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Pharma report (NSE)


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Pharma report (NSE)

  1. 1. PROJECT REPORT ON Equity Research on Pharma Sector BY Pritam Jadhav Under the Guidance of PROF. Trupti NaikSubmitted in partial fulfillment of the requirements for qualifying MMS - Finance, Semester-III Examination Vidyalankar Institute of Technology Vidyalankar Campus, Vidyalankar Coll Marg, Wadala (E). Mumbai-400 037. University Of Mumbai 2011-2013 1
  2. 2. DECLARATIONI the undersigned solemnly declare that the report of the project work entitled EquityResearch on Pharma Sector is based on my own work carried out during the course of mySummer Internship under the supervision of Mr. Ravi NathaniI assert that the statements made and conclusions drawn are an outcome of the project work.I further declare that to the best of my knowledge and belief that the project report does notcontain any part of any work which has been submitted for the award of any otherdegree/diploma/certificate in this University or any other University. ______________ (Signature of the Candidate) Pritam Jadhav Name of the Candidate Roll No.: 11-E20 2
  3. 3. ACKNOWLEDGEMENT There are many people who have helped me directly and indirectly to completethis project successfully. First I would like to thank my project guide Mr.Ravi Nathani and faculty Prof.TruptiNaik for guiding me through out the project. Without her help it would have been impossiblefor me to complete this project. They helped me in each step of progress and motivated methroughout. I am also thankful to all my friends who helped me to understand the technicalaspects of the project and complete my research survey. 3
  4. 4. INDEXTopic Title Page No.No.1 Executive Summary / Abstract 62 Objective of Study 73 Stock Market Basic 8 - 104 Corporate Securities And Derivatives Market 11 - 125 Equity (Stocks) 12 - 136 History of Stock Broking Fund 147 Stock Exchange 15 - 178 Difference Between Technical And Fundamental Analysis 18 - 199 FII And Stock Market 20 - 2210 Types Of Charts 23 - 2511 Trend Analysis 26 - 3512 Chart Patterns 36 - 5313 Candlestick Pattern 54 - 6114 Indicators And Oscillators 62 - 6315 Pharmaceutical Sector Analysis Report 64 - 6916 Prospect 7017 Conclusion 71* Bibliography 72 4
  5. 5. Executive summaryWhat Is Technical Analysis?Technical analysis is a method of evaluating securities by analyzing the statistics generated bymarket activity, such as past prices and volume. Technical analysts do not attempt to measure asecuritys intrinsic value, but instead use charts and other tools to identify patterns that can suggestfuture activity.Just as there are many investment styles on the fundamental side, there are also many differenttypes of technical traders. Some rely on chart patterns; others use technical indicators and oscillators,and most use some combination of the two. In any case, technical analysts exclusive use of historicalprice and volume data is what separates them from their fundamental counterparts. Unlikefundamental analysts, technical analysts dont care whether a stock is undervalued - the only thingthat matters is a securitys past trading data and what information this data can provide about wherethe security might move in the future. 5
  6. 6. OBJECTIVEThis study is aimed at undertaking technical analysis of selected companies in cluded in theCNX Nifty and the PHARMA SECTOR of BSE.Following are the main objective of this report:- To understand and demonstrate the movement of stock prices of top 5 companies of the pharma sector through technical analysis. To explain the various tools of technical analysis that can be used in forecasting stock prices.SCOPEThis project mainly focuses on trading decisions by predicting future stock price movementby the use of technical analysis. The Application of the technical tools is limited to PHARMAsector of BSE and its top five stocks only. 6
  7. 7. STOCK MARKET BASICWhat are corporations? Companies are started by individuals or may be a small circle of people.They pool their money or obtain loans, raising funds to launch the business.A choice is made to organize the business as a sole proprietorship where onePerson or a married couple owns everything, or as a partnership with others whomay wish to invest money. Later they may choose to "incorporate". As aCorporation, the owners are not personally responsible or liable for any debts ofthe company if the company doesnt succeed. Corporations issue official-lookingsheets of paper that represent ownership of the company. These are called stockcertificates, and each certificate represents a set number of shares. The totalnumber of shares will vary from one company to another, as each makes its ownchoice about how many pieces of ownership to divide the corporation into. Onecorporation may have only 2,500 shares, while another, such as IBM or the FordMotor Company, may issue over a billionShares. Companies sell stock (pieces of ownership) to raise money and providefunding for the expansion and growth of the business. The business foundersgive up part of their ownership in exchange for this needed cash. The expectationis that even though the owners have surrendered a portion of the company to thePublic, their remaining share of stock will become increasingly valuable as thebusiness grows. Corporations are not allowed to sell shares of stock on the openStock market without the approval of the Securities and Exchange Commission(SEC). This transition from a privately held corporation to a publicly traded one isCalled going public, and this first sale of stock to the public is called an initialpublic offering, or IPO. 7
  8. 8. Why do people invest in the stock market? When you buy stock in a corporation, you own part of that company. This gives you a vote at annual shareholder meetings, and a right to a share of future profits. When a company pays out profits to the shareholder, the money received is called a "Dividend". The corporations board of directors choose when to declare a dividend and how much to pay. Most older and larger companies pay a regular dividend, most newer and smaller companies do not. The average investor buys stock hoping that the stocks price will rise, so the shares can be sold at a profit. This will happen if more investors want to buy stock in a company than wish to sell. The potential of a small dividend check is of little concern. What is usually responsible for increased interest in a companys stock is the prospect of the companys sales and profits going up. A company who is a leader in a hot industry will usually see its share price rise dramatically. Investors take the risk of the price falling because they hope to make more money in the market than they can with safe investments such as bank CDs or government bonds. What is a stock market index? In the stock market world, you need a way to compare the movement of the market, up and down, from day to day, and from year to year. An index is just a benchmark or yardstick expressed as a number that makes it possible to do this comparison. For e.g. S&P CNX Nifty is the index of NSE and SENSEX is the index of BSE.The price per share, like the market cap, has nothing to do with how big a company is. 8
  9. 9. The Securities Market consists of two segments, viz. Primary market andSecondary market. Primary market is the place where issuers create and issue equity,debt or hybrid instruments for subscription by the public; the Secondary market enablesthe holders of securities to trade them.Secondary market essentially comprises of stock exchanges, which provide platformfor purchase and sale of securities by investors. In India, apart from the RegionalStockExchanges established in different centers, there are exchanges like theNational Stock Exchange (NSE) and the Over the Counter Exchange of India(OTCEI), who provide nation wide trading facilities with terminals all over thecountry. The trading platform of stock exchanges is accessible only throughbrokers and trading of securities is confined only to stock exchanges. 9
  10. 10. CorporateSecurities: The no of stock exchanges increased from 11 in 1990 to 23 now. All theexchanges are fully computerized and offer 100% on-line trading. 9644companies were available for trading on stock exchanges at the end of March2002. The trading platform of the stock exchanges was accessible to 9687members from over 400 cities on the same date.DerivativesMarket: Derivatives trading commenced in India in June 2000. The total exchange tradedderivatives witnessed a volume of Rs. 442,343 crore during 2002-03 as against Rs.4018 crore during the preceding year. While NSE accounted for about 99.5% oftotal turnover, BSE accounted for about 0.5% in 2002-03. The market witnessedhigher volumes from June 2001 with introduction of index options, and still highervolumes with introduction of stock options in July 2001. There was a spurt involumes in November 2001 when stock futures were introduced. It is believedthat India is the largest market in the world for stock futures. 10
