“Technical analysis”(Analysis of State Bank of India)        Rishikesh R Kshirsagar Masters in Financial Services Manageme...
DeclarationI, Mr. Rishikesh Ravindra Kshirsagar TYMFSM Student of AlkeshDinesh Mody Institute for Financial and Management...
University of Mumbai’s              Alkesh Dinesh Mody Institute For              Financial and Management Studies        ...
TABLE OF CONTENTSS.NO.   PARTICULARS                                      PAGE                                            ...
INTRODUCTION:-WHAT’S THIS EQUITY ANALYSIS?      Professional investor will make more money & less loss than, wholet their ...
enables the investor to arrive at buying & selling decision. The financialanalysts always need yardsticks to evaluate the ...
2. Equity analysis is purely based on the INVESTMENT PHILOSOPHY,so the investment object has vital importance associated t...
9. An individual perceptions about the investment return & associatedrisk may differ from individual to individual.10. Alt...
frequently used yardstick to check & analyze underlying price progress.For that matter a verity of tools was consider.    ...
assumption that many think technical analysis is a tool, which is effectivefor short-term investing.DOW THEORY:-   • Charl...
• The short swing which usually moves for short time like    two weeks and extends up to a month; this movement can    be ...
•   In this chart the technical analyst should plot the price of    the share. With it, he should also mark the market ave...
future trend or to diagnose the buy and sell signals in the    market.•   These applications of the Dow Theory have come i...
History of Technical Analysis:      Technical Analysis as a tool of investment for the average investorthrived in the late...
thing that matters is a securitys past trading data and what informationthis data can provide about where the Security mig...
Drawbacks / limitations of technical analysis:1. Technical analysis does not able to explain the rezones behind theemploym...
Most brokers provide basic charts and technical indicators for free or at avery low cost.    3)    One way to avoid gettin...
If prices are based on investor expectations, then knowing what asecurity should sell for (i.e., fundamental analysis) bec...
Open - This is the price of the first trade for the period (e.g., the firsttrade of the day). When analyzing daily data, t...
Open Interest - This is the total number of outstanding contracts (i.e.,those that have not been exercised, closed, or exp...
2) Line Chart.It gives the detailed information about every aspect.The exchange rates for each time period are plotted in ...
The relatively easy handling of line charts is a great advantage. Linecharts do not show price movements within a time per...
23
In the 1600s, the Japanese developed a method of technical analysis toanalyze the price of rice contracts. This technique ...
2)   Hammer. This is a bullish line if it occurs after a significant     downtrend. If the line occurs after a significant...
4)   Bullish engulfing lines. This pattern is strongly bullish if it occurs     after a significant downtrend (i.e., it ac...
6)   Bullish doji star. A "star" indicates a reversal and a doji indicates       indecision. Thus, this pattern usually in...
1)   Long black (filled-in) line. This is a bearish line. It occurs when     prices open near the high and close significa...
3)   Dark cloud cover. This is a bearish pattern. The pattern is more     significant if the second lines body is below th...
5) Evening star. This is a bearish pattern signifying a potential top.The "star" indicates a possible reversal and the bea...
7) Shooting star. This pattern suggests a minor reversal when it     appears after a rally. The stars body must appear nea...
2)   Dragon-fly doji. This line also signifies a turning point. It occurs     when the open and close are the same, and th...
4)   Star. Stars indicate reversals. A star is a line with a small real body     that occurs after a line with a much larg...
1)   Spinning tops. These are neutral lines. They occur when the     distance between the high and low, and the distance b...
4) Point And Figure Charts       The point and figure chart is not well known or used by theaverage investor but it has ha...
these represent months, and give investors an idea of the date. Each boxon the chart represents the price scale, which adj...
37
TRENDS IN TECHNICAL ANALYSISThe Use of TrendsOne of the most important concepts in technical analysis is that oftrend. The...
There are lots of ups and downs in this chart, but there isnt a clearindication of which direction this security is headed...
It is an example of an uptrend. Point 2 in the chart is the first high, whichis determined after the price falls from this...
in the peaks and troughs, its a sideways or horizontal trend. If you wantto get really technical, you might even say that ...
When analyzing trends, it is important that the chart is constructedto best reflect the type of trend being analyzed. To h...
trend line is as simple as drawing a straight line that follows ageneral trend. These lines are used to clearly show the t...
Channels       A channel, or channel lines, is the addition of two paralleltrend lines that act as strong areas of support...
A descending channel on a stock chart; the upper trend line hasbeen placed on the highs and the lower trend line is on the...
of the volume (up or down), chartists look at the volume bars thatcan usually be found at the bottom of any chart. Volume ...
reversal? This is where volume helps traders. If volume is highduring the day relative to the average daily volume, it is ...
able to convey to chartists. Basically, if the volume is not there toconfirm the pivotal moments of a chart pattern, the q...
on this assumption. The idea is that certain patterns are seen many times,and that these patterns signal a certain high pr...
when formed, signals that the security is likely to move against theprevious trend. As you can see, there are two versions...
Both of these head and shoulders patterns are similar in that there are fourmain parts: two shoulders, a head and a neckli...
upward trend has paused but will continue in an upward direction oncethe pattern is confirmed.The price pattern forms what...
price movement tests support or resistance levels twice and is unable tobreak through. This pattern is often used to signa...
Triangles are some of the most well-known chart patterns used intechnical analysis. The three types of triangles, which va...
trend line is flat and the upper trend line is descending. This is generallyseen as a bearish pattern where chartists look...
lines. In both cases, the trend is expected to continue when the pricemoves above the upper trend line6. Triple Tops and B...
7. Rounding Bottoma rounding bottom, also referred to as a saucer bottom, is a long-termreversal pattern that signals a sh...
A rounding bottom chart pattern looks similar to a cup and handle patternbut without the handle. The long-term nature of t...
Support is the price level through which a stock or market seldom falls(illustrated by the blue arrows). Resistance, on th...
Role Reversal         Once a resistance or support level is broken, its role is reversed. Ifthe price falls below a suppor...
rather frequently, even with some of the most well-knowncompanies. For example, this phenomenon is evident on the Wal-Mart...
need to be monitored by anyone who uses technical analysis. As long asthe price of the share remains between these levels ...
MOVING AVERAGES:-             Most chart patterns show a lot of variation in pricemovement. This can make it difficult for...
1.   Simple Moving Average (SMA)       This is the most common method used to calculate the movingaverage of prices. It si...
likelihood that it will reverse.      Many individuals argue that the usefulness of this type of      average is limited b...
more important and, therefore, it should also have a higher      weighting. This type of criticism has been one of the mai...
the calculation is not generally required for most traders because mostcharting packages do the calculation for you. The m...
above it, the security is in an uptrend. Conversely, a downward slopingmoving average with the price below can be used to ...
The other signal of a trend reversal is when one moving average crossesthrough another. For example, if the 15-day moving ...
If the periods used in the calculation are relatively short, for example 15and 35, this could signal a short-term trend re...
Moving averages are a powerful tool for analyzing the trend in a security.They provide useful support and resistance point...
BOLLINGER BANDSOverview        Bollinger Bands are similar to moving average envelopes. Thedifference between Bollinger Ba...
Following are characteristics of Bollinger Bands.• Sharp price changes tend to occur after the bands tighten, as volatilit...
and 20% respectively.)InterpretationThe MACD proves most effective in wide-swinging trading markets.There are three popula...
An indication that an end to the current trend may be near occurs whenthe MACD diverges from the security. A bearish diver...
Overview       Volume is simply the number of shares (or contracts) tradedduring a specified time frame (e.g., hour, day, ...
RATE OF CHANGE (ROC)Rate of change measures the rate at which prices rise or fall.It is based on the principle that prices...
18             2119                          2160                0.981  19          2229.95                          2125 ...
ROC, the latest closing price is divided by the closing price of the scrip10 days ago. If the latest price is higher than ...
• If the ROC line is above 1 and rising; the difference between the       current day price and 10 days back price grows a...
change and momentum are some of the widely used simple oscillators.There are some flaws like erratic movement due to sudde...
The RSI value for the seventh day is 66.67. For calculating the RSI value for the eighth day, we have to exclude the first...
