A summary of Chapter Three: Technical Analysis found in the following textbook - Introduction to Investment Management (revised edition) by Ms. A de Vries, Mr. DJ Smit, and Prof. PD Erasmus.
Table of Contents
1. Introduction ........................................................................................................................ 2
2. What is a Technical Analysis? .............................................................................................. 2
2.1. Basic Assumptions of Technical Analysis ..................................................................... 2
3. Share Price Indexes ............................................................................................................. 2
3.1. The Uses of Share Price Indexes .................................................................................. 3
3.2. The Calculation of a Share Price Index......................................................................... 4
a. Price Weighting Technique .......................................................................................... 4
b. Equal Weighting Technique ......................................................................................... 5
c. Market Capitalization Technique ................................................................................. 5
3.3. The FTSE/JSE Africa Index Series.................................................................................. 6
4. Charts and Technical Indicators .......................................................................................... 6
4.1. The Dow Theory (origin of technical analysis) ............................................................. 7
Primary Trend : Long-term Trend ........................................................................................ 7
Secondary Trend : Interruptions ......................................................................................... 7
Short-term Fluctuations ...................................................................................................... 7
4.2. Bar Charts .................................................................................................................... 8
4.3. Point-and-figure Chart ................................................................................................. 8
Chart Formations............................................................................................................... 10
Trend Lines ........................................................................................................................ 11
4.4. Moving Averages ....................................................................................................... 11
4.5. Market Breadth Index ................................................................................................ 12
4.6. Relative Strength Index (RSI) ..................................................................................... 13
Page 1 of 15
, Technical Analysis
1. Introduction
Basic overview of chapter → see table of contents.
2. What is a Technical Analysis?
Def: The study of all events in the market (movements in share prices, indices, and
volumes) to determine trends. Based on the basic philosophy that trends of the past
tend to repeat themselves in the future.
Fundamental Analysis Technical Analysis
Attempts to identify opportunities by looking
Evaluates stocks by attempting to measure
at statistical trends, such as movements in a
their intrinsic value to determine if share is
stock's price and volume. The core
overvalued or undervalued. Fundamental
assumption is that all known fundamentals
analysts study everything from the overall
are factored into price, thus there is no need
economy and industry conditions to the
to pay close attention to them. Technical
financial strength and management of
analysts do not attempt to measure a
individual companies. Earnings, expenses,
security's intrinsic value. Instead, they use
assets, and liabilities all come under scrutiny
stock charts to identify patterns and trends
by fundamental analysts. WHAT shares to
that suggest what a stock will do in the
buy/sell.
future. WHEN to buy/sell.
Figure 1: "Understanding Fundamental vs. Technical Analysis - Investopedia." 11 Apr. 2022,
https://www.investopedia.com/ask/answers/difference-between-fundamental-and-technical-analysis/.
2.1. Basic Assumptions of Technical Analysis
Predictions are based on assumptions.
1. Market price is determined by the interaction of the supply and demand.
2. Supply and demand are influenced by various factors, both rational and irrational.
3. The price of individual securities and the market in its totality tend to form certain
trends which continue for a reasonably long time.
4. Trends will change due to changes in supply and demand.
3. Share Price Indexes
Charles H Dow (editor of the Wall Street Journal) developed the Dow Theory → what the
general expectancy was on the direction of economic activity. How did he do this? On specific
days he added the share prices of larger companies to see whether the index was moving
upwards or downwards. This served as an indication of either positive or negative
expectations on the economy as share prices are a culmination of the supply of and demand
of shares.
Page 2 of 15
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