  11. 11. Equity (Stocks)When you hear the words shares, stocks,equity, markets, stock exchange, Sensex,Nifty - they are roughly pointing out to thesame idea of risky assets. There is noguarantee regarding how much money wouldyou get back in say, 1 year or 3 years. In along term, their returns are higher than FDrates or inflation. You might have almosttripled your money or lost two-third of it,depending on when did you invest in theequity markets between 2007-2010.In simplest terms, equity or stocks are likesmall, micro pieces of ownership in abusiness (equity means ownership). Thewords stocks, shares and equity (or equities)are used interchangeably and that is sourceof confusion for many beginners. Stockexchanges facilitate buying and selling ofstocks and BSE (Bombay Stock Exchange)and NSE (National Stock Exchange) are themajor exchanges in India. Sensex denotesthe cumulative price of top 30 stocks in BSEand Nifty denotes the cumulative price of top50 stocks.If you have stocks of a company, you can vote to choose its board, which in turn selects themanagement (CEO, MD, President and others below. However, for an individual investor, itsnot the decision-making rights, but the claim in companys profit, which is important. At theend of a quarter or year, if the company has accumulated some profit and can think of newand exciting opportunities to employ this money, it will try to grow your money further.Otherwise, it will try to return the profits to the owners (you) in form of dividends.Here, well try to answer some of frequently asked and misunderstood questions aboutstocks. 11
  12. 12. When to invest in markets?Saying that, finding a good or bad time to invest in markets is extremely difficult, is anunderstatement. All the highly paid and extremely talented economists and finance whizzeshave been grappling with this question for decades. What you should really do: Find your asset allocation or portfolio mix Save and invest every month Invest in equity mutual funds, debt mutual funds or FDs Split your investments in the options above according to your asset allocationWhich stock will go up? When you are trying to answer the question which stock will go up or which stock to buy, you are trying to solve the million dollar question - what should be the right price of this stock? If the current price is lower than this right price, the stock is undervalued and it will go up, and vice versa. The price of any financial security is given by the present value of its future earnings. A stock provides earnings to the investor through dividends. So any valuation of stock is essentially the present value of all its future dividends. However, there are so many factors (company specific, industry specific, economy specific, etc.) involved in the actual estimation of dividends that it becomes impossible to actually predict. Any stock valuation model works on the principal of garbage in, garbage out, and is as good as your assumptions.The most important thing is to understand here is that the price is right. One can never saywhether the right price of a stock should be lower or higher than the current price. If there arehundred players in the market, the current price reflects the collective opinion of those 100investors. 50 would be ready to buy at current price of say, Rs. 100 and 50 would be ready tosell. If 60 players start thinking that the stock will go up, the stock would actually go up to say,Rs. 110. If 90 players start thinking that the company is going to be bankrupt, the price wouldcrash down to say, Rs. 25. 12
  13. 13. HISTORY OF THE STOCK BROKING INDUSTRYIndian Stock Markets are one of the oldest in Asia. Its history dates back tonearly 200 years ago.In 1887, they formally established in Bombay, the "Native Share and StockBrokers Association" (which is alternatively known as "The Stock Exchange"). In1895, the Stock Exchange acquired a premise in the same street and it wasinaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.Thus in the same way, gradually with the passage of time number of exchangeswere increased and at currently it reached to the figure of 24 stock exchanges.This was followed by the formation of associations /exchanges in Ahmadabad(1894), Calcutta (1908), and Madras (1937).In order to check such aberrations and promote a more orderly development ofthe stock market, the central government introduced a legislation called theSecurities Contracts (Regulation) Act, 1956. Under this legislation, it ismandatory on the part of stock exchanges to seek government recognition. As ofJanuary 2002 there were 23 stock exchanges recognized by the centralGovernment. They are located at Ahmadabad, Bangalore, Baroda,Bhubaneswar, Calcutta, Chennai,(the Madras stock Exchanges ), Cochin,Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Ludhiana,Mangalore, Mumbai(the National Stock Exchange or NSE), Mumbai (The StockExchange), popularly called the Bombay Stock Exchange, Mumbai(OTCExchange of India), Mumbai (The Inter-connected Stock Exchange ofIndia), Patna, Pune, and Rajkot. Of course, the principle bourses are the NationalStockExchange and The Bombay Stock Exchange, accounting for the bulk of thebusiness done on the Indian stock market. 13
  14. 14. BSE (BOMBAY STOCK EXCHANGE ) The Stock Exchange, Mumbai, popularly known as "BSE" wasestablished in 1875 as "The Native Share and Stock Brokers Association". It isthe oldest one in Asia, even older than the Tokyo Stock Exchange, which wasestablished in 1878. It is the first Stock Exchange in the Country to have obtainedpermanent recognition in 1956 from the Govt. of India under the SecuritiesContracts (Regulation) Act, 1956. A Governing Board having 20 directors is the apex body, which decidesthe policies and regulates the affairs of the Exchange. The Governing Boardconsists of 9 elected directors, who are from the broking commUnity (one third of them retire ever year by rotation), three SEBI nominees, sixpublic representatives and an Executive Director & Chief Executive Officer and aChief Operating Officer.NSE (NATIONAL STOCK EXCHANGE) NSE was incorporated in 1992 and was given recognition as a stockexchange in April 1993. It started operations in June 1994, with trading on theWholesale Debt Market Segment. Subsequently it launched the Capital MarketSegment in November 1994 as a trading platform for equities and the Futuresand Options Segment in June 2000 for various derivative instrument 14
  15. 15. MCX(MULTICOMMODITYEXCHANGE) „MULTI COMMODITY EXCHANGE‟ of India limited is a new order exchangewith a mandate for setting up a nationwide, online multi-commodity market place,offering unlimited growth opportunities to commodities market participants. As atrue neutral market, MCX has taken several initiatives for users in a newgeneration commodities futures market in the process, become the country‟spremier exchange. MCX, an independent and a de-mutualized exchange since inception, is allset up to introduce a state of the art, online digital exchange for commoditiesfutures trading in the country and has accordingly initiated several steps totranslate this vision into reality. 15
  16. 16. NCDEX (NATIONAL COMMODITIES AND DERIVATIVESEXCHANGE) NCDEX started working on 15th December, 2003. This exchangeprovides facilities to their trading and clearing member at different 130 centers forcontract. In commodity market the main participants are speculators,hedgers and arbitrageurs.FacilitiesProvidedByNCDEX  NCDEX has developed facility for checking of commodity and also provides a wear house facility  By collaborating with industrial partners, industrial companies, news agencies, banks and developers of kiosk network NCDEX is able to provide current rates and contracts rate.  To prepare guidelines related to special products of securitization NCDEX works with bank.  To avail farmers from risk of fluctuation in prices NCDEX provides special services for agricultural.  NCDEX is working with tax officer to make clear different types of sales and service taxes.  NCDEX is providing attractive products like “weather derivatives” 16
