29/01/2012 1 Financial Data Analysis ECON3140B Ng Yau Man, David 吳幼珉 1 Grading • Class performance (10%) • Four homework assignments (4 x 5%) • A term project (no more than 3 members. The project is a 2000-word paper studying the profitability of a trading rule, 20%) • A mid-term exam (20%) • A final exam (30%). 2 References • 林瑞芬《 技术分析攻略 》(第22版) • Course Handouts, by DN • Technical Analysis of the Financial Markets, by J. Murphy, 1999, New York Institute, New York • Technical Analysis Explained, by M.J. Pring, 4th edition, 2002, McGraw Hill • The Alchemy of Finance, by G. Soros, 2003, John Wiley and Sons. • The Candlestick Course, 2003, by Steve Nison and Marketplace Books • Breakthroughs in Technical Analysis: New Thinking from the World’s Top Minds by David Keller, 2007. • Technical Analysis of Stock Trends by Robert D. Edwards and John Magee, 2007 3 Financial Data Analysis • Fundamental analysis (基本分析) – Analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets • Technical analysis (技術分析) – study of charts and statistics 4 Principles of TA • Market action discounts everything (市場行為 反影一切) • Prices move in trends (價格按趨勢變化) • History tends to repeat itself (歷史往往會重 演) 5 The Dow Theory (道氏理論) • The market has three movements. • Market trends have three phases. • The stock market discounts all news. • Stock market averages must confirm each other. • Trends are confirmed by volume. • Trends exist until definitive signals prove that they have ended. 6
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29/01/2012
1
Financial Data AnalysisECON3140B
Ng Yau Man, David吳幼珉
1
Grading
• Class performance (10%)• Four homework assignments (4 x 5%)
• A term project (no more than 3 members. The project is a 2000-word paper studying the profitability of a trading rule, 20%)
• A mid-term exam (20%)
• A final exam (30%).
2
References• 林瑞芬《技术分析攻略》(第2 2版)
• Course Handouts, by DN
• Technical Analysis of the Financial Markets, by J. Murphy, 1999, NewYork Institute, New York
• Technical Analysis Explained, by M.J. Pring, 4th edition, 2002,McGraw Hill
• The Alchemy of Finance, by G. Soros, 2003, John Wiley and Sons.
• The Candlestick Course, 2003, by Steve Nison and Marketplace Books
• Breakthroughs in Technical Analysis: New Thinking from the World’sTop Minds by David Keller, 2007.
• Technical Analysis of Stock Trends by Robert D. Edwards and JohnMagee, 2007
3
Financial Data Analysis
• Fundamental analysis (基本分析)– Analyzing its financial statements and health, its
management and competitive advantages, and its competitors and markets
• Technical analysis (技術分析)– study of charts and statistics
4
Principles of TA
• Market action discounts everything (市場行為反影一切)
• Prices move in trends (價格按趨勢變化)
• History tends to repeat itself (歷史往往會重演)
5
The Dow Theory (道氏理論)
• The market has three movements. • Market trends have three phases.
• The stock market discounts all news.
• Stock market averages must confirm each other.
• Trends are confirmed by volume. • Trends exist until definitive signals prove that
they have ended.
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Illustration: Stock market averages must confirm each other.
7
Illustration: Trends are confirmed by volume.
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Does a Downward Trend Exist and Continue?
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Contents
Part 1. Brief Introduction to the Stock Market of Hong Kong and other Equity Markets
Part 2. Chart ConstructionPart 3. Chart Pattern AnalysisPart 4. Moving AveragePart 5. Advanced AnalysisPart 6. The Elliott Wave TheoryPart 7. WarrantsPart 8. Point and Figure Charting
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Part 1
Weeks 1 & 2
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Part 1. Brief Introduction to the Stock Market of Hong Kong and other Markets
• The History of Hong Kong Stock market
• The Calculation of Hang Seng Index
• The Hang Seng Futures• Forex Market
• Commodity Market
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The History of Hong Kong Stock Market (1)
• The first Companies Ordinance (公司法) in 1865.
