the Reserve Bank of Australia moving rates up from 3.00% to 3.25%.[174] The Norges Bank of Norway and the Reserve Bank of India raised interest rates in March 2010.[175]

Comparisons with the Great Depression

Main article: Comparisons between the Great Recession and the Great Depression

On April 17, 2009, the then head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronised by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries.[176] Olivier Blanchard, IMF Chief Economist, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the United States, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in 19281929.[177] Concerning unemployment, during the 19801982 recession, unemployment peaked at nearly 11% (10.8%) in November 1982 and remained above 10% from September 1982 through June 1983. Unemployment remained over 8% through January 1984 before dipping lower. By contrast, unemployment peaked at 10% in October 2009 for one month, before declining to below 10% after that, although remaining high at above 8% through April 2012. Unemployment numbers at the beginning of both recessions were at similar levels, around 6% in early-1980 and around 5% in early 2008.

In regards to inflation, the 19801982 recession inflation rate peaked at 14.76% in March 1980 and remained over 10% through October 1981, before dropping in early to mid-1982. By comparison, inflation during the 20082009 recession was practically non-existent, with a peak of nearly 5.6% inflation in July 2008 before dropping to .09% by December 2008. Deflation occurred in 2009, specifically between MarchOctober, troughing at negative (-) 2.10% in July 2009 before going positive to 2.72% in December 2009. Inflation remains low, standing at 2.65% as of March 2012. In a related debilitating category, the Prime Lending Rate (PLR) stood at 20% in early-1980 in order to combat high inflation. The PLR fluctuated somewhat but hit 20% again in late1980, again in early-1981, and yet again in late-1981, remaining at around 15% through mid1982 before dropping below 10% by the end of 1982. By contrast, during the 20082009 recession the PLR has remained flat at around 1% since late in 2008, practically speaking during the entire period. Although the banking industry and housing sector were hit hard in the 19801982 recession, the housing sector was hit harder in the 20082009 recession due to the housing bubble bursting in 20062007. This is the only category that is clearly worse in the 20082009 recession from a U.S. perspective.

Risks

Risk of relapse into recession

As recovery stalled and stagnation set in, several observers warned of the possibility of a second recession. United States observers often cite the recession of 19371938 as a model.[178] In his article On the Possibilities to Forecast the Current Crisis and its Second Wave (with Askar Akaev and Andrey Korotayev) in the Russian academic journal Ekonomicheskaya politika (December 2010. Issue 6. pp. 3946 [179]) the Rector of the Moscow State University Viktor Sadovnichiy published "a forecast of the second wave of the crisis, which suggested that it might start in July August, 2011".[180] A September 14, 2011 Reuters Poll indicated that economists thought the probability of another recession was at 31%, up from 25% the month before.[181] Since the US economy has not fully recovered from the last recession, any resumption would be considerably more painful.[182] In the United States, jobs paying between $14 and $21 per hour made up about 60% those lost during the recession, but such mid-wage jobs have comprised only about 27% of jobs gained during the recovery through mid-2012. In contrast, lower-paying jobs constituted about 58% of the jobs regained.

CHART PATTERNS

Head and Shoulders

Watch the Head and Shoulders Video and the Inverse Head and Shoulders Video. The Head and Shoulders chart pattern is a heavily used and quite profitable charting pattern, giving easily understood buy and sell signals. The chart of Home Depot (HD) below shows a Head and Shoulders pattern:

Head and Shoulders Components

1. Left Shoulder: Bulls push prices upwards making new highs; however these new highs are short lived and prices retreat. 2. Head: Prices don't retreat for long because bulls make another run, this time succeeding and surpassing the previous high; a bullish sign. Prices retreat again, only to find support yet again. 3. Right Shoulder: The bulls push higher again, but this time fail to make a higher high. This is very bearish, because bears did not allow the bulls to make a new higher or even an equal high. The bears push prices back to support (Confirmation line); this is a pivotal moment Will bulls make another push higher or have the bears succeeded in stopping the move higher.

Head and Shoulders Sell Signal

If prices break the confirmation support line, it is clear that the bears are in charge; thus, when price closes below the confirmation line, a strong sell signal is given. Note that a downward sloping confirmation line is generally seen as a more powerful Head & Shoulders pattern, mainly because a downward sloping confirmation line means that prices are making lower lows.