  17. 17. Difference between Technical and Fundamental AnalysisTechnical analysis and fundamental analysis are the two main attentions in the financialmarkets. Mainly, technical analysis looks at the price movement of a security and usesthis data to predict its future price movements. Fundamental analysis, on the otherhand, looks at economic factors, known as fundamentals.  Charts vs. Financial StatementsAt the most basic level, a technical analyst approaches a security from the charts, whilea fundamental analyst starts with the financial statements. By looking at the balancesheet, cash flow statement and income statement, a fundamental analyst tries todetermine a company‟s value. In financial terms, an analyst attempts to measure acompany‟s fundamental value. In this approach, investment decisions are fairly easy tomake - if the price of a stock trades below its intrinsic value, it‟s a good investment.Technical traders, on the other hand, believe there is no reason to analyze a company‟sfundamentals because these are all accounted for in the stock‟s price. Techniciansbelieve that all the information they need about a stock can be found in its charts.  Time approach for both the techniqueFundamental analysis takes a relatively long-term approach to analyzing the marketcompared to technical analysis. While technical analysis can be used on a timeframe ofweeks, days or even minutes, fundamental analysis often looks at data over a numberof years.The different timeframes that these two approaches use is a result of the nature of theinvesting style to which they each adhere. It can take a long time for a company‟s valueto be reflected in the market, so when a fundamental analyst estimates intrinsic value, again is not realized until the stock‟s market price rises to its “correct” value. This type ofinvesting is called value investing and assumes that the short-term market is wrong, but 17
  18. 18. that the price of a particular stock will correct itself over the long run. This “long run” canrepresent a timeframe of as long as several years, in some cases.Furthermore, the numbers that a fundamentalist analyzes are only released over longperiods of time. Financial statements are filed quarterly and changes in earnings pershare don‟t emerge on a daily basis like price and volume information. Also rememberthat fundamentals are the actual characteristics of a business. New management can‟timplement sweeping changes overnight and it takes time to create new products,marketing campaigns, supply chains, etc. Part of the reason that fundamental analystsuse a long-term timeframe, therefore, is because the data they use to analyze a stock isgenerated much more slowly than the price and volume data used by technicalanalysts.  Trading Versus InvestingNot only is technical analysis more short term in nature that fundamental analysis, butthe goals of a purchase (or sale) of a stock are usually different for each approach. Ingeneral, technical analysis is used for a trade, whereas fundamental analysis is used tomake an investment. Investors buy assets they believe can increase in value, whiletraders buy assets they believe they can sell to somebody else at a greater price.Technical analysis has only recently begun to enjoy some mainstream credibility. Whilemost analysts on Stock Exchanges focus on the fundamental side, just about any majorbrokerage now employs technical analysts as well. 18
  19. 19. FIIs and Stock MarketFIIs are Foreign Institutional Investors. A term that is commonly found whenever there‟sa discussion on stock markets. FIIs are entities (banks, insurance companies, mutualfunds etc) registered in a country other than in which they are investing. For e.g. a USMutual Fund which invests in the Indian Stock Market. FIIs usually pool large sums ofmoney and invest those in securities, real property and other investment assets. Asbulks of their investments are in the stock market, the inflow or outflow of money by FIIsaffect the stock market movement significantly.In India, Foreign Institutional Investors are not permitted to invest in equity issued by anAsset Reconstruction Company. They are also not allowed to invest in any companywhich is engaged or proposes to engage in the following activities:- Business of chitfund, Nidhi Company, Agricultural or plantation activities, Real estate business orconstruction of farm houses (real estate business does not include development oftownships, construction of residential/commercial premises, roads or bridges).Trading inTransferable Development Rights (TDRs).The presence of institutional investors has its own plus and minus points.On the brighter side –FIIs always purchase stocks on the basis of fundamentals. And this means that it isessential to have information to evaluate, so research becomes important and this leadsto increasing demands on companies to become more transparent and moredisclosures. This will lead to reduction in information asymmetries.The increasing presence of this class of investors leads to reform of securities tradingand transaction systems, nurturing of securities brokers, and liquid markets.FII inflow increasing every year will bring the very welcome inflow of foreign capital.Attracting foreign capital is the main reason for opening up of the stock markets for FIIs. 19
  20. 20. If FIIs are investing huge amounts in the Indian stock exchanges then it reflects theirhigh confidence and a healthy investor sentiment for our markets. They have improvedthe breadth and depth of Indian markets.FII inflows help in financial innovation and development of hedging instruments. Also, itnot only enhances competition in financial markets, but also improves the alignment ofasset prices to fundamentals.FIIs as professional bodies of asset managers and financial analysts enhancecompetition and efficiency of financial marketsOn the Flipside-There are always some dangers if certain limits are exceeded. Firstly, the foreign capitalis free and unpredictable and is always on the look out of profits. FIIs frequently moveinvestments, and those swings can be expected to bring severe price fluctuationsresulting in increasing volatility. Infact the FIIs are greatly responsible for causingvolatility in Indian market.Increased investment from overseas may shift control of domestic firms to foreignhands.The FIIs profit from investing in emerging financial stock markets. If the cap on FII ishigh then they can bring in huge amounts of funds in the country‟s stock markets andthus have great influence on the way the stock markets behaves, going up or down. TheFII buying pushes the stocks up and their selling shows the stock market the downwardpath. This creates problems for the small retail investor, whose fortunes get driven bythe actions of the large FIIs.FII flows leading to appreciation of the currency may lead to the exports industrybecoming uncompetitive. 20
  21. 21. FIIs Effect on Stock MarketWhile analysing a stock, the percentage of FII holding is an important factor to be noted.When % holdings of FIIs increases in a stock its stocks price goes up and when itdrops, its share price comes down. However, readers should not take that as a negativeremark. If an FII invests in a company, it also means that they see growth potential inthat company.If the number is too large then it‟s easier for the individual entities to move out of a stockwhich would make stock price of the company very volatile and risky. So, investing in acompany which has smaller number of FIIs could be a safer investment option.A fundamentally sound company which has a consistent and stable FII shareholdingwould be an ideal candidate for investment. When some FIIs exit from a good stock, itsprice actually falls thus giving a good chance to invest in it. However be sure to checkthe reason for the FIIs exiting the stock. If it is due to change in the fundamentals of thecompany, it is a negative sign. 21
  22. 22. Types Of ChartsThere are three main types of charts that are used by investors and traders dependingon the information that they are seeking and their individual skill levels. The chart typesare: 1. The line chart, 2. The bar chart, and 3. The candlestick chart 1. Line ChartThe most basic of the three charts is the line chart because it represents only theclosing prices over a set period of time. The line is formed by connecting the closingprices over the time frame. Line charts do not provide visual information of the tradingrange for the individual points such as the high, low and opening prices. However, theclosing price is often considered to be the most important price in stock data comparedto the high and low for the day and this is why it is the only value used in line charts. 22
  23. 23. 2. Bar ChartsThe bar chart expands on the line chart by adding several more key pieces ofinformation to each data point. The chart is made up of a series of vertical lines thatrepresent each data point. This vertical line represents the high and low for the tradingperiod, along with the open and close price. The close and open are represented on thevertical line by a horizontal dash. The opening price on a bar chart is illustrated by thedash that is located on the left side of the vertical bar. Conversely, the close isrepresented by the dash on the right. Generally, . When open is higher than close thechart is said to be a Green bar. When open is lower than close the chart is said to be aRed bar. 23
