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Microsoft Corporation - Applied Fund Management

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Applied Fund Management

Introductory of Technical Analysis

This report summarises the performance of historical stock prices on two corporations and conducts the technical analysis based on the output data of moving averages on each stock from the Ox computer code, which may refer to the appendix in section three. Basically, moving average, which is the most simple and reliable analytical tool, will be used to determine the future price movement of the financial assets. By using this approach, traders and investors could simply track down the number of fluctuations or noises on a daily stock price chart. To be more specific about the length of moving average, a shorter period is more suitable for short-term trading and a longer period used for long-term investors. In this report, there are two main sections of technical analysis on the historical financial asset prices of Microsoft Corporation for 15-day and 80-day moving averages and General Electric Corporation for 40-day and 200-day moving averages periods.

1. Technical Analysis on Microsoft Corporation

The 15-day and 80-day Moving Averages

In section one, the historical data of Microsoft between January 1993 and March 1994, the 15 months period will be used to analyse the past prices for short-term and long-term moving averages. In the following line chart, the red line represents the average price over the past 15 days, short period, whereas the blue line stands for the average price over the past 80 days, longer period. The 15-day moving average has a significant amount of lag than the 80-day moving average since shorter period contains only the past 15 days prices in the figure below. When these two moving averages are plotted onto a chart, we can identify the direction of the price whether angled up or down which means it is moving up or down overall. By identifying these moving averages break above or below, investors and traders are able to determine the prominent trading signals for both entries and exits.

Figure 1 Technical Analysis on Microsoft Corporation with 15-day and 80-day Moving Averages

Source: Technical Analysis on MICROSOFT CORP

As shown in the figure above, the 15-day moving average was crossover down through the 80-period moving averages signals a price breakdown that should start a new downward trend at the beginning of February 1993, in which the price was decreased by $88 per share. The occurrence of this downward momentum with a bearish situation is also called a death cross, which indicates a sell signal for traders to make a trading decision simultaneously. Once again in July 1993, a declining moving average with shorter period occurred and this result alarms traders to make a selling Microsoft stock in a bearish market. In the downtrend, the 80-day moving average performs as a resistance; like a ceiling as the price bounced up and then dropped again.

On the other hand, there were three strong indicators in May and September 1993 and January 1994. Among these three periods, the highest trading price was approximately $93 per share which was increased from $86 per share in May 1993. The prices of the rest periods rose from $80 to $83 per share in September 1993 and $81 to $85 per share in January 1994. Nonetheless, these trading signals are buying signals which indicate the uptrend momentum with a golden cross, where the shorter period is crossing up through, the longer period. In this bullish situation, traders are more likely to make a decision on buying stocks in the marketplace.

Overall, the reaction of moving average with the shorter look-back period (15 days) was faster in price variation than the average with the longer look back period (80 days). Thus, the 15-day moving average provides a lot more reversal signals than the 80-day did. This means the traders who prefer in short-term investment will be more likely to use this trading strategy.

2. Technical Analysis on General Electric Corporation

The 40-day and 200-day Moving Averages

In the second section, the technical analysis on General Electric Corporation will be performed based on the past prices for two years; 1993 and 1994. Similar to the analysis on Microsoft, the red and blue lines describe the short-term and long-term moving average periods, respectively.

Figure 2 Technical Analysis on General Electric Corporation with 40-day and 200-day Moving Averages

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