Windows (Gaps)
Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are called in the west, are an important concept in technical analysis. Whenever, there is a gap (current open is not the same as prior closing price), that means that no price and no volume transacted hands between the gap.

A Gap Up occurs when the open of Day 2 is greater than the close of Day 1. Contrastly, a Gap Down occurs when the open of Day 2 is less than the close of Day 1. There is much psychology behind gaps. Gaps can act as: Resistance: Once price gaps downward, the gap can act as long-term or even permanent resistance. Support: When prices gap upwards, the gap can act as support to prices in the future, either long-term or permanently.

Windows Example - Gaps as Support & Resistance

The chart below of eBay (EBAY) stock shows the gap up acting as support for prices.

Often after a gap, prices will do what is referred to as "fill the gap". This occurs quite often. Think of a gap as a hole in the price chart that needs to be filled back in. Another common occurance with gaps is that once gaps are filled, the gap tends to reverse direction and continue its way in the direction of the gap (for example, in the chart above of eBay, back upwards). The example of eBay (EBAY) above shows the gap acting as support. Traders and investors see anything below the gap as an area of no return, after all, there was probably some positive news that sparked the gap up and is still in play for the company. The chart below of Wal-Mart (WMT) stock shows many instances of gaps up and gaps down. Notice how gaps down act as areas of resistance and gaps up as areas of support:

Gaps are important areas on a chart that can help a technical analysis trader better find areas of support or resistance. For more information on how support and resistance work and how they can be used for trading, (see: Support & Resistance). Also, Gaps are an important part of most Candlestick Charting patterns; (see: Candlestick Basics) for a list of candlestick pattern charts and descriptions.

Flag
The Flag pattern usually occurs after a significant up or down market move. After a strong move, prices usually need to rest. This resting period usually occurs in the shape of a rectangle, thus the word "flag". The Flag is considered a continuation pattern because after resting, prices will usually continue in the direction they did before.

Flag Buy Signal

When price has moved higher and prices have consolidated, creating a channel of support and resistance, a buy signal is given when prices penetrate and close above the upward resistance line.

Flag Sell Signal

Assuming prices previously moved downward, then after a period of price consolidation, a sell signal is given when price penetrates and closes below the support line.

Double Top
The Double Top technical analysis charting pattern is a common and highly effective price reversal pattern. The chart below of Altria (MO) stock illustrates the Double Top reversal pattern:

Double Top Formation Components

1. First High: Bulls push prices upwards making new highs; however, these new highs are short lived and prices retreat. 2. Second High: Prices don't retreat for long because bulls make another run, making a similar high. Nevertheless, this is bearish, because bulls were unable to push prices higher; bears held their ground at the previous high level. The bears push prices back to support (Confirmation line); this is a pivotal moment - either bulls will make another push higher or bears will take control and push prices even lower, more than likely taking over for good.

Double Top Sell Signal

Sell when price closes below the confirmation line. Note that traders expect a significant increase in volume to accompany the confirmation line break; if there is very little volume when price pierces the confirmation line, then the move downward is suspect. Small volume usually means weak support of price movement (see: Volume).

Double Bottom
Watch a video with a detailed description of the Double Bottom Chart Pattern. The Double Bottom technical analysis charting pattern is a common and highly effective price reversal pattern. The chart below of Altria (MO) stock illustrates the Double Bottom reversal pattern:

To create a double bottom pattern, price begins in a downtrend, stops, and then reverses trend. However, the reversal to the upside is short-term. Price breaks again to the downside only to stop again and reverse direction upwards. With the second bottom of the double bottom pattern, it is usually more bullish if the second low is higher than the first low.