  24. 24. 3. Candlestick ChartThe candlestick chart is similar to a bar chart, but it differs in the way that it is visuallyconstructed. Similar to the bar chart, the candlestick also has a thin vertical line showingthe periods trading range. The difference comes in the formation of a wide bar on thevertical line, which illustrates the difference between the open and close. There are twocolour constructs for days up and one for days that the price falls. When the price of thestock is up and closes above the opening trade, the candlestick will usually be white orclear. If the stock has traded down for the period, then the candlestick will usually be redor black. 24
  25. 25. TREND ANALYSISThere are three types of trend 1. BULLISH (UPTREND) 2. BEARISH (DOWNTREND) 3. FLATISH (SIDEWARDS) 25
  26. 26. Bullish TrendDefinition of a bullish trend :- An uptrend /bullish trend is a sequence of higher tops and higher bottom. Uptrend lines act as support and indicate that net-demand is increasing even as the price rises. A rising price combined with increasing demand is very bullish, and shows a strong determination on the part of the buyers. Thus, Whenever the peak / top is broken it is said as a bullish breakout - result a buy signal is ruled out with a stop loss of bottom. The above figure of Sun Pharmaceuticals ltd. is in and continues bullish trend for the past 52- weeks showing higher tops and higher bottoms thus whenever the high is broken it is a buy signal. 26
  27. 27. Bearish TrendDefinition of a bearish trend An down/bearish trend is a sequence of lower tops and lower bottom. The second high must be lower than the first for the line to have a negativeslope. Downtrend lines act as resistance, and indicate that net-supply (supply lessdemand) is increasing even as the price declines. A declining price combined withincreasing supply is very bearish, and shows the strong resolve of the sellers. Thus, whenever the bottom / support is broken it is said as a bearish breakout -result a sell signal is ruled out with a stop loss of peak. The above figure of GAIL ltd. is in and continues bearsih trend for the past 52-weeks showing lower tops and lower bottoms thus whenever the low is broken it is asell signal. 27
  28. 28. Flattish TrendDefinition of a flattish trend :- Trading between range with similar tops and similar bottoms. Such pattern on charts indicate flat consolidation in the market whereas trade above / below the range would give breakouts (negative / positive) The above figure of LIC Housing Finance ltd. was in flattish trend for the 3 month period of October- December (2011). 28
  29. 29. Trend LinesTechnical analysis is built on the assumption that prices move in a trend. Trend Linesare an important tool in technical analysis for both trend identification and confirmation.A trend line is a straight line that connects two or more price points and then extendsinto the future to act as a line of support or resistance.Types of Trend lines BullishAn bullish pattern has a positive slope and is formed by connecting two or more lowpoints. The second low must be higher than the first for the line to have a positive slope.Uptrend lines act as support and indicate that net-demand (demand less supply) isincreasing even as the price rises. A rising price combined with increasing demand isvery bullish, and shows a strong determination on the part of the buyers. As long asprices remain above the trend line, the uptrend is considered solid and intact. A breakbelow of this trend indicates that net-demand has weakened and a change in trendcould be imminent. 29
  30. 30. BearishA bearish pattern has a negative slope and is formed by connecting two or more highpoints. The second high must be lower than the first for the line to have a negativeslope. Downtrend lines act as resistance, and indicate that net-supply (supply lessdemand) is increasing even as the price declines. A declining price combined withincreasing supply is very bearish, and shows the strong resolve of the sellers. As longas prices remain below the downtrend line, the downtrend is solid and intact. A breakabove this trend indicates that net-supply is decreasing and that a change of trend couldbe imminent. 30
  31. 31. Support & ResistanceOnce you understand the concept of a trend, the next major concept is that of supportand resistance. Youll often hear technical analysts talk about the ongoing battlebetween the bulls and the bears, or the struggle between buyers (demand) and sellers(supply). This is revealed by the prices a security seldom moves above (resistance) orbelow (support).As you can see in Figure 6, support is the price level through which a stock or marketseldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the pricelevel that a stock or market seldom surpasses (illustrated by the red arrows).Why Does it Happen?These support and resistance levels are seen as important in terms of marketpsychology and supply and demand. Support and resistance levels are the levels atwhich a lot of traders are willing to buy the stock (in the case of a support) or sell it (inthe case of resistance). When these trendlines are broken, the supply and demand and 31
  32. 32. the psychology behind the stocks movements is thought to have shifted, in which casenew levels of support and resistance will likely be established.The Importance of Support and ResistanceSupport and resistance analysis is an important part of trends because it can be used tomake trading decisions and identify when a trend is reversing. For example, if a traderidentifies an important level of resistance that has been tested several times but neverbroken, he or she may decide to take profits as the security moves toward this pointbecause it is unlikely that it will move past this level.Support and resistance levels both test and confirm trends and need to be monitored byanyone who uses technical analysis. As long as the price of the share remains betweenthese levels of support and resistance, the trend is likely to continue. It is important tonote, however, that a break beyond a level of support or resistance does not alwayshave to be a reversal. For example, if prices moved above the resistance levels of anupward trending channel, the trend has accelerated, not reversed. This means that theprice appreciation is expected to be faster than it was in the channel.Being aware of these important support and resistance points should affect the way thatyou trade a stock. Traders should avoid placing orders at these major points, as thearea around them is usually marked by a lot of volatility. If you feel confident aboutmaking a trade near a support or resistance level, it is important that you follow thissimple rule: do not place orders directly at the support or resistance level. This isbecause in many cases, the price never actually reaches the whole number, but flirtswith it instead. So if youre bullish on a stock that is moving toward an important supportlevel, do not place the trade at the support level. Instead, place it above the supportlevel, but within a few points. On the other hand, if you are placing stops or short selling,set up your trade price at or below the level of support. 32
  33. 33. VolumeVolume is the number of shares or contracts traded during a given time frame.The time frame is usually one day, but can also be a week.The analysis of volume isbasic and essential in technical analysis. Volume provides evidence of intensity with agiven price move. As volume often leads price, it is a valuable indicator, especially forprice peaks.Volume has two major premises When Prices rise or fall, an increase in volume is strong confirmation that the rise or fall in the price is real and the price movement has strength. When prices rise or fall and there is a decrease in volume, then this is interpreted as being a weak price move as the price move had very little strength and interest from traders.Illustration a) A-places a buy order for 10 shares of a reliance. The transaction occurs Rs. 10above the CMP. Therefore Rs. 10 price movement had 10shares worth of interest from a buyer. b) B- places a buy order for 1000 shares of reliance. This transaction takes place at a price that is Rs. 10 above the current price.Both the transaction increased the price by Rs 10 but the second one is more significantas B is bullish and is taking large positions to prove it where as in the earlier case 10shares is insignificant. Increase or decrease in prices along with increased volume is aconfirmation of a trend. 33
  34. 34. Concept of deliverable volumes :-Deliverable volumes are the net delivery position out of the total volumes traded in theday. Higher the percentage of it higher is the confirmation of the price movement in thedirection. Thus, if a peak is broken with good volumes and higher percentage of deliverythen it‟s a definite buy signal. 34
