Technical Analysis: The Complete Resource for Financial Market Technicians (Charles D.Kirkpatrick II & Julie R. Dahlquist, 2006)

Trends

• Can be detected through Linear Least-Squares Regression.
• Trend develops from supply and demand.
• Patterns are very identical and they are in fractal irrespective of time.

Technical analysis controversies

• Random walk hypothesis state that one cannot get the current market from past results. The market moves like flipping coins.
• Efficient market hypothesis state that when new information come into the market, it immediately become the real price that will render technical and fundamental analysis useless.

Market

• To ensure a market is tradable, it must consist of fungiblity across different geographical location.
• Technical analysis can be applied to any market.
• Types of contracts
• Common stock
• Agricultural commodities
• Metals commodities
• Interest rates
• Foreign exchange
• Indexes
• Mutual funds
• Exchange traded funds
• Hypothetical player and marketplace
1. A specialist (market maker) to stablise the price.
2. A mutual fund desires to accumulate as the earning should improve.
3. A group of investors acting on from past records.
4. Funds owning the company's shares.
5. An estate need to raise cash sells.
6. Hedge fund attemping to trade.
• Market measurement
• Price-weighted average.
• Market capitalisation weighted average.
• Equally weighted (or geometric) average.

Dow Theory

• Main components
1. The market discounts eveything.
2. There are 3 primary kinds of market trends.
3. Primary trends have 3 phases.
4. Indices must confirm each other.
5. Volume must confirm the trend.
6. Trends persist until a clear reversal occurs.
• Rhea presented three hypotheses
1. The primary trend is inviolate.
2. The averages discount everything. 
3. Dow Theory is not infallible.

Market sentiment

• The net amount of any group of market players’ optimism or pessimism reflected in any asset or market price at a particular time.
• The theory of contrarian investing
• Whenever nonprofessional investors become “significantly” one-sided in their expectations about the future course of stock prices, the market will move in the direction opposite to that which is anticipated by the masses
• Human bias are their own worse enemy (Zweig, 2007)
• Everyone knows that you should buy low and sell high—and yet, all too often, we buy high and sell low. 
• Everyone knows that beating the market is nearly impossible—but just about everyone thinks he can do it. 
• Everyone knows that panic selling is a bad idea—but a company that announces it earned 23 cents per share instead of 24 cents per share can lose $5 billion of market value in a minute-and-a-half. 
• Everyone knows that Wall Street strategists can’t predict what the market is about to do—but investors still hang on every word from the financial pundits who prognosticate on TV.
•  Everyone knows that chasing hot stocks or mutual funds is a sure way to get burned—yet millions of investors flock back to the flame every year. Many do so though they swore, just a year or two before, never to get burned again.

Market strength

• Oscillators are indicators that are designed to determine whether a market is “overbought” or “oversold.”
• Haurlan Index
• Measures breadth over the short term, intermediate term, and long term with a set of moving averages derived from the number of advancing and declining stocks on the New York Stock Exchange (NYSE).
• Equity line 
• A graph of a potential account value beginning at any time adjusted for each successive trade profit or loss.
• McClellan Oscillator
• McClellan Ratio-Adjusted Oscillator
• McClellan Summation Index
• Plurality Index
• Absolute Breadth Index
• Unchanged Issues Index
• Breadth ratio
• Advance-Decline Ratio
• Breadth Thrust
• A thrust is when a deviation from the norm is sufficiently large to be noticeable and when that deviation signals the beginning of a new trend, usually upward.
• Up and down volume indicator
• Arms index
• Modified arms index
• Ninety Percent Downside Days (NPDD)
• An NPDD in isolation is only a warning of potential danger ahead, suggesting, “Investors are in a mood to panic” (Desmond, 2002, p. 38). 
• An NPDD occurring right after a new market high or on a surprise negative news announcement is usually associated with a short-term correction. 
• When two or more NPDDs occur, additional NPDDs occur, often 30 trading days or more apart. 
• Big volume rally periods of two to seven days often follow an NPDD and can be profitable for agile traders but not for investors. 
• A major reversal is signaled when an NPDD is followed by a 90% upside day or two 80% upside days back-to-back.
• In half the cases, the upside reversal occurred within five trading days of the low. The longer it takes for the upside day reversal, the more skeptical the investor should be. 
• Investors should be careful when only one of the two upside components reaches 90%. Such rallies are usually short. 
• Back-to-back 90% upside days are relatively rare but usually are long-term bullish.
• Hindenburg Omen
• Combination of several indicators.
• The 52-week highs and lows are each greater than 2.2% of total issues. 
• The small number of new highs or new lows is greater than 75. 
• The ten-week moving average of the NYSE Composite Index is rising. 
• The McClellan Oscillator is negative. 
• New highs cannot be more than two times the number of new lows (OK for new lows to be two times the number of highs). 
• Confirmation, defined as two or more occurrences within a 36-day period, exists.

