Using Technical Analysis

to Improve Portfolio Performance

By Ralph J. Acampora, CMT
Managing Director,
Altaira Wealth Management
[email protected]
March, 2011
 Basic Principle Of Finance
“The price/earnings ratio is a concept that the working analyst will
have to deal with extensively…the subject will fall into two parts. The
first deals with the actual behavior of the market, that is, of investors
and speculators with respect to P/E ratios. The second part…will
explore what the P/E ratio or multiple should be”. (page 345)

Security Analysis by Graham and Dodd

 PRICE / EARNINGS

Fact Estimate

Never Restated Often Restated

Technical Fundamental

Fusion-Analysis
 The Company
Competition Dividends
P/E Ratio Management Product

Price Psychology
Volume Time

The Stock
 Economic Analysis

Technical Fundamental
Analysis
Research Analysis

Quantitative Analysis
 History Of Technical Analysis (cont’d)
• 1960’s – The beginnings of the Chartered Financial Analysts (CFA)
designation

• 1970 – The beginning of the Market Technicians Association (MTA)

• 1975 – The MTA establishes the first technical library – housed at the New
York Institute of Finance

• 1985 – The creation of the Chartered Market Technician (CMT)

designation
 History Of Technical Analysis (cont’d)
• March 2005 – The Securities Exchange Commission amends Rule 344:
There are officially two different categories of Wall Street research
analysts: a fundamental analyst follows companies and has a CFA diploma;
a technical analyst follows stocks and has a CMT diploma. The Market
Technicians Association is a ‘Professional Regulatory Organization’ (PRO)
 Technical Tools
Charts And Their Specific Data:

• Line Chart – closing prices

• Bar Chart – price: high/low/close, and volume

• Candlestick Chart – price: open/high/low/close, and volume; the “real

body” is the thick bar that ranges between the open and the close; the
intraday highs and lows are called “shadows”.
Line Chart
 Bar Chart
High

Price Close

Low

Volume
Candlestick Chart

High High
Close Open

Open Close
Low Low
 Point & Figure

35 X Breakout Above the

34 DoubleTop
X X
X 0 X
X 0 X
X 0 X

30 X 0
 Sample of Five Minute Bar Chart

Source: TradeStation
 Sample of Daily Bar Chart

Source: TradeStation
 Sample of Weekly Bar Chart

Source: TradeStation
 Sample of Monthly Bar Chart

Source: TradeStation
 Sample of Five Minute Candlestick
Chart

Source: TradeStation
 Sample of Daily Candlestick Chart

Source: TradeStation
 Sample of Weekly Candlestick Chart

Source: TradeStation
 Sample of Monthly Candlestick Chart

Source: TradeStation
Comparison Between Bar/Candlestick
Versus Point & Figure Charting
Users’ Orientation Bar/Candlestick P&F

Intra-Day Trading Real-Time (Minute-

N/A
By-Minute) Charts

Near-Term (Outlook: Daily Charts 1-Unit

Several Days To
Several Weeks)
Comparison Between Bar/Candlestick
Versus Point & Figure Charting (cont’d)
Users’ Orientation Bar/Candlestick P&F

Intermediate-Term Weekly Charts 1-Unit

(Outlook: Several Weeks
1X3
To Six Months Or So)

Long-Term 1-Unit
Weekly Charts
(Outlook: One Year 1X3
Monthly Charts
Or More) 2-Unit
2X3
Example Of Hand Drawn Trends
Example Of Hand Drawn Trends
(cont’d)
Identifying Support And Resistance
Levels
Failures to break to a new high over time: Why?
Because there is supply or selling at 25.
Technicians refer to this as a level of resistance.

25 25

20 20

Failures to break down over time: Why?

Because there is demand or buying at 20.
Technicians refer to this as a level of support
Accelerated Price Trends
Parabolic Rise A Collapse
 Examples Of Trend Violations
Trend breaks in gradual uptrends: closing price; 3% Rule on heavy
volume.
 Examples Of Trend Violations (cont’d)
Trend breaks in gradual downtrends: closing price; 3% Rule on heavy
volume.
Fanning Principle In An Upward Bias
Fanning Principle Within A Downward
Bias
The Four Phases Of Price Activity

Phase Three

Phase One
Phase One
Identifying A “Value Stock”

100

20
Identifying A “Momentum Stock”

100

20
Identifying An “Over Valued” Stock
100

20
Identifying A “Vulnerable” Stock
100

20
AT & T

60
Eastman Kodak

60
V- Bottom

Key Reversal Day

Gap
 Double Bottom
30

25

Key Reversal Day

20 20 Retest low on lighter volume
 Ascending Triangle
90 Objective

80 Apex

70
Head & Shoulder Top
Head

Left Shoulder Right Shoulder

Neckline
Head & Shoulder Top
75

55 55

35 Objective
 Rising Flag
75

70

65
60 Objective
 Doji And Doji Dragonfly
Definition: a Doji represents
indecision on the part of investors in
general – the open and closing prices Doji
are the same. A Southern Doji
materializes during a decline.