  35. 35. Chart PatternsA chart pattern is a distinct formation on a stock chart that creates a trading signal, or asign of future price movements. Chartists use these patterns to identify current trendsand trend reversals and to trigger buy and sell signals.Basically there are two types of chart patterns Reversal and Continuation 35
  36. 36. ReversalIt is a change in the direction of a price trend. On a price chart, reversals undergo arecognizable change in the price structure. An uptrend, which is a series of higher highsand higher lows, reverses into a downtrend by changing to a series of lower highs andlower lows. A downtrend, which is a series of lower highs and lower lows, reverses intoan uptrend by changing to a series of higher highs and higher lows.It also referred to as a "trend reversal", "rally" or "correction".Head and Shoulders TopA bearish head & shoulders top is a powerful and reliable reversal pattern that appearsas a large distribution period after a significant uptrend. Its completion signals a trendreversal. Three successive peaks characterize the pattern with the middle one being thetallest and the two outside ones being shorter and approximately equal. 36
  37. 37. The above chart illustrates the sequences of events that unfold as the pattern develops.The left shoulder is formed as just another peak and correction within a long uptrend.The stock then rallies and makes another higher high. This action, which forms the leftshoulder and first half of the head is no different than what is expected with a stock in atypical uptrend. And at this point in time, there is no way for the trader to know that ahead & shoulders is forming. The stock then begins its usual “pullback within anuptrend,” but not only does the stock trade below the left shoulder, it falls to, or close to,the same level as the previous pullback. The head has now been formed. This is thefirst sign that the buyers may be getting tired and the stock seems to be losing strength.A trend line, called the neckline, can be drawn between the two troughs. The stock thenrallies again but is unable to eclipse its previous high. This is the second sign theuptrend may be nearing an end. A sell-off from this shorter peak (right shoulder) throughthe neckline would mark a successful reversal of the uptrend.The neckline should be flat or slightly upward sloping. Downward sloping necklines dooccasionally occur, but their existence indicates that weakness is slowly working itselfinto the stock and a large correction is probably not imminent. In this case, the traderought to look elsewhere for trading opportunities.Breakouts to the downside do not have the same volume or movement requirements astheir bullish counterparts. In fact, when stock breaks support with a massive volumesurge, it often signals that of a capitulation sell-off and the stock rebounds shortly after.The best downside breaks occur on average volume followed by the stock drifting lowerfor a few days on increasing volume. Psychologically, when a stock first breaks support,stockholders become concerned; many of them show a loss and some sell. As the stocktrades lower, concern becomes fear and the selling accelerates. Then fear becomespanic, and people sell regardless of price. This is why there typically is a delayedvolume surge with breaks to the downside. 37
  38. 38. Head & Shoulder BottomBullish head & shoulders bottoms are powerful and reliable reversal patterns thatappear as large basing periods after a substantial downtrend. Its completion signals atrend reversal. Three successive troughs characterize the pattern with the middle onebeing the deepest and the two outside ones being shallower and approximately equal.The above chart illustrates the sequence of events that unfold as the pattern develops.The left shoulder is formed as just another sell-off and bounce within a long downtrend.The stock then falls and makes another lower low. This action, which forms the leftshoulder and first half of the head, is no different than what is expected with a stock in atypical downtrend. And at this point in time, there is no way for the trader to know that ahead & shoulders bottom is forming. The stock then begins its usual “bounce within adowntrend,” but not only does the stock trade above the left shoulder, it rallies to, orclose to, the same level as the previous bounce. The head has now been formed. Thisis the first sign that the selling pressure may be abating and the stock seems to begaining strength. A trendline, called the neckline, can be drawn between the twotroughs. The stock then falls again but the imbalance of supply and demand is such thatthe stock does not make a lower low. This is the second sign the downtrend may benearing an end. A rally from this shallower dip (right shoulder) through the neckline witha volume surge would mark a successful reversal of the downtrend. 38
  39. 39. Like all other upside breaks, a surge in volume must accompany the breakout. Failureto accomplish this doesnt necessarily mean the pattern will be a complete failure, but ared flag is raised. Remember, a head & shoulders bottom occurs after a weak stock hasbeen in a long downtrend. There really needs to be a massive amount of buying toreverse the downtrend.The character and extent of the expected price movement upon breakage depends onseveral factors. Typically it is equal to the distance from the neckline to the extremepoint of the head. But this is just a guideline. Head and shoulders is a reversal pattern,so there must be a significant move to reverse. A small move into the pattern usuallyresults in a small rally upon break. Also, the rally tends to be the mirror image of thepreceding drop. This means a quick and violent drop foreshadows a quick rally.Double Tops and BottomsThis chart pattern is another well-known pattern that signals a trend reversal - it isconsidered to be one of the most reliable and is commonly used. These patterns areformed after a sustained trend and signal to chartists that the trend is about to reverse.The pattern is created when a price movement tests support or resistance levels twiceand is unable to break through. This pattern is often used to signal intermediate andlong-term trend reversals.In the case of the double top pattern in below chart, the price movement has twice triedto move above a certain price level. After two unsuccessful attempts at pushing theprice higher, the trend reverses and the price heads lower. In the case of a doublebottom (shown on the right), the price movement has tried to go lower twice, but hasfound support each time. After the second bounce off of the support, the security entersa new trend and heads upward. 39
  40. 40. Triple TopThis bearish reversal pattern is formed when a security that is trending upward tests asimilar level of resistance three times without breaking through. Each time the securitytests the resistance level, it falls to a similar area of support. After the third fall to thesupport level, the pattern is complete when the security falls through the support; theprice is then expected to move in a downward trend.The first step in this pattern is the creation of a new high in an uptrend that is stalled byselling pressure, which forms a level of resistance. The selling pressure causes theprice to fall until it finds a level of support, as buyers move back into the security. Thebuying pressure sends the price back up to the area of resistance the securitypreviously met. Again, the sellers enter the market and send the security back down tothe support level.This up-and-down movement is repeated for the third time; but this time the buyers,after failing three times, give up on the security, and the sellers take over. Upon fallingthrough the level of support, the security is expected totrend downward.This pattern can be difficult to spot in the early stages as it will initially look likea double-top pattern, which was discussed in a previous section. The most importantthing here is that one waits for the price to move past the level of resistance beforeentering the security, as the security could actually just end up being range-bound,where it trades between the two levels forsometime.In the triple-top formation, each test of resistance at the upper end should be markedwith declining volume at each successive peak. And again, when the price breaks belowthe support level, it should be accompanied by high volume. 40