Temporal patterns and cycles

• The long (50-60-year) Kondratieff wave cycle
• Waves are attributes of the world economy led by a major national economy.
• Waves concern output rather than prices—sector output surges rather than general macroeconomic performance. 
• Waves unfold as phased processes, implying an S-shaped growth curve sequence rather than mechanical and precise periodic cycles. 
• Waves arise from bunching of innovations in product, services, technology, methods of production, new markets, new sources of raw materials, and new forms of business organization (from Schumpeter). This innovation spurt comes from earlier economic slowdown, and its predominant innovative character (see Table 9.1) can identify each wave. 
• Each K-wave has its characteristic location—cotton in Manchester, Great Britain, or technology in Orange County, California—and a clear location in time that can be dated. World systems theorists can now date the theory back 19 separate waves to Sung China, more than a thousand years ago. 
• Each K-wave affects the structure of the world economy into the future.
• The long start-up of a K-wave is often accompanied by a major war. 
• A significant relationship exists between the K-wave and the rise and fall of world powers. A new K-wave in a new and different location suggests the next location for global leadership. The K-wave grows out of necessity and innovation and then influences global power and politics as they evolve to accept the new economics.
• The 34-year cycle
• The decennial cycle
• Four-year cycles, including the election year pattern

Flow of Funds

• Money market fund
• Margin debt
• Secondary offerings
• Short-term interest rates
• Long-term interest rates (bond)
• Money velocity
• Misery index
• Fed policy futures
• Yield curve

Charts

• Benefits
• Charts provide a concise price history—an essential item of information for any trader (or investor). 
• Charts can provide the trader or investor with a good sense of the market’s volatility—an important consideration in assessing risk.
• Charts can be a very useful tool to the fundamental analyst. Long-term price charts enable the fundamentalist to isolate quickly the periods of major price moves. By determining the fundamental conditions or events that were peculiar to those periods, the fundamentalist can identify the key price-influencing factors. This information can then be used to construct a price behavior model.
• Charts can serve as a timing tool, even by traders who base their decisions on other information (e.g., fundamentals). 
• Charts can be used as a money management tool by helping to define meaningful and realistic stop points.
• Charts reflect market behavior that is subject to certain repetitive patterns. Given sufficient experience, some traders will uncover an innate ability to use charts successfully as a method of anticipating price moves. 
• An understanding of chart concepts is probably an essential prerequisite for developing profitable technical trading systems.
• Cynics take notice: Under specific circumstances, a contrarian approach to classical chart signals can lead to very profitable trading opportunities (when those signals fail).
• Every operations on a chart is called a ticker because in the past it was being recorded on a ticker tape,

Trends

• How to profit from trend
1. Determine, with minimum risk of error, when a trend has begun, at its earliest time and price. 
2. Select and enter a position in the trend that is appropriate to the existing trend, regardless of direction (i.e., trade with the trend—long in upward trends and short or in cash in downward trends). 
3. Close those positions when the trend is ending.
• Why does support/resistance happen?
• The previous price is often the stop loss or take profit for people who has traded after it.
• Those who missed the price point will be entering back where it was left off and wanted to purchase it again.
• People want to reenter a position at the prie they sold earlier.
• Round number by itself can be a support/resistance.
• Reversal point methods
• DeMark or William
• Percentage
• Gann two-day swing
• High volume

