Technical analysis
by hipockets | October 26, 2014 8:50 pm
TECHNICAL ANALYSIS OF THE FINANCIAL MARKETS was mentioned weeks ago by another Irregular as an excellent reference for technical analysis (TA). ( I apologize for not being able to give him credit, but I could not find his name by searching SGS.) I bought the book because of his recommendation and because the book has 4 1/2 stars (out of 5) on Amazon. After starting to study it, I realized that reviewing the book might be a way to say “Thank You” to the Irregulars who are teaching me so much. I hope everybody finds this useful. If you don’t, you can complain to our CEO! 
Before I get started – Joe, I was very disappointed when I found that Marxism was never mentioned. Not once!
The book was written by John H. Murphy; Revised 1999; New York Institute of Finance; IBSN 0-7352-006-1. Amazon’s price for a new book is about $55. Used books, as of today’s date, are available for between $25 and $30. The book has 542 pages, 19 chapters, and 4 appendices, all of which are listed at the end of this review.
To briefly sum up this review: I am glad that I bought the book. I have started using some of the techniques, and I’m convinced that it was money well spent. However, one wishing to learn TA cannot expect to read the book once and then magically be able to read charts. There must be a willingness to study the techniques and perhaps read some of the chapters more than once. Murphy says repeatedly that that the ability of analyze charts comes only with experience. TA is not a Holy Grail for guaranteeing stock performance, but I believe it has its uses.
The first edition, published in 1986, was TECHNICAL ANALYSIS OF THE FUTURES MARKETS. Although it did not specifically talk about stocks, many of the techniques can be used for either one. This second edition, published in 1999, contains much of the information from the first one, but there is much new information and the emphasis, of course, is on stocks. The differences between TA for futures and TA for stocks are well explained.
To benefit readers new to TA, one sentence from Chapter 5, and one from Chapter 6, might have been better placed early in Chapter 1. From Chapter 5: “The analyst must face the realization that he or she is dealing with percentages and probabilities. . . .” From Chapter 6: “The treatment of all chart patterns deals of necessity with general tendencies as opposed to rigid rules”.
The Good: A lot.
>> Murphy discusses many of the popular TA techniques in easy to understand language (usually, anyway, see the comment about “Elliot Wave Theory” below). Investors with no or little knowledge of TA and wanting to learn will find it invaluable. Investors who already use TA will probably learn additional techniques and at a minimum learn some nuances and variations of the techniques that they already use. There is a plethora of easy-to-read charts illustrating the techniques (easy to read except for some “Point and Figure” charts, see below), with explanations under each chart. The text font is large and easy to read.
The Bad: Not much. A few brabbles, just to be picky:
>> I earlier stated that the charts are easy to read. An exception: some of the ”Point and Figure” charts used a small font in order to pack as much data into the chart as possible. Sometimes the font size was so small that I had to use a magnifying glass.
>> I would like to have several practice charts at the end of most chapters with the question: “What is this chart telling us, and why?”
>> I would like to have a chapter on “Risk Analysis”, but since the risk would vary according to the expertise of the chart reader, I suppose such a chapter would not be possible.
>> I would like to have some discussion about the frequency of techniques occurring, e.g., “A head and shoulders pattern occurs roughly ”X” % of the time”. I would like it, but it probably can’t be done, once again due to the expertise of the chart reader. You might recognize a head and shoulders pattern, but I might not see any pattern at all.
>> The biggest complaint that I have is that Chapter 15, “Computers and Trading Systems”, says very little about software packages for PCs, although “Trade Station” is mentioned in the Chapter and later in Appendix C. I download end-of-day data daily and update my charts manually; I was hoping to find a review of some low cost software packages that would automate the procedure.
This is not a criticism of the book, but I feel that TA often would be of little use in working with microcaps. TA uses as its basis the buying and selling actions (derived from sales price and volumes) of shareholders. My thinking: The fewer the shares, the more the actions (warranted or otherwise) of a small number of shareholders can almost instantaneously affect the price. Conversely, I think TA would be of great benefit when investing in behemoths like JNJ.
