Vipin k, Asst Prof. VJIM

1
Meaning:
• Study of market generated data like price and volume
to determine the future direction of price movement.
• A s...
• Technical analysts believe that past patterns of market action

will recur in the future and that past patterns can be u...
Assumptions/basic principles/premises of technical analysis
 Market prices are determined by the interactions of supply a...
Vipin k, Asst Prof. VJIM

5
Vipin k, Asst Prof. VJIM

6
Vipin k, Asst Prof. VJIM

7
Vipin k, Asst Prof. VJIM

8
• Charles .H. Dow
• Editor of wall street journal, in USA

• Popularly known as Theory of Technical
analysis
Vipin k, Asst...
According to Charles .H. Dow
• “ The market is always considered as having

three movements, all going at the same time. T...
• The Dow theory is used to indicate reversals and trends in
the market as a whole or in individual securities.
• Accordin...
• Dow formulated a hypothesis is that the stock
market does not move on a random basis but

is influenced by three distinc...
According to Dow theory
• Price movements in the market can be identified by
means of line chart.
• In the line chart, clo...
* Primary or main movements /trend
• Long range cycle that carries the entire market up or
down long term trend in the mar...
Vipin k, Asst Prof. VJIM

15
Minor or Narrow movements/trend


Day today fluctuations in the market



Not significant & have no analytical value


...
• Primary movements – Tides
• Secondary/ correction movements – Waves

• Minor/ Narrow movements – Ripples

Vipin k, Asst ...
• Trend is the direction of movement.
• Share price can either increase, decrease or
remain in flat.
• The three direction...
• Share price do not rise or fall in a straight line.

• Every rise or fall in price experience a counter moves

• Share p...
Trend lines
• Straight line drawn connecting either the top or
bottom of the price movement
• To draw a trend line, the te...
(1) Rising/up trend

Vipin k, Asst Prof. VJIM

21
(2) Falling/down trend

Vipin k, Asst Prof. VJIM

22
(3) Flat trend

Vipin k, Asst Prof. VJIM

23
Trend Reversal
• Changes in the direction of trend is referred to as

trend reversal.
• A share that exhibits a rising tre...
• When the trend begins to rise the technical analyst
would recommend purchase of the shares.
• When the trend begins to f...
Trend Reversal

Vipin k, Asst Prof. VJIM

26
• Ralph Elliot
• Theory was formulated in 1934
• After analyzing 75 years of stock market price
movements and charts.
• Ac...
According to this theory
• The market moves in waves
(A wave is a movement of the stock price from one change in
the direc...
Vipin k, Asst Prof. VJIM

29
According to this theory
• A movement in a particular direction can be

represented by five distinctive waves.
• Of these ...
Graph

Vipin k, Asst Prof. VJIM

31
Graph

Vipin k, Asst Prof. VJIM

32
Graph

Vipin k, Asst Prof. VJIM

33
• Waves 1,3 & 5 are the impulsive waves
• 2 & 4 are the corrective waves
• The wave 1 is upwards and wave 2 correct the wa...
• Correction involves correcting the earlier rise
• Wave 2 would correct the rise of wave 1

• Wave 4 would correct the ri...
• The ABC correction following the fifth wave would
correct the entire rise from the starting of wave 1 to the
end of the ...
Support and

Level

• Support and resistance define natural
boundaries for rising and falling prices.

Vipin k, Asst Prof....
Vipin k, Asst Prof. VJIM

38
Support Level
• Level that the technical analyst believes a
stock price will not fall below. Some times
called “Floor”.

V...
Resistance Level
• Opposite of support level.
• Technical analyst believe that stock price will
not exceed.

Vipin k, Asst...
Breakout
• The security price moves out of the previous
trading range (breaching the resistance or support
level)

Vipin k...
• Term used to study the advance and decline that have occurred
in the stock market.
• Advance means – Number of shares wh...
Day

advance

decline

Net

Breadth

21-02-12

1486

774

712

712

22-02-12

1310

966

344

1056

23-02-12

898

1225

-...
Vipin k, Asst Prof. VJIM

44
• Line Chart
• Bar Charts

• Candlestick Charts

Vipin k, Asst Prof. VJIM

45
Line Chart
 The most basic of the four charts – because it represents only the closing
prices over a set period of time.
...
Line Chart

Vipin k, Asst Prof. VJIM

47
Bar Charts
•

The chart is made up of a series of vertical lines that represent

each data point. This vertical line repre...
Bar Charts
• Generally, if the left dash (open) is lower than the right

dash (close) then the bar will be shaded black,
r...
Bar Charts

Vipin k, Asst Prof. VJIM

50
Candlestick Charts
•

Similar to a bar chart, but it differs in the way that it is visually constructed.