• The Association of Stockbrokers in Hong Kong, was formed in 1891 and was renamed the Hong Kong Stock Exchange in 1914.
• The Hong Kong Sharebrokers’ Association was formed on 1 October 1921.
• The two exchanges merged to form the Hong Kong Stock Exchange in 1947.
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The History of Hong Kong Stock Market (2)
• The Hang Seng Index was made public on 24 November 1969. The index was based on the performance of 33 representative stocks (=100 on 31/7/1964).
• Far East Exchange (17 December 1969)• The Kam Ngan Stock Exchange 金銀證劵交易所有限公司 (15 March 1971)
• The Kowloon Stock Exchange (5 January 1972).
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The History of Hong Kong Stock Market (3)
• The HSI reached a high of 1774.96 points on 9 March 1973 from less than 700 points only four months earlier.
• Towards the end of 1973, the bubble began to burst and the HSI plunged to 177.22 by end of December 1974.
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The History of Hong Kong Stock Market (3a)
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The History of Hong Kong Stock Market (4)
• The Stock Exchange of Hong Kong (Stock Exchange) was incorporated on 7 July 1980.
• Amid a crisis of confidence stemming from uncertainties about Hong Kong’s future, the HSI fell to a year low of 676.30 points on 2 December 1982.
• The Hong Kong Commodity Exchange was renamed the Hong Kong Futures Exchange (Futures Exchange) on 7 May 1985.
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The History of Hong Kong Stock Market (5)
• The four exchanges ceased trading after the close of business on 27 March 1986 and the unified Stock Exchange of Hong Kong (Stock Exchange) with 570 participant organizations commenced trading on 2 April that year.
• The Futures Exchange launched the HSI Futures on 6 May 1986.
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The History of Hong Kong Stock Market (6)
• A long bull run took the HSI to a high of 3968.70 points on 1 October 1987. On 19 October 1987 (Monday) that followed a global market crash, the Hong Kong market dived to 3362.39 points at the close.
• The Stock Exchange suspended trading for four days from 20 October to 23 October 1987. HSI Futures was also suspended.
• When the market reopened on 26 October, the HSI plunged about 43 per cent in one day.
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The History of Hong Kong Stock Market (6a)
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The History of Hong Kong Stock Market (7)
• In March 1989, the Hong Kong Securities Clearing Company (HKSCC) was formed.
• The Securities and Futures Commission (SFC) was established on 1 May 1989.
• Hong Kong Securities Clearing Company Limited created CCASS, the central clearing and settlement system, which became the central counterparty for all CCASS participants since 1992.
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The History of Hong Kong Stock Market (8)
• Transactions between CCASS participants are settled on T+2.
• Nominee service.• Since 25 January 1996, terminals installed in securities
brokers’ offices enabled them to execute trades from their offices, in addition to the Trading Hall.
• The Hong Kong-incorporated Mainland Enterprise (red chip 紅籌股) firstly listed on the Stock Exchange in July 1992.
• The first H-share company (a Mainland-incorporated Enterprise) commenced trading in Hong Kong on 15 July 1993.
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The History of Hong Kong Stock Market (10)
• The Futures Exchange introduced HSI options on 5 March 1993,
• Stock options contracts were introduced by the Stock Exchange in September 1995,
• Trading of Rolling Forex currency futures on the futures market started in November 1995.
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The History of Hong Kong Stock Market (11)
• On 7 August 1997, the HSI reached a high of 16820.31 points. However, in October 1997, the Hong Kong dollar – pegged to the US dollar – came under significant speculative pressure and the HSI bottomed at 6544.79 points on 13 August 1998.
• The Government injected about $120 billion to buy blue chips in defence of the pegged exchange rate; and the HSI rebounded to about the 8000 level in two weeks.
• The Government started to divest itself from the position in 2001.
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The History of Hong Kong Stock Market (11a)
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The History of Hong Kong Stock Market (12)
• On 15 November 1999, the Stock Exchange launched a second board, the Growth Enterprise Market (GEM).