  41. 41. Once the signal is formed, the price objective is based on the size of the chart pattern orthe price distance between the level of resistance and support.Triple BottomThis bullish reversal pattern has all of the same attributes as the triple top but signals areversal of a downward trend. The triple-bottom pattern illustrates a security that istrading in a downtrend and attempts to fall through a level of support three times, eachtime moving back to a level of resistance. After the third attempt to push the price lower,the pattern is complete when the price moves above the resistance level and beginstrading in an upward trend.This pattern begins by setting a new low in a downtrend, which is followed by a rally to ahigh. This sets up the range of trading for the triple-bottom pattern. After hitting the high,the price again comes under selling pressure, which sends it back down to the previouslow. Buyers again move back into the security at this support level, sending the priceback up again, usually tothe previous high.This is repeated a third time, but after failing again to move to a new low, the pattern iscomplete when the security moves above the resistance level tobegin trading in an uptrend.In this pattern, volume plays a role similar to the triple top, declining at each trough as ittests the support level, which is a sign of diminishing selling pressure. Again, volumeshould be high on a breakout above the resistance level on the completion of thepattern.The price objective will also initially be calculated as the distance of the chart patternadded to the price breakout. 41
  42. 42. Rounding BottomsA rounding bottom, also referred to as a saucer bottom, is a long-term reversal patternthat signals a shift from a downtrend to an uptrend. This pattern is traditionally thoughtto last anywhere from several months to several years. Due to the long-term look ofthese patterns and their components, the signal and construct of these patterns aremore difficult to identify than other reversal patterns.The pattern should be preceded by a downtrend but will sometimes be preceded by asideways price movement that formed after a downward trend. The start of the roundingbottom (its left side) is usually caused by a peak in the downward trend followed by along price descent to a new long-term low.The time distance from the initial peak to the long-term low is considered to be half thedistance of the rounding bottom. This helps to give chartists an idea to as to how longthe chart pattern will last or when the pattern is expected to be complete, with abreakout to the upside. For example, if the first half of the pattern is one year, then thesignal will not be formed until around a year later.Volume is one of the most important confirming measures for this pattern where volumeshould be high at the initial peak (or start of the pattern) and weaken as the pricemovement heads toward the low. As the price moves away from the low to the pricelevel set by the initial peak, volume should be rising.Breakouts in chart patterns should be accompanied by a large increase in volume,which helps to strengthen the signal formed by the breakout. Once the price movesabove the peak that was established at the start of the chart pattern, the downwardtrend is considered to have reversed and a buy signalis formed. 42
  43. 43. Rounding TopA Rounded Top is considered a bearish signal, indicating a possible reversal of thecurrent uptrend to a new downtrend.A Rounded Top is dome-shaped, and is sometimes referred to as an inverted bowl or asaucer top. The pattern is confirmed when the price breaks down below its movingaverage.VolumeVolume can fluctuate, however volume generally appears to be concave, and followsthe inverse of the price pattern. Therefore, as the price begins to ascend, volume tendsto decrease. Once the top of the price pattern starts its downward turn, volume tends toincrease.Duration of the Rounded TopRounded Tops typically occur over a period of about 3 weeks, but can also be observedover several years.Target PriceAfter a downside breakout, technical analysts may use the starting price at 43
  44. 44. ContinuationA technical analysis pattern that suggests a trend is exhibiting a temporary diversion inbehaviour, and will eventually continue on its existing trend. The symmetrical trianglecharts displayed below are both exhibiting a continuation pattern. Notice how the chartextends above (below) its existing pattern.Bullish symmetrical trianglesBullish symmetrical triangles represent neutral periods of doubt and indecision. Theyare characterized by a series of higher lows and lower highs as the forces of supply anddemand are nearly equal. Each rally is seen as a selling opportunity while each dip ismet with buying. The pattern is typically large and takes several months or more than ayear to form.Bullish symmetrical triangles appear in uptrends and typically resolve themselves to theupside. Breakouts to the upside must be accompanied by a significant increase involume to confirm the breakout. Failure to accomplish this doesnt automatically renderthe play invalid, but it does raise a yellow flag. Besides volume, the astute trader oughtto look for a close above the most recent high. This price represents the previous areaof selling pressure and an area where stockholders may be looking to “get out even.” Itis recommended that if volume does not accompany the break, and if the stock fails tomake a higher high within a reasonable amount of time, the trader should move a sellstop up to protect profits.The expected price movement upon breakout is approximately equal to the widest partof the pattern. 44
  45. 45. Bearish symmetrical trianglesBearish symmetrical triangles represent neutral periods of doubt and indecision. Theyare characterized by a series of higher lows and lower highs as the forces of supply anddemand are nearly equal. Each rally is seen as a selling opportunity while each dip ismet with buying. The pattern is typically large and takes several months or more than ayear to form.Bearish symmetrical triangles appear in downtrends and typically resolve themselves tothe downside. Breakdowns do not have the same volume or movement requirements astheir opposite upside breaks. In fact, when stock breaks support with a massive volumesurge, it often signals that of a capitulation sell-off and the stock rebounds shortly after.The best downside breaks occur on average volume followed by the stock drifting lowerfor a few days on increasing volume. Psychologically, when a stock first breaks support,stockholders become concerned; many of them show a loss and some sell. As the stocktrades lower, concern becomes fear and the selling accelerates. Then fear becomes 45
  46. 46. panic, and people sell regardless of price. This is why there typically is a delayedvolume surge with breaks to the downside.The expected price movement upon breakout is approximately equal to the widest partof the pattern. Bearish symmetrical trianglesAscending TrianglesAscending triangles form in uptrends and characterized by a series of higher lows butthe same highs. They have a definite bullish bias and typically form in 2 to 8 weeks.It is as if a massive sell order has been placed at the upper trend line and even thoughthe stock is strong and in an uptrend, it takes some time to fully execute the order.Volume usually diminishes as the pattern develops. Once the overhead supply isabsorbed, the stock is free to catapult higher because the lack of supply shifts thesupply/demand imbalance to favor the buyers. Also, if indeed a stock is in a steadyuptrend, every stockholder who bought in the prior several months will be showing again. Satisfied and happy stockholders rarely sell. This reality also helps to push thestock higher after the break. 46
  47. 47. Breakouts should be accompanied by a significant increase in volume. Failure toaccomplish this doesnt render the breakout invalid, but a red flag is raised andappropriate stops should be employed.There are two guidelines a trader can use to determine the extent of the rally uponbreakout. The first expected price movement is approximately equal to the widest partof the pattern. The second price target is equal to the rally into the pattern. The extent ofthe advance will often depend on the overall market. A strong market will help greatly inachieving the more ambitious price target, but in a weak market, a trader should behappy with just a moderate advance. 47
  48. 48. Descending TrianglesDescending triangles form in downtrends and are characterized by a series of lowerhighs but the same lows. They have a definite bearish bias and typically form in 2 to 8weeks.It is as if a massive buy order has been placed at the lower trendline, and even thoughthe stock is weak and in a downtrend, it takes some time to fully executes the order.Volume usually diminishes as the pattern develops. Once the underneath demand isabsorbed, a big drop in the stock can occur because the lack of demand shifts thesupply/demand imbalance to favour the sellers. Also, given this is a weak stock in asteady downtrend, when support is broken, every stockholder who recently establisheda long position in the prior several months shows a loss. So besides the large buy orderbeing absorbed, fear now sets in and adds to the downward pressure.Like symmetrical triangles, downside breaks do not have strict volume requirements.The best downside breaks occur on average volume followed by the stock drifting lowerfor a few days. Volume then ramps up as traders throw in the towel, and the stockcrashes.There are two guidelines a trader can use to determine the extent of the fall after thebreak. The first expected price movement is approximately equal to the widest part ofthe pattern. The second price target is equal to the price movement into the pattern. Thedrop will often depend on the overall market. A weak market will help push the stocklower, but a strong market may slow or stop the descent. 48
