Technical analysis of foreign market and bond market

Technical anlaysis of bond market
Difficult to analyse bond markets as most bonds are traded in OTC and it is difficult to get volumn datas.

Stock price and Volumn

Importance of volumn:
upside-downside ratio= volumn of stocks that increased/ volumn of stocks that decreased

• If greater than 1.5 overbrought => bearish
• If smaller than 0.75, oversold =>bullish

Support and resistance levels

Moving averaging line

Relative Strength
= stock price/ market price
If increase over time => outperforming stock;
If decrease over time =>underperforming stock

Graphs
For example, bar charts (price against time), point and figure charts (Y-price , x- only plot movement if a preset price reversal occurs)

Other market environment indicators

Breath of market:
Advance – decline line
= total sum of daily advance – declines on NYSE

• If advance-decline line and the index move together, movement is broadly across the market;
• If diverse, market heat a peak or trough
  

Diffusion index
= (5 week moving ave of daily total of the stock dvanced + 1/2 no of remained unchanged ) / total no of issue traded

Short interest - Sold short and not covered
= O/S short interest / average daily volumn on exchange

• If greater than 60 => bullish
• If smaller than 60=> bearish

Stock above their 200-day moving average:

• If greater than 80% =>overbrought => bearish
  If smaller than 20% => oversold => bullish

Block uptick-downtick ratio:

• Uptick: block trading at above prior price (buyer’s market);
• Downtick: at below prior price (seller’s market);
  

Uptick-downtick ratio

= no of block upticks trades/no of block downtick trades

• It is a measurment of instiutional invesment sentiment
• If close to 0.7 => bullish
  If close to 1.1 => bearish

Classes of technical trading rules, Contrary opinion rules, Smart money rules

Classes of technical trading rules:

• General market movement indicators
• Individual stock selection indicator (graphs and moving average)

Contrary opinion rules:

Contrarians believe that the majority is always wrong and would buy stocks when:

• Mutual fund cash positions are high
• Credit balances in brokerage accounts are high
• Investment advisory opinions are bearish
• OTC versus NYSE volume is low. (5) CBOE put/call ratio is high (>0.5).
• Index futures positions are bearish.

Mutual fund cash position:

• MFR = MU cash/ Total fund cash
• If greater than 13% => market - bearish; contrarian - bullish;
• If smaller than 5% =>opposite

Investor credit balance in brokerage a/c:

• If falling => market - bullish, contrarian - bearish;
• If rising =>opposite

Investment Advisory Opinions:

• IAR = bearish opinion/total opinions
• If greater than 60% => market – bearish, contrarian - bullish;
  If smaller than 20% => opposite

Over the Counter vs NYSE volumn:

• Volumn ratio= OCT volumn/ NYSE volumn (degree of speculation trading)
• If≥112% investor bullish contrarian bearish , If £ 87% opposite

CBOE Put/Call ratio:

• PCR=Puts /calls
• If ≥0.5 => market – bearish, contrarian - bullish;
• If ≤ 0.25 opposite

Futures Traders bullish % stock index:

• If greater than 75% =>speculators – bullish, contrarian - bearish;
• If smaller than 25% => opposite

Smart money rules
Smart money analysts follow the experts and would buy stocks when:

• Confidence index is higher (approaching 100)
• T-bill Eurodollar spread (or high quality / low quality bond spread) is low
• Short sales by specialists as a percentage of the overallshort sales are low
• Debit balances in brokerage accounts are high.
  

Confidence index

• If increase confidence=>sell quality bond buy low grade bond =>decrease bond price and increase yield of quality bond, increase price and decrease yield for low grade bond => narrow their spread
  
  CI = Barron’s average yield on 10 top grade corpoprate bond/ DJ averagee 40 bonds, or
  CI = quality bond yield / average bond yield (always less than 1);
  

T-bill-Eurobond yield spread :

• In case of internaitonal crisis, the spread will increase as T-bills is safer.
  

Short sale by specialist:

• S.S by specialist/ Total S.S. on NYSE;
• If smaller than 30, bullish
• If greater than 30%, bearish

Debt balance in brokerage a/cs

• If increase => bullish

Advantages and challenges to technical analysis

Advantages of technical analysis:

• Quick and simple
• Do not involve messing with data and accounting problems
• Incorporate psycologyical factors
• Tell when to buy but not why to buy
  

Challenges to technical analysis:

• Empirical studies support EMH and show that technical analysis rules cannot be used to generate excess returns. EMH believes all available information impounded in the price and new information causes instantaneous price adjustment, technical relationship is not repeating.
• Statistics test of autocorrelations and runs: not move in trends
• If technical trading rules worked, market would self-destruct (call as self fulfilling prohecy)
• If the rule is successful, others will copy and neutralize it at last
• Too subjective, decision variable changes over time.

Underlying assumptions of technical analysis

• Security prices are determined solely by supply and demand, which is driven by rational and irrational factors.
• Prices patterns persist for appreciable lengths of time
• Believe that the market is slow to adjust to new information, giving them the opportunity to profit. Believe that cause for the change is difficult to determine, but actual shift in supply and demand can be observed in market behaviour.