SUCCESS PROBABILITY OF TECHNICAL ANALYSIS IN EQUITY MARKET

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SUCCESS PROBABILITY OF TECHNICAL ANALYSIS IN EQUITY MARKET

SUCCESS PROBABILITY OF TECHNICAL ANALYSIS IN EQUITY MARKET

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  • 1. EXECUTIVE SUMMARY The project deals with a brief introduction of technical analysis how to trade and invest in stock market as the investors and traders are more concerned of return and they want to be far from risk, technical analysis is very helpful in deciding as when to buy & sell a particular stock. The core area of this project focuses on technical analysis of the stock’s and to finding the success probability of technical analysis in equity market and trading and investment decisions. The major portion of the project was carried out in “NATHANI INVESTMENT” which is a sub-broking firm under SATCO CAPITAL MARKETS LTD. Prices of securities in the stock market fluctuate daily on account of continuous buying and selling. Stock prices move in trends and cycles and are never stable. An investor in the stock market is interested in buying securities at a low price and selling them at a high price so as to get a good return on his investment. Technical Analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as prices and volume. Technical analysis does not give the intrinsic value of a security, but instead it includes charts and other tools to identify patterns that can suggest future activity. The rationale behind the technical analysis is that the share price behavior repeats itself over time and analysts attempt to derive methods to predict this repetition. A technical analyst looks at the past share price data to see if he can establish any patterns. He then looks at the current price data to see if any of the established patterns are applicable and if so, forecasting can be made to predict the future price movements. Although past share prices are the major data used by technical analysts, other statistics such as volume of trading and stock market indices are also utilized to some extent. Technical analysis basically studies supply and demand in a market in an attempt to determine what direction or trend will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself as opposed to its components. The recent trend in the stock market regarding its volatility which leads to the depression and also losses for many investors, If when the investors ask him-self about why did the stock market behaved in this way; the factor may be many. One has to develop a bird‟s view over the stock market and analyze every factor with tools and technique so that he/she may not go wrong in the investment decision. One of the tools is technical analysis which helps to study the market action, primarily through the use of charts, for the purpose of forecasting future price trends. Page | 1
  • 2. ABOUT NATHANI IVESTMENT NATHANI IVESTMENT is one of the leading sub broking firm under SATCO CAPITAL MARKETS LTD based in Mumbai, Kurla. It is a part of NATHANI group founded by Ravi Nathani in 2007. NATHANI INVESTMENT offer wide range of broking services including equity, commodity, currency and derivatives. Firm also offer other service such as portfolio management services, wealth management services. Moreover it also provides research and distribution service of insurance, IPOs, mutual funds, fixed deposits and other financial products. NATHANI INVESTMENT is the largest broking firm in kurla-Mumbai, serves more then thousand clients. The daily average turnover of Nathani investment is approximate 50lac‟s. NATHANI INVESTMENT is a Trading and clearing member in NSE, BSE, MCX-SX, and spot Exchanges of MCX (NSEL) and NSDL. Products and Services of NATHANI INVESTMENT: Investment Consultant Stock Broker Equity Share Broking Derivatives Mutual Fund PMS Wealth management Distribution of financial products Commodities IPO Research Page | 2
  • 3. OBJECTIVE OF THE STUDY THE CORE OBJECTIVE OF THE STUDY IS TO FIND OUT THE SUCCESS PROBABILITY OF TECHNICAL ANALYSIS IN TRADING AND INVESTMENT DECISION‟S. SUB OBJECTIVES: To understand the movements of stock prices of selected company stocks through Technical analysis. To know how best we can utilize these analyses to meet the financial goals. To know the effectiveness of technical analysis in trading and investment decisions. To find out when to enter and exit from a particular stock. To analyze tools of technical analysis can be used in forecasting stock prices. To understand the emotions in the market. To analyze & forecast future price movements of chosen equity shares with the help of technical movements in equity price. To know how an investor can take rational Investment decisions by the study of Market trends and movements. To provide the investors with a technique from which they can make a decent profit by Trading in stocks. Page | 3
  • 4. SCOPE OF THE STUDY The study mainly focus on trading and investment decisions by anticipating future stock price movement with the use of Technical analysis and its success probability of achieving a predicted target. This study is base on technical study of 25 equities selected from NSE (National Stock Exchange). Following are the main scope of this study: The analysis has been done only on 25 stock of Nifty. The analysis involves using of limited technical tools out of various tools. The study is related to predict the future behavior of the stock with the help of technical analysis and to find how much one can reliable on the signal of technical analysis about the future trend Techniques of data analysis: Technical tools used for the study are; (a)Chart patterns: Japanese candlestick chart Line chart (b)Indicators of the study: Accumulation distribution (Volume Indicator) Ichimoku Kinko Hyo (Oscillator) Moving Average Convergence Divergence (MACD) (Oscillator) Average Directional Index (ADX) (Trend Indicator) GMMA (Trend Indicator) Page | 4
  • 5. FINDINGS On the basis of the study, it‟s found that the success probability of Technical analysis is 76%. The share prices of a company are very sensitive and may change very rapidly (upward or downward), but by following a systematic study, it is possible to anticipate the share prices to a certain extent. The stocks move according to some patterns, we can anticipate the stock prices by identifying such patterns. RECOMMENDATIONS Technical analysis helps to improve the investment decision. Technical analysis is more simple and reliable then fundamental analysis because the information required for technical analysis is easily available as compared to fundamental analysis. Technical analysis is less time consuming then fundamental analysis. The knowledge of technical analysis help traders and investors to reduce there risk and earn good profit from the market. Even though technical analysis is enough for making decision in stock market, simultaneous usage of both fundamental and technical analysis will reduce errors in forecasting future prices. LIMITATIONS OF THE STUDY All calls have given for near term target only, because we can‟t predict the prices of the stocks for long term without including fundamental analysis. Time period given is of only two months, which may not sufficient for the required tenure to find out the success probability of technical analysis. The study is restricted to only 25 stocks of NSE. Technical analysis can‟t be applicable to newly listed companies script. Page | 5
  • 6. WHAT IS STOCK ANALYSIS? Stock analysis is a term that refers to the evaluation of a particular trading instrument, an investment sector or the market as a whole. Stock analysts attempt to determine the future activity of an instrument, sector or market. There are two basic types of stock analysis: 1-Fundamental analysis 2-Technical analysis Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. TECHNICAL ANALYSIS Technical analysis can be defined as a method that attempts to forecast future price trends by the means of analyzing market action. It was established as early as 18th century. However, most of its methods as we know them today were created in the first decades of 20th century. The core idea of technical analysis is that history tends to repeat itself. That is why we can find certain situations in the market that occur regularly. These situations can be discovered by chart analysis and technical indicators, which we can use for our advantage and that is precisely what technical analysis is trying to do. There are several approaches to technical analysis – such as the Dow Theory, Elliot wave theory, Fibonacci's analysis, cyclical analysis and so on. However, the most commonly used methods can be divided into two major branches – namely chart analysis (also called charting) and statistical approach. With chart analysis, the analyst is trying to find patterns that price create in the chart and that occur repeatedly. For example: head and shoulders or double bottoms are considered typical chart patterns. As soon as the analyst identifies such a pattern, he can make a trade based on the direction the price should follow based on the type of the pattern. Page | 6