Double Bottom Buy Signal

The signal to buy is given when the confirmation line is penetrated to the upside. The confirmation line is drawn across the top of the double bottom pattern (see chart above). Often, after price penetrates the confirmation line, price will retrace for a short time, sometimes back to the confirmation line. This retracement offers a second chance to get into the market long. Volume also plays an important part of interpreting the Double Bottom pattern; this is illustrated in the chart below of Pfizer (PFE):

Generally, volume should explode when the confirmation line is penetrated as it did in the chart of Pfizer (PFE). The Double Bottom reversal pattern is a heavily used and effective charting reversal pattern. Another similar and popular bottom reversal pattern is the Reverse Head & Shoulders Pattern (see: Head & Shoulders). The opposite of the Double Bottom is the bearish Double Top pattern (see: Double Top).

TECHNICAL INDICATORS Elliott Wave

Elliott Wave theory states that prices move in waves. These waves occur in a repeating pattern of a (1) move up, (2) then a partial retracement down, (3) another move up, (4) a retracement, (5) then finally a last move up. Then, there is a (A) full retracement, followed by a (B) partial retracement upward, then (C) a full move downward. This repeats on a macro and micro time frame. A visual illustration of the basic pattern of the Elliott Wave is given below. A real life example of Elliott Wave in action is given further down:

Elliott Wave is based on crowd psychology of booms and busts, rallies and retracements. Traders often use fibonacci numbers (see: Fibonacci) to anticipate where a retracement is likely to end and thus the place where they should place their trade. The chart below illustrates the Elliott Wave pattern applied to crowd psychology (i.e. S&P 500) and Fibonacci Retracements:

Trading the Elliott Wave

In the example above of the S&P 500 ETF, if the Elliott Wave theorist recognizes that he/she just completed a the leg from (2) to (3) and the market is beginning to retrace, the trader

might put a buy order at the 38% Fibonacci retracement. In the example above, that trade would have failed and the trader would have been stopped out of their long position. The trader then might consider putting an order in at the 50% retracement. In the example above, that would have been an extremely profitable trade, making up for the previous loss and more. Next, realizing that the latest trend was the (4) to (5) upmove, the Elliot Wave theorist would next expect a downward move to (A). This retracement is larger than the previous (1) to (2) retracement and (3) to (4) retracement. A reasonable guess as to where the retracement (5) to (A) will end is the 0.618, the golden fibonacci ratio. Selecting the 61% retracement would have proved profitable for a little while, assuming the trader didn't have extremely tight stop losses in place, but the retracement turned out to be a head fake. Subsequently, the next often used Fibonacci retracement is 100%. This trade would have been very profitable, given the S&P 500 retraced almost perfectly at 100% of the move from (4) to (5). A likely profit target to exit at least part of the trade initiated at point (A) is the 38% Fibonacci level. This also happened to be the turning point for the next leg down from (B) to (C)

Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) weighs current prices more heavily than past prices. This gives the Exponential Moving Average the advantage of being quicker to respond to price fluctuations than a Simple Moving Average; however, that can also be viewed as a disadvantage because the EMA is more prone to whipsaws (i.e. false signals). The chart below of eBay (EBAY) stock shows the difference between a 10-day Exponential Moving Average (EMA) and the 10-day regular Simple Moving Average (SMA):

The main thing to notice is how much quicker the EMA responds to price reversals; whereas the SMA lags during periods of reversal. The chart below of the Nasdaq 100 exchange traded fund shows the difference between moving average crossovers buy and sell signals with a EMA and a SMA:

As the chart above of the QQQQ's illustrates, even though EMA's are quicker to respond to price movement, EMA's are not necessarily faster to give buy and sell signals when using moving average crossovers.

Also note that the concept illustrated in the chart above with Exponential Moving Average crossovers is the concept behind the wildly popular Moving Average Convergence Divergence (MACD) indicator; (see: MACD). Since Exponential Moving Averages weigh current prices more heavily than past prices, the EMA is viewed by many traders as quite superior to the Simple Moving Average; however, every trader should weigh the pros and the cons of the EMA and decide in which manner they will be using moving averages. Nevertheless, Moving Averages remain the most popular and arguably the most effective technical analysis indicator out on the market today.