•

The differenc...
Candlestick Charts

Vipin k, Asst Prof. VJIM

52
• Mathematical indicators calculated with the help of
the closing price data.
• Helps to identify overbought and over sold...
• RSI (Relative Strength Index)
• ROC (Rate of Change Indicator)
• MACD (Moving Average Convergence/Divergence)

Vipin k, ...
(Relative Strength Index)

RSI = 100 – 100
(1+RS)
RS = Average gain per day
Average loss per day
Vipin k, Asst Prof. VJIM
...
• Most commonly used time period for the calculation of RSI

is 14 days.
• RSI value ranging from 0 – 100
• RSI value abov...
Vipin k, Asst Prof. VJIM

57
ROC (Rate of Change Indicator)
• ROC measures the rate of change of the
current price as compared to the price a certain
n...
ROC (Rate of Change Indicator)
• Value may be +ve,-ve or zero
• When the ROC line is above the zero line, the price
is ris...
MACD (Moving Average Convergence Divergence)
• Short term & long term exponential moving average
are calculated with the h...
MACD (Moving Average Convergence Divergence)

Vipin k, Asst Prof. VJIM

61
MACD (Moving Average Convergence Divergence)
• MACD line (blue line): difference between the 12 and 26 days EMAs

• signal...
• Shares are generally sold in a lot of hundreds
• Shares are sold in smaller lots fewer than 100 are called odd lot.
•

B...
• Basic assumption of technical analyst is that price trends

occur in an orderly manner & not random.
• Random walk theor...
• Random walk theory states that market price evolve at random and do
not follow any regular pattern.

• According to this...
 Market is supreme and no investor or group can influence it.
 Stock price discount all information quickly.

 Markets ...
• Hypothesis states that the capital

market is efficient in processing

information.
• Efficient capital market is one in...
Forms of market efficiency
• There are three forms of the efficient market hypothesis
• The "Weak" form asserts that all p...
•

In this diagram, the circles
represent

the

amount

of All historical prices and returns

information that each form o...
• Information is free and quick to flow
• All investors have the same access to information.
• Every investor has access t...
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technical analysis

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Technical Analysis a tool for investment analysis

