Technical Analysis Explained

Presented by

Martin J. Pring
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Three Points to Take Home.

1. Prices are determined by psychology,
peoples attitude to the emerging fundamentals
not the fundamentals themselves.
2. Keep things simple and apply common sense
at all times.
3. Only use approaches that make sense to
you.
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Real Earnings are not Correlated to Stock Prices (1870-2013)

4

Inflation Adjusted Equities

2
1

Shiller Real Earnings (10-year MA)

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

CPI Adjusted
S&P
Composite
Deflated
US Stock
Prices

Shiller P/E

??

Definition of Technical Analysis:

The art of identifying a price trend reversal
at a relatively early stage and riding on that
trend until.

.the weight of the evidence

shows or proves that the trend has reversed.
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In technical analysis we are dealing

in probabilities, never certainties.

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The hopes and fears of all market

participants are reflected in one thing .the
price !!

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Technical analysis assumes that prices

move in trends.

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Trends have a tendency to perpetuate

because...

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Prices in any freely traded market are

determined by the attitude of all market
participants to the underlying fundamentals.

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A trend is a trend is a trend.

Always assume
the prevailing trend is in existence.

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There is no known technique for

determining the duration and exact
magnitude of a price move.
We can only recognize a change in
direction.

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It doesnt matter what time frame you

are following...

the principles of technical analysis

remain constant.

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The only difference is

the longer the time frame, the greater
the significance of any given trend
reversal.

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It doesnt matter what security you are

following...
the principles of technical analysis
remain constant.
If human nature ever changes technical
analysis will die!!

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Trends

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What is a trend?

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Market Cycle Model

Short-term trend
2 to 6 weeks

Intermediate trend
6 weeks to 9 months

Primary trend
9 months to 2 years

3-4-years
Source: Yelton Fiscal

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Market Cycle Model

Short-term trend
2-6weeks

Now Becomes.

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Intraday Market Cycle Model

Short-term trend
4-12
hours

Intermediate trend
4-12 days
Primary trend
2-6 weeks

Psychology and Momentum

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Keycorp
Keycorp

Earnings up Price down

Earnings

Earnings up

Keycorp
Keycorp

Price down
Earnings up

Earnings
Earnings up

Ebay
Price sideways to down
Ebay

Earnings Up
Ebay Earnings

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Calculating a Price Oscillator

S&P Composite

13-week moving average.

S&P Composite (1/13 Price Oscillator)

Price oscillator appears

on the next chart.
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Stock Sentiment vs Stock Momentum

S&P Composite (1/13 Price Oscillator)

Bullish Advisors 1/13 Price Oscillator*

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* Source Investors Intelligence.com

Stock Sentiment vs Stock Momentum

S&P momentum

Bullish
advisors
momentum
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Bond Sentiment vs Bond Momentum

Govt Bond Prices)

Bond Bulls (10-week MA)*

14-week RSI (10-week MA)

*Source Market Vane

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Primary
bear

Primary bear market

lasts 1 to 2 years

Primary bull market

lasts 1 to 2 years

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. . . means that the price

will very likely rally.

Oversold in a
bull market . . .

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. . . probably means
the top of the rally.

Overbought in a
bear market . . .

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Followed by a
trading range

Overbought in
a bull market

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Followed by a trading range

Oversold in a
bear market
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Doesnt necessarily
result in much of a rally

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

Bear trend

Bear trend
Extreme overbought
is a
bull market characteristic

30-day ROC

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GoldmanSachs
SachsCommodity
CommodityIndex
Index
Goldman

Extreme overbought is a
bull market characteristic
30-day ROC

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Psychology and One and Two Bar Price

Patterns

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Outside bars

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Outside bar
Encompasses
trading range of
previous bar and
then some!!

We want the close to

be in the lower end of
the trading range.

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Close should be in the

upper part of the range.

Encompasses trading
range of previous bar
and then some!!

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Measuring the Significance of Outside Bars

1. The wider the bar and the
wider the difference between
the open and close the better.

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

reversal) the better.

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Bank of India Daily

Bank of India

Outside bar

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Two Bar Reversals

Sharp rally

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Closes near the high

First bar opens

near the low.

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Second bar opens

near the high

Closes near the low

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Resistance zone

The lower
the
resistance
zone the
better.

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CRB Composite

Two bar reversal

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Look at Different Time Frames

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December 2006 British Pound IMM

10-minute bar

False breakout

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December 2006 British Pound IMM

Hourly bar

Two bar reversal

signals false
breakout

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December 2006 Dow

30-minute bar

Not much of a
reversal signal.

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December 2006 Dow

Hourly bar

Strong two bar

reversal

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December Australian Dollar 2006

10-minute bar

No reversal signals here!!

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December Australian Dollar 2006

Hourly bar

Instant confirmation
Two bar reversal

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December Australian Dollar 2006

Two bar reversal

S&P ETF (SPY)

Outside bar
Outside bar

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Partial Checklist for Identifying a Stock Market

Peak
Strong economy
Preceded by rising short-term interest rates.
Rotation already moved to earnings driven
sectors. RS momentum of leaders rolling over.
Market breadth leads the way down.
Net new highs diverge negatively

Partial Checklist for Identifying a Stock Market

Peak
Long-term momentum peaking.
Confirmed by trendline breaks and negative 12month MA crossovers.
Bullish sentiment. Question is no longer if, but when
and by how much is the market going higher?

S&P versus the Economy

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S&P versus Bond Yield Momentum

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Sector Momentum Position August 31 2013

Inflation/Deflation Ratio)

Green highlights show when

KST is rising.
KST

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World Stocks versus Long-term Momentum

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S&P versus the Economy

15/16 and 6/6

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