Technical Analysis

Assumptions

Supply/demand (whether driven by rational or irrational reasons), drive stock prices.
Persistent trends in security price movement
"Why" is not important, but the "what" has been observed

Key notes: Key difference between fundamental analysts and technical analysts is the speed at which information is incorporated in pricesCategories of technicians:

1. 
   Contrarian - "majority is wrong". If crowd is bearish, then buy. Use ratios like
   
   
   
   
   • MFR (Mutual Fund Ratio - MF Cash/ Total fund assets > 13% implies bearish)
   
   
   • Investor Credit balance (increase implies crowd is bearish),
   
   
   • Investment Advisor Ratio (IAR - greater than 60% advisors are bearish, lower than 20% bullish),
   
   
   • OTC/NYSE volume (<> 112% implies bullish)
   
   
   • Put/call ratio - > 0.5 implies bearish, <>
     
   • Stock Index futures - > 75% futures bullish or <>
     
   
   


2. 
   Smart money - follow the smart investors. Ratios used:
   
   
   
   

   
   
   • Confidence Index = Avg. yield 10 top grade corp bonds/ Dow Jones Avg 40 bonds - closer to 1 means higher confidence (bullish)
   
   
   • T-bill-Eurodollar spread (TED) - higher TED spread implies money flowing to T-bill safe haven, ie, crisis
   
   
   • Short sales by specialist/ total shorts on NYSE - below 30% implies bullish, above 50% bearish
   
   
   • Debit balance (margin debt) in brokerage accounts -
     
   
   

   
   
   
   

Short Int Ratio (SIR) = outstanding short interest/ avg daily vol on NYSE/ NASD - > 6.0 implies bullish (high demand), < 4.0 high potential of shorting