Fibonacci

Fibonacci tools utilize special ratios that naturally occur in nature to help predict points of support or resistance. Fibonacci numbers are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc. The sequence occurs by adding the previous two numbers (i.e. 1+1=2, 2+3=5) The main ratio used is .618, this is found by dividing one Fibonacci number into the next in sequence Fibonacci number (55/89=0.618). The logic most often used by Fibonacci based traders is that since Fibonacci numbers occur in nature and the stock, futures, and currency markets are creations of nature - humans. Therefore, the Fibonacci sequence should apply to the financial markets. There are many Fibonacci tools used by traders, they include:

Fibonacci Retracements
Arguably the most heavily used Fibonacci tool is the Fibonacci Retracement. To calculate the Fibonacci Retracement levels, a significant low to a significant high should be found. From there, prices should retrace the initial difference (low to high or high to low) by a ratio of the Fibonacci sequence, generally the 23.6%, 38.2%, 50%, 61.8%, or the 76.4% retracement. For the examples of this section, the S&P 500 Depository Receipts (SPY) will be used based on the logic that the S&P 500 is a broad measure of human nature, thus the Fibonacci sequence should apply very well. Nevertheless, the Fibonacci sequence is applied to individual stocks, commodities, and forex currency pairs quite regularly. The chart above shows the 38.2% retracement acting as support for prices. Note that a trendline was drawn from a significant low (beginning of trend) to a significant high (end of trend); the trading software calculated the retracement levels. The chart below of the SPY's shows that Fibonacci Retracements can be used to retrace downtrend moves as well:

Notice after the bottom in the S&P 500, that price rallied to the 23.6% retracement level and then was promptly rejected downwards. After breaking resistance a few months later, the 23.6% retracement became support (see: Support & Resistance). Price rallied up to the 50% retracement level, where it ran up against resistance. Price continued to fluctuate between the 38.2% retracement level (acting as support) and the 50% retracement level (acting as resistance). There are many other Fibonacci tools available to stock, forex, or futures traders. Fibonacci Arcs are discussed next.

MACD
The MACD indicator is one of the most popular technical analysis tools. There are three main components of the MACD shown in the picture below:
1. MACD: The 12-period exponential moving average (EMA) minus the 26-period EMA. 2. MACD Signal Line: A 9-period EMA of the MACD. 3. MACD Histogram: The MACD minus the MACD Signal Line.

The MACD indicator is an effective and versatile tool. There are three main ways to interpret the MACD technical analysis indicator, discussed on the following three pages:

Moving Averages
Moving Averages
1. 2. 3. 4. 5. 6. 7. Simple Moving Average (SMA) Moving Average Crossovers Exponential Moving Average (EMA) Weighted Moving Average (WMA) Adaptive Moving Average Typical Price Moving Average (Pivot Point) Triangular Moving Average

Simple Moving Average

The Simple Moving Average is arguably the most popular technical analysis tool used by traders. The Simple Moving Average (SMA) is used mainly to identify trend direction, but is commonly used to generate buy and sell signals. The SMA is an average, or in statistical speak - the mean. An example of a Simple Moving Average is presented below:

The prices for the last 5 days were 25, 28, 26, 24, 25. The average would be (25+28+26+26+27)/5 = 26.4. Therefore, the SMA line below the last days price of 27 would be 26.4. In this case, since prices are generally moving higher, the SMA line of 26.4 would be acting as support (see: Support & Resistance.

The chart below of the Dow Jones Industrial Average exchange traded fund (DIA) shows a 20-day Simple Moving Average acting as support for prices.

Moving Average Acting as Support - Buy Signal

When price is in an uptrend and subsequently, the moving average is in an uptrend, and the moving average has been tested by price and price has bounced off the moving average a few times (i.e. the moving average is serving as a support line), then buy on the next pullbacks back to the Simple Moving Average. A Simple Moving Average can serve as a line of resistance as the chart of the DIA shows:

Moving Average Acting as Resistance Sell Signal

At times when price is in a downtrend and the moving average is in a downtrend as well, and price tests the SMA above and is rejected a few consecutive times (i.e. the moving average is serving as a resistance line), then buy on the next rally up to the Simple Moving Average. The examples above have been only using one Simple Moving Average; however, traders often use two or even three Simple Moving Averages. The advantages to using more than one Simple Moving Average is discussed on the next page.