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technical analysis

  1. 1. Vipin k, Asst Prof. VJIM 1
  2. 2. Meaning: • Study of market generated data like price and volume to determine the future direction of price movement. • A study of past or historical price and volume movement so as to predict the future stocks price behavior. • Forecasting techniques that utilize historical share price data. Vipin k, Asst Prof. VJIM 2
  3. 3. • Technical analysts believe that past patterns of market action will recur in the future and that past patterns can be used for predictive purposes. • Some of the tools used by chartists to measure supply and demand and to forecast security prices are the Dow theory chart, odd-lot theory, confidence index, breadth-of-market indicators, relative-strength analysis, and trading-volume data. Vipin k, Asst Prof. VJIM 3
  4. 4. Assumptions/basic principles/premises of technical analysis  Market prices are determined by the interactions of supply and demand forces.  Supply and demand are influenced by variety of factors, both rational and irrational. Includes fundamentals as well as psychological factors.  Shift in demand & supply bring about changes in trends.  Shift in demand & supply detected with the help of charts of market action.  Analysis of past market data can be used to predict the future price behavior. Vipin k, Asst Prof. VJIM 4
  5. 5. Vipin k, Asst Prof. VJIM 5
  6. 6. Vipin k, Asst Prof. VJIM 6
  7. 7. Vipin k, Asst Prof. VJIM 7
  8. 8. Vipin k, Asst Prof. VJIM 8
  9. 9. • Charles .H. Dow • Editor of wall street journal, in USA • Popularly known as Theory of Technical analysis Vipin k, Asst Prof. VJIM 9
  10. 10. According to Charles .H. Dow • “ The market is always considered as having three movements, all going at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement covering at least four years in its duration” Vipin k, Asst Prof. VJIM 10
  11. 11. • The Dow theory is used to indicate reversals and trends in the market as a whole or in individual securities. • According to the theory, there are three movements going on in the markets at all times: 1. daily fluctuations (the narrow movement from day-to-day) 2. secondary movements (short-run movements over two weeks to a month or more) 3. primary trends, major movements covering at least four years in duration Vipin k, Asst Prof. VJIM 11
  12. 12. • Dow formulated a hypothesis is that the stock market does not move on a random basis but is influenced by three distinctive cyclical trends that guides its direction. 1) Primary / main movements 2) Secondary reaction / correction movement 3) Minor / narrow movements Vipin k, Asst Prof. VJIM 12
  13. 13. According to Dow theory • Price movements in the market can be identified by means of line chart. • In the line chart, closing price of shares or the closing value of the market index may be plotted against the corresponding trading day. • The charts helps in identifying the primary, secondary and minor movements. Vipin k, Asst Prof. VJIM 13
  14. 14. * Primary or main movements /trend • Long range cycle that carries the entire market up or down long term trend in the market. * Secondary reaction or correction movement/trend • These are the opposite direction to the primary movements • Only for a short period • Eg:- when the market is moving upward continuously, this upward movement will be interrupted by downward movement of short duration. Vipin k, Asst Prof. VJIM 14
  15. 15. Vipin k, Asst Prof. VJIM 15
  16. 16. Minor or Narrow movements/trend  Day today fluctuations in the market  Not significant & have no analytical value  Very short duration Vipin k, Asst Prof. VJIM 16
  17. 17. • Primary movements – Tides • Secondary/ correction movements – Waves • Minor/ Narrow movements – Ripples Vipin k, Asst Prof. VJIM 17
  18. 18. • Trend is the direction of movement. • Share price can either increase, decrease or remain in flat. • The three directions : Vipin k, Asst Prof. VJIM 18
  19. 19. • Share price do not rise or fall in a straight line. • Every rise or fall in price experience a counter moves • Share price move in a zigzag manner. Vipin k, Asst Prof. VJIM 19
  20. 20. Trend lines • Straight line drawn connecting either the top or bottom of the price movement • To draw a trend line, the technical analyst should have at lest two tops or bottoms. Vipin k, Asst Prof. VJIM 20
  21. 21. (1) Rising/up trend Vipin k, Asst Prof. VJIM 21
  22. 22. (2) Falling/down trend Vipin k, Asst Prof. VJIM 22
  23. 23. (3) Flat trend Vipin k, Asst Prof. VJIM 23
  24. 24. Trend Reversal • Changes in the direction of trend is referred to as trend reversal. • A share that exhibits a rising trend may start to move narrowly or fall after some times, this change in the direction of movement represent trend reversal. • Technical analyst tries to identify the trend reversal at an early stage so as to trade profitably. Vipin k, Asst Prof. VJIM 24
  25. 25. • When the trend begins to rise the technical analyst would recommend purchase of the shares. • When the trend begins to fall, sale is indicated. • During a flat trend the investor should stay away from the market. Vipin k, Asst Prof. VJIM 25
  26. 26. Trend Reversal Vipin k, Asst Prof. VJIM 26