Description: during a dragonfly Doji,

the open, low and close are all at the
High of the day.
Doji Dragon Fly
 Bullish Engulfing Pattern
Definition: prices are falling until
buying comes in and swamps the
selling.

Description: a black candle appears

first and is then completely overtaken
by a white candle. The white candle’s
high is higher and its low is lower than
the previous black body.
 Rising Window
Definition: the imbalance of buyers
over sellers creates an upside gap
(space) on the price chart which the
Japanese call a rising window. This
upward momentum usually continues.
Support
Gap
Description: the rising window now
serves as underlying support –
another factor in the maintenance of
this up trend.
 Tower Top
Definition: materializes at the end of
a major advance in price. Buyers are
replaced by sellers as the trend
reverses; but shortly thereafter, a
sudden, sharp decline takes place.

Description: several tall white

candles are followed by several small
bodies – this decreases the positive
momentum and then a large black
body appears that represents the
“tower”.
 Falling Three Method
Definition: the downtrend pauses in
such a manner that the stage is set for
the resumption of this trend. Counter-
trend rallies are normal within
downtrends.

Description: a large black candle is

followed by three white or Harami
bodies that remain within the black
candle’s high/low range. The last
session is dominated by another large
black candle that opens below the
close of the previous body.
 Double Top
Definition: a period of time where
price consolidates and finally breaks
Out above the supply (resistance); it is 35 X Breakout Above the
34 DoubleTop
from this bottom formation that one is X X
able to take an upside vertical and/or X 0 X
horizontal count. X 0 X
X 0 X
Description: needs three columns:
30 X 0
two columns of “X’s” and one column Source: “Point & Figure Charting” – Thomas J. Dorsey

Of “0’s”. The third column ends with a

new high (the higher “X”).
 Bearish Triangle
Definition: it is similar to a symmetrical X
triangle in bar charting wherein the buyers X 0
and sellers are equally at odds. This 80 X 0 X
standoff is a sign of doubt as to which force X 0 X 0 X
is greater, the buyers or the sellers. X 0 X 0 X 0
X 0 X 0 X 0
Description: the pattern must have five
X 0 X 0 X 0
vertical columns with a series of declining
highs and rising lows. It is a consolidation 75 X 0 X 0 0

formation and not a continuation pattern X 0 0 Sell Signal

because it is not clear as to the direction X

price will take after the eventual break out. X

Source: “Point & Figure Charting” – Thomas J. Dorsey
 Dow Theory
Charles H. Dow’s Theory:

• Use only two indexes:

– The Dow Jones Industrial Average – thirty component issues
– The Dow Jones Transportation Average – twenty component issues

• Plot only closing prices – Dow stated: “the most important price of the
day is the close”

• These two averages must confirm each other’s direction

 Dow Theory
• Primary Bull Market – when both averages are making new closing highs

• Primary Bear Market – when both averages are making new closing lows

• Secondary Reaction – when one average does not confirm the direction of
the other average. When one fails to make a new high in a primary bull
market or one fails to make a new low in a primary bear market, then a
secondary reaction is taking place.
 Recent Dow Theory Primary Bull And
Bear Signals

Primary Bull Market

Primary Bear Market

Negative Non-Confirmation

Positive Non-Confirmation

Source: TradeStation
 Recent Dow Theory Primary Bull And
Bear Signals

Primary Bear Market

Negative Non-Confirmation

Source: TradeStation
Dow’s Psychology Of A Bull Market
• Investor sentiment moves between two extremes:

– Fear – dominates at market bottoms

– Greed – dominates at market tops

• Three stages of stock participation:

– Quality Stocks – blue chips dominate early in a new bull market

– Secondary Stocks – small and mid-cap issues come into vogue mid way in the
primary bull market
– Speculative Stocks – the “cats and dogs” dominate the last stage
 Dow’s Psychology Of A Bear Market
The Three C’s:

At the market’s peak, investors are complacent

During the mid-point of a bear market, investors are concerned

At the end of a bear market, investors capitulate - selling begets

selling as emotions (fear) dictate their market decisions
 Advance/Decline Line
“It Is Not A Stock Market But Rather A Market Of Stocks”

The Advance/Decline Line is a measurement of the market’s internal

momentum (breadth - the direction of the majority of stocks). It is
calculated by accumulating the net difference between daily advancing
issues versus daily declining stocks

“A Fully In-Gear Market”- both the leading market index, e.g. the Dow
Jones Industrial average, and the A/D line (breadth) are moving in the
same direction.
Advance/Decline
Lines

Source: The Lowry Report

Top Down Approach to Investing in
Equities
Stock
Market
Indexes

Internals-Breadth

Sentiment

Sector Analysis

Intermarket Analysis

Exchange Traded Funds (ETFs)

Individual Stock Selection