Breakouts

• Can be confirmed with
• Close filter
• Point or percent filter
• Time
• Volume
• Volatility

Moving Averages

• Variations
• Linearly weighted moving average (LWMA)
• Exponentially smoothed moving average (EMA)
• Wilder method
• Geometric moving average (GMA)
• Triangular moving average 
• Variable EMAs
• Strategies
• Determine trend
• Determine support and resistance
• Determine price extremes
• Giving specific signals
• Directional movement
• ADX
• Envelopes
• Bands
• Bollinger band
• Keltner band
• STARC band
• Trend
• Riding the trend is the most profitable use of technical analysis.
• Trends can be identified with trend lines, moving averages, and relative highs and lows. 
• Always pick a security that trends up and down. Flat or random trends are usually unprofitable. 
• Be aware of the next longer period and shorter period trends from the one being traded. 
• Always trade with the trend:
• “Trend is your friend.” 
• “Don’t buck the trend.” 
• Breakouts from support or resistance levels, patterns, or bands usually signal a change in trend. 
• A trend line breakout is at least a warning. 
• The longer the trend, the more important the breakout. 
• Confirm any breakout with other evidence, especially when entering a position. In exiting, confirmation is not as important. 
• Always use stops, protective and trailing.
• Do not sell profitable positions too soon; just keep trailing with stops.

Chart patterns

• Double top and bottom
• Rectangle (range)
• Triple top and bottom
• Standard triangle
• Descending triangle
• Ascending triangle
• Symmetrical triangle (coil, isolate triangle)
• Broadening pattern (megaphone, funnel, reverse triangle, inverted triangle)
• Diamond top
• Wedge and climax
• Rounding top, rounding bottom (saucer, bowl, cup)
• Head-and-shoulders
• Flags and pennants (half-mast formation)

Point and figure chart

• Consolidation area (congestion area)
• Trend lines in one-box chart
• The count in one-point chart
• Head-and-shoulder pattern
• The fulcrum
• Standard patterns
1. Double top or double bottom 
2.  Rising bottom or declining top 
3. Triple top or triple bottom 
4. Ascending triple top or descending triple bottom
5. Spread triple top or spread triple bottom
6. Bullish or bearish triangle 
7. Above bullish resistance line or bearish support line
8. Below bearish resistance line or bearish support line
• Shakeout
• The stock and market must be in an uptrend. 
• The stock should be trading above its bullish support line.
• The stock price must form two tops at the same price. 
• The reversal from these two tops gives a double bottom sell signal. 
• This sell signal is the first that has occurred in the uptrend. 
• The relative strength chart must be showing Xs in the recent column or be on a buy signal.

Short-term patterns

• The more complex the pattern, the less frequently it is going to occur. Some analysts have libraries of hundreds of patterns they have found useful in the past and through experimentation and use a computer-screening program that will pump out all the relevant patterns before each trading day. This gives them an edge but is impractical for most traders.
• Gaps
• Breakaway (or breakout) gaps
• Opening gap
• Exhaustion gaps
• Spike (wide-range, large-range bar)
• Dead cat bounce
• One-bar reversal (reversal bar, climax, top or bottom reversal bar, key reversal bar)
• Two-bar reversal
• Horn pattern
• Two-bar breakout
• Inside bar
• Hook reversal day
• Naked bar upward reversal
• Hikkake
• Outside bar
• Multiple bar patterns
• Trend correction
• Knockout pattern
• Oops!
• Shark
• Volatility pattern
• Wide-range bar
• Narrow-range bar
• Candlestick patterns
• Doji
• Window
• Harami
• Hammer and hanging man
• Shooting star and inverted hammer
• Engulfing
• Dark cloud cover and piercing line
• Morning and evening star
• Three black crows and three white soldiers
• Three inside up and three inside down
• Three outside up and three outside down
• Upside Tasuki gap
• Matching low
• Abandoned baby
• Two black gapping
• Breakaway