  27. 27. • Ralph Elliot • Theory was formulated in 1934 • After analyzing 75 years of stock market price movements and charts. • According to this theory – market movement was quite orderly and followed a patter of waves. Vipin k, Asst Prof. VJIM 27
  28. 28. According to this theory • The market moves in waves (A wave is a movement of the stock price from one change in the direction to the next change in the same direction. Depending on the demand & supply pressure waves are generated) Vipin k, Asst Prof. VJIM 28
  29. 29. Vipin k, Asst Prof. VJIM 29
  30. 30. According to this theory • A movement in a particular direction can be represented by five distinctive waves. • Of these five waves, three waves are in the direction of the movement & are called impulse waves. • Two waves are against the direction of the movement & are termed as corrective waves or reaction waves Vipin k, Asst Prof. VJIM 30
  31. 31. Graph Vipin k, Asst Prof. VJIM 31
  32. 32. Graph Vipin k, Asst Prof. VJIM 32
  33. 33. Graph Vipin k, Asst Prof. VJIM 33
  34. 34. • Waves 1,3 & 5 are the impulsive waves • 2 & 4 are the corrective waves • The wave 1 is upwards and wave 2 correct the wave 1. • Waves 3 & 5 are impulsive and 4 corrects wave 3 Vipin k, Asst Prof. VJIM 34
  35. 35. • Correction involves correcting the earlier rise • Wave 2 would correct the rise of wave 1 • Wave 4 would correct the rise of wave 3 & after the completion of wave 5, there would come a correction which would be labeled ABC • This correction would be in three waves in which the waves ‘A & C’ will be against the trend and wave ‘B’ will be along the trend. Vipin k, Asst Prof. VJIM 35
  36. 36. • The ABC correction following the fifth wave would correct the entire rise from the starting of wave 1 to the end of the fifth wave. • One complete cycle consist of waves made up of two distinctive phases, bullish & bearish. One full cycle of waves is completed after the termination of 8 waves movement, there will be a fresh cycle started. • The theory is used for predicting the future price changes & in deciding the timing of investment. Vipin k, Asst Prof. VJIM 36
  37. 37. Support and Level • Support and resistance define natural boundaries for rising and falling prices. Vipin k, Asst Prof. VJIM 37
  38. 38. Vipin k, Asst Prof. VJIM 38
  39. 39. Support Level • Level that the technical analyst believes a stock price will not fall below. Some times called “Floor”. Vipin k, Asst Prof. VJIM 39
  40. 40. Resistance Level • Opposite of support level. • Technical analyst believe that stock price will not exceed. Vipin k, Asst Prof. VJIM 40
  41. 41. Breakout • The security price moves out of the previous trading range (breaching the resistance or support level) Vipin k, Asst Prof. VJIM 41
  42. 42. • Term used to study the advance and decline that have occurred in the stock market. • Advance means – Number of shares whose prices have increased from the previous day’s trading. • Decline means – Number of shares whose prices have fallen from the previous day’s trading. • The net difference between the number of stock advanced & declined during the same period is the breadth of the market. Vipin k, Asst Prof. VJIM • A cumulative index of net differences measure the market 42
  43. 43. Day advance decline Net Breadth 21-02-12 1486 774 712 712 22-02-12 1310 966 344 1056 23-02-12 898 1225 -327 729 24-02-12 1108 1091 17 746 25-02-12 931 1279 -348 398 Vipin k, Asst Prof. VJIM 43
  44. 44. Vipin k, Asst Prof. VJIM 44
  45. 45. • Line Chart • Bar Charts • Candlestick Charts Vipin k, Asst Prof. VJIM 45
  46. 46. Line Chart  The most basic of the four charts – 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.  Do not provide visual information of the trading range for the individual points such as the high, low and opening prices.  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. Vipin k, Asst Prof. VJIM 46
  47. 47. Line Chart Vipin k, Asst Prof. VJIM 47
  48. 48. Bar Charts • 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. Vipin k, Asst Prof. VJIM 48
  49. 49. Bar Charts • 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). Vipin k, Asst Prof. VJIM 49
  50. 50. Bar Charts Vipin k, Asst Prof. VJIM 50
  51. 51. Candlestick Charts • Similar to a bar chart, but it differs in the way that it is visually constructed. • The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. • There are two color constructs for days up and one for days that the price falls. • When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. • If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. • If the stock's price has closed above the previous day's close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day Vipin k, Asst Prof. VJIM 51
  52. 52. Candlestick Charts Vipin k, Asst Prof. VJIM 52
  53. 53. • Mathematical indicators calculated with the help of the closing price data. • Helps to identify overbought and over sold conditions of the scrip. • Helps to identify possibility of trend reversal. Vipin k, Asst Prof. VJIM 53
  54. 54. • RSI (Relative Strength Index) • ROC (Rate of Change Indicator) • MACD (Moving Average Convergence/Divergence) Vipin k, Asst Prof. VJIM 54
  55. 55. (Relative Strength Index) RSI = 100 – 100 (1+RS) RS = Average gain per day Average loss per day Vipin k, Asst Prof. VJIM 55
