Ch_9 - 15-1The market value of any good or service is...

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Unformatted text preview: 15-1The market value of any good or service is determined solely by the interaction of supply and demandSupply and demand are governed by numerous factors, both rational and irrationalDisregarding minor fluctuations, the prices for individual securities and the overall value of the market tend to move in trends, which persist for appreciable lengths of timeUnderlying Assumptions of Technical Analysis15-2Underlying Assumptions of Technical AnalysisPrevailing trends change in reaction to shifts in supply and demand relationships. These shifts, no matter why they occur, can be detected sooner or later in the action of the market itselfSee Exhibit 15.1It shows the process wherein new information causes a decrease in the equilibrium price for a security but the price adjustment is not rapid15-3Exhibit 15.115-4Advantages of Technical AnalysisTechnical analysis is not heavily dependent on financial accounting statements. The technician contends that there are several major problems with accounting statements:Lack information needed by security analystsGAAP allows firms to select reporting procedures, resulting in difficulty comparing statements from two firmsNon-quantifiable factors do not show up in financial statements15-5Fundamental analyst must process new information and quickly determine a new intrinsic value, but technical analyst merely has to recognize a movement to a new equilibriumTechnicians trade when a move to a new equilibrium is underway but a fundamental analyst finds undervalued securities that may not adjust their prices as quicklyAdvantages of Technical Analysis15-6Challenges to Technical AnalysisFor Assumptions of Technical AnalysisEmpirical tests of Efficient Market Hypothesis (EMH) show that prices do not move in trendsFor Technical Trading RulesThe past may not be repeatedPatterns may become self-fulfilling propheciesA successful rule will gain followers and become less successfulRules require a great deal of subjective judgement15-7Technical Trading Rules & Indicators...
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This note was uploaded on 05/27/2011 for the course FIN 4504 taught by Professor Wang during the Fall '10 term at Florida A&M.

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Ch_9 - 15-1The market value of any good or service is...

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