Whole chapters are devoted to the basic concepts of many of the techniques. Murphy does not dive deeply into some of the topics, since some, such as Japanese Candlesticks and Elliot Wave Theory, have had whole books written about them. He lists several resources for such topics in one of the appendices.
After explaining the basics of a technique, he frequently writes about or mentions variations of the technique. When explaining RSI, “While 9 and 14 day spans are the most common values used…..some use shorter lengths, such as 5 or 7 days, to increase volatility….[or] 21 or 58 days to smooth out the RSI signals.” Also, he frequently mentions ways to confirm a signal. Many variations of moving averages are discussed.
Chapter 1 starts with a definition: “TA is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends”. It then lists the three basic assumptions of TA:
1. Market action discounts everything.
2. Prices move in trends.
3. History repeats itself.
(I think “History can repeat itself” or “History often repeats itself ” is more likely. )
There is a discussion about the differences between fundamental analysis and TA. Murphy says that, in essence, the fundamentals of a stock are built into the chart. “The fundamentalist studies the cause of market movement, while the technician studies the effect.” Later in the book, he says that charts are often leading indicators of changes in fundamentals and gives a few examples.
Chapter 13, which discusses Elliot Wave analysis, is hard for me to understand, although it seems to me to be a souped-up (I checked the spelling! ) version of moving averages. The basic theory is well explained—price movements come in 5 advancement (up) waves and 3 correction (down) waves. Then there are 9 different levels of magnitude. Etc. There are several explanatory charts — the thing that eludes me is how to easily apply the technique to buying/selling a stock. Since I am new to charting, and since this is a complicated topic, I will wait till I master the simpler techniques before getting into this one.
Gumlandians probably will not use the concepts of time cycles (Chapter 14) unless they are long-term investors, but it’s interesting to read about them. “. . . 37 different examples of the 9.6 year cycle, including caterpillar abundance in New Jersey, coyote abundance in Canada[1], wheat acreage in the U.S., and cotton prices in the U.S. . . . acted in synchrony ; that is, they turned at the same time. . . .” Seasonal cycles, typical stock market cycles, and the January Barometer are some of the topics worth reading.
Chapter 18 discusses evaluating the market as a whole and why it is important. Techniques such as the Advance-Decline Line and the McClellan Oscillator are discussed, and I found the information about comparing the various market averages very educational. If the comparison is to be meaningful, there is more to it than one would think.
Chapter 19 presents a 23 item check list that can be used when thinking about buying or selling. At first, I found the checklist to be intimidating, but after re-reading it, I saw that much of it would become second nature after understanding the techniques discussed in the previous chapters.
I will close by repeating the statement that “I’m glad that I bought the book”, and saying, “ Alan, I hope you were not overloaded with complaints! ”
Here’s the Table of Contents:
Chapter 1 Philosophy of Technical Analysis
Chapter 2 Dow Theory
Chapter 3 Chart Construction
Chapter 4 Basic Concepts of Trend
Chapter 5 Major Trend Reversals
Chapter 6 Continuation Patterns
Chapter 7 Volume and Open Interest
Chapter 8 Long Term Charts
Chapter 9 Moving Averages
Chapter 10 Oscillators and Contrary Opinion
Chapter 11 Point and Figure Charting
Chapter 12 Japanese Candlesticks
Chapter 13 Elliot Wave Theory
Chapter 14 Time Cycles
Chapter 15 Computers and Trading Systems
Chapter 16 Money Management and Trading Tactics
Chapter 17 The Link Between Stocks and Futures:
Intermarket Analasis
Chapter 18 Stock Market Indicators
Chapter 19 Putting It Altogether – A Checklist
Appendix A Advanced Technical Indicators
Appendix B Market Profile
Appendix C The Essentials of Building a Trading System
Appendix D Continuous Futures Contracts
Plus Glossary, Selected Bibliography, Selected Resources, and Index.