• If the RSI moves above the value 70, it is considered as      overbought.   • If the RSI moves below the value 30, it is...
Hence, the divergence is between the RSI line and the share price. Forinstance, if the RSI line is falling below from the ...
TECHNICAL ANALYSIS OF SBINState Bank of India- HistoryThe origin of the State Bank of India goes back to the first decade ...
was founded in 1921 under the Imperial Bank of India Act 1920.The Bank transacts general banking business of every descrip...
CONCLUSION:-Technical Analysis of State Bank of India:3 Years data taken (1st-Jan-2009 to 27th-Feb-2012)Bar ChartCandle St...
Line Chart             88
Rate of Change (ROC)Relative Strength Index (RSI)                         89
When 50 DMA crosses 200 DMA in Upside that time InTechnical words it’s called as GOLDEN CROSS it’s a strongbullish signal ...
As per charts SBI has strong support @ 2040 & 1880 &Resistance @ 2190, 2390 & 2450.Whereas RSI is crossing up 50 level whi...
Recommendation: - Buy SBI at current level i.e.2100-2130,Short term Target 2190 & 2390, Stop Loss @ 2040Long Term Target ...
BIBLIOGRAPHYwww.investopedia.comwww.onlincetradingconcepts.comwww.nseindia.comwww.bseindia.comAnd Help taken by my office ...
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  1. 1. “Technical analysis”(Analysis of State Bank of India) Rishikesh R Kshirsagar Masters in Financial Services Management (M.F.S.M) Academic Year – 2011-12 Under the Guidance of Prof. Pankaj Bhattacharjee University of Mumbai’s Alkesh Dinesh Mody Institute For Financial and Management Studies 1
  2. 2. DeclarationI, Mr. Rishikesh Ravindra Kshirsagar TYMFSM Student of AlkeshDinesh Mody Institute for Financial and Management Studies, herebydeclare that I have completed the project titled Technical analysis ofState Bank of India during the academic year 2011-2012.The report work is original and the information/data included in thereport is true to the best of my Knowledge. Due credit is extended onthe work of Literature/Secondary Survey by endorsing it in theBibliography as per prescribed format. Signature of the Student with Date Rishikesh Ravindra Kshirsagar 2
  3. 3. University of Mumbai’s Alkesh Dinesh Mody Institute For Financial and Management Studies CertificateI, Professor Pankaj Bhattacharjee hereby certify that Mr. RishikeshRavindra Kshirsagar, TYMFSM Student of Alkesh Dinesh ModyInstitute for Financial and Management Studies has completed aproject titled Technical analysis of State Bank of India in the academicyear 2011-2012. The work of the student is original and theinformation included in the project is true to the best of myKnowledge.Signature of Guide with DateProf. Pankaj Bhattacharjee 3
  4. 4. TABLE OF CONTENTSS.NO. PARTICULARS PAGE NO. 1. Introduction 5 2. Technical analysis 8 3 Dow Theory 10 4 Drawbacks / limitations of technical analysis 15 5 Tools & Instruments in technical analysis 18 6 Chart Types 20 7 Trends In Technical Analysis 37 8 Why Volume Is Important 45 9 Chart Patterns 48 10 Technical Indicators 73 11 Technical analysis of “State Bank of India” 87 12 Bibliography 95 4
  5. 5. INTRODUCTION:-WHAT’S THIS EQUITY ANALYSIS? Professional investor will make more money & less loss than, wholet their heart rule. Their head eliminate all emotions for decision making.Be ruthless & calculating, you are out to make money. Decision shouldbe based on actual movement of share price measured both in money &percentage term & nothing else. Greed must be avoided Patience may be a virtue, but impatience can frequently beprofitable.In Equity Analysis anticipated growth, calculations are based onconsidered FACTS & not on HOPE. Equity analysis is basically acombination of two independent analyses, namely fundamental analysis& Technical analysis. The subject of Equity analysis, i.e. the attempt todetermine future share price movement & its reliability by references tohistorical data is a vast one, covering many aspect from the calculatingvarious FINANCIAL RATIOS, plotting of CHARTS to extremelysophisticated indicators. A general investor can apply the principles by using the simplest oftools: pocket calculator, pencil, ruler, chart paper & your cautious mind,watchful attention. It should be pointed out that, this equity analysis doesnot discuss how to buy & sell shares, but does discuss a method which 5
  6. 6. enables the investor to arrive at buying & selling decision. The financialanalysts always need yardsticks to evaluate the efficiency &performances of any business unit at the time of investment. Fundamentalanalysis is useful in long term investment decision. In Fundamentalanalysis a company s goodwill,It’s performances, liquidity, leverage, turnover, profitability & financialhealth was checked & analysis with the help of ratio analysis for thepurpose of long term successful investment. Technical analysis refers to the study of market generated data likeprices & volume to determine the future direction of prices movements. Technical analysis mainly seeks to predict the short term pricetravels. The focus of technical analysis is mainly on the internal marketdata, i.e. prices & volume data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating back to thelate 19th century.Assumption’s for the Equity Analysis.1. Works only in normal share-market conditions with great reliability, italso works in abnormal share-market conditions, but with low reliability. 6
  7. 7. 2. Equity analysis is purely based on the INVESTMENT PHILOSOPHY,so the investment object has vital importance associated to return alongwith risk.3. Cash management gets the magnitude role, because the scenario ofequity analysis is revolving around the term money4. Portfolio management, risk management was up to the investor sknowledge.5. Capital market trend is always a friend, whether it is short run or longrun.6. You are buying stock & not companies, so don t are curious or panic todoPost-mortem of companies’ performances7. History repeats: investors & speculators react the same way to thesame types of events homogeneously.8. Capital market has a typical market psychology along with other issueslike; perceptions, the crowd Vs the individual, tradition s & trust. 7
  8. 8. 9. An individual perceptions about the investment return & associatedrisk may differ from individual to individual.10. Although the equity analysis is art as well as sciences so, it also hassomeExceptions EQUITY ANALYSIS FUNDAMENTAL TECHNICAL ANALYSIS ANALYSISTechnical analysis:- “Technical analysis refers to the study of market generated datalike prices & volume to determine the future direction of pricesmovements.” Technical analysis mainly seeks to predict the short term pricetravels. It is important criteria for selecting the company to invest. It alsoprovides the base for decision-making in investment. The one of the most 8
  9. 9. frequently used yardstick to check & analyze underlying price progress.For that matter a verity of tools was consider. This Technical analysis is helpful to general investor in manyways. It provides important & vital information regarding the currentprice position of the company. Technical analysis involves the use of various methods forcharting, calculating & interpreting graph & chart to assess theperformances & status of the price. It is the tool of financial analysis,which not only studies but also reflecting the numerical & graphicalrelationship between the important financial factors. The focus of technical analysis is mainly on the internal marketdata, i.e. prices & volume data. It appeals mainly to short term traders. Itis the oldest approach to equity investment dating back to the late 19thcentury. It uses charts and computer programs to study the stock’s tradingvolume and price movements in the hope of identifying a trend.In fact the decision made on the basis of technical analysis is done onlyAfter inferring a trend and judging the future movement of the stock onthe basis of the trend. Technical Analysis assumes that the market isefficient and the price has already taken into consideration the otherfactors related to the company and the industry. It is because of this 9
  10. 10. assumption that many think technical analysis is a tool, which is effectivefor short-term investing.DOW THEORY:- • Charles Dow who was editor of Wall Street Journal in 1900 is known for the most important theory developed by him with technical indicators. In fact, the theory gained so much significance that the theory was named after him. • The Dow Theory has been further developed by other technical analysts and it forms the basis of the technician’s theory. • The theory predicts trends in the market for individual and total existing securities. It also shows reversals in stock prices. • According to ‘Dow theory’, the market always has three movements and the movements are simultaneous in the nature. These movements may be described as:- • The narrow movement which occurs from day to day. 10
  11. 11. • The short swing which usually moves for short time like two weeks and extends up to a month; this movement can be called a short term movement, and The third movement is also the main movement and it covers for years in its duration.• According to the type of movements, they have been given special names.• The narrow movement is called ‘fluctuations’ the short swing is better known as ‘secondary movements’ and the main movement is also called the ‘primary trends’.• Narrow movements are called ‘fluctuations’. Secondary movements are those which last only for a short while and they are also known as “corrections”. Primary trends are, therefore, the main movement in the stock market. It is also called ‘Bears” and ‘Bulls” market.• According to the Dow Theory, the price movements in a market can be identified by means of a line-chart. 11
