Technical Analysis in Financial Markets

Markets, Instruments, Data, and the Technical Analyst

• Technical analysis is applicable to certain asset classes.
• Specific tradable instruments used by technicians include cash, futures, options, indices and exchange-traded products.
• Data-handling issues, such as bad ticks in data, should be considered by a technician.

Where We Use Technical Analysis

• Technical analysis is particularly suited to markets with sufficient liquidity and activity.
• Key tradable instruments include cash, futures, options, indexes and exchange-traded products.
• Stocks, bonds, currencies, and commodities are common asset types used in technical analysis.

Asset Types & Instrument Types

• A table shows the matching of asset types and instrument types (cash, futures, options, index, ETP).
• The assets are stocks, bonds, currencies, and commodities.
• The instruments should be active and liquid for analysis.

Data Handling

• Data vendors filter data, and analysts need to remove bad ticks.
• Analysts should focus on analysis that isn't highly sensitive to short time frame data.
• High or low data points in particular might be influenced by inaccurate data.

Late Trades

• "Out-of-market" trades are reported after the close.
• Different vendors handle late trades in various ways (e.g., accounting into daily high/low/close).
• Intraday trades require determining the correct bar for inclusion in analysis.

Equities

• Define equity securities and primary data types (e.g., stock exchanges, prices).
• Describe the benefits of equities for investors (e.g., potential for capital gains, income).
• Identify the effect of corporate actions (e.g., dividends, stock splits) on price data.
• Categorize sectors, capitalization, and other ways to divide the market (e.g., sector-specific, capitalization-based).

Equity vs. Debt

• Equity represents ownership in a company; debt represents a loan.
• Equity holders have a claim in liquidation after debt holders are paid.
• Technical Analysis does not care about the type of product (equity or debt, as long as there is price and volume).

Why Buy Stocks?

• Investors may buy stocks for capital gains or income.
• Companies reinvest profits into their business to create value.
• Stockholders can have voting rights to influence decisions.

Warrants

• Warrants allow holders to buy company stock at a specified price.
• Warrants are similar to options, but issued by the company, not another trader.
• Warrants give rise to new stock when exercised.

Preferred Stock

• Preferred stock's benefits are that a company can quickly raise money.
• Preferred stock is a hybrid of common stock and bonds, offering dividends.
• Preferred stockholders are paid before common stock holders in the event of liquidation.

Corporate Bonds

• Companies raise capital by issuing corporate bonds in similar fashion to government bonds.
• Bonds pay a fixed interest to holders.
• Bondholders generally do not have voting rights.
• In liquidation events, bondholders are generally paid before other holders.

What the Technician Needs

• Price and volume are the major data points needed in technical analysis.
• Key additional factors include bid/ask, 52-week highs/lows, and market capitalization, and price x shares outstanding.

Corporate Actions

• Ex-dividend date determines entitlement to dividend payments; this date can cause price fluctuations before and after the ex-dividend date.
• Secondary offerings dilute existing shareholder ownership to raise capital; this can negatively affect stock prices.

Splits

• Companies split shares to meet certain trading value requirements, and for other market reasons.
• There are no changes in holdings or market capitalization following a split.
• Stock splits can be especially relevant when using subjective technical indicators.

Market Segments

• Stock markets are often grouped according to stocks and relevant sectors or industry, capitalization, geography, stock style, and indexes.
• Price movements of these segments are typically aggregated in relevant index calculations.