  49. 49. Bullish flagsBullish flags are small continuation patterns that represent brief pauses within analready existing uptrend. They appear flat or trade with a slight downward slant andtypically occur in the middle of a large rally or immediately after a stock has broken outof a basing period.The slight short-term downtrend against the overall uptrend is very healthy as itfunctions to scare off weak and emotional long positions that would otherwise slow themovement after the breakout. These longs would sell at the first sign of strength. Butinstead, as the stock slowly trends down, these weak stockholders sell their positions.Once enough have sold, the overhead resistance in essence is cleared and the stockcan continue its ride up.Whether a bullish flag pattern appears during a large rally or after breaking out of aconsolidation period, the expected price movement upon breakout is approximatelyequal to the preceding move into the flag. 49
  50. 50. It is important to emphasize that for a bullish flag to truly posses great potential, it musthave been preceded by a significant move on heavy volume. Like pennants, bullishflags tend to be symmetrical in that the stock movement after the breakout often mirrorsthe move into the pattern.Bearish flagsBearish flags are small continuation patterns that represent brief pauses within analready existing downtrend. They appear flat or trade with a slight upward slant andoccur in the middle of a large drop or immediately after a stock has broken down from asubstantial rally.The slight short-term uptrend against the overall downtrend is very healthy and hasserves two functions.Weak shorts that were hoping to take profits at a lower price get scared and cover theirpositions. This covering is partially responsible for the short-term upward slant. Onceenough have covered, the underneath support in essence is lessened.The slight uptrend also indicates that the lay public is being “suckered into” the stock asthey buy what they believe to be a cheap stock. 50
  51. 51. When the buying from the lay public dries up and the weak shorts finish covering,support disappears, and the stock continues it downward movement.Whether a bearish flag pattern appears during a large fall or after breaking down from adistribution period, the expected price movement upon breakout is approximately equalto the preceding move into the flag.PennantsPennants are small continuation patterns that represent brief pauses within an alreadyexisting trend. They are characterized by converging trendlines and have a definitebullish or bearish bias depending on the overall trend.Bullish breakouts should be accompanied by a significant increase in volume withappropriate stopsloss used if this is not seen.Downside breaks do not have the same volume requirement as their bullishcounterparts. Like other bearish breaks, there often is a delayed volume surge. 51
  52. 52. The price action prior to a wedge formation can be used as a guide in predicting theprice movement upon breakout. So, for a bullish wedge in an uptrend to truly possessgreat potential, it must have been preceded by a significant move (i.e. if the movementinto the pattern was quick and full of energy, the rally after the breakout most likely willbe quick and full of energy).The expected price movement upon breakout is approximately equal to the distance ofthe move into the pattern.GapsA gap in a chart is an empty space between a trading period and the following tradingperiod. This occurs when there is a large difference in prices between two sequentialtrading periods. For example, if the trading range in one period is between 625 and 640and the next trading period opens at 650, there will be a large gap on the chart betweenthese two periods. Gap price movements can be found on bar charts and candlestickcharts but will not be found on point and figure or basic line charts. Gaps generally show 52
  53. 53. that something of significance has happened in the security, such as a better-than-expected earnings announcement.There are main types of Gaps : 53
  54. 54. Bullish Candlestick Patterns Engulfing Morning Star Hammer Three White Soldiers 54
  55. 55. 55
  56. 56. 56
  57. 57. Bearish Candlestick Patterns 57
  58. 58. 58
  59. 59. DOJIDoji candlesticks have the same open and close price or at least their bodies areextremely short. A doji should have a very small body that appears as a thin line.Doji candles suggest indecision or a struggle for turf positioning between buyers andsellers. Prices move above and below the open price during the session, but close at orvery near the open price.Neither buyers nor sellers were able to gain control and the result was essentially adraw.There are four special types of Doji candlesticksMoving AveragesAn indicator frequently used in technical analysis showing the average value of asecuritys price over a set period. Moving averages are generally used to measuremomentum and define areas of possible support and resistance.Types of Moving AveragesThere are a number of different types of moving averages that vary in the way they arecalculated, but how each average is interpreted remains the same. The calculationsonly differ in regards to the weighting that they place on the price data, shifting from 59
  60. 60. equal weighting of each price point to more weight being placed on recent data. Thethree most common types of moving averages are simple, linear and exponential.Simple Moving Average (SMA)This is the most common method used to calculate the moving average of prices. Itsimply takes the sum of all of the past closing prices over the time period and dividesthe result by the number of prices used in the calculation. For example, in a 10-daymoving average, the last 10 closing prices are added together and then divided by 10.As you can see in Figure 1, a trader is able to make the average less responsive tochanging prices by increasing the number of periods used in the calculation. Increasingthe number of time periods in the calculation is one of the best ways to gauge thestrength of the long-term trend and the likelihood that it will reverse.Many individuals argue that the usefulness of this type of average is limited becauseeach point in the data series has the same impact on the result regardless of where itoccurs in the sequence. The critics argue that the most recent data is more importantand, therefore, it should also have a higher weighting. This type of criticism has beenone of the main factors leading to the invention of other forms of moving averages.Bollinger BandsDeveloped by John Bollinger, Bollinger Bands are volatility bands placed above andbelow a moving average. Volatility is based on the standard deviation, which changes avolatility increase and decreases. The bands automatically widen when volatilityincreases and narrow when volatility decreases. This dynamic natureof Bollinger Bands also means they can be used on different securities with thestandard settings. 60
  61. 61.  Middle Band = 20-day simple moving average (SMA)  Upper Band = 20-day SMA + (20-day standard deviation of price x 2)  Lower Band = 20-day SMA - (20-day standard deviation of price x 2)Bollinger Bands consist of a middle band with two outer bands. The middle band isa simple moving average that is usually set at 20 periods. A simple moving average isused because a simple moving average is also used in the standard deviation formula.The look-back period for the standard deviation is the same as for the simple movingaverage. The outer bands are usually set 2 standard deviations above and below themiddle band. 61
