Investment Theory and Portfolio Development - Technical Analysis – Other Indicators

  • Flow of Funds Indicators - these endeavor to measure the ability or the financial position of different investor groups. Such analysis seeks out trends in customer accounts, initial public offerings, mutual funds, pension funds, margin accounts and bank trust accounts. Such data may be of limited use to technicians as it is lagged, i.e. technicians usually receive it stale. Additionally, it often is a better indicator of the source of the flows, rather than their destination.
  • Market Structure Indicators - such indicators consider price trends of individual securities and indices alike to determine the existence of any continuity between indicators as validation of such trends.
    1. Breadth of Market - because indices represent a small number of large companies rather than the entire market, which encompasses many medium and small firms as well, these indices and the small-to-mid size issues move in different directions. A broad market move would comprise large and small companies alike. To measure the strength of market support, two measures are commonly used.
    2. Advance/Decline Line - a running total of daily advances minus daily declines on the New York Stock Exchange (NYSE). The advance/decline line and the index moving in tandem would constitute broadly based movement over the market. By contrast, a divergence in the index's trend and the advance/decline line would indicate the attainment of a peak or trough.
    3. Diffusion Index - this is a five (5) week moving average of all stocks that advance on a given day along with 50% of the number that remain unchanged/number of issues that trade during the day. A higher number would indicate greater cohesion and the presence of market strength, whereas a lower number would indicate a greater degree of diffusion and weakness.
    4. Dow Theory - according to the theory, stock prices move in trends of varying intensity. They are major, intermediate and short-run movements. The technical analyst will parse these data in search of trend reversals and recoveries.
    5. Support and Resistance Levels - stock prices fluctuate from their average value. The lower limit of the fluctuations is the support level. This would be a cue to the technicians to buy. The higher limit to the fluctuations would be the resistance level. Here the stock would appear to be overpriced and worth selling.
    6. Moving Average Lines - stock prices move in trends which random short-term fluctuations may mask. A moving average line takes a bigger picture perspective of such trends, thereby eliminating these short-term anomalies.
      - stocks above their 200-day moving average (over 80% of stocks selling above the average)=overbought=bearish indicator.|
      - stocks below their 200-day moving average (less than 20% of the stocks are selling above the average) =oversold-bullish indicator.
    7. Relative Strength - a ratio expressed as follows:
relative strength=stock price/market index value

An increase in the ratio over time would signal the stock's outperformance relative to the market. A decrease in the ratio over time would signal the stock's underperformance relative to the market.

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