Trend confirmation

• Trend strength
• Failure swing (Wilder, 1978)
• Overbought/oversold
• Divergences
• Reversals (Brown, 1999)
• Trend ID (Brown, 1999)
• Crossover
• Classic patterns
• Volume
• On-balance-volume (OBV)
• Price and volume trend
• Williams variable accumulation distribution (WVAD)
• Accumulation distribution
• Williams accumulation distribution
• Chaikin money flow
• Twiggs money flow
• Chaikin oscillator
• Money flow index
• Elder force index
• Ease of movement (EMV)
• Interest
• Herrick payoff index 
• On balance open interest indicator
• Price and open interest (POI) index
• Specific indexes and oscillators
• Moving average convergence-divergence (MACD)
• Rate of change (ROC)
• Relative strength indicator (RSI)
• Stochastic oscillator
• William %R
• Commodity channel index (CCI)

Cycle

• Certain patterns re-emerge when we broken down into periodic such as monthly/yearly.
• Half-cycle reversal
• The Tillman method

Elliot wave

• Introduction
• 1 corrective wave
• 1 motive wave
• 2 total waves
• 3 subwave down (A-B-C)
• 5 subwaves up (1-2-3-4-5)
• 8 subwaves total
• Basic
1. Impulse waves move in the same direction as the trend of the next higher degree wave.
2. Impulse waves divide into five subwaves.
3. Within an impulse wave, subwaves 1, 3, and 5 are themselves impulse waves of a lesser degree, and subwaves 2 and 4 are corrective waves.
4. Within an impulse wave, subwave 1 and 5 might be either an impulse or diagonal pattern.
5. Within an impulse wave, subwave 3 is always an impulse pattern. 
6. In cash markets, within an impulse pattern, subwave 4 never overlaps any portion of subwave 1. This is not always true for futures markets.
• Impulse
• Wave 1 is an impulse or a leading diagonal.
• Wave 2 can be any corrective pattern but a triangle. 
• Wave 2 does not retrace more than 100% of wave 1. 
• Wave 3 is always an impulse. 
• Wave 3 is larger than wave 2. 
• Wave 3 is never shorter than waves 1 and 5. 
• Wave 4 can be any corrective pattern. 
• Waves 2 and 4 do not overlap in price. 
• Wave 5 is an impulse or ending diagonal. 
• Wave 5 retraces at least 70% of wave 4. 
• In wave 5, a diagonal, extension, or truncation indicates that a major reversal is to occur soon.
• Diagonals
• Classic wedge pattern and throw-over (Frost and Prechter, 2000) is it will bounce 5 times before reversing.

Fibonacci

• Fibonacci sequence will end up with Golden ratio.
• W.D. Gann further developed Fibonacci's theory.

Statistics

• Measures of central tendency
• Mean
• Medium
• Mode
• Geometric mean
• Measure of dispersion
• Variance
• Standard deviation
• Sample vs. population
• Result in unbiased estimate with a degree of freedom.
• Relationships between variables
• Variance and covariance
• Correlation coeffecient
• R-square or coeffecient of determination
• Error term or residual
• Autocorrelation or serial dependance
• Dependent variable
• Independent variable
• Explanatory variable
• Multiple regression
• Multicollinearity
• Inferential statistics
• Probability distribution
• Normal distribution
• Gaussian distribution
• Bell curve
• Central limit theorem
• Chi-square
• Advanced statistical methods
• Time series modeling
• Unit root test
• Generalised autoregressive conditional heteroscedasticity (GARCH)

Modern portfolio theory

• The mean return of a portfolio is a simple weighted average of the mean returns of the individual stocks. 
• The standard deviation (of returns) of a portfolio is a quadratic function.
• The standard deviation of a portfolio is almost always less than a simple weighted average of the individual stock standard deviations.
• Even with weak positive correlation, there are significant benefits to diversification. 
• If an investor is only concerned with the mean return and standard deviation of a portfolio, it is possible logically to eliminate many portfolios from consideration. 
• For large portfolios, the variance of each stock contributes little to the overall portfolio variance. However, the covariance of each stock’s returns with the returns of all the other stocks is quite important.

Performance measurement

• Sharpe performance measure or Sharpe ratio
• Treynor measure of performance
• Jensen's alpha