  • 7. Another branch of technical analysis is constituted by the statistical techniques, which comprise mostly the study and use of various technical indicators. These indicators are computed from historical market data and are mostly used for forecasting trend reversals or changes in strength of the trend. Many of the indicators yield precise buy and sell signals. There are several kinds of indicators – from the very simple ones like moving averages to the very complicated such as Swing index, for which the mathematical formula is several lines long. Yet, the major drawback of using technical indicators is that they provide too many trading signals that are often contradicting each other. It is so because different indicators work best in different kind of market (or phase of the trend). BASIC ASSUMPTIONS OF TECHNICAL ANALYSIS "The future influences the present just as much as the past." Friedrich Nietzsche (1844 - 1900) Technical Analysis is built on some fundamental assumptions in regards to the fashion in which a market operates. The field of technical analysis is based on following three assumptions: 1. Price discounts everything. 2. Price moves in trends. 3. History repeats itself over time! 1-Price discounts everything: This first assumption seeks to incorporate all the fundamental, political, macro and micro economic data as well as the risk component of a stock into the current market price at any one period. This infers that the market price can be heavily influenced by an investor's perception of supply and demand, as well as the general broad economic overview at the time the price is captured. Therefore, it can be assumed that Technical Analysts believe that the current market price of a stock reflects all the relatively important information that Fundamental Analysts are seeking to provide qualitative and quantitative explanations for. This is one of the key reasons that Technical Analysts do not focus on the underlying data behind price variation, but rather focus on what the market is valuing the stock at. 2-Price Moves in Trends: In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption. Page | 7
  • 8. 3-History repeats itself over time: Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. , TECHNICAL ANALYSIS v/s FUNDAMENTAL ANALYSIS Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements, whereas fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. The Differences: Charts vs. Financial Statements: At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement; a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts. Time Horizon: Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be Page | 8
  • 9. reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases. Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts. Trading Versus Investing: Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools. The Critics: Some critics see technical analysis as a form of black magic. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. In fact, technical analysis has only recently begun to enjoy some mainstream credibility. While most analysts on Wall Street focus on the fundamental side, just about any major brokerage now employs technical analysts as well. Much of the criticism of technical analysis has its roots in academic theory - specifically the efficient market hypothesis (EMH). This theory says that the market's price is always the correct one any past trading information is already reflected in the price of the stock and, therefore, any analysis to find undervalued securities is useless. There are three versions of efficient market hypothesis (EMH). In the first, called weak form efficiency, all past price information is already included in the current price. According to weak form efficiency, technical analysis can't predict future movements because all past information has already been accounted for and, therefore, analyzing the stocks past price movements will provide no insight into its future movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be of little use in finding investment opportunities. The third is strong form efficiency, which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental analysis can provide investors with an edge. The vast majority of academics believe in at least the weak Page | 9
  • 10. version of EMH, therefore, from their point of view, if technical analysis works, market efficiency will be called into question. There is no right answer as to who is correct. There are arguments to be made on both sides. Can They Co-Exist? Although technical analysis and fundamental analysis are seen by many as polar opposites the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved. Alternatively, some technical traders might look at fundamentals to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Often times, having both the fundamentals and technical‟s on your side can provide the best-case scenario for a trade. While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school, there are certainly benefits to at least understanding both schools of thought. WHY WE USE TECHNICAL ANALYSIS? Technical analysis provides information on the best entry and exit points for a trade. On a chart, the trader can see where momentum is rising, a trend is forming, a price is dipping or other events are developing that show the best entry point and time for the most profitable trade. Benefits of Technical Analysis: The benefits of technical analysis are: Helps to identify a trend, allowing investors to make predictions on future trends. Allows investors to judge the direction of the current trend and enables them to gauge the best time to take a position in the market. When it is used in conjunction with fundamental analysis and company and industry related news, it minimizes the chances of an investors and traders incurring losses. Page | 10
  • 11. Drawbacks of Technical Analysis: The drawbacks of technical analysis are: It draws heavily on a person‟s opinion or interpretation. It is more a study of probabilities than of actual value. Useful only for short-term trade. WHAT IS CHART Charts are the heart and soul of technical analysis. Many experienced traders wax poetically about how 'charts talk to them' and make bold statements about the future direction of a stock based on examination of price history. Yet to the untrained eye, these same graphs are but squiggles across a page with no discernible order. Beneath the surface, it is actually an accumulated history of human behavior, a voting mechanism of sorts. The technician is able to see how individuals reacted to earnings reports, economic conditions, and political ramifications over time. There is no need to re-examine those events, since informed market participants have cast their votes as prices over time reflect different expectations. The basic data on which the chart is drawn are: 1-Date 2-Price Band (Open, High, Low & Close) 3-Volume Above data is published by the stock market on their websites. Chart Properties: There are several things that we should be aware when looking at a chart, as these factors can affect the information that is provided. They include the time scale, the price scale and the price point properties used. The Time Scale: The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually. The shorter the time frame, the more detailed the chart. Each data point can represent the closing price of the period or show the open, the high, the low and the close depending on the chart used. Page | 11