  12. 12. • In this chart the technical analyst should plot the price of the share. With it, he should also mark the market average every day.• This would help in identifying the primary and secondary movements.• Dow theorists believe in ‘momentum’, which, according to them, keeps the price moving in the same direction.• They believe in primary trends, which according to them are momentum or bear and bull markets. The momentum will carry the prices further but momentum of primary trend will be halted by the terminology used by technical analysts called ‘support areas’ and ‘resistance areas’. Criticism of Dow Theory• The Dow Theory is subject to various limitations in actual practice.• Dow has developed this theory to depict the general trend of the market but not with the intention of projecting the 12
  13. 13. future trend or to diagnose the buy and sell signals in the market.• These applications of the Dow Theory have come in the light of analytical studies of financial analysts.• This theory is criticized on the ground that it is too subjective and based on historical interpretation; it is not infallible as it depends on the interpretative ability of the analyst.• The results of this theory do not also give meaningful and conclusive evidence of any action to be taken in terms of buy and sell operations. Candlestick Charting• The candle is comprised of two parts, the body and the shadows. The body encompasses the open and closing price for the period. The candle body is black if the security closed below the open, and white if the close was higher than the open for the period. The candlestick shadow encompasses the intra period high and low. 13
  14. 14. History of Technical Analysis: Technical Analysis as a tool of investment for the average investorthrived in the late nineteenth century when Charles Dow, then editor ofthe Wall Street Journal, proposed the Dow Theory. He recognized thatthe movement is caused by the action/reaction of the people dealing instocks rather than the news in itself. Technical analysis is a method of evaluating securities byanalyzing theStatistics generated by market activity, such as past prices and volume.Technical analysts do not attempt to measure a securitys intrinsic value,but instead use charts and other tools to identify patterns that can suggestfuture activity. Just as there are many investment styles on thefundamental side,There are also many different types of technical traders. Some rely onchart patterns; others use technical indicators and oscillators, and mostuse some combination of the two. In any case, technical analystsexclusive use of historical price and volume data is what separates themfrom their fundamental counterparts. Unlike fundamental analysts,technical analysts dont care whether a stock is undervalued the only 14
  15. 15. thing that matters is a securitys past trading data and what informationthis data can provide about where the Security might move in the future.Basic premises of technical analysis:1. Market prices are determined by the interaction of supply & demandforces.2. Supply & demand are influenced by variety of supply & demandaffiliated Factors both rational & irrational3. These include fundamental factors as well as psychological factors.4. Barring minor deviations stock prices tend to move in fairly persistenttrends.5. Shifts in demand & supply bring about change in trends.6. This shift s can be detected with the help of charts of manual &computerized action, because of the persistence of trends & patternsanalysis of past market data can be used to predict future pricesbehaviours. 15
  16. 16. Drawbacks / limitations of technical analysis:1. Technical analysis does not able to explain the rezones behind theemployment or selection of specific tool of Technical analysis.2. The technical analysis failed to signal an uptrend or downtrend in time.3. The technical analysis must be a self defeating proposition. As more &more people use, employ it the value of such analysis trends to reduce.Why we use TECHNICAL ANALYSIS? 1) Technical analysis provides information on the best entry andExit points for a trade. 2) On a chart, the trader can see where momentum is rising, aTrend is forming, a price is dipping or other events are developing thatshow the best entry point and time for the most profitable trade. With theconstant movement of various currencies against each other in the Forexmarket, mostTraders will focus on using technical indicators to find and place theirTradesIS TECHNICAL ANALYSIS DIFFICULT? 1) Technical analysis is not difficult, but it requires studyingDifferent types of charts such as the hourly or daily charts, knowingwhich technical indicators to use and how to use them. 2) Computers and the Internet have made this process much easier. 16
  17. 17. Most brokers provide basic charts and technical indicators for free or at avery low cost. 3) One way to avoid getting frustrated by all the lines, colours, andGraphics is to focus on using only a few indicators that willProvide you with the information needed. Try not to clutter yourChart with too much information.Fundamental vs. Technical Analysis Technical analysis and fundamental analysis are the two mainschools of thought in the financial markets. As weve mentioned,technical analysis looks at the price movement of a security and uses thisdata to predict its future price movements. Fundamental analysis, on theother hand, looks at economic factors, known as fundamentals. Fundamental analysis takes a relatively long-term approachto analyzing the market compared to technical analysis. Whiletechnical analysis can be used on a timeframe of weeks, days oreven minutes, fundamental analysis often looks at data over anumber of years.The future can be found in the past 17
  18. 18. If prices are based on investor expectations, then knowing what asecurity should sell for (i.e., fundamental analysis) becomes lessimportant than knowing what other investors expect it to sell for. Thatsnot to say that knowing what a security should sell for isnt important--itis. But there is usually a fairly strong consensus of a stocks futureearnings that the average investor cannot disprove. Technical analysis is the process of analyzing a securitys historicalprices in an effort to determine probable future prices. This is done bycomparing current price action (i.e., current expectations) withcomparable historical price action to predict a reasonable outcome. Thedevout technician might define this process as the fact that history repeatsitself while others would suffice to say that we should learn from thepast.Usually the following tools & instruments are used todo the technical analysis:Price FieldsTechnical analysis is based almost entirely on the analysis of price andvolume. The fields which define a securitys price and volume areexplained below. 18
  19. 19. Open - This is the price of the first trade for the period (e.g., the firsttrade of the day). When analyzing daily data, the Open is especiallyimportant as it is the consensus price after all interested parties were ableto "sleep on it."High - This is the highest price that the security traded during theperiod. It is the point at which there were more sellers than buyers (i.e.,there are always sellers willing to sell at higher prices, but the Highrepresents the highest price buyers were willing to pay).Low - This is the lowest price that the security traded during the period.It is the point at which there were more buyers than sellers (i.e., there arealways buyers willing to buy at lower prices, but the Low represents thelowest price sellers were willing to accept).Close - This is the last price that the security traded during the period.Due to its availability, the Close is the most often used price for analysis.The relationship between the Open (the first price) and the Close (the lastprice) are considered significant by most technicians. This relationship isemphasized in candlestick charts.Volume - This is the number of shares (or contracts) that were tradedduring the period. The relationship between prices and volume (e.g.,increasing prices accompanied with increasing volume) is important. 19
  20. 20. Open Interest - This is the total number of outstanding contracts (i.e.,those that have not been exercised, closed, or expired) of a future oroption. Open interest is often used as an indicator.Bid - This is the price a market maker is willing to pay for a security(i.e., the price you will receive if you sell).Ask - This is the price a market maker is willing to accept (i.e., the priceyou will pay to buy the security).Price Styles (Charts Types)Price in a chart can be displayed in four styles: 1. Bar Chart. 2. Line Chart. 3. Candlestick Chart. 4. Point and Figure Charts 1) Bar Charts :The highs and lows of a foreign currency are plotted in a diagram and thepoints are joined with vertical lines (bars). A small horizontal tick to theleft denotes the opening level while a small horizontal tick to the rightrepresents the closing price of each interval. 20
  21. 21. 2) Line Chart.It gives the detailed information about every aspect.The exchange rates for each time period are plotted in a diagram and thepoints are joined. Prices on the y-axis, time on the x-axis.The line chart chooses for example the closing price of consecutive timeperiods, but can also work with daily, official fixings. 21
  22. 22. The relatively easy handling of line charts is a great advantage. Linecharts do not show price movements within a time period. This can be aproblem because important information for exchange rate analysis can belost. This Problem was remedied with the development of bar charts thatrepresent a more sophisticated form of line chart.3) Candlestick Chart.A candlestick is black if the closing price is lower than the opening price.A candlestick is white if the closing price is higher than the openingprice. 22
  23. 23. 23