• The Stock Exchange, the Futures Exchange and the HKSCC became wholly owned subsidiaries of Hong Kong Exchanges and Clearing Limited (HKEx) on 6 March 2000.
• HKEx (388) floated on the Stock Exchange on 27 June 2000.
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The History of Hong Kong Stock Market (13)
• On 5 June 2000, floor trading on the Futures Exchange was abolished.
• The Securities and Futures Ordinance (SFO) together with a number of codes and guidelines came into effect on 1 April 2003.
• HKEx was ranked number one globally in funds raised through IPOs in 2009 with a total $248.23 billion.
• CEPA• International floating.
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The History of Hong Kong Stock Market (14)
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The History of Hong Kong Stock Market
• What have you learnt from the history of HK stock market?
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The Calculation of Hang Seng Index
Descriptions on parameters:P(t):Current Price at Day tP(t-1):Closing Price at Day (t-1)IS: Issued Shares FAF(流通系数, 流通股份佔總發行股之百份比):Freefloat-adjusted
Factor, which is between 0 and 1, adjusted quarterlyCF(比重上限系数):Cap Factor, which is between 0 and 1, adjusted
quarterly
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FAF & CF
• FFA: the proportion of shares that is free floated as a percentage of issued shares. – Not include restricted stocks, such as those held
There are 45 HSI constituent stocks in total. As of September 6, 2010, they are:Hang Seng Finance Sub-index0005 HSBC Holdings plc0011 Hang Seng Bank Ltd0023 Bank of East Asia, Ltd0388 HKEx Limited0939 China Construction Bank1398 Industrial and Commercial Bank of China2318 Ping An Insurance2388 BOC Hong Kong (Holdings) Ltd2628 China Life3328 Bank of Communications Ltd3988 Bank of China LtdHang Seng Utilities Sub-index0002 CLP Holdings Ltd0003 Hong Kong and China Gas Company Limited0006 Hong Kong Electric Holdings Ltd0836 China Resources PowerHang Seng Properties Sub-index0001 Cheung Kong (Holdings) Ltd0012 Henderson Land Development Co. Ltd0016 Sun Hung Kai Properties Ltd0083 Sino Land Co Ltd0101 Hang Lung Properties Ltd0688 China Overseas Land & Investment Limited1109 China Resources Land Limited
Hang Seng Commerce & Industry Sub-index0004 Wharf (Holdings) Ltd0013 Hutchison Whampoa Ltd0017 New World Development Co. Ltd.0019 Swire Pacific Ltd 'A'0066 MTR Corporation Ltd0144 China Merchants Holdings (International) Co Ltd0267 CITIC Pacific Ltd0291 China Resources Enterprise, Ltd0293 Cathay Pacific Airways Ltd0330 Esprit Holdings Ltd0386 Sinopec Corp0494 Li & Fung Ltd0700 Tencent Holdings Limited0762 China Unicom Ltd0857 PetroChina Company Limited0883 CNOOC Ltd0941 China Mobile Ltd1088 China Shenhua Energy Company Limited1199 COSCO Pacific Ltd1880 Belle International1898 China Coal Energy2038 Foxconn International Holdings Ltd2600 Aluminum Corporation of China Limited (Chalco)
• Hang Seng China Enterprises Index (恒生中國企業指數)• Hang Seng China-Affiliated Corporations Index (恒生香港中資企業指數)• Hang Seng China H-Financials Index (恒生中國H股金融行業指數)• Hang Seng Mainland 100 (恒生中國內地100)• Hang Seng Mainland 25 (恒生中國內地25)• Hang Seng HK 35 (恒生香港35)• Hang Seng REIT Index (恒生房地產基金指數)• Hang Seng Corporate Sustainability Index Series (恒生可持續發展企業指數系列)• Hang Seng Composite Index (恒生綜合指數系列)• Hang Seng Composite Industry Indexes (恒生綜合行業指數)• Hang Seng Composite Size Indexes (恒生綜合市值指數)• Hang Seng Short & Leveraged Index Series (恒生短倉及槓桿指數系列)• Hang Seng China A Industry Top Index (恒生A股行業龍頭指數)• Hang Seng China 50 Index (恒生神州50指數)• Hang Seng China AH Premium Index(恒生AH股溢價指數)• Hang Seng China AH Index Series (恒生AH指數系列)• Hang Seng Total Return Index Series (恒生股息累計指數系列)• Hang Seng Dividend Point Index Series (股息點指數系列)