- Canada: https://www.stockgumshoe.com/tag/canada/
Source URL: https://www.stockgumshoe.com/2014/10/microblog-technical-analysis/
Kenny: There are myriad ways to read charts. I choose candle sticks coz they are consistant. Theres a site called Americanbulls.com (free in cutdown form). This shows what candlestick patterns are forming for EVERY ticker. A Dojo is a v important pattern that says a shite storm’s comming (unless youre betting short). So, go to bulls, type your ticker, underneath the graph it will say pattern descption….hit more and you will get the full description of the pattern and what it means, fwiw. Im NOT a salesman for this strategy, but I am a semi believer.
PS I claim my 10 $yawn shares and will see you on our Caribbean island or, more likely, near the food trash bins in the alley.
Ben / Alan – – – or is it Ben / Benny? whatever:
I’m not really convinced that charting, DoJo and all, really applies to volatile and unpredictable biotech stocks. It may be a worthwhile vehicle for megacaps as JNJ, GILD, CELG etc. As for using the charts at this point in time for JUNO, I would be especially reluctant to depend on them cause as the Doc pointed out yesterday, the lockup period expires on June 17th, potentially exposing 77m shares to the market, so all bets are off as far as what the charts may be saying.
Some months ago, one of the gummies (was it JP?) was reading the charts on a daily basis and reporting on its short term interpretation. If I remember correctly, the track record was not that accurate. I don’t blame the chart reader for the inaccuracy of the reading, I think it was because it really can’t be done with a great degree of accuracy for these type of investments.
Alan – we will have to play rock/paper/scissors to see who makes the first trip into the trash bins.
I agree with you Kenny, it is another tool that is subject to interpretation. I’d also like to invite you again to share OUR catalyst calendar with you. Best-Ben
Ben – what is the link/info for the calendar?
Kenny, go to main page and search catalyst calender for information.
You shall find the information available on that thread. I am happy to assist.
Best2YA-Ben
Ben – I think I am already subscribed to the calendar. To ensure that I am looking at the correct one, the one I am looking at shows an event for ESPR and FLKS for Tuesday, june 9. The calendar name is SGS Bio 2015? Is this the same one or are you referring to another one?
Kenny, That’s it…sawry…i get confused as to who has and who has not. Best2Ya!-Ben
John King, a few weeks ago you asked how I do due diligence. Outdoor projects got in the way of my replying, but I did not forget.
I use Scottrade, so I have access to S&P CAPITAL IQ, THOMSON REUTERS, and MarketEdge’s SECOND OPINION research reports. I used those and lots of web surfing for a few years. Nowadays, though, I rely almost 100 % on technical analysis. For the science, of course, I rely on Dr. KSS and the fabulous members we call the ”All Stars”. I could not invest in biotech if I did not have access to their thinking, and I will be forever thankful for their presence and generosity .
John H. Murphy has written two (at least) excellent books on TA – TECHNICAL ANALYSIS OF THE FINANCIAL MARKETS (reviewed at the top of this page) and the sequel, THE VISUAL INVESTOR – How to Spot Market Trends.
Quote snippets from the former: ”The fundamentalist studies the cause of market movement; while the technician studies the effect………The problem is that the charts and fundamentals are often in conflict with each other. Usually at the beginning of important market moves, the fundamentals do not support or explain what the market seems to be doing…….Usually they come back into sync [with the charts] but often too late for the trader to act. ……….market price tends to lead the known fundamentals. Stated another way, market price acts as a leading indicator of the fundamentals”.
He states the difference between the two somewhat differently in THE VISUAL INVESTOR : “Analysis of fundamental data, such as earning expectations and the state of the economy, helps determine what a stock SHOULD be doing. Market analysis tells us what the stock is ACTUALLY DOING.”
So I pay very little attention to fundamentals. Here’s my reasoning:
The price of any share of stock at any point in time was the average opinion of all of the buyers and sellers about their perceived value of the share at that point in time. If you were to chart the stock based on the opinion of just one buyer or seller, the chart would be based on whatever data that person felt was important. One person might base his opinion on data froom one set of data types, but another on a different set, and still another on yet a third set. The fundamentals could be part of any of the sets.
