Pattern recognition and the stock market
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Pattern Recognition and the stock market. Is it possible to predict future prices of stocks?. The 2 types of analyses of the market. There are two major analysis methods. Fundamental analysis (also known as quantitative analysis) Technical analysis. Fundamental analysis.

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Pattern recognition and the stock market

Pattern Recognition and the stock market

Is it possible to predict future prices of stocks?

Dr. Henrick Jeanty


The 2 types of analyses of the market

The 2 types of analyses of the market

  • There are two major analysis methods.

    • Fundamental analysis (also known as quantitative analysis)

    • Technical analysis

Dr. Henrick Jeanty


Fundamental analysis

Fundamental analysis

  • A method of evaluating a stock by attempting to measure its intrinsic value. Fundamental analysts study everything from the overall economy and industry conditions, to the financial condition and management of companies.

  • In other words, fundamental analysis is about using real data to evaluate a stock's value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth.

Dr. Henrick Jeanty


Technical analysis

Technical analysis

  • Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.

Dr. Henrick Jeanty


The three basic principles of technical analysis

The three basic principles of Technical Analysis

  • Price Discounts Everything

  • Prices move in trends

  • History repeats itself

Dr. Henrick Jeanty


1 price discounts everything

1. Price discounts everything

  • Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, and …

  • Stock Market Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

Dr. Henrick Jeanty


2 prices move in trends

2. Prices Move in Trends

  • Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend.

Dr. Henrick Jeanty


3 history repeats itself

3. History Repeats Itself

  • Technical analysts believe that investors repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions

Dr. Henrick Jeanty


A stock chart the dji

A stock chart. The DJI

Dr. Henrick Jeanty


Candlestick

Candlestick

  • A graphical way to represent the price movement of a stock during a fixed period of time.

  • It depicts the opening price, the high price, the low price and the closing price for the period of time of interest

  • The period can be as small as 1 minute and as long as a quarter (3 months)

Dr. Henrick Jeanty


Anatomy of a candlestick

Anatomy of a candlestick

  • The 2 types of candles

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Retracement

Retracement

  • After a stock has gained value, there is a tendency for the stock to give back some of the gains in what is called a retracement.

  • After a stock has lost value, there is a tendency for the stock to recoup some of the losses in what is also called a retracement

Dr. Henrick Jeanty


The jeanty buy pattern

The Jeanty Buy pattern

  • Phase 1. Look for a downward price movement.

  • Phase 2. Look for an upward retracement that bounces one or more times off the 38%, 50% or 62% retracement levels.

  • Phase 3. Look for a resumption of the downward price movement and a bounce off the 38%, 50% or 62% extension price levels.

  • Phase 4. If you buy the stock at the confirmation of the bounce, expect the target price to be the 0% extension (or equivalently, the 0% retracement) which is the bottom of the downward price move seen in Phase 1.

Dr. Henrick Jeanty


Extensions

Extensions

  • After a downward or upward move and associated retracement, the downward or upward trend may resume. Price levels corresponding to an extension of the original trend are called extensions. For instance, the 50% extension represents the price that would be reached if you were to add half the value of the original movement to the original move.

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


The jeanty sell pattern

The Jeanty sell pattern

  • Phase 1. Look for an upward price movement.

  • Phase 2. Look for a downward retracement that bounces one or more times off the 38%, 50% or 62% retracement levels.

  • Phase 3. Look for a resumption of the upward price movement and a bounce off the 38%, 50% or 62% extension price levels.

  • Phase 4. If you sell (or short) the stock at the confirmation of the bounce, expect the stock to move down to the 0% extension (or equivalently, the 0% retracement) which is the top of the upward price move seen in Phase 1.

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Is this true

Is this true?

Dr. Henrick Jeanty


The next step

The next step

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Wal mart

Wal-mart

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Detailed analysis of the dow over the last weeks

Detailed Analysis of the DOW over the last weeks

Dr. Henrick Jeanty


First pattern

First pattern

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Scales

Scales

  • These patterns occur at all scales:

  • They occur at intraday, daily, weekly and monthly scales.

  • Following is a chart of these patterns at an intraday scale for Microsoft

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Do events affect stocks

Do events affect stocks?

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Pattern recognition and the stock market

Dr. Henrick Jeanty


Were there patterns giving out signals recently oct 2008

Were there patterns giving out signals recently? (Oct. 2008)

  • Yes there were. Google produced 3 Buy patterns and Buy signals.