  • 12. Intraday charts plot price movement within the period of one day. This means that the time scale could be as short as five minutes or could cover the whole trading day from the opening bell to the closing bell. Daily charts are comprised of a series of price movements in which each price point on the chart is a full day's trading condensed into one point. Again, each point on the graph can be simply the closing price or can entail the open, high, low and close for the stock over the day. These data points are spread out over weekly, monthly and even yearly time scales to monitor both short-term and intermediate trends in price movement. Weekly, monthly, quarterly and yearly charts are used to analyze longer term trends in the movement of a stock's price. Each data point in these graphs will be a condensed version of what happened over the specified period. So for a weekly chart, each data point will be a representation of the price movement of the week. For example, if we are looking at a chart of weekly data spread over a five-year period and each data point is the closing price for the week, the price that is plotted will be the closing price on the last trading day of the week, which is usually a Friday. The Price Scale and Price Point Properties: The price scale is on the right-hand side of the chart. It shows a stock's current price and compares it to past data points. This may seem like a simple concept in that the price scale goes from lower prices to higher prices as we move along the scale from the bottom to the top. The problem, however, is in the structure of the scale itself. A scale can either be constructed in a linear (arithmetic) or logarithmic way, and both of these options are available on most charting services. If a price scale is constructed using a linear scale, the space between each price point (10, 20, 30, 40) is separated by an equal amount. A price move from 10 to 20 on a linear scale is the same distance on the chart as a move from 40 to 50. In other words, the price scale measures moves in absolute terms and does not show the effects of percent change. Figure1 Figure2 If a price scale is in logarithmic terms, then the distance between points will be equal in terms of percent change. A price change from 10 to 20 is a 100% increase in the price while a move Page | 12
  • 13. from 40 to 50 is only a 25% change, even though they are represented by the same distance on a linear scale. On a logarithmic scale, the distance of the 100% price change from 10 to 20 will not be the same as the 25% change from 40 to 50. In this case, the move from 10 to 20 is represented by a larger space one the chart, while the move from 40 to 50, is represented by a smaller space because, percentage-wise, it indicates a smaller move. In Figure 2, the logarithmic price scale on the right leaves the same amount of space between 10 and 20 as it does between 20 and 40 because these both represent 100% increases. TYPES OF CHARTS There are four main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types are: 1-Line chart 2-Bar chart, 3-Japanese candlestick chart (1)Line Chart: The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts. A Typical Line Chart Page | 13
  • 14. (2)Bar Charts: The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open). An OHLC bar Chart An OHLC Bar Page | 14
  • 15. (3)Japanese candlestick charts: Overview Candle charts originated in Japan several centuries ago, but have recently gained a following in other countries. Candle charts can be plotted only for markets in the opening, closing, high, and low intra-day prices are known. Candles can be used to identify price patterns as well as to construct trend line. Structure of a candle A typical candle consists of two parts: the real body, that is, the rectangular part, and the shadow or wick, that is, the two vertical extensions. The tops and bottoms of the rectangle are determined by the opening and closing prices for the day. If the closing price ends up above the opening price, it is plotted in white (Blue). When it closes below the opening price, it is plotted in black (Red). The thin, vertical shadow lines that protrude from the real body reflect the high and low for the day. White and Black candles Candlestick chart Page | 15
  • 16. Top Candlestick Patterns: There are many candlestick patterns but only a few are actually worth knowing. Here are some candlestick patterns worth looking for. Remember that these patterns are only useful when we understand what is happening in each pattern. The following patterns are divided into two parts: (1) Bullish patterns (2) Bearish patterns These are reversal patterns that show up after a pullback or a rally. (1)Bullish Reversal candlestick patterns: Bullish Engulfing: A long white body that engulfs a small black real body in a down trend. The white body's opening price is below the closing price of the previous black body, a bullish trend reversal. Bullish Engulfing Hammer: As with any single candlestick, confirmation is required. The Bullish Hammer formation shows the price goes much lower than the open then closes near the opening price. This fact reduces the confidence of the bears. Ideally, a white real body Hammer with a higher open the following day could be a bullish signal for the days ahead. Page | 16
  • 17. Hammer Harami: Harami formation indicates a loss of momentum. The second candle forms a real body that is sufficiently small to be engulfed by the prior day's long real body. The harami pattern indicates a balance between buyers and sellers and often warns of an impending trend change. Harami position Bullish Bearish Piercing Line: The signal is more pronounced during a downtrend or in the lower part of a congestion zone. It is important to note whether the second day's white body closes more than halfway above the previous black body. If it does not, conventional wisdom indicates that additional weakness is likely. Piercing Page | 17
  • 18. Doji: The doji is probably the most popular candlestick pattern. The stock opens up and goes nowhere throughout the day and closes right at or near the opening price. Quite simply, it represents indecision and causes traders to question the current trend. This can often trigger reversals in the opposite direction. Doji Kickers: There is one more pattern worthy of mention. A "kicker" is sometimes referred to as the most Powerful candlestick pattern of all We can see in the above graphic why this pattern is so explosive. Like most candle patterns there is a bullish and bearish version. In the bullish version, the stock is moving down and the last black candle closes at the bottom of the range. Then, on the next day, the stock gaps open above the previous days high and close. This "shock event" forces short sellers to cover and brings in new traders on the long side. This is reversed in the bearish version. Bullish Continuation: Rising Three Methods: The rising three methods is a bullish pattern and consist of a long white body followed by a series of three declining small black bodies. These bodies should be accompanied by a noticeable contraction in volume that a very fine balance is developing between buyers and sellers. The final part of the pattern is a very strong white body that takes the price to a new closing high. This final day should record a significant increase in activity. Page | 18
  • 19. Rising Three Methods Upward Gapping Tasuki: An upside tasuki gap pattern develops over three periods. In the first period, price closes above its opening price, resulting in a white real body. In the second period, price gaps to the upside on the open and then close higher, creating a white real body. In the third period, price opens within the real body of the second period and then close lower, but do not fill the gap (with either the real body or the lower shadow). This suggests that only a temporary setback has occurred and that prices will continue higher (in essence, because the gap has acted as a support level). Upward Gapping Tasuki (2)Bearish candlestick patterns: All of these bearish patterns are the opposite of the bullish patterns. These patterns come after a rally and signify a possible reversal just like the bullish patterns. Page | 19