  24. 24. In the 1600s, the Japanese developed a method of technical analysis toanalyze the price of rice contracts. This technique is called candlestickcharting. Steven Nison is credited with popularizing candlestick chartingand has become recognized as the leading expert on their interpretation.Candlestick charts display the open, high, low, and closing prices in aformat similar to a modern-day bar chart, but in a manner that extenuatesthe relationship between the opening and closing prices. CandlestickCharts are simply a new way of looking at prices, they dont involve anycalculations. Because candlesticks display the relationship between theopen, high, low, and closing prices, they cannot be displayed onsecurities that only have closing prices, nor were they intended to bedisplayed on securities that lack opening prices.The interpretation of candlestick charts is based primarily on patterns.The most popular patterns are explained below.Bullish Patterns 1) Long white (empty) line. This is a bullish line. It occurs when prices open near the low and close significantly higher near the periods high. 24
  25. 25. 2) Hammer. This is a bullish line if it occurs after a significant downtrend. If the line occurs after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real body (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low is significantly lower than the open, high, and lose). The body can be empty or filled-in.3) Piercing line. This is a bullish pattern and the opposite of a dark cloud cover. The first line is a long black line and the second line is a long white line. The second line opens lower than the first lines low, but it closes more than halfway above the first lines real body. 25
  26. 26. 4) Bullish engulfing lines. This pattern is strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is engulfed by a large bullish (empty) line.5) Morning star. This is a bullish pattern signifying a potential bottom. The "star" indicates a possible reversal and the bullish (empty) line confirms this. The star can be empty or filled-in. 26
  27. 27. 6) Bullish doji star. A "star" indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the morning star, above) before trading a doji star. The first line can be empty or filled in.Bearish Patterns 27
  28. 28. 1) Long black (filled-in) line. This is a bearish line. It occurs when prices open near the high and close significantly lower near the periods low.2) Hanging Man. These lines are bearish if they occur after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low was significantly lower than the open, high, and close). The bodies can be empty or filled-in. 28
  29. 29. 3) Dark cloud cover. This is a bearish pattern. The pattern is more significant if the second lines body is below the centre of the previous lines body (as illustrated).4) Bearish engulfing lines. This pattern is strongly bearish if it occurs after a significant uptrend (i.e., it acts as a reversal pattern). It occurs when a small bullish (empty) line is engulfed by a large bearish (filled-in) line. 29
  30. 30. 5) Evening star. This is a bearish pattern signifying a potential top.The "star" indicates a possible reversal and the bearish (filled-in) lineconfirms this. The star can be empty or filled in. 6) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star. 30
  31. 31. 7) Shooting star. This pattern suggests a minor reversal when it appears after a rally. The stars body must appear near the low price and the line should have a long upper shadow.Reversal Patterns1) Long-legged doji. This line often signifies a turning point. It occurs when the open and close are the same, and the range between the high and low is relatively large. 31
  32. 32. 2) Dragon-fly doji. This line also signifies a turning point. It occurs when the open and close are the same, and the low is significantly lower than the open, high, and closing prices.3) Gravestone doji. This line also signifies a turning point. It occurs when the open, close, and low are the same, and the high is significantly higher than the open, low, and closing prices. 32
  33. 33. 4) Star. Stars indicate reversals. A star is a line with a small real body that occurs after a line with a much larger real body, where the real bodies do not overlap. The shadows may overlap.5) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.Neutral Patterns 33
  34. 34. 1) Spinning tops. These are neutral lines. They occur when the distance between the high and low, and the distance between the open and close, are relatively small.2) Doji. This line implies indecision. The security opened and closed at the same price. These lines can appear in several different patterns. Double doji lines (two adjacent doji lines) imply that a forceful move will follow a breakout from the current indecision. 34
  35. 35. 4) Point And Figure Charts The point and figure chart is not well known or used by theaverage investor but it has had a long history of use dating back to thefirst technical traders. This type of chart reflects price movements and isnot as concerned about time and volume in the formulation of the points.The point and figure chart removes the noise, or insignificant pricemovements, in the stock, which can distort traders views of the pricetrends. These types of charts also try to neutralize the skewing effect thattime has on chart analysis.When first looking at a point and figure chart, you will notice a series ofXs and Os. The Xs represent upward price trends and the Os representdownward price trends. There are also numbers and letters in the chart; 35
  36. 36. these represent months, and give investors an idea of the date. Each boxon the chart represents the price scale, which adjusts depending on theprice of the stock: the higher the stocks price the more each boxrepresents. On most charts where the price is between $20 and $100, abox represents $1, or 1 point for the stock. The other critical point of apoint and figure chart is the reversal criteria. This is usually set at threebut it can also be set according to the chartists discretion. The reversalcriteria set how much the price has to move away from the high or low inthe price trend to create a new trend or, in other words, how much theprice has to move in order for a column of Xs to become a column of Os,or vice versa. When the price trend has moved from one trend to another,it shifts to the right, signalling a trend change.Summary of charts 36
  37. 37. 37
  38. 38. TRENDS IN TECHNICAL ANALYSISThe Use of TrendsOne of the most important concepts in technical analysis is that oftrend. The meaning in finance isnt all that different from thegeneral definition of the term - a trend is really nothing more thanthe general direction in which a security or market is headed. Takea look at the chart below: Isn’t it hard to see that the trend is up? However, its not alwaysthis easy to see a trend: 38
  39. 39. There are lots of ups and downs in this chart, but there isnt a clearindication of which direction this security is headed.A More Formal Definition Unfortunately, trends are not always easy to see. In otherwords, defining a trend goes well beyond the obvious. In any givenchart, you will probably notice that prices do not tend to move in astraight line in any direction, but rather in a series of highs andlows. In technical analysis, it is the movement of the highs andlows that constitutes a trend. For example, an uptrend is classifiedas a series of higher highs and higher lows, while a downtrend isone of lower lows and lower highs. 39
  40. 40. It is an example of an uptrend. Point 2 in the chart is the first high, whichis determined after the price falls from this point. Point 3 is the low that isestablished as the price falls from the high. For this to remain an uptrendeach successive low must not fall below the previous lowest point or thetrend is deemed a reversal.Types of TrendThere are three types of trend:1. Uptrend2. Downtrend3. Sideways/Horizontal Trends As the names imply, when each successive peak and trough ishigher, its referred to as an upward trend. If the peaks and troughs aregetting lower, its a downtrend. When there is little movement up or down 40
  41. 41. in the peaks and troughs, its a sideways or horizontal trend. If you wantto get really technical, you might even say that a sideways trend isactually not a trend on its own, but a lack of a well-defined trend in eitherdirection. In any case, the market can really only trend in these threeways: up, down or nowhere.Trend LengthsAlong with these three trend directions, there are three trendclassifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of thestock market, a major trend is generally categorized as one lastinglonger than a year. An intermediate trend is considered to lastbetween one and three months and a near-term trend is anythingless than a month. A long-term trend is composed of severalintermediate trends, which often move against the direction of themajor trend. If the major trend is upward and there is a downwardcorrection in price movement followed by a continuation of theuptrend, the correction is considered to be an intermediate trend.The short-term trends are components of both major andintermediate trends. Take a look a Figure 4 to get a sense of howthese three trend lengths might look. 41
  42. 42. When analyzing trends, it is important that the chart is constructedto best reflect the type of trend being analyzed. To help identifylong-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing bothintermediate and short-term trends. It is also important toremember that the longer the trend, the more important it is; forexample, a one-month trend is not as significant as a five-yeartrend.Trend Lines A trend line is a simple charting technique that adds a line toa chart to represent the trend in the market or a stock. Drawing a 42