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Price Volume Trend

Price Volume Trend combines percentage price change and volume to confirm the strength of price trends or through divergences, warn of weak price moves. Unlike other pricevolume indicators, the Price Volume Trend takes into consideration the percentage increase or decrease in price, rather than just simply adding or subtracting volume based on whether the current price is higher than the previous day's price. How the formula is calculated is presented below:
1. On an up day, the volume is multiplied by the percentage price increase between the current close and the previous time-period's close. This value is then added to the previous day's Price Volume Trend value. 2. On a down day, the volume is multiplied by the percentage price decrease between the current close and the previous time-period's close. This value is then added to the previous day's Price Volume Trend value.

The Price Volume Trend is helpful in seeing divergences; examples of these divergences are shown below in the chart of AT&T (T):

The Price Volume Trend indicator is usually interpreted as follows:

Increasing price accompanied by an increasing Price Volume Trend value, confirms the price trend upward. Decreasing price accompanied by a decreasing Price Volume Trend value, confirms the price trend downward. Increasing price accompanied by a decreasing or neutral Price Volume Trend value is a divergence and is indicating that the price movement upward is weak and lacking conviction. Decreasing price accompanied by a increasing or neutral Price Volume Trend value is a divergence and is indicating that the price movement downward is weak and lacking conviction.

High #1 to High #2
AT&T stock made lower highs, but the Price Volume Trend indicator made higher highs. This bullish divergence warned that bulls might be taking control of the stock and shorting AT&T would not be advisable. Since the Price Volume Trend indicator multiplies positive volume when prices close higher than the previous day's close, the Price Volume Trend indicator could be interpreted as meaning that more volume flowed into High #2 than flowed into High #1. More volume interest by buyers at High #2 signaled that the price move higher had significant strength behind it and it probably was going to continue.

Low #1 to Low #2
The stock price made higher lows, generally considered a bullish signal; the Price Volume Trend indicator confirmed this move higher when it made higher highs as well.

Price Volume Trend is a valuable technical analysis tool that combines both price and volume to confirm price action or warn of potential weakness or lack of conviction by buyers and sellers. Other similar indicators that should be investigated further are the Chaikin Oscillator (see: Chaikin Oscillator) and the Money Flow Index (see: Money Flow Index).

Weighted Moving Average

Moving Averages The Weighted Moving Average places more importance on recent price moves; therefore, the Weighted Moving Average reacts more quickly to price changes than the regular Simple Moving Average (see: Simple Moving Average). A basic example (3-period) of how the Weighted Moving Average is calculated is presented below:

Prices for the past 3 days have been $5, $4, and $8. Since there are 3 periods, the most recent day ($8) gets a weight of 3, the second recent day ($4) receives a weight of 2, and the last day of the 3-periods ($5) receives a weight of just one. The calculation is as follows: [(3 x $8) + (2 x $4) + (1 x $5)] / 6 = $6.17

The Weighted Moving Average value of 6.17 compares to the Simple Moving Average calculation of 5.67. Note how the large price increase of 8 that occured on the most recent day was better reflected in the Weighted Moving Average calculation. The chart below of Wal-Mart stock illustrates the visual difference between a 10-day Weighted Moving Average and a 10-day Simple Moving Average:
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Buy and sell signals for the Weighted Moving Average indicator are discussed in depth with the Simple Moving Average indicator (see: Simple Moving Average).

Relative Strength Index (RSI)

Relative Strength Index One of the most popular technical analysis indicators, the Relative Strength Index (RSI) is an oscillator that measures current price strength in relation to previous prices. The RSI is a versatile tool, it can be used to:

Generate buy and sell signals Show overbought and oversold conditions Confirm price movement Warn of potential price reversals through divergences

The chart below of eBay (EBAY) shows how the RSI can generate easy to follow buy and sell signals:

RSI Buy Signal

Buy when the RSI crosses above the oversold line (30).

RSI Sell Signal

Sell when the RSI crosses below the overbought line (70). Varying the time period of the Relative Strength Index can increase or decrease the number of buy and sell signals. In the chart below of Gold, two RSI time periods are shown, 14-day (default) and 5-day. Notice how decreasing the time period made the RSI more volatile, increasing the number of buy and sell signals substantially.

There is another way the Relative Strength Index gives buy and sell signals. This, and how to interpret RSI divergences, all contained on the next page