  • 20. Bearish Engulfing: A long black body that engulfs a small white real body in an uptrend, the black body's opening price is above the closing price of the previous white body, a bearish trend reversal. Bearish Engulfing Shooting Star: A small real body at the lower end of a long upper shadow, it warns of a potential bearish Reversal in a rising market Shooting Star Harami (White, Black): Harami formation indicates a loss of momentum. The second candle forms a real body that is sufficiently small to be engulfed by the prior day's long real body. The harami pattern indicates a balance between buyers and sellers and often warns of an impending trend change. Harami Dark Cloud Cover: In an uptrend a long white body is followed by a black body that opens higher than the previous days upper shadow, but then closes more than half way down the white body. A bearish trend reversal. Page | 20
  • 21. Dark Cloud Cover Hanging Man: A small real body at the top of a long lower shadow, it warns of a potential top reversal in a rising market. Hanging Man Dark Cloud Cover: In an uptrend a long white body is followed by a black body that opens higher than the previous day‟s upper shadow, but then closes more than half way down the white body, a bearish trend reversal. Dark Cloud Cove Bearish Continuation: Downward Gapping Tasuki: The gap down on the second day does not get filled by the third day. This suggests that the bearish trend will continue. Downward Gapping Tasuki Page | 21
  • 22. Falling Three Methods: This is a formation which shows the market taking a breath before continuing its downtrend. Notice that a new high is not seen during the 4 remaining days of this formation. Falling Three Methods TRENDS ON CHART The trend is the fundamental cornerstone of technical analysis. The trend denotes the overall direction of the security or market at a given time over a given scope, showing the trader the tendency of change in market prices. More simply put, the trend shows the direction of the market. Thus it follows that all trends fall under one of the following three categories: 1-Upward (Bullish) 2-Downward (Bearish) 3-Sideways (Flattish) Trends may also be classified by their timeframes as long-term, medium-term and short-term trends. Upward Trend: (Bullish) An upward trend is denoted by the systematic and extended rise in the price of the given security over some prolonged period of time. This does not mean that the price of the given stock never recedes, but merely that in the overall picture the price raises more than it falls in the given timeframe. Bullish trend on chart Page | 22
  • 23. Downward Trend: (Bearish) A downward trend shares all the characteristics of the upward trend but in the reverse direction, thus denoting the fall in the price of a given security. Bearish trend on chart Sideways Trend: (Flattish) The sideways trend is also known as a trendless, ranging or flat market. Though similar to the other two types, the sideways trend shows no major difference in the price values between the beginning and the end of a specific time period. The sideways trend denotes market conditions in which prices may be moving back and forth between levels of support and resistance. Sideways Trend Page | 23
  • 24. TREND LINES The basic trend line is one of the simplest of the technical tools employed by the chartist, but by any standard the most powerful and valuable tool in trading. The trend line is constructed when there are three higher or lower points to be connected. This forms a channel which the price action can be monitored. As discussed, one of the obvious presumptions derived from chart studies is that prices have a prevailing tendency to move in a particular direction. This trend frequently assumes a definition pattern which evolves along a straight line. This ability of prices to adhere extremely close to an imaginary straight line is one of the most extraordinary characteristics of chart movements. Up trend line: An up trend line is a straight line drawn up to the right of the chart along successive higher highs and lows. Down trend line: A down trend line is a straight line drawn down to the left of the chart along successive lower highs and lows. Range trading: The prices move up and down in a horizontal trading channel for an extended period of time. Page | 24
  • 25. Purpose of drawing trend lines: The purpose of drawing trend lines is to identify where possible reversals will take place. They can also signal that a change in trend may occur. In an uptrend, draw the line along the lowest points in the trend without letting the line cross through prices. We need at least two touches of the trend line. Like this: That is the proper way to draw a trend line. We can see how the stock found support near the line after we got a least two touches. That would have been a great opportunity to establish a position in the stock. But the stock market is not perfect............ Page | 25
  • 26. We can see in the above chart, that there was a trend line break but it did not result in a change of trend. Just because a stock breaks that line that we drew, does not mean that all of a sudden the stock is going to tank! On this chart, we can also see how a stock can often run into resistance near a trend line, if it is broken. So what do we do if the stock breaks the trend line? We draw another one! Like this...... Sometimes, we can have several trend lines on a single chart. Here is another example on a chart of the Dow Jones Industrials: Dow Jones Industrials chart After the first trend line break, we discovered that a change in trend was not going to occur, so we drew another one at this point. After that, we would just wait for another touch of the line and look for a reversal pattern to establish a position. Some very important trend line tips: -The more times a stock touches a trend line, the more significant it becomes. Page | 26
  • 27. -It takes two touches to draw a trend line, but 3 to confirm it as being a valid one. -In a down trend, draw the line along the highs of prices. -Spacing point between the trend line points should not be too far, or too close. [If the (lows, highs) are too close together, the validity of the reaction (low, high) may be in question. If the lows are too far apart, the relationship between the two points could be suspect] -The steeper the trend line, the less reliable it will be. -A trend line break does not mean that the trend will change. SUPPORT and RESISTENCE Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. These terms are used interchangeably throughout this and other articles. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control. Support: Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level. Page | 27
  • 28. Resistance: Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance. Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level. Methods to Establish Support and Resistance: Support and resistance are like mirror images and have many common characteristics. -Highs and Lows: Support can be established with the previous reaction lows. Resistance can be established by using the previous reaction highs. Support Equals Resistance: Another principle of technical analysis stipulates that support can turn into resistance and vice versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance. The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found. Page | 28
  • 29. From the above example, we can see that support can turn into resistance and then back into support. Trading Range: Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. A trading range is a period of time when prices move within a relatively tight range. This signals that the forces of supply and demand are evenly balanced. When the price breaks out of the trading range, above or below, it signals that a winner has emerged. A break above is a victory for the bulls (demand) and a break below is a victory for the bears (supply). Break above (positive) and Break below (negative) Support and Resistance Zones: Because technical analysis is not an exact science, it is useful to create support and resistance zones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case. Each security has its own characteristics, and analysis should reflect the intricacies of the security. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, then it is best to use support and resistance zones. These are only meant as general guidelines, and each trading range should be judged on its own merits. Page | 29