My thinking is that when all of the opinions of thousands, and hopefully tens of thousands, of buyers and sellers are distilled into one chart, the chart is a good visual summary of everything, including the fundamentals, that affected the price of the stock. The chart cannot predict what will happen next, of course, but there are a few geometric patterns that occur with some frequency that can give an indication of the probability of what will happen next. Both of the referenced books talk about the patterns.
But what do I know? Warren has not invited me to join his staff. 🙂
Of course, none of the above has much use when investing in small biotech stocks subject to binary events.
By the way, John – I appreciate your contributions to the group.
Hi Pockets – I am going to order the two books this morning. I also trade via Scottrade, and am a relative newbie to this world (trading). That said, I appreciate you taking the time to enlighten this old boy. THe comment makes perfect sense to me, and a methodology I can follow once I get Murphy read and digested. Many, many thanks.
Also, thank you for the compliment. And, by the way, I am an outdoor enthusiast too.
jk
Hi Pockets – I ordered the two books by John J. Murphy and saw another on ETF’s. Have you read it? I’m anxious to read both. Once again, thank you!
jk
FYI – Received this today about Samsung disabling Windows updates: http://askbobrankin.com/who_got_caught_disabling_windows_update.html?awt_l=IoXZp&awt_m=JtqW0pBO7uP6SL
This really irritates me!
jk
John, I can tell from your post about Windows Updates that you are a computer geek, as am I.
About the EFT book – No, I was not aware of it, and I did not find one by Murphy on Amazon or by googling John Murphy. I would be interested in it if I could find it.
Scottrade members have access to daily emails from https://www.recognia.com . Each email will contain technical analysis charts of 3 stocks with bullish charts and 3 with bearish charts. I think you have to access the site through Scottrade ELITE. In the ELITE top menu bar, go to Research then Newsletter subscriptions. I do not use Elite, because there is no training manual and I have not had the patience to explore all of it. If I remember correctly, the charting capability is poor.
Sadly, both of the books by Murphy that I mentioned have only a very basic overview of Candlesticks. I’m convinced that Candlestick charting is much, much superior to the simple charts plotted using only closing sales price. Candlesticks graph the Open, High, Low, Close, and Daily Price Range (which, of course, is the High minus the Low). Did the stock open today higher than the low, or lower than the high? Was the range volatile or restricted? How does today’s pattern compare to yesterday’s and the day before? Answering questions like those gives a chartist a much more detailed picture of how investors have reacted and are reacting to stock market events.
Since you ordered both books, I wish I had mentioned candlesticks in my answer above, but I’m just starting to study them and I did not think to do so.
I make my own charts in EXCEL and download data from Scottrade daily to update them. I just discovered that the newer versions of EXCEL can chart candlesticks, so I have some work to do.
I do not have a book about candlesticks, although there are many. http://www.candlesticker.com/Introduction.aspx?lang=en is an excellent educational site. Links on that page will take you to descriptions of the 70 or so individual patterns. Luckily, only 4 to 10 are the most useful, so the education is not as daunting as it first appears. I hope!
You can surf through the links at https://www.americanbulls.com/Default.aspx?lang=en and learn a lot. They have a paid service, but you can surf most of it for free. Benny and I are trying to develop a methodology for using the paid service.
Just to the right of the blue tab on the “Da Man” spreadsheet at http://www.tinyurl.com/welovekss is a tabbed marked “TA”. There are links on that tab to many articles about patterns and about candlesticks.
Methinks it’s past my bedtime! Happy Charting!
Hi Pockets – Here’s the link to the book: http://www.amazon.com/Trading-Intermarket-Analysis-Financial-Exchange-Traded/dp/1118314379/ref=sr_1_4?s=books&ie=UTF8&qid=1435672057&sr=1-4&keywords=john+j.+murphy
Please note the John J. Murphy – middle initial may make a difference in your search…a “J” rather than a “P”.
Again, many thanks. I am going to be out of pocket for the new couple days.
jk
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