  43. 43. trend line is as simple as drawing a straight line that follows ageneral trend. These lines are used to clearly show the trend andare also used in the identification of trend reversals. An upward trend line is drawn at the lows of an upwardtrend. This line represents the support the stock has every timeit moves from a high to a low. Notice how the price is propped upby this support. This type of trend line helps traders to anticipatethe point at which a stocks price will begin moving upwards again.Similarly, a downward trend line is drawn at the highs of thedownward trend. This line represents the resistance level that astock faces every time the price moves from a low to a high. 43
  44. 44. Channels A channel, or channel lines, is the addition of two paralleltrend lines that act as strong areas of support and resistance. Theupper trend line connects a series of highs, while the lower trendline connects a series of lows. A channel can slope upward,downward or sideways but, regardless of the direction, theinterpretation remains the same. Traders will expect a givensecurity to trade between the two levels of support and resistanceuntil it breaks beyond one of the levels, in which case traders canexpect a sharp move in the direction of the break. Along withclearly displaying the trend, channels are mainly used to illustrateimportant areas of support and resistance. 44
  45. 45. A descending channel on a stock chart; the upper trend line hasbeen placed on the highs and the lower trend line is on the lows.The price has bounced off of these lines several times, and hasremained range-bound for several months. As long as the pricedoes not fall below the lower line or move beyond the upperresistance, the range-bound downtrend is expected to continue.The Importance of Trend It is important to be able to understand and identify trends so thatyou can trade with rather than against them. Two important sayings intechnical analysis are "the trend is your friend" and "dont buck thetrend," illustrating how important trend analysis is for technical tradersIMPORTANCE OF VOLUME:-What Is Volume? Volume is simply the number of shares or contracts thattrade over a given period of time, usually a day. The higher thevolume the more active the security. To determine the movement 45
  46. 46. of the volume (up or down), chartists look at the volume bars thatcan usually be found at the bottom of any chart. Volume barsillustrate how many shares have traded per period and show trendsin the same way that prices do.Why Volume Is Important? Volume is an important aspect of technical analysisbecause it is used to confirm trends and chart patterns. Any pricemovement up or down with relatively high volume is seen as astronger, more relevant move than a similar move with weakvolume. Say, for example, that a stock jumps 5% in one tradingday after being in a long downtrend. Is this a sign of a trend 46
  47. 47. reversal? This is where volume helps traders. If volume is highduring the day relative to the average daily volume, it is a sign thatthe reversal is probably for real. On the other hand, if the volumeis below average, there may not be enough conviction to support atrue trend reversal. Volume should move with the trend. If pricesare moving in an upward trend, volume should increase (and viceversa). If the previous relationship between volume and pricemovements starts to deteriorate, it is usually a sign of weakness inthe trend. For example, if the stock is in an uptrend but the uptrading days are marked with lower volume, it is a sign that thetrend is starting to lose its legs and may soon end. When volumetells a different story, it is a case of divergence, which refers to acontradiction between two different indicators. The simplestexample of divergence is a clear upward trend on decliningvolume.Volume and Chart Patterns The other use of volume is to confirm chart patterns.Patterns such as head and shoulders, triangles, flags and other pricepatterns can be confirmed with volume, a process which welldescribe in more detail later in this tutorial. In most chart patterns,there are several pivotal points that are vital to what the chart is 47
  48. 48. able to convey to chartists. Basically, if the volume is not there toconfirm the pivotal moments of a chart pattern, the quality of thesignal formed by the pattern is weakened.Volume Precedes Price Another important idea in technical analysis is that price ispreceded by volume. Volume is closely monitored by technicians andchartists to form ideas on upcoming trend reversals. If volume is startingto decrease in an uptrend, it is usually a sign that the upward run is aboutto end. Now that we have a better understanding of some of the importantfactors of technical analysis, we can move on to charts, which help toidentify trading opportunities in prices movements.CHART PATTERNS:- A chart pattern is a distinct formation on a stock chart that createsa trading signal, or a sign of future price movements. Chartists use thesepatterns to identify current trends and trend reversals and to trigger buyand sell signals. In the first section of this tutorial, we talked about the threeassumptions of technical analysis, the third of which was that in technicalanalysis, history repeats itself. The theory behind chart patterns is based 48
  49. 49. on this assumption. The idea is that certain patterns are seen many times,and that these patterns signal a certain high probability move in a stock.Based on the historic trend of a chart pattern setting up a certain pricemovement, chartists look for these Patterns to identify tradingopportunities. While there are general ideas and components to everychart pattern, there is no chart pattern that will tell you with 100%certainty where a security is headed. This creates some leeway anddebate as to what a good pattern looks like, and is a major reason whycharting is often seen as more of an art than a science. There are twotypes of patterns within this area of technical analysis, reversal andcontinuation. A reversal pattern signals that a prior trend will reverseupon completion of the pattern. A continuation pattern, on the other hand,signals that a trend will continue once the pattern is complete. Thesepatterns can be found over charts of any timeframe. In this section, wewill review some of the more popular chart patterns.1. Head And Shoulders This is one of the most popular and reliable chart patterns intechnical analysis. Head and shoulders is a reversal chart pattern that 49
  50. 50. when formed, signals that the security is likely to move against theprevious trend. As you can see, there are two versions of the head andshoulders chart pattern. Head and shoulders top (shown on the left) is achart pattern that is formed at the high of an upward movement andsignals that the upward trend is about to end. Head and shoulders bottom,also known as inverse head and shoulders (shown on the right) is thelesser known of the two, but is used to signal a reversal in a downtrend.______________________________________________________________ 50
  51. 51. Both of these head and shoulders patterns are similar in that there are fourmain parts: two shoulders, a head and a neckline. Also, each individualhead and shoulder is comprised of a high and a low. For example, in thehead and shoulders top image shown on the left side, the left shoulder ismade up of a high followed by a low. In this pattern, the neckline is alevel of support or resistance. Remember that an upward trend is a periodof successive rising highs and rising lows. The head and shoulders chartpattern, therefore, illustrates a weakening in a trend by showing thedeterioration in the successive movements of the highs and lows.2. Cup and Handlea cup and handle chart is a bullish continuation pattern in which the 51
  52. 52. upward trend has paused but will continue in an upward direction oncethe pattern is confirmed.The price pattern forms what looks like a cup, which is preceded by anupward trend. The handle follows the cup formation and is formed by agenerally downward/sideways movement in the securitys price. Once theprice movement pushes above the resistance lines formed in the handle,the upward trend can continue.3. Double Tops and BottomsThis chart pattern is another well-known pattern that signals a trendreversal - it is considered to be one of the most reliable and is commonlyused. These patterns are formed after a sustained trend and signal tochartists that the trend is about to reverse. The pattern is created when a 52
  53. 53. price movement tests support or resistance levels twice and is unable tobreak 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 bottompattern is shown on the right. In the case of the double top pattern, theprice movement has twice tried to move above a certain price level. Aftertwo unsuccessful attempts at pushing the price higher, the trend reversesand the price heads lower. In the case of a double bottom (shown on theright), the price movement has tried to go lower twice, but has foundsupport each time. After the second bounce off of the support, thesecurity enters a new trend and heads upward.4. Triangles 53
  54. 54. Triangles are some of the most well-known chart patterns used intechnical analysis. The three types of triangles, which vary inconstruct and implication, are the symmetrical triangle, ascendingand descending triangle. These chart patterns are considered to lastanywhere from a couple of weeks to several months.The symmetrical is a pattern in which two trend lines converge towardeach other. This pattern is neutral in that a breakout to the upside ordownside is a confirmation of a trend in that direction. In an ascendingtriangle, the upper trend line is flat, while the bottom trend line is upwardsloping. This is generally thought of as a bullish pattern in whichchartists look for an upside breakout. In a descending triangle, the lower 54