  • 30. In above chart we can see that the November high of the trading range (33 to 44) extended more than 20% past the low, making the range quite large relative to the price. Because the September support break forms our first resistance level, we are ready to set up a resistance zone after the November high is formed, probably around early December. At this point though, we are still unsure if a large trading range will develop. The subsequent low in December, which was just higher than the October low, offers evidence that a trading range is forming, and we are ready to set the support zone. As long as the stock trades within the boundaries set by the support and resistance zone, we will consider the trading range to be valid. Support may be looked upon as an opportunity to buy, and resistance as an opportunity to sell. PEAK AND TROUGH ANALYSIS Peak and troughs are patterns that are developed by the price action experienced by all securities. As we know, prices never move in straight lines, whether in an uptrend or a downtrend. The term "zigzag pattern" has been used to describe the peaks and troughs, and many charting software programs will have a '%-zigzag' indicator that investors can lay down on a chart that they are viewing. How to identify the top (Peak): -it should be higher then previous day. -it should be equal or higher then following 3days. Peak Page | 30
  • 31. How to identify the low (Trough): -it should be lower then previous day. -it should be lower and equal then following 3days. Trough The Ups and Downs: Rising peaks and troughs can be seen easily on a chart by recognizing the higher peaks, or tops, and higher troughs, or bottoms, creating the uptrend. Another way to look at it would be to recognize that each new top that is created by the price action is higher than the high of the previous few days, weeks or even months of trading. As well, each new trough would also be higher than the previous trough over the same period of time. (1)Rising peak and trough In the above chart, red arrows are showing the rising troughs and green arrows indicating the rising peaks of this uptrend. (2)Falling peaks and troughs Page | 31
  • 32. In the second chart, we can see the downtrend and the arrows show the falling peaks and troughs each breaking new ground from the previous price action pattern. Trend Breaking: The easiest way to determine whether or not a trend line has been broken is to witness the breakdown and then replacement of either rising or falling peaks or troughs. Given that chartists place a great deal of emphasis on the psychological aspects of technical analysis, some technicians might agree that this tried and proven technical indicator outshines most, if not all, trend-following techniques. Investor confidence and an optimistic view of the future of a particular issue drives stock prices upward, and conversely, lack of confidence see even the most stalwart issues begin a downtrend. IMPORTANCE OF VOLUME What is Volume? Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. Higher volume means the security has been more active. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do. Notice how the volume bars are attached to the bottom of the above chart and in left hand site of the chart the number of volumes are mentioned 96.8k is the highest volume of Eicher Motors ltd in previous 6months. Page | 32
  • 33. Why Volume is important? Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story. If stock is going down on instead of relatively heavy volume, sell signal for the stock. If stock going up on a heavy volume, buy signal for the stock. If Stock going up on low volumes, may be a falls indicator, trader and investors should stay away from such type of stock‟s. CHART PATTERNS A chart pattern is a pattern that is formed within a chart when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern which naturally occurs and repeats over a period. Chart patterns are used as either reversal or continuation signals. [A] A “reversal” pattern signals that a prior trend will reverse upon completion of the pattern. (1)Double Top and Bottoms (Reversal): This chart pattern is well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals. (A double top pattern is shown on the left, while a double bottom pattern is shown on the right) Page | 33
  • 34. In the case of the double top pattern in above chart, the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward. (2)Triple Tops and Bottoms (Reversal): Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend. Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon. (3)Head and Shoulders (Reversal): This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As we can see in below chart, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend. Page | 34
  • 35. Head and shoulders top are shown on the left. Head and shoulders bottom, or inverse head and shoulders, is on the right. Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side in above chart, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows. Volume: As the Head and Shoulders pattern unfolds, volume plays an important role in confirmation. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing volume levels. Ideally, but not always, volume during the advance of the left shoulder should be higher than during the advance of the head. This decrease in volume and the new high of the head, together, serve as a warning sign. The next warning sign comes when volume increases on the decline from the peak of the head. Final confirmation comes when volume further increases during the decline of the right shoulder. (4)Wedge (Reversal): The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over longer periods, usually between three and six months. Page | 35
  • 36. Falling wedge The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is (bullish) and a rising wedge is (bearish). In the above chart, we have a falling wedge in which two trend lines are converging in a downward direction. If the price was to rise above the upper trend line, it would form a continuation pattern, while a move below the lower trend line would signal a reversal pattern. (5)Rounding Bottom (Reversal): A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years. Rounding Bottom A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, make‟s it a difficult pattern to trade. Page | 36
  • 37. [B] A “continuation” pattern, signals that a trend will continue once the pattern is complete. (1)Flag and Pennant (Continuation): These two short-term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks. As you we can see in above chart, there is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trend lines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trend lines. In both cases, the trend is expected to continue when the price moves above the upper trend line. (2)Triangles (Continuation): Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical Page | 37
  • 38. triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months. -The symmetrical triangle in the above chart pattern is a pattern in which two trend lines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. -In an ascending triangle, the upper trend line is flat, while the bottom trend line is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. -In a descending triangle, the lower trend line is flat and the upper trend line is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout. Page | 38
  • 39. (3)Rectangle (Continuation): The rectangle is a relatively rare pattern, appearing almost always as a continuation pattern, although it can exist as a reversal pattern. The price moves between two horizontal trend lines and touches a minimum of two times each line. (4)Cup with Handle (Continuation): A cup with handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed. As we can see in above chart, this price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue. There is a wide ranging time frame for this type of pattern, with the span ranging from several months to more than a year. Page | 39
  • 40. (5)Measured Move (Continuation): The Measured Move is also called the Swing Measurement. Illustrates how the market has a propensity to retrace half of the move before resuming the ongoing trend. Bullish Measured Move: Bullish continuation chart pattern Pattern has 3 waves: AB - BC - CD Forms at the end of a downtrend Price makes an advance ideally forming a channel: AB wave Corrective BC wave: price retraces a third to a half of the prior advance CD wave: price resumes the uptrend duplicating the size and slope of the first AB wave CD wave is parallel to AB wave Volume should increase at the beginning of both AB and CD waves and decrease at the end of the retracement BC wave Price entry: break of the high of the AB wave Bearish Measured Move: Bearish continuation chart pattern Pattern has 3 waves: AB - BC - CD Forms at the end of an uptrend Price makes an decline ideally forming a channel: AB wave Corrective BC wave: price retraces a third to a half of the prior decline CD wave: price resumes the downtrend duplicating the size and slope of the first AB wave CD wave is parallel to AB wave Volume should increase at the beginning of both AB and CD waves and decrease at the end of the retracement BC wave Price entry: break of the low of the AB wave Page | 40