  • One on July 21, 2008

  • One on September 10, 2008

  • One on October 8, 2008

Dr. Henrick Jeanty


Google buy signal july 21 2008

Google: Buy signal July 21, 2008

Dr. Henrick Jeanty


Google buy signal september 10 2008

Google: Buy signal September 10, 2008

Dr. Henrick Jeanty


Google buy signal october 8 2008

Google: Buy signal October 8, 2008

Dr. Henrick Jeanty


Google what happened after those buy signals

Google: What happened after those Buy signals?

  • Remembering that the target prices are the bottom of the red rectangles we have the following Buy prices (assuming buying at the close on the day of the signal), target prices and potential percentage gains:

  • July 21: Buy:$468.80 Target:$501.10 Potential %Gain: 6.89%

  • Sept.10: Buy:$414.16 Target:$461.90 Potential %Gain:11.53%

  • Oct. 8: Buy:$338.11 Target:$380.71 Potential %Gain:12.60%

Dr. Henrick Jeanty


Did goog actually reach those target prices

Did GOOG actually reach those target prices?

  • To answer the question we simply need to look at the days following the buy signals.

Dr. Henrick Jeanty


What happened after july 21 2008

What happened after July 21, 2008?

Dr. Henrick Jeanty


So what happened after july 21 2008

So, what happened after July 21, 2008?

  • Looking at the chart we can see that GOOG reached its target price of $501.10 on August 11, 2008, 15 bars after the signal, or 21 days after the signal.

  • GOOG gained $32.02 (6.89%) in 21 days.

  • After hitting its target, GOOG has only gone down since then.

  • This almost looks like we were able to time the market for GOOG. We bought at a low ($468.80) and sold at (almost) high ($501.10)

  • Note how on Aug. 11, GOOG reached a high of $508.88 ($7.78 above the target price) only to close at $500.84, only 26 cents below the target price of $501.10

  • GOOG closed 0.05% below the target price. How accurate!

  • It looks like GOOG was “homing” in on the target price.

Dr. Henrick Jeanty


What happened after september 10 2008

What happened after September 10, 2008?

Dr. Henrick Jeanty


So what happened after september 10 2008

So, what happened after September 10, 2008?

  • Looking at the chart we can see that GOOG reached its target price of $461.90 on Sept. 19, 2008, 7 bars after the signal, or 9 days after the signal.

  • GOOG gained $47.74 (11.53%) in 9 days.

  • After hitting its target, GOOG has only gone down since then.

  • Again it looks like we were able to time the market for GOOG. We bought at a low ($414.16) and sold at a high ($461.90).

  • Note how on Sept. 19, GOOG opened at $461.00 (90 cents below the target, or 0.2% below the target) then reached a high of $462.07 (17 cents above the target price, or only 0.037% above the target) then retreated to close at $449.15

  • Again an example of accuracy in the prediction of the target.

  • It looks like GOOG was “homing” in on the target price.

Dr. Henrick Jeanty


What happened after october 8 2008

What happened after October 8, 2008?

Dr. Henrick Jeanty


So what happened after october 8 2008

So, what happened after October 8, 2008?

  • Looking at the chart we can see that GOOG reached its target price of $380.71 on Oct. 13, 2008, 3 bars after the buy signal, or 5 days after the buy signal.

  • GOOG gained $42.60 (12.60%) in 5 days.

  • After hitting its target, GOOG has only gone down (as of this writing).

  • Again it looks like we were able to time the market for GOOG. We bought at a low ($338.11) and sold at a (almost) high of ($380.71).

  • Note how on Oct. 13, GOOG reached a high of $381.95 ($1.24 above the target or 0.33%) and closed at $381.02 (31 cents above the target or 0.08%). Again, an example of accuracy in the prediction of the target.

  • Again, It looks like GOOG was “homing” in on the target price.

Dr. Henrick Jeanty


The 3 patterns together

The 3 patterns together

Dr. Henrick Jeanty


Recap

Recap

  • The last three examples show the power of some technical analysis.

  • They have occurred over just the last 4 months.

  • The accuracy with which the target prices have been hit is remarkable.

  • The gains occurred over short periods of time.

  • GOOG is not the only example of such patterns.

Dr. Henrick Jeanty


Conclusions

Conclusions

  • Technical Analysis can help understand certain price movements.

  • Technical Analysis can help predict certain price movements.

Dr. Henrick Jeanty


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