  55. 55. trend line is flat and the upper trend line is descending. This is generallyseen as a bearish pattern where chartists look for a downside breakout.5. Flag and PennantsThese two short-term chart patterns are continuation patterns that areformed when there is a sharp price movement followed by a generallysideways price movement. This pattern is then completed upon anothersharp price movement in the same direction as the move that started thetrend. The patterns are generally thought to last from one to three weeks.There is little difference between a pennant and a flag. The maindifference between these price movements can be seen in the middlesection of the chart pattern. In a pennant, the middle section ischaracterized by converging trend lines, much like what is seen in asymmetrical triangle. The middle section on the flag pattern, on the otherhand, shows a channel pattern, with no convergence between the trend 55
  56. 56. lines. In both cases, the trend is expected to continue when the pricemoves above the upper trend line6. Triple Tops and BottomsTriple tops and triple bottoms are another type of reversal chart pattern inchart analysis. These are not as prevalent in charts as head and shouldersand double tops and bottoms, but they act in a similar fashion. These twochart patterns are formed when the price movement tests a level ofsupport or resistance three times and is unable to break through; thissignals a reversal of the prior trend.Confusion can form with triple tops and bottoms during the formation ofthe pattern because they can look similar to other chart patterns. After thefirst two support/resistance tests are formed in the price movement, thepattern will look like a double top or bottom, which could lead a chartistto enter a reversal position too soon. 56
  57. 57. 7. Rounding Bottoma rounding bottom, also referred to as a saucer bottom, is a long-termreversal pattern that signals a shift from a downward trend to an upwardtrend. This pattern is traditionally thought to last anywhere from severalMonths to several years. 57
  58. 58. A rounding bottom chart pattern looks similar to a cup and handle patternbut without the handle. The long-term nature of this pattern and the lackof a confirmation trigger, such as the handle in the cup and handle, makeit a difficult pattern.SUPPORT AND RESISTANCE:- Once you understand the concept of a trend, the next major conceptis that of support and resistance. Youll often hear technical analysts talkabout the ongoing battle between the bulls and the bears, or the strugglebetween buyers (demand) and sellers (supply). This is revealed by theprices a security seldom moves above (resistance) or below (support). 58
  59. 59. Support is the price level through which a stock or market seldom falls(illustrated by the blue arrows). Resistance, on the other hand, is the pricelevel that a stock or market seldom surpasses (illustrated by the RedArrows). These support and resistance levels are seen as important in termsof market psychology and supply and demand. Support and resistancelevels are the levels at which a lot of traders are willing to buy the stock(in the case of a support) or sell it (in the case of resistance). When thesetrend lines are broken, the supply and demand and the psychology behindthe stocks movements is thought to have shifted, in which case newlevels of support and resistance likely be established. 59
  60. 60. Role Reversal Once a resistance or support level is broken, its role is reversed. Ifthe price falls below a support level, that level will become resistance. Ifthe price rises above a resistance level, it will often become support. Asthe price moves past a level of support or resistance, it is thought thatsupply and demand has shifted, causing the breached level to reverse itsrole. For a true reversal to occur, however, it is important that the pricemake a strong move through either the support or resistance.For example, as you can see, the dotted line is shown as a level ofresistance that has prevented the price from heading higher on twoprevious occasions (Points 1 and 2). However, once the resistanceis broken, it becomes a level of support (shown by Points 3 and 4)by propping up the price and preventing it from heading loweragain.Many traders who begin using technical analysis find this concepthard to believe and dont realize that this phenomenon occurs 60
  61. 61. rather frequently, even with some of the most well-knowncompanies. For example, this phenomenon is evident on the Wal-Mart Stores Inc. (WMT) chart between 2003 and 2006. Notice howthe role of the $51 level changes from a strong level of support to alevel of resistance.In almost every case, a stock will have both a level of support anda level of resistance and will trade in this range as it bouncesbetween these levels.The Importance of Support and Resistance Support and resistance analysis is an important part of trendsbecause it can be used to make trading decisions and identify when atrend is reversing. Support and resistance levels both test and confirm trends and 61
  62. 62. need to be monitored by anyone who uses technical analysis. As long asthe price of the share remains between these levels of support andresistance, the trend is likely to continue. It is important to note, however,that a break beyond a level of support or resistance does not always haveto be a reversal. For example, if prices moved above the resistance levels of anupward trending channel, the trend have accelerated, not reversed. Thismeans that the price appreciation is expected to be faster than it was inthe channel.Being aware of these important support and resistance points shouldaffect the way that you trade a stock. Traders should avoid placing ordersat these major points, as the area around them is usually marked by a lotof volatility. If you feel confident about making a trade near a support orresistance level, it is important that you follow this simple rule: do notplace orders directly at the support or resistance level. This is because inmany cases, the price never actually reaches the whole number, but flirtswith it instead. So if youre bullish on a stock that is moving toward animportant support level, do not place the trade at the support level.Instead, place it above the support level, but within a few points. On theother hand, if you are placing stops or short selling, set up your tradeprice at or below the level of support. 62
  63. 63. MOVING AVERAGES:- Most chart patterns show a lot of variation in pricemovement. This can make it difficult for traders to get an idea of asecuritys overall trend. One simple method traders use to combatthis is to apply moving averages. A moving average is the averageprice of a security over a set amount of time. By plotting asecuritys average price, the price movement is smoothed out. Oncethe day-to-day fluctuations are removed, traders are better able toidentify the true trend and increase the probability that it will workin their favour.Types of Moving Averages: - There are a number of different types of moving averages thatvary in the way they are calculated, but how each average is interpretedremains the same. The calculations only differ in regards to the weightingthat they place on the price data, shifting from equal weighting of eachprice point to more weight being placed on recent data. The three mostcommon types of moving averages are simple, linear and exponential. 63
  64. 64. 1. Simple Moving Average (SMA) This is the most common method used to calculate the movingaverage of prices. It simply takes the sum of all of the past closing pricesover the time period and divides the result by the number of prices usedin the calculation. For example, in a 10-day moving average, the last 10closing prices are added together and then divided by 10. As you can seein Figure 1, a trader is able to make the average less responsive tochanging prices by increasing the number of periods used in thecalculation. Increasing the number of time periods in the calculation isone of the best ways to gauge the strength of the long-term trend and the 64
  65. 65. likelihood that it will reverse. Many individuals argue that the usefulness of this type of average is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence. The critics argue that the most recent data is 65
  66. 66. more important and, therefore, it should also have a higher weighting. This type of criticism has been one of the main factors leading to the invention of other forms of moving averages.2. Linear Weighted Average This moving average indicator is the least common out of thethree and is used to address the problem of the equal weighting. Thelinear weighted moving average is calculated by taking the sum of all theclosing prices over a certain time period and multiplying them by theposition of the data point and then dividing by the sum of the number ofperiods. For example, in a five-day linear weighted average, todaysclosing price is multiplied by five; yesterdays by four and so on until thefirst day in the period range is reached. These numbers are then addedtogether and divided by the sum of the multipliers.3. Exponential Moving Average (EMA) This moving average calculation uses a smoothing factor to placea higher weight on recent data points and is regarded as much moreefficient than the linear weighted average. Having an understanding of 66