  • 41. INDICATORS A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced. For example: the average of 3 closing prices is one data point ( (41+43+43) / 3 = 42.33 ). However, one data point does not offer much information and does not an indicator make. A series of data points over a period of time is required to create valid reference points to enable analysis. By creating a time series of data points, a comparison can be made between present and past levels. For analysis purposes, technical indicators are usually shown in a graphical form above or below a security's price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison. A technical indicator offers a different perspective from which to analyze the price action. Technical indicators can provide a unique perspective on the strength and direction of the underlying price action. Tips for Using Indicators: Indicators indicate. This may sound straightforward, but sometimes traders ignore the price action of a security and focus solely on an indicator. Indicators filter price action with formulas. As such, they are derivatives and not direct reflections of the price action. This should be taken into consideration when applying analysis. Any analysis of an indicator should be taken with the price action in mind. What is the indicator saying about the price action of a security? Is the price action getting stronger? Weaker? Even though it may be obvious when indicators generate buy and sell signals, the signals should be taken in context with other technical analysis tools. An indicator may flash a buy signal, but if the chart pattern shows a descending triangle with a series of declining peaks, it may be a false signal. Leading Indicators: Some of the leading indicators are as follows: [A]VOLUME: 1-ACCUMULATION/DISTRIBUTION: The accumulation/distribution line is one of the more popular volume indicators that measures money flows in a security. This indicator attempts to measure the ratio of buying to selling by comparing the price movement of a period to the volume of that period. Page | 41
  • 42. Calculated: Acc/Dist = ((Close - Low) - (High - Close)) / (High - Low) * Period's Volume This is a non-bounded indicator that simply keeps a running sum over the period of the security. Traders look for trends in this indicator to gain insight on the amount of purchasing compared to selling of a security. If a security has an accumulation/distribution line that is trending upward, it is a sign that there is more buying than selling. (2)MONEY FLOW INDEX (MFI): (A volume-weighted version of RSI that shows shifts is Buying and selling pressure) Money Flow Index (MFI) is the technical indicator, which indicates the rate at which money is invested into a security and then withdrawn from it. Construction and interpretation of the indicator is similar to Relative Strength Index with the only difference that volume is important to MFI. When analyzing the MFI we need to take into consideration the following points: -Divergences between the indicator and price movement. If prices grow while MFI falls (or vice versa), there is a great probability of a price turn; -Money Flow Index value, which is over 80 or under 20, signals correspondingly of a potential peak or bottom of the market. Page | 42
  • 43. (3)ON-BALANCE VOLUME (OBV): The on-balance volume (OBV) indicator is one of the most well-known technical indicators that reflect movements in volume. OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming. Page | 43
  • 44. [B]OSCILLATORS: (1)AVERAGE TRUE RANGE (ATR): (Measures a stock's volatility) Wilder originally developed the ATR for commodities but the indicator can also be used for stocks and indexes. Simply put, a stock experiencing a high level of volatility will have a higher ATR, and a low volatility stock will have a lower ATR. (2)CHAIKIN MONEY FLOW: (Combines price and volume to show how money may be flowing into or out of a stock. Alternative to Accumulation/Distribution Line) I developed the Chaikin Money Flow technical indicator to measure the flow of funds into and out of a stock over a one month time period. The basic trading premise with the CMF indicator is if the indicator is above 0 this is a bullish sign, while a reading below 0 represents a bearish signal. Reading above +.25 or below -.25 indicate strong trends and positions can be added on minor corrections. Page | 44
  • 45. (3) ICHIMOKU KINKO HYO: (Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance) The Ichimoku Kinko Hyo charting technique was developed by the Japanese analyst Hosoda, who wrote under the name of "Ichimoku Sanjin". Ichimoku is make up of 5 indicators. 1-Tenkan sen 2-Kijun sen 3-Chikou span 4-Senkou Span A 5-Senkou Span B 1-Tenkan sen: short „moving average (conversion, pink line) Unlike typical simple moving average, where the day‟s closing price is taken and calculated, Tenkan sen is calculated as (HIGHEST HIGH + LOWEST LOW)/2 for the past 9 periods The angle of the Tenkan sen can be used to suggest the strength of the momentum. If it is a steep line, we can say that the underlying has a change in momentum and is very strong. 2-Kijun sen: higher timeframe „moving average‟ (light blue line, base) Kijun sen is calculated using (HIGHEST HIGH + LOWEST LOW)/2 for the past 26 periods. This is the longer timeframe line and is less sensitive to current price changes. However, it is a key indicator for major change in trends. 3-Chikou Span: (the “lagging line”) (green line, lagging) This is shown on the chart as a lagging line behind the price. In the chart below, it is the green line and it is calculated as CURRENT CLOSING PRICE time-shifted backwards (into the past) 26 periods. Chikou Span is one of the unique features of Ichimoku. And this is the line that we used to determine the support and resistant levels. 4-Senkou Span A&B: The first Senkou line (A) is calculated by averaging the Tenkan Sen and the Kijun Sen and plotted 26 periods ahead. The second Senkou line (B) is determined by averaging the highest high and the lowest low for the past 52 periods and plotted 26 periods ahead. The space between senkou span A & B known as “kumo” (cloud) -If the price stays above the cloud then there is an upward trend. -If it stays below the cloud then there is a downward trend. -If the price is within the cloud then the market is flat. -When the price exits the cloud downward it is a sell signal, upward – buy signal. Page | 45
  • 46. (4)MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD): The moving average convergence divergence (MACD) is one of the most well known and used indicators in technical analysis. This indicator is comprised of two exponential moving averages, which help to measure momentum in the security. The MACD is simply the difference between these two moving averages plotted against a centerline. The centerline is the point at which the two moving averages are equal. Along with the MACD and the centerline, an exponential moving average of the MACD itself is plotted on the chart. The idea behind this momentum indicator is to measure short-term momentum compared to longer term momentum to help signal the current direction of momentum. MACD= shorter term moving average - longer term moving average When the MACD is positive, it signals that the shorter term moving average is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative - this signals that the shorter term is below the longer and suggest downward momentum. When the MACD line crosses over the centerline, it signals a crossing in the moving averages. The most common moving average values used in the calculation are the 26-day and 12-day exponential moving averages. The signal line is commonly created by using a nine-day exponential moving average of the MACD values. These values can be adjusted to meet the needs of the technician and the security. For more volatile securities, shorter term averages are used while less volatile securities should have longer averages. Page | 46