  62. 62. Indicators and OscillatorsIndicatorStatistics used to measure current conditions as well as to forecast financial oreconomic trends. Indicators are used extensively in technical analysis to predictchanges in stock trends or price patterns. In fundamental analysis, economic indicatorsthat quantify current economic and industry conditions are used to provide insight intothe future profitability potential of public companiesOscillatorIt is a technical analysis tool that is banded between two extreme values and built withthe results from a trend indicator for discovering short-term overbought or oversoldconditions. As the value of the oscillator approaches the upper extreme value the assetis deemed to be overbought, and as it approaches the lower extreme it is deemed to beoversold.Moving Average ConvergenceThe moving average convergence divergence (MACD) is one of the most well-knownand used indicators in technical analysis. This indicator is comprised of two exponentialmoving averages, which help to measure momentum in the security. The MACD issimply the difference between these two moving averages plotted against a centerline.The centerline is the point at which the two moving averages are equal. Along with theMACD and the centerline, an exponential moving average of the MACD itself is plottedon the chart. The idea behind this momentum indicator is to measure short-termmomentum compared to longer term momentum to help signal the current direction ofmomentum.MACD= shorter term moving average - longer term moving averageWhen the MACD is positive, it signals that the shorter term moving average is above thelonger term moving average and suggests upward momentum. The opposite holds truewhen the MACD is negative - this signals that the shorter term is below the longer and 62
  63. 63. suggest downward momentum. When the MACD line crosses over the centerline, itsignals a crossing in the moving averages. The most common moving average valuesused in the calculation are the 26-day and 12-day exponential moving averages. Thesignal line is commonly created by using a nine-day exponential moving average of theMACD values. These values can be adjusted to meet the needs of the technician andthe security. For more volatile securities, shorter term averages are used while lessvolatile securities should have longer averages.As you can see in Figure 2, one of the most common buy signals is generated when theMACD crosses above the signal line (blue dotted line), while sell signals often occurwhen the MACD crosses below the signal. 63
  64. 64. Pharmaceuticals Sector Analysis Report (AS ON 9/9/2012)The Indian Pharmaceutical industry is highly fragmented with about 24,000 players(around 330 in the organised sector). The top ten companies make up for more than athird of the market. The Indian pharma industry grew by a robust 18% YoY in 2011 to `565 bn (approx. US$ 12.5 bn). It accounts for about 1.4% of the worlds pharma industryin value terms and 10% in volume terms.Besides the domestic market, Indian pharma companies also have a large chunk oftheir revenues coming from exports. While some are focusing on the generics market inthe US, Europe and semi-regulated markets, others are focusing on custommanufacturing for innovator companies. Biopharmaceuticals is also increasinglybecoming an area of interest given the complexity in manufacture and limitedcompetition.The drug price control order (DPCO) continues to be a menace for the industry. Thereare three tiers of regulations - on bulk drugs, on formulations and on overall profitability.This has made the profitability of the sector susceptible to the whims and fancies of thepricing authority. The new Pharmaceutical Policy 2006, which proposes to bring 354essential drugs under price control has not been officially passed as yet and has beenstiffly opposed by the pharmaceutical industry.The R&D spends of the top five companies is about 5% to 10% of revenues. This ratiois still way below the global average of 15% to 20% of sales. Indian companies haveadopted various strategies for their R&D efforts. Some have entered into collaborationand partnership agreements with innovator companies; others have out-licensed theirmolecules for milestone payments. Hiving off R&D units into separate companies hasalso become a preferred option for many Indian pharma players. That said, given thatthe research pipelines of Big Pharma are drying up, they have now begun to dabble ingenerics. In this regard, these innovator companies are either buying out Indian firms orare forging alliances with them.KEY POINTSSupply Higher for traditional therapeutic segments, which is typical of a developing market. Relatively lower for lifestyle segment.Demand Very high for certain therapeutic segments. Will change as life expectancy, literacy increases.Barriers to entry Licensing, distribution network, patents, plant approval by regulatory authority. 64
  65. 65. Bargaining power Distributors are increasingly pushing generic products in a bid toof suppliers earn higher margins.Bargaining power High, a fragmented industry has ensured that there is widespreadof customers competition in almost all product segments. (Currently also protected by the DPCO).Competition High. Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for 85% of sales value. Consolidation is likely to intensify.The Healthcare index is showing Higher Top and Higher Bottom i.e.bullish trend in thelong term chart where the price of index comes up from 6463.09 to 6969.89.Also, onMACD as well a positive breakout was given. High weightage stocks of the sector likeSUNPHARMA, DR.REDDY, CIPLA, LUPIN. 65
  66. 66. SUNPHARMASUNPHARMA CMP :- 625.25Long term pattern on chart is bullish. Whereas near term pattern on chart is rangebound. A strong support is at 612.65 and stiff resistance is 639.9. Any trade closesabove / below would add trigger in the direction. Hence traders are advised to watchthis stock closely. 66
  67. 67. DR.REDDYDR.REDDY CMP :- 1646.60The stock has a bearish pattern on charts but near term trend is rangebound between1600 – 1683.40. The stock has resistance at 1683.40 & support at 1609.45. Tradersshould look at these levels as any above/ below would add trigger direction for stock oncharts. 67
  68. 68. CIPLACIPLA CMP :- 322.35Near term trend is in a bullish phase. Best trading strategy would be to buy at dips witha strict stoploss of 314.40. The technical oscillators also have confirmed the signal ofbuy. 68
  69. 69. LUPINLUPIN CMP :- 544.65Near term pattern on chart is bullish. Whereas near term pattern on chart is rangebound. A strong support is at 536 and stiff resistance is 556.60. Any trade closes above/ below would add trigger in the direction. Hence traders are advised to watch this stockclosely. 69
  70. 70. ProspectsThe product patents regime heralds an era of innovation and research resulting in the launch of new patented product launches. In the longer run, domestic companies would face fresh competition from MNCs, as they would make aggressive new launches. However, the latter would most likely be subject to price negotiation.Drugs having estimated sales of over US$ 100 bn are expected to go off patent between CY10 and CY14. With the governments in the developed markets looking to cut down healthcare costs by facilitating a speedy introduction of generic drugs into the market, domestic pharma companies will stand to benefit. However, despite this huge promise, intense competition and consequent price erosion would continue to remain a cause for concern.The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyle patterns. High growth in domestic sales in the future will depend on the ability of companies to align their product portfolio towards the chronic segment as the lifestyle diseases like hypertension, congestive heart failure, depression, asthma, and diabetes are on the rise.Contract manufacturing and research (CRAMS) is expected to gain momentum going forward. Indias competitive strengths in research services include English-language competency, availability of low cost skilled doctors and scientists, large patient population with diverse disease characteristics and adherence to international quality standards. As for contract manufacturing, both global innovators and generic majors are finding it profitable to outsource production. Although the scenario has yet not improved for this space after the financial crisis, it is expected to improve going forward as the pressure to prune costs increases. 70
  71. 71. ConclusionIf youd like to make profits in up markets, make profits in down markets and put theseprofits in your trading account over short periods of time, then the technique which canmake this happen is Technical Analysis.Emotions can whipsaw a trader until all reason is lost, and buy and sell orders are madewithout a sound basis. This does not have to happen. Find stocks that are in positionwhere big gains can be made, either up or down; in relatively short periods of time. Wecan apply detailed technical analysis to determine if it is time to be bullish or bearish.We can see whether a stock is overbought, oversold, basing, breaking out or breakingdown. If you want to make money irrespective of whichever way the market goes-thekey is doing the homework to determine what move is the right one so you can enter atrade with confidence and without hesitation, and exit with the same precision. 71