  67. 67. the calculation is not generally required for most traders because mostcharting packages do the calculation for you. The most important thing toremember about the exponential moving average is that it is moreresponsive to new information relative to the simple moving average.This responsiveness is one of the key factors of why this is the movingaverage of choice among many technical traders. A 15-period EMAraises and falls faster than a 15-period SMA. This slight differencedoesn’t seem like much, but it is an important factor to be aware of sinceit can affect returns.Major Uses of Moving Averages Moving averages are used to identify current trends and trendreversals as well as to set up support and resistance levels. Movingaverages can be used to quickly identify whether a security is moving inan uptrend or a downtrend depending on the direction of the movingaverage. When a moving average is heading upward and the price is 67
  68. 68. above it, the security is in an uptrend. Conversely, a downward slopingmoving average with the price below can be used to signal a downtrend.Another method of determining momentum is to look at the order of apair of moving averages. When a short-term average is above a longer-term average, the trend is up. On the other hand, a long-term averageabove a shorter-term average signals a downward movement in the trend. Moving average trend reversals are formed in two main ways: whenthe price moves through a moving average and when it moves throughmoving average crossovers. The first common signal is when the pricemoves through an important moving average. For example, when theprice of a security that was in an uptrend falls below a 50-period movingaverage, it is a sign that the uptrend may be reversing. 68
  69. 69. The other signal of a trend reversal is when one moving average crossesthrough another. For example, if the 15-day moving average crossesabove the 50-day moving average, it is a positive sign that the price willstart to increase. 69
  70. 70. If the periods used in the calculation are relatively short, for example 15and 35, this could signal a short-term trend reversal. On the other hand,when two averages with relatively long time frames cross over (50 and200, for example), this is used to suggest a long-term shift in trend.Another major way moving averages are used is to identify support andresistance levels. It is not uncommon to see a stock that has been fallingstop its decline and reverse direction once it hits the support of a majormoving average. A move through a major moving average is often usedas a signal by technical traders that the trend is reversing. For example, ifthe price breaks through the 200-day moving average in a downwarddirection, it is a signal that the uptrend is reversing. 70
  71. 71. Moving averages are a powerful tool for analyzing the trend in a security.They provide useful support and resistance points and are very easy touse. The most common time frames that are used when creating movingaverages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-dayaverage of a half a year, a 50-day average of a quarter of a year, a 20-dayaverage of a month And 10 – day average of two weeks. Movingaverages help technical traders smooth out some of the noise that is foundin day-to-day price movements, giving traders a clearer view of the pricetrend. So far we have been focused on price movement, through chartsand averages. In the next section, well look at some other techniquesused to confirm price movement and patterns.Technical Indicators 71
  72. 72. BOLLINGER BANDSOverview Bollinger Bands are similar to moving average envelopes. Thedifference between Bollinger Bands and envelopes is envelopes areplotted at a fixed percentage above and below a moving average, whereasBollinger Bands are plotted at standard deviation levels above and belowa moving average. Since standard deviation is a measure of volatility, thebands are self-adjusting: widening during volatile markets andcontracting during calmer periods.Bollinger Bands were created by John Bollinger.Interpretation Bollinger Bands are usually displayed on top of security prices,but they can be displayed on an indicator. These comments refer to bandsdisplayed on prices. As with moving average envelopes, the basicinterpretation of Bollinger Bands is that prices tend to stay within theupper- and lower-band. The distinctive characteristic of Bollinger Bandsis that the spacing between the bands varies based on the volatility of theprices. During periods of extreme price changes (i.e., high volatility), thebands widen to become more forgiving. During periods of stagnantpricing (i.e., low volatility), the bandsNarrow to contain prices. 72
  73. 73. Following are characteristics of Bollinger Bands.• Sharp price changes tend to occur after the bands tighten, as volatilitylessens.• When prices move outside the bands, a continuation of the current trendis implied• Bottoms and tops made outside the bands followed by bottoms and topsmade inside the bands call for reversals in the trend.• A move that originates at one band tends to go all the way to the otherband. This observation is useful when projecting price targets.MACDOverviewThe MACD ("Moving Average Convergence/Divergence") is a trendfollowing momentum indicator that shows the relationship between twomoving averages of prices. The MACD was developed by Gerald Appel,publisher of Systems and Forecasts. The MACD is the differencebetween a 26-day and 12-day exponential moving average. A 9-dayexponential moving average, called the "signal" (or "trigger") line isplotted on top of the MACD to show buy/sell opportunities. (Applespecifies exponential moving averages as percentages. Thus, he refers tothese three moving averages as 7.5%, 15 73
  74. 74. and 20% respectively.)InterpretationThe MACD proves most effective in wide-swinging trading markets.There are three popular ways to use the MACD: crossovers,overbought/oversold conditions, and divergences.CrossoversThe basic MACD trading rule is to sell when the MACD falls below itssignal line. Similarly, a buy signal occurs when the MACD rises aboveits signal line. It is also popular to buy/sell when the MACD goes above/below zero.Overbought/Oversold ConditionsThe MACD is also useful as an overbought/oversold indicator. When theshorter moving average pulls away dramatically from the longer movingaverage (i.e., the MACD rises), it is likely that the security price isoverextending and will soon return to more realistic levels. MACDoverbought and oversold conditions exist vary from security to security.Divergences 74
  75. 75. An indication that an end to the current trend may be near occurs whenthe MACD diverges from the security. A bearish divergence occurs whenthe MACD is making new lows while prices fail to reach new lows. Abullish divergence occurs when the MACD is making new highs whileprices fail to reach new highs. Both of these divergences are mostsignificant when they occur at relatively overbought/oversold levels.MOMENTUMOverviewThe Momentum indicator measures the amount that a securitys price haschanged over a given time span.InterpretationThe interpretation of the Momentum indicator is identical to theinterpretation of the Price ROC. Both indicators display the rate-of-change of a securitys price. However, the Price ROC indicator displaysthe rate-of-change as a percentage whereas the Momentum indicatordisplays the rate-of-change as a ratio.VOLUME 75
  76. 76. Overview Volume is simply the number of shares (or contracts) tradedduring a specified time frame (e.g., hour, day, week, month, etc). Theanalysis of volume is a basic yet very important element of technicalanalysis. Volume provides clues as to the intensity of a given price move.Interpretation Low volume levels are characteristic of the indecisive expectationsthat typically occur during consolidation periods (i.e., periods whereprices move sideways in a trading range). Low volume also often occursduring the indecisive period during market bottoms. High volume levelsare characteristic of market tops when there is a strong consensus thatPrices will move higher. High volume levels are also very common at thebeginning of new trends (i.e., when prices break out of a trading range).Just before market bottoms, volume will often increase due to panic-driven selling.Volume can help determine the health of an existing trend. A healthy up-trend should have higher volume on the upward legs of the trend, andlower volume on the downward (corrective) legs. A healthy downtrendusually has higher volume on the downward legs of the trend and lowervolume on the upward (corrective) legs. 76
  77. 77. RATE OF CHANGE (ROC)Rate of change measures the rate at which prices rise or fall.It is based on the principle that prices usually rise and fall at the fastestpace well ahead of their peak and before their trough respectively.10 – Day ROCThe concept of ROC can be explained with the help of a single example.A ball thrown into the Air generally shoots up with speed butsubsequently shows down considerably before it turns to come downagain. The loss of upward momentum that occurs before the ball changescourse can be seen in the stock market also. Before peaking out, shareprocess registers a noticeable decrease in momentum. THE CALCULATION OF 10 DAY RATE OF CHANGE DA SHARE SHARE PRICE 10DAYS ROC 10 DAYS Y PRICE AGO AGO 1 2 3 (4) =(2)/(3) 1 2079.5 2 2065.05 3 2106.05 4 2165.2 5 2151.1 6 2178.1 7 2189.35 8 2160 9 2125 10 2197 11 2247.95 2079.5 1.081 12 2343 2065.05 1.135 13 2421.35 2106.05 1.150 14 2448 2165.2 1.131 15 2252.95 2151.1 1.047 16 2270 2178.1 1.042 17 2205.15 2189.35 1.007 77
  78. 78. 18 2119 2160 0.981 19 2229.95 2125 1.049 20 2250.5 2197 1.024 21 2206 2247.95 0.981 22 2242.2 2343 0.957 23 2167 2421.35 0.895 24 2148.65 2448 0.878 25 2151 2252.95 0.955 26 2240.05 2270 0.987 27 2309.25 2205.15 1.047 28 2328.6 2119 1.099 29 2357.7 2229.95 1.057 30 2292 2250.5 1.018The concept of ROC can be explained with the help of a single example.A ball thrown into the air generally shoots up with speed butsubsequently shows down considerably before it turns to come downagain. The loss of upward momentum that occurs before the ball changescourse can be seen in the stock market also. Before peaking out, shareprocess registers a noticeable decrease in momentum. To measure therate of change, the ratio of the most recent closing price to the price for acertain number of days in the past is worked out. To calculate a 10 days 78