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The Hang Seng Futures• Type Index Underlying Hang Seng Index • Currency Hong Kong Dollar (HKD)
• Want to square by taking a short– Bid/ask 15100/15111 Spot =15100– 15100(15), 15099(50), … /15100(8^), 15111(25), … – Done at 15100– Then in a square position
• P/L =(15100-15000) x 50
• Long 15000• Short 14900• P/L =-100 x 50
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• Markets
• Securities
• Broker (itself does not take a position)
• Dealer (from its own portfolio)• Trader (with the goal of profiting)
=HKD1.2355)– In most parts of the world, the order is: EUR – GBP – AUD
– NZD – USD – others. Accordingly, a conversion from EUR to AUD, EUR is the base currency, AUD is the quote currency and the exchange rate indicates how many Australian dollars would be paid or received for 1 Euro.
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Direct / Indirect Quotations
• Direct quotation: 1 foreign currency unit = x home currency units– GBP/USD 1.6054 1.6059 in the U.K.
– USD/HKD 7.7805 7.7829
• Indirect quotation: 1 home currency unit = x foreign currency units– HKD/USD 0.12849 0.12852
43
Cross Rates
• Exchange rate between two currencies, both of which are not home currency or do not involve the U.S. dollar.
Example:
Given EUR/USD = 1.0060/65GBP/USD = 1.5847/52USD/JPY = 120.25/30USD/CHF = 1.4554/59
Find GPB/CHFGBP/USD: Bid: 1.5847 Offer: 1.5852USD/CHF: 1.4554 1.4559GBP/USD X USD/CHF 1.5847 X1.4554 1.5852 X 1.4559
• Spot Rate: the present value of a currency.• Forward Rate: a specific exchange rate at
which two parties agree to trade currencies at a future date.
• Forwards (遠期合約) : specific agreements between two parties.
• Futures (期貨合約): standardized contracts traded over a regulated futures exchange.
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Forward Exchange Rate
Future Value of Currency
FV=P(1+r)n
where
P = Principal
r = interest rate per year
n = number of years
Forward Exchange RateForward Exchange Rate = Spot
Price x (Future Value ofQuote Currency / Future Value of Base Currency) = S(1+rq)n/ (1+rb)n
S = Spot Pricerq = Interest Rate of Quote
Currency rb = Interest Rate of Base
Currencyn = Number of Compounding
Periods
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Example — Calculating the Forward Exchange Rate
• If the spot price for USD/EUR = 0.7395 / 0.7405, the borrowing / lending interest rates in Europe is currently 3.75% / 4% p.a. and the current interest rates in the United States is 5% / 5.25% p.a.
Forward premium or discount = [(Forward rate -Spot rate) ÷ (Spot rate)] x [360÷(# of days)] x 100.
ExampleIf the 3-month ¥ / $ forward exchange rate is 109.50 and the spot rate is ¥ / $ = 109.38, then the dollar is considered to be "strong" relative to the yen, as the dollar's forward value exceeds the spot value. The dollar has a premium of 0.12 yen per dollar. Find forward premium.
Forward premium or discount = [(Forward rate -Spot rate) ÷ (Spot rate)] x [360÷ (# of days)] x 100.
ExampleBut the yen would trade at a discount because its forward value in terms of dollars is less than its spot rate. Find the discount for the Japanese yen.