  56. 56. • Most commonly used time period for the calculation of RSI is 14 days. • RSI value ranging from 0 – 100 • RSI value above 70 are considered to denote overbought condition. • RSI value below 30 considered to denote oversold condition. Vipin k, Asst Prof. VJIM 56
  57. 57. Vipin k, Asst Prof. VJIM 57
  58. 58. ROC (Rate of Change Indicator) • ROC measures the rate of change of the current price as compared to the price a certain number of days or weeks back. • ROC = Current price price ‘n’ period ago Vipin k, Asst Prof. VJIM - 1 58
  59. 59. ROC (Rate of Change Indicator) • Value may be +ve,-ve or zero • When the ROC line is above the zero line, the price is rising & when it is below zero line ,the price is falling. Vipin k, Asst Prof. VJIM 59
  60. 60. MACD (Moving Average Convergence Divergence) • Short term & long term exponential moving average are calculated with the help of closing price data. • A 12 day & 48 day exponential moving average are popular combination • Difference between short term & long term EMA represent MACD Vipin k, Asst Prof. VJIM 60
  61. 61. MACD (Moving Average Convergence Divergence) Vipin k, Asst Prof. VJIM 61
  62. 62. MACD (Moving Average Convergence Divergence) • MACD line (blue line): difference between the 12 and 26 days EMAs • signal (red line): 9 day EMA of the blue line • histogram (bar graph): difference between the blue and red lines Mathematically: • MACD = [stockPrices,12]EMA - [stockPrices,26]EMA • signal = [MACD,9]EMA • histogram = MACD – signal Vipin k, Asst Prof. VJIM 62
  63. 63. • Shares are generally sold in a lot of hundreds • Shares are sold in smaller lots fewer than 100 are called odd lot. • Buyers & sellers of odd lots are called odd lotters. • Odd lot purchases to odd lot sales ( purchase %) is the odd lot index. ( Odd lot purchases divided by odd lot sales) • Increases the odd lot purchases results in an increase in the index.(selling leads to fall the index) Vipin k, Asst Prof. VJIM 63
  64. 64. • Basic assumption of technical analyst is that price trends occur in an orderly manner & not random. • Random walk theory gained popularity in 1973 when Burton Malkiel wrote "A Random Walk Down Wall Street", a book that is now regarded as an investment classic. • Theory that states that the past movement or direction of the price of a stock or overall market cannot be used to predict its future movement. Vipin k, Asst Prof. VJIM 64
  65. 65. • Random walk theory states that market price evolve at random and do not follow any regular pattern. • According to this theory future stock price are completely independent of past stock prices. • The Random Walk Hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted by analyzing the past stock prices. Vipin k, Asst Prof. VJIM 65
  66. 66.  Market is supreme and no investor or group can influence it.  Stock price discount all information quickly.  Markets are efficient and that the flow of information is free and unbiased.  All investors have free access to the same information and nobody has superior knowledge or expertise.  Market quickly adjusts itself to any deviations from equilibrium level due to the operations of free forces of demand and supply. Vipin k, Asst or insider information.  Nobody has better knowledge Prof. VJIM 66
  67. 67. • Hypothesis states that the capital market is efficient in processing information. • Efficient capital market is one in which security prices equal their intrinsic value at all time, and where most securities are correctly priced. • According to Elton and Gruber,” when some one refers to efficient capital markets, they mean that securities prices fully reflect all available information” Vipin k, Asst Prof. VJIM 67
  68. 68. Forms of market efficiency • There are three forms of the efficient market hypothesis • The "Weak" form asserts that all past market prices and data are fully reflected in securities prices. In other words, technical analysis is of no use. • The "Semi strong" form asserts that all publicly available information is fully reflected in securities prices. In other words, fundamental analysis is of no use. • The "Strong" form asserts that all information is fully reflected in securities prices. In other words, even insider information is of no use. Vipin k, Asst Prof. VJIM 68
  69. 69. • In this diagram, the circles represent the amount of All historical prices and returns information that each form of the Strong Form EMH includes. • Note that the weak form covers Semi-Strong the least amount of information, and the strong form covers all Weak Form information. • Also note that each successive form includes the previous ones. All information, public and private Vipin k, Asst Prof. VJIM All public information 69
  70. 70. • Information is free and quick to flow • All investors have the same access to information. • Every investor has access to lending and borrowing at the same rate. • Market absorbs the information quickly and the market responds to new technology, new trends, change the tastes, etc efficiently and quickly. • Investors are rational and behave in a cost effective competitive manner for optimization of returns Vipin k, Asst Prof. VJIM 70
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