  • 47. (5)RELATIVE STRENGTH INDEX (RSI): (Indicates over bought and oversold conditions in a Security) RSI helps to signal overbought and oversold conditions in a security. The indicator is plotted in a range between zero and 100. A reading above 70 is used to suggest that a security is overbought, while a reading below 30 is used to suggest that it is oversold. This indicator helps traders to identify whether a security's price has been unreasonably pushed to current levels and whether a reversal may be on the way. Page | 47
  • 48. (6)STOCHASTIC OSCILLATOR: (Shows how a stock's price is doing relative to past Movements) The stochastic oscillator is one of the most recognized momentum indicators used in technical analysis. The idea behind this indicator is that in an uptrend, the price should be closing near the highs of the trading range, signaling upward momentum in the security. In downtrends, the price should be closing near the lows of the trading range, signaling downward momentum. The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20. The stochastic oscillator contains two lines. The first line is the %K, which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. The second line is the %D, which is simply a moving average of the %K. The %D line is considered to be the more important of the two lines as it is seen to produce better signals. The stochastic oscillator generally uses the past 14 trading periods in its calculation but can be adjusted to meet the needs of the user. [C]TRENDS INDICATORS: (1)AVERAGE DIRECTIONAL INDEX (ADX): (measure the strength of a current trend) The average directional index (ADX) is a trend indicator that is used to measure the strength of a current trend. The indicator is seldom used to identify the direction of the current trend, but can identify the momentum behind trends. The ADX is a combination of two price movement measures: the positive directional indicator (+DI) and the negative directional indicator (-DI). The ADX measures the strength of a trend but not the direction. The +DI measures the strength of the upward trend while the Page | 48
  • 49. -DI measures the strength of the downward trend. These two measures are also plotted along with the ADX line. Measured on a scale between zero and 100, readings below 20 signal a weak trend while readings above 40 signal a strong trend. (2)BOLLINGER BAND: Bollinger Bands, a chart indicator developed by John Bollinger, are used to measure a market's volatility. Basically, this little tool tells us whether the market is quiet or whether the market is LOUD! When the market is quiet, the bands contract and when the market is LOUD, the bands expand. One thing we should know about Bollinger Bands is that price tends to return to the middle of the bands. If price touch the lower band, then it is expected that there will be a bounce back toward the middle area of the band and if price touch upper band then it is expected that price will take a down turn towards middle area. Page | 49
  • 50. (3)COMMODITY CHANNEL INDEX (CCI): (Shows a stock's variation from its 'typical' price) The Commodity Channel Index (CCI) is originally designed to identify cyclical patterns in commodities. The under- lying assumption behind the index is that commodities (stocks, bond) have high and low values at periodic cycles, and it tries to estimate when an asset is oversold or overbought. The CCI boundaries are often considered between -100 and +100 (or sometimes between -200 and +200). When the CCI is above +100, the asset is considered to be overbought. Similarly, if the CCI falls below -.100, the asset is considered to be oversold. -IF CCI increases to above 100 THEN BULLISH -IF CCI decreases to below 100 THEN BEARISH. -IF CCI increases to above -100 THEN BULLISH. -IF CCI decreases to below -100 THEN BEARISH. . (4)GMMA: (identify changing trends) This indicator use to identify changing trends. The technique consists of combining two groups of moving averages with differing time periods. The relationship between the two sets of moving averages is used by traders to determine if the outlook of short-term traders aligns with investors who have a longer-term outlook. Changing trends are identified when the two groups of moving averages intersect. A bullish trend is present when the short-term moving averages are above the long-term averages. Conversely, a bearish trend occurs when the short-term averages are below the long-term averages. Page | 50
  • 51. (5)MOVING AVERAGE: Moving averages are one of the oldest and most popular technical analysis tools. A moving average is the average price of a security at a given time. When calculating a moving average, we specify the time span to calculate the average price (e.g., 20 days). A "simple" moving average is calculated by adding the security prices for the most recent "n" time periods and then dividing by "n." For example; adding the closing prices of a security for most recent 20 days and then dividing by 20. The result is the security‟s average price over the last 20 days. This calculation is done for each period in the chart. Note that a moving average cannot be calculated until you have "n" time periods of data. For example, you cannot display a 20-day moving average until the 20th day in a chart. Figure below shows a 20-day simple moving average of the closing price of EICHER MOTORS LTD Page | 51
  • 52. Since the moving average in this chart is the average price of the security over the last 20days, it represents the consensus of investor‟s expectations over the last 20days. The classic interpretation of a moving average is to use it to observe change in prices. -If the security price is above its moving average, it means that investor‟s current expectations (i.e. current price) are higher than that average expectations over the last 20 days, and that investors are becoming bullish on the security. -If the security price is below its moving average, it shows that current expectations are below average expectations over the last 20 days. “Buy” arrows (Green arrows) on the above chart when share price rose above its 20-day moving average and “Sell” arrows (Red arrows) on the chart when share price fell below its 25-day moving average. TIME PERIODS IN MOVING AVERAGE: Moving average is divided in to two parts, 1-Short term Moving average 2-Long term moving average Shorter length moving averages are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but less responsive, only picking up the big trends. COMPARISON OF THE TWO MOVING AVERAGES: When long term and short term moving averages are drawn, the intersection of two moving averages generates buy or sell signal. When the scrip price is falling and if the short term average intersects the long term moving average from above and falls below it, the sell signal is generated. If the scrip price is rising, the short term average would be above the long term average. The short term average intersects the long term average from below indicating a further rise in price, gives a buy signal. TYPES OF MOVING AVERAGE: There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are as follows: Simple Moving Average Linear Moving Average and Exponential Moving Average In this study Simple moving average is used. (6)PARABOLIC SAR: (A chart overlay that shows reversal points below prices in an Uptrend and above prices in a downtrend) This indicator is similar to the Moving Average Technical Indicator with the only difference that Parabolic SAR moves with higher acceleration and may change its position in terms of Page | 52
  • 53. the price. The indicator is below the prices on the bull market (Up Trend), when it’s bearish (Down Trend), it is above the prices. If the price crosses Parabolic SAR lines, the indicator turns, and its further values are situated on the other side of the price. When such an indicator turn does take place, the maximum or the minimum price for the previous period would serve as the starting point. When the indicator makes a turn, it gives a signal of the trend end (correction stage or flat), or of its turn. The Parabolic SAR is an outstanding indicator for providing exit points. Long positions should be closed when the price sinks below the SAR line, short positions should be closed when the price rises above the SAR line. It is often the case that the indicator serves as a trailing stop line. If the long position is open (i.e., the price is above the SAR line), the Parabolic SAR line will go up, regardless of what direction the prices take. The length of the SAR line movement depends on the scale of the price movement. Page | 53