Answer:
First, calculate the forward and spot rates for the Japanese yen in terms of dollars per yen:
(1/109.50 = 0.0091324) and (1/109.38 = 0.0091424) respectively.The annualized forward discount for the Japanese yen, in terms of U.S. dollars, would be: ((0.0091324 – 0.0091424) ÷ 0.0091424) × (12 ÷ 4) × 100% = -0.328%
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Speculation
• Investment ( expenditures made for income)• Speculation ( high risk, anticipated price movement,
high profit) • Gambling (not make informed decision)
• Sells USD/EUR 1-month forward at USD1 = EUR 0.729.• Three hours later, squares off at 0.730. • The change in price is € 0.001/$. • Has 2 contracts and each contract is USD1 million.• Profit is € 2000.
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Arbitrage (套利) Example
• A stock price is quoted as £100 for $162 in New York
• The current exchange rate is 1.6500 in London.
• What is the arbitrage opportunity?
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Foreign Exchange Market
• In 1983, the Hong Kong dollar was linked to the US dollar at $7.80.
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Derivatives (衍生工具) are Used
• To hedge risks (對冲)• To speculate (take a view on the future
direction of the market)• To lock in an arbitrage profit
• To change the nature of a liability
• To change the nature of an investment without incurring the costs of selling one portfolio and buying another
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Forward Contract (遠期合約) & Futures (期貨) (1)
• Forward contracts are similar to futures.
– allow people to buy or sell a specific type of asset at a specific time at a given price.
• Difference between futures and forward contracts:
– Futures are exchange-traded and, therefore, are standardized contracts.
– Forward contracts are private agreements between two parties.
– A party may default on its side of a forward.
– Futures contracts have clearing houses that guarantee the transactions.
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Forward Contract & Futures (2)– Settlement of a forward occurs at the end of the contract.
– Futures contracts are marked-to-market daily (Daily changes are settled day by day until the end ).
– Futures are usually closed out prior to maturity and delivery usually never happens.
– Forward contracts, delivery of the asset or cash settlement will usually take place.
• Forward & futures are popular on currencies and interest rates.
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Forward Contracts vs Futures Contracts
Forward Futures
Private contract between two parties Traded on an exchange
Not standardized Standardized
Usually one specified delivery date Range of delivery dates
Settled at end of contract Settled daily
Delivery or final settlement usual Usually closed out prior to maturity
Some credit risk Virtually no credit risk
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Options (期權)
• A call option is an option to buy a certain asset by a certain date for a certain price (the strike price)
• A put option is an option to sell a certain asset by a certain date for a certain price (the strike price)
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Options vs Futures/Forwards
• A futures/forward contract gives the holder the obligation to buy or sell at a certain price.
• An option gives the holder the right to buy or sell at a certain price.
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American vs European Options
• An American option can be exercised at any time during its life.
• A European option can be exercised only at maturity.
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Commodity Market
• As time passes, the contract's price changes relative to the initially fixed price.
• This creates profits or losses for the trader.
• In most cases, delivery never takes place.
• Arbitrage (套利).• Price via expectation.
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Futures for Crude Oil on Aug 4, 2009
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Futures for Soybeans on Aug 4, 2009
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Commodity Futures
• January: an investor enters into a long futures contract to buy 100 oz of gold @ $1750 in Nov
• Nov: the price of gold $1650 per oz
What is the investor’s profit?
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1. Gold: An Arbitrage Opportunity?
• Suppose that:– The spot price of gold is US$1000
– The quoted 1-year futures price of gold is US$1100
– The 1-year US$ interest rate is 5% per annum
– No income or storage costs for gold• Is there an arbitrage opportunity?
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The Futures Price of Gold
If the spot price of gold is S & the futures price is for a contract deliverable in T years is F, then
F = S (1+r )T
where r is the 1-year (domestic currency) risk-free rate of interest.
In our examples, S=1000, T=1, and r=0.05 so thatF = 1000(1+0.05) = 1050
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Short / Sell
SPOT
Bank Commodity Future @f P / L
|P 1 | |1 sell |
One year later
Bank Commodity Future @f P / L
|P+I |1 1 buy| |
f | |f-(P+I)
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Short / Sell
SPOT
Bank Commodity Future @1100 P / L
|1000 1 | |1 sell |
One year later
Bank Commodity Future @1100 P / L
|1050 |1 1 buy | |
1100| |50
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2. Gold: Another Arbitrage Opportunity?