  79. 79. ROC, the latest closing price is divided by the closing price of the scrip10 days ago. If the latest price is higher than that of the historical pricefor the ten previous days, the ROC value will be above the line 1 and viceversa. In the following table an example of 10 days ROC is explained.Under column 2 the share price movement of a company is provided for20 days while under column 3 the prices ruling 10 days ago has beentaken.In the last column, the ROC values are arrived at by dividing the currentday’s price by the price 10 days ago. The ROC values are available from the 11th day only as for the first 10trading days. The 10 days back share prices are not available. It is worthnoting that the share prices are available only on the trading that actuallytook place in the market.Therefore, the ROC is computed for 10 trading days and not 10 calendardays.The share price has been increased by Re. 1 on every day trading dayfrom day 1 to day 15. However, the ROC declined continuously fromthe 11th day to 15th day, though the share price in rupees terms increased.This indicates that though there was a share price rise in absolute terms,in percentage terms the rise in share price declined during that period. • If the ROC line is above 1; the current day price is higher than that of 10 days ago. 79
  80. 80. • If the ROC line is above 1 and rising; the difference between the current day price and 10 days back price grows at an increasing rate (bullish signal). • If ROC line is above 1, but declining; the price rises at a lower rate than the earlier growth rate (bearish signal) • If the ROC line is below 1, the current day’s price is lower than the price 10 days ago. • If the ROC line is below 1 and falling, the difference between 10 days price and 10 days back price grows at a faster rate (bearish signal). • If the ROC line is below 1, but rising, the rate of decline slows down (bullish signal). • The ROC line is so constructed that it is always a step ahead of the price movement. It gives an advance signal before the share price line takes a reversal direction.Relative Strength IndexRelative Strength Index (RSI) us is one of the very few sophisticatedOscillators used in technical analysis. The others which we have alreadydiscussed in the previous issues are stochastic and MACD. The rate of 80
  81. 81. change and momentum are some of the widely used simple oscillators.There are some flaws like erratic movement due to sudden drop or rise inthe price movement even in a single trading day in the usage of simpleoscillators. For instance, in a 10 day momentum, a sharp advance ordecline ten days back can cause sudden shifts in momentum line even ifthere is a marginal or no change in current prices. Therefore, it isnecessary to reduce these distortions and smoothen the oscillatorindicator distortions and smoothen the oscillator indictor distortion andsmoothen the oscillator indicator. The other problem in simpleoscillators is that there is no specified range on vertical scale. Mainly toaddress these two major problems of simple oscillators RSI wasdeveloped by J. Welles Wilder, Jr. in 1978. RSI indicator provides notonly the required smoothing but also 0 and 100 as lower and upper limitsrespectively for its vertical scale.RSI is calculated using the following formula.RSI=100 – {100 / (1+RS)}Where RS = Average of n periods price gains Average of n periods price losses7 day RS value = (8/7) / (4/7) = 1.143 / 0.571=2RSI= 100 – {100 / (1+RS)}= 100 – {100 / (1+2)}=100- 33.33 = 66.67. 81
  82. 82. The RSI value for the seventh day is 66.67. For calculating the RSI value for the eighth day, we have to exclude the first day closing price and include the price on the eighth day. We can calculate RSI for any time period. The most widely used period is 14 days. Some technical analysts also use lesser time periods like 5 - day, 7 – day, 9 – day to get the quicker signals. Like I any other Oscillators, shorter the time period, the more sensitive and volatile the RSI becomes. Therefore, to reduce the misleading signals Wilder recommended and used a 14 day period for constructing RSI.RSI CALCULATION CHANGE IN PRICE OVER PREVIOUS DAYDAY CLOSING PRICE GAIN LOSS1 43 0 02 45 2 03 44 0 14 46 2 05 45 0 16 43 0 27 47 4 0TOTAL 8 4 Interpretation: • The RSI values are plotted on chart with a vertical scale of 0 to 100. 82
  83. 83. • If the RSI moves above the value 70, it is considered as overbought. • If the RSI moves below the value 30, it is treated as an oversold zone.In other words, there may be down trends in the price after the RSImoving above the 70 level and prices may recover and look up after theRSI falls below 30 level. Generally, RSI indicator crosses the 70 levelmuch before the share price touches the peak. Similarly, RSI line goesbelow the 30 level well ahead of price lifting the bottom. Hence, RSIgives an advance signal for reversal share price movements.Failure swings: we can see the failure in rallies and also in declines whenthe RSI is above 70 and 30 respectively. Failure “A” in rally when theRSI rises above 70 rises again but fails to reach the level 70 and belowthe prior lower level. This is a clear sell signal. Failure at bottom ofwhen the RSI in a downtrend. Failure “B” explains the failure in declinewhen fails to set new low and starts an uptrend to exceed previous peak.Divergence:According to Wilder, divergence is the most indicative character of theRSI which gives a warning signal for likely reversal in share movement. 83
  84. 84. Hence, the divergence is between the RSI line and the share price. Forinstance, if the RSI line is falling below from the level of 80 to 70 and asame time the share price is still in an uptrend, it gives as indication thatthe share price is also likely to reverse its direction shortly. Thisdivergence gives a sell signal.Similarly, we get a buy signal when the RSI line is moving up below thelevel 30 and at the same time the share price is still continuing in adowntrend.The RSI indicator simply means • Buy, when the RSI line is crossing up through the 50 level and • Sell, when the RSI line is crossing down through the 50 level.We can also identify the chart patterns like triangles, flags, rectangles inthe RSI line and interpret the same way as in price chart. Support andResistance levels also can be drawn for RSI charts.These Oscillators are quite useful only for short terms investors andtraders. These are not useful for long term investors, because they cannotsimply sell their shares for the simple reason that RSI has moved abovethe 70 level. The first entry of RSI into the overbought zone is only afirst warning signal. One has to wait for further confirmations beforereally liquidating his portion 84
  85. 85. TECHNICAL ANALYSIS OF SBINState Bank of India- HistoryThe origin of the State Bank of India goes back to the first decade ofthe nineteenth century with the establishment of the Bank ofCalcutta in Calcutta on 2 June 1806. Three years later the bankreceived its charter and was re-designed as the Bank of Bengal (2January 1809). A unique institution, it was the first joint-stock bankof British India sponsored by the Government of Bengal. The Bankof Bombay (15 April 1840) and the Bank of Madras (1 July 1843)followed the Bank of Bengal. These three banks remained at the apexof modern banking in India till their amalgamation as the ImperialBank of India on 27 January 1921.1955 - On 1st July State Bank of India was constituted under theState Bank of India Act 1955, for the purpose of taking over theundertaking and business of the Imperial Bank of India. TheImperial Bank of India 85
  86. 86. was founded in 1921 under the Imperial Bank of India Act 1920.The Bank transacts general banking business of every descriptionincluding,foreign exchange, merchant banking and mutual funds.Management of - SBIName DesignationPratip Chaudhuri Chairman / Chair PersonA Krishna Kumar Managing DirectorAshok Jhunjhunwala DirectorS Venkatachalam DirectorG D Nadaf DirectorParthasarthy Iyengar DirectorSubir Vithal Gokran DirectorDeepak Ishwarbhai Amin Non Official Part Time DirectorName DesignationHemant G Contractor Managing DirectorDiwakar Gupta Managing DirectorDileep C Choksi DirectorD Sundaram DirectorRashpal Malhotra Non Official Part Time DirectorD K Mittal DirectorJyoti Bhushan Mohapatra Director 86
  87. 87. CONCLUSION:-Technical Analysis of State Bank of India:3 Years data taken (1st-Jan-2009 to 27th-Feb-2012)Bar ChartCandle Stick Chart 87
  88. 88. Line Chart 88
  89. 89. Rate of Change (ROC)Relative Strength Index (RSI) 89
  90. 90. When 50 DMA crosses 200 DMA in Upside that time InTechnical words it’s called as GOLDEN CROSS it’s a strongbullish signal 90
  91. 91. As per charts SBI has strong support @ 2040 & 1880 &Resistance @ 2190, 2390 & 2450.Whereas RSI is crossing up 50 level which Indicate Buy Signal.and if we see 10 days ROC is above 1 but declining the pricerises at lower rate than the earlier growth rate which indicatebearish signal. But if we take 3 years data and calculate ROCthen we can see “ROC line is above 1 and rising; the differencebetween the current day price and 10 days back price grows at anincreasing rate (bullish signal)” 91
  92. 92. Recommendation: - Buy SBI at current level i.e.2100-2130,Short term Target 2190 & 2390, Stop Loss @ 2040Long Term Target  above 2390 2540 and above thislevel 2600 - - 2700 Targets is there, Stop Loss @ 2040 92
  93. 93. BIBLIOGRAPHYwww.investopedia.comwww.onlincetradingconcepts.comwww.nseindia.comwww.bseindia.comAnd Help taken by my office colleague MrChandrashekhar Khamkar (Reliance Securities) who hasgood knowledge of technical analysis. 93

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