  • 54. DATA ANALYSIS AND INTERPRETATION COLGATE PALMOLIVE LTD 1-ACCUMULATION/DISTRIBUTION:Accumulation/Distribution is a popular volume indicator that measures the flows money in to or out of the stock (this includes price and volume of the shares) It indicating Colgate Palmolive ltd (COLPAL), from the period of July 2012 to August 2013 Here in the month of April2013 and July2013 Accumulation/distribution line shows upward movement indicating that a distribution pressure on stock has been over and accumulation in stock is started signaling a buy call, however in the month of June2013 and August2013 line is showing a downward movement indicating a distribution pressure on stock and giving a sell call. Page | 54
  • 55. 2-ICHIMOKU KINKO HYO:This indicator gives resistance/support levels, trend direction and entry/exit points. Indicating Colgate Palmolive ltd (COLPAL) for the period on July 2012 to August 2013. Chikou Span (Green line) is one of the unique features of Ichimoku. And this is the line that we used to determine the support and resistant levels. As we can see in the above chart in the month of September2012 and March2013 the Lagging line has broken the resistance indicates an upward move in share price in near term (buy signal), similarly in the month of January and May lagging line has broken the support line indicated a sell signal. Page | 55
  • 56. 3-MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD):It indicates Colgate Palmolive ltd (COLPAL) from the period on July 2012 to August 2013. In the above chart we can observe that when longer term moving average (Blue line) cross shorter term moving average (red line) from below to above gives a buy signal and from above to below gives a sell signal. In the month of October2012 and April2013 longer term moving average cross short term moving average from below to above indicates an upward movement in stock in near term, whereas in the month of January2013, May2013 and August2013 MACD has given a sell signal because longer term moving average cross short term moving average from above to below which indicates a correction in stock in near term and give sell signal. Page | 56
  • 57. 4-AVERAGE DIRECTIONAL INDEX (ADX):- ADX measures the strength of a trend not the direction. (+ve)DI measures the strength of an upward trend while the (–ve) DI measures the strength of the downward trend. In blow chart ADX indicating the trend strengthens of Colgate Palmolive ltd (COLPAL) from the period on July 2012 to August 2013. When +DI (Blue line) cross -DI (Red line) from below to above and ADX line (Green line) is below the bullish line indicates the strength of an upward trend and give buy signal, same we can see in the month of October2012, April2013 and July2013 where +DI crossed -DI from below to above plus ADX line were moving below the +DI indicated a strength of bullish trend and given a buy signal. Where as in the month of January2013, May 2013, and July2013 -DI crossed +DI from below to above plus position of ADX indicated strength in bearish trend, which gives a sell signal. Page | 57
  • 58. 5-GMMA:This indicator use to identify changing trends. In below given chart Colgate Palmolive ltd (COLPAL) GMMA indicating a changing trend for the period of July2012 August2013. As shown in the above chart GMMA indicates a buy and sell signal which is got by using short-term and long-term moving average. Colgate Palmolive ltd stock had a bull phase in October 2012, April 2013, and July 2013 indicated by GMMA were short-term moving average lines crossed long-term moving average lines and was moving above the long-term moving average lines indicated a buy call, whereas in the month of January2013, June2013, and August 2013 short-term moving average lines crossed long-term moving average lines from upward to downward indicated bearish trend in near term and was a sell signal for trader and investors. Page | 58
  • 59. TREND LINE AND SUPPORT & RESISTANCE INTERPRETATION The 3 basic assumptions of Technical analysis “Price discounts everything”, “Price moves in trends”, “History repeats itself over time” help us to forecast the future trend of stock price. In the above chart we can see that the trend line (Blue line) from the month of December 2012 to March 2013 was working as a resistance for the stock, between the period of December 2012 to March 2013 stock price tried 4times to break the resistance but couldn‟t succeed, which shows the strength of the resistance line. But in the month of April 2013 stock has broken the trend line (resistance) upward indicated a rally in near term and with the support of given indicators stock was giving a perfect buy call. Every signal of buy call was correct and stock rise 20% in 45days. The same trend has repeated in July 2013, after 3attemp resistance has been broken successfully in 4th attempt on 5th July 2013 and with the help of other indicators stock was giving a perfect buy call. I had given a buy call on 7th of July 2013 with the target of Rs.1505. Everything went in to the favor of technical analysis and stock jump 10% in 9days only. Page | 59
  • 60. FEW SNAPSHOTS OF THE CALLS GIVEN BY ME ON (www.stockgyaan.com) WEBSITE IN THE MONTH OF JUNE & JULY 2013 ON BASIS OF TECHNICAL ANALYSIS 1-COLGATE PALMOLIVE LTD:- TARGET ACHIEVED ON 17TH JULY 2013, STOCK “JUMP” UP TO 10% IN 9DAYS ONLY. Page | 60
  • 61. 2-THE BYKE HOSPITALITY LTD:- TARGET ACHIVED ON 27TH JUNE 2013, STOCK “JUMP” UPTO 11% IN 3DAYS ONLY. Page | 61
  • 62. 3-SIEMENS LTD:- TARGET ACHIVED 1ST AUGUST 2013, STOCK “FALL” UPTO 16.82% IN 7DAY’S ONLY. Page | 62
  • 63. 4-THE INDIAN HOTELS CO. LTD:- TARGET ACHIVED 31ST JULY 2013, STOCK “FALL” UPTO 23.47% IN 16DAY’S ONLY. Page | 63
  • 64. 5-HINDUSTAN UNILEVER LTD:- TARGET ACHIVED 17TH JULY 2013, STOCK “JUMP” UPTO 19.04% IN 17DAY’S ONLY. Page | 64
  • 65. PERFORMANCE OF THE STOCK’S TIPS GIVEN BY ME (NAUSHAD CHAUDHARY) ON BASIS OF TECHNICAL ANALYSIS IN THE MONTH OF JUNE & JULY 2013, OUT OF 25 CALL’S 19 STOCKS ACHIVE THE TARGET AND BOOKED A PROFIT MORE THEN 8% WITHIN 30DAY’S. Page | 65
  • 66. CONCLUSION Technical analysis is a useful technique in guiding trading and investment decisions. In light of my technical study on 25 companies, I have seen how technical analysis can be used to anticipate the possible futures swings of stock prices. By studying 25 companies technically, it has been observed that technical analysis does not provide 100% accuracy to the investor. As the stock prices are dynamic in nature, combination of Fundamental analysis and Technical analysis will increases the percentage of accuracy and thus giving an idea to the trader and investor to invest in that stock which will yield him good returns. On basis of technical analysis of all these 25 companies mentioned in report, 19 companies have achieved their targets (more then 8%) within one month and 6 companies have trigger there stop-loss which means “there is 76% probability of success of technical analysis in equity market” In general, from the above performance I conclude that technical analysis can play very important role in the timing of the entry and exit from the market. By applying technical indicators, trends, charts and patterns trader or investors can enjoy substantial profit. Page | 66
  • 67. BIBLIOGRAPHY http://www.stockgyaan.com/user-blog.php?_u=255 http://www.nseindia.com/ http://www.moneycontrol.com/ http://www.bseindia.com/ http://www.chartnexus.com/ http://www.investopedia.com/university/fundamentalanalysis/ https://www.credit-suisse.com/legal/pb_research/technical_tutorial_en.pdf http://www.tradersdaytrading.com/technical-analysis-fundamentals.html http://www.forexyard.com/en/technical-analysis http://finviz.com/help/technical-analysis/introduction.ashx http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:chart_patterns http://www.swing-trade-stocks.com/draw-trend-lines.html http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:support_and_resistan http://optionalpha.com/3-reasons-why-technical-analysis-is-superior-when-trading-stocks-andoptions-9008.html Book, John J. Murphy (Technical analysis of the financial market) Book, Robert D. Edwards (Technical analysis of the stock trends) Page | 67