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Investments: Principles of Portfolio and Equity Analysis by Gerhard Van de Venter, CFA, Wendy L. Pirie, CFA, Jerald E. Pinto, CFA, Michael G. McMillan, CFA

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CHAPTER 12

TECHNICAL ANALYSIS

Barry M. Sine, CFA

Miami Beach, FL, U.S.A.

Robert A. Strong, CFA

Orono, ME, U.S.A.

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • Explain the principles of technical analysis, its applications, and its underlying assumptions.
  • Discuss the construction and interpretation of different types of technical analysis charts.
  • Demonstrate the uses of trend, support and resistance lines, and change in polarity.
  • Identify and interpret common chart patterns.
  • Discuss common technical analysis indicators: price-based indicators, momentum oscillators, sentiment, and flow of funds.
  • Explain the use of cycles by technical analysts.
  • Discuss the key tenets of Elliott Wave Theory and the importance of Fibonacci numbers.
  • Describe intermarket analysis as it relates to technical analysis and asset allocation.

1. INTRODUCTION

Technical analysis has been used by traders and analysts for centuries, but it has only recently achieved broad acceptance among regulators and the academic community. This chapter gives a brief overview of the field, compares technical analysis with other schools of analysis, and describes some of the main tools in technical analysis. Some applications of technical analysis are subjective. That is, although certain aspects, such as the calculation of indicators, have specific rules, the interpretation of findings is often subjective and based on the long-term context of the security being analyzed. This aspect ...

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