• Suppose that:– The spot price of gold is US$1000
– The quoted 1-year futures price of gold is US$990
– The 1-year US$ interest rate is 5% per annum
– No income or storage costs for gold• Is there an arbitrage opportunity?
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Buy / Long
SPOT
Bank Commodity Future @990 P / L
1000| | 1 1 buy | |
One year later
Bank Commodity Future @990 P / L
1050| 1 | |1 sell |
|990 |60
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3. Oil: An Arbitrage Opportunity?
Suppose that:– The spot price of oil is US$70– The quoted 1-year futures price of oil
is US$80– The 1-year US$ interest rate is 5% per
annum– The storage costs of oil are 2% per
annum
• Is there an arbitrage opportunity?
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4. Oil: Another Arbitrage Opportunity?
• Suppose that:– The spot price of oil is US$70– The quoted 1-year futures price of oil
is US$65– The 1-year US$ interest rate is 5% per
annum– The storage costs of oil are 2% per
annum
• Is there an arbitrage opportunity?
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Margins
• A margin is cash or marketable securities deposited by an investor with his or her broker
• The balance in the margin account is adjusted to reflect daily settlement
• Margins minimize the possibility of a loss through a default on a contract
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Part 2
Week 3
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Part 2. Chart Construction
-Type of Charts Available-Construction of the Daily Bar Chart
-Weekly and Monthly Bar Charts
-Candlesticks, Prosticks
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Type of Charts
• Charting– Shows visual summary of stock activity over time
– Easy to use and to understand
– Use to spot developing trends
– Major types• Line charts• Bar Charts• (Point-and-Figure Charts)• Candlesticks• Prosticks
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Line Chart (線形圖)
• Displays information as a series of data points connected by straight line segments.
• Time-series data demonstrate a trend over a period of time.
Hang Seng Index (Closing)
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Bar Charts (柱狀圖)
– HCL: high-low-close
– OHCL: open-high-low-close
– Often used to compare current stock price with moving average
– When current price goes above or below a moving average, indicates significant price change
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HCL Bar Chart
81
OHCL Bar Chart
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85 86
87 88
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Bar (OHLC) Charts and Candlesticks (陰陽燭圖)
• Each bar is composed of 4 elements:– Open– High– Low– Close
• The candlestick body is empty (white) on up days, and filled (some color) on down days Open
Close
High
LowStandardBar Chart
JapaneseCandlestick
Open
Close
High
LowStandardBar Chart
JapaneseCandlestick
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Candlesticks and ProsticksModal (典型) Point : the most heavily transacted price for the particular time interval.
Extreme tail: price range that has very little trading activity caused by strong resistance and /or support.
91 92
The Three White Soldiers Candlestick Pattern
• A bullish reversal pattern that forms with three consecutive long white candlesticks.
• Like a long white candlestick which combines the three candlesticks, takes the open of the first candlestick and the close of the last candlestick.
• After a decline, or down-trend, the three white soldiers pattern signals strong buying.
• Careful about parabolic moves.
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Advance Block• Three white soldiers occur in
downtrends, while the advance block occurs in uptrends.
• The first candlestick in the advance block formation is a long green candlestick with very little upper shadow and closes near its high. The next two candlesticks in the formation will close higher, but they both have lengthy upper shadows. These upper shadows are an early indication that the uptrend is at risk.
• The second and third candlestick open within the body of the preceding candle.
• A bearish reversal signal. This chart pattern materializes after a clear uptrend is in place. 94
Deliberation
• In an upward trend two long blue days occur
• The third day is a shorter blue candle.
• Significant after long rallies.
• Shows a weakening upward trend.
• Direction: Bearish• Type: Reversal
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The Three Black Crows Candlestick Formation
• Consists of three large, consecutive, declining candles.
• Precludes lower prices, especially after a strong advance higher.
• Requires the trader have patience or even wait for a countertrend rally before looking to take a short position or sell out of longs.