Technical Analysis Rudramurthy

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Technical Analysis Rudramurthy

  1. 1. TECHNICAL ANALYSIS RUDRAMURTHY BV @ B.V.RUDRAMURTHY 1
  2. 2. DEFINITION: Technical Analysis is the study of:  PRICE.  VOLUME.  OPEN INTEREST. It is the study of market action through the help of charts and other technical indicators so as to forecast the trend. @ B.V.RUDRAMURTHY 2
  3. 3. ASSUMPTIONS:  Current Price of an underlying asset discounts all information.  Price always moves in trends.  History repeats often. @ B.V.RUDRAMURTHY 3
  4. 4. @ B.V.RUDRAMURTHY 4
  5. 5. DIFFERENCES: FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS 1. TIME CONSUMING. 1. QUICK STUDY. 2. STUDY OF CAUSE. 2. STUDY OF EFFECT. 3. INTRINSIC VALUE. 3. STUDY OF CHARTS. 4. INCLUDES ECONOMIC, 4. PRICE, VOLUME AND OPEN INDUSTRY AND COMPANY INTEREST ANALYSIS. ANALYSIS. 5. APPLIED FOR FEW MARKETS UNDER STUDY. 5. CAN BE APPLIED TO ANY MARKET AND INSTRUMENT. @ B.V.RUDRAMURTHY 5
  6. 6. ADVANTAGES:  Can be used on any markets and on any underlying asset.  Takes care of fundamental analysis.  Helpful for short term traders and speculators.  Helps in understanding market psychology.  Helps in economic forecasting. @ B.V.RUDRAMURTHY 6
  7. 7. LIMITATIONS:  It is a Probabilistic study and not deterministic study.  Chart Patterns are very subjective in nature.  Does not works accurately for illiquid markets and underlying assets with controlled regime.  Past may not be the indicator of future.  Random walk theory.  Contradicting views by different indicators. @ B.V.RUDRAMURTHY 7
  8. 8. DIFFERENCES IN APPLICABILITY: Technical analysis as applied to stock Markets is same to even derivative markets. However the following things shall be kept In mind:  Pricing Structure.  Time period.  Margin requirements.  Timing is everything in futures market, where buy and hold strategy does not work. @ B.V.RUDRAMURTHY 8
  9. 9. DOW THEORY CHARLES DOW & NELSON @ B.V.RUDRAMURTHY 9
  10. 10. DOW THEORY:  Ideas of Charles Dow, propounded by NELSON.  Assumptions of Dow theory: a) The Market indices discounts everything. b) The market has 3 trends, namely: 5. Primary Trend. (Major trend). 6. Secondary Trend. (Intermediate trend). 7. Minor Trend. (Short term trend). @ B.V.RUDRAMURTHY 10
  11. 11. STUDY OF VARIOUS TRENDS: 1. THE PRIMARY OR MAJOR TREND: Dow compares the major trend to a TIDE, where a major uptrend is represented by patterns of rising peaks and troughs and a downtrend is characterized by lower peaks and troughs. A MAJOR TREND LASTS FOR MORE THAN AN YEAR OR SEVERAL YEARS. @ B.V.RUDRAMURTHY 11
  12. 12. STUDY OF VARIOUS TRENDS: 2. THE SECONDARY OR INTERMEDIATE TREND: DOW compares the intermediate trend to waves that makeup tides and they represents correction in the Primary trend. AN INTERMEDIATE TREND GENERALLY LASTS FOR THREE WEEKS TO THREE MONTHS. THESE INTERMEDIARY CORRECTIONS GENERALLY RETRACES 1/3 OR 1/2 OR 2/3 OF THE PREVIOUS MOVE. @ B.V.RUDRAMURTHY 12
  13. 13. STUDY OF VARIOUS TRENDS: 3. THE MINOR OR SHORT TERM TREND: DOW compares the minor or short term trend to ripples on the waves. Minor trend represents fluctuations in the intermediate trends. A MINOR TREND GENERALLY LASTS FOR LESS THAN THREE WEEKS. @ B.V.RUDRAMURTHY 13
  14. 14. FOCUS ON MAJOR TRENDS: Dow suggests to focus on the big picture i.e to focus on the MAJOR TREND. The major trend consists of three phases Namely: e) ACCUMULATION PHASE. f) PUBLIC PARTICIPATION PHASE. g) DISTRIBUTION PHASE. @ B.V.RUDRAMURTHY 14
  15. 15. @ B.V.RUDRAMURTHY 15
  16. 16. VOLUME MUST CONFIRM THE TREND!!! According to DOW, Volume must confirm Uptrend by expanding as Price moves Higher and diminishes with decrease in Price. In a Downtrend, Volume should expand as Price drops and diminish as they rally. @ B.V.RUDRAMURTHY 16
  17. 17. FAILURE SWING: B C E A D The rally at point B is higher than point A, but the rally at point C fails to exceed the previous rally at point B. This indicates reversal of uptrend and the point below the neck line i.e. D – E indicates a failure swing. @ B.V.RUDRAMURTHY 17
  18. 18. FAILURE SWING: C B E G A D H F The rally at point B is higher than point A, and the rally at point C is higher than that of rally at point B; But it falls below D and few theorists sells at a break out Point below E. While others would like to wait to see a lower high at point G to confirm the lower high as well as lower lows and then sell at a Point below H. @ B.V.RUDRAMURTHY 18
  19. 19. A trend is said to be at effect until it gives definite signals that it has reversed: A trend in motion continues to be in motion until any external force causes it to change direction. Various technical tools help the analyst to identify signals of trend reversals. A trend before reversing, slows down and then changes direction. Volume confirmation of a trends direction reversal is to be considered. @ B.V.RUDRAMURTHY 19
  20. 20. CRITICISMS OF DOW THEORY:  Dow theory generally misses 20% to 25% of a move before generating a signal.  Use of closing prices (Line charts).  Signals in Dow theory are generally generated during the second phase of the uptrend.  It was primarily used as an indicator of Economy which was substituted to stocks and other underlying assets.  Subjectivity and difficulty in distinguishing the various phases of trends. @ B.V.RUDRAMURTHY 20
  21. 21. Dow theory applied to Derivatives instrument:  Dow assumed most of the investors only trade major trend; Whereas in reality traders in futures market generally trend intermediate trend which was unimportant according to Dow’s assumption.  Minor Swings are more important than Major Swings.  Keeping in mind the above differences, Dow theory can be applied even to derivatives market. @ B.V.RUDRAMURTHY 21
  22. 22. CHART CONSTRUCTION:  Price and Volume data are generally studied by using graphical representations called charts.  Different types of charts include; a) LINE CHARTS. b) BAR CHARTS. c) CANDLE STICKS. @ B.V.RUDRAMURTHY 22
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  26. 26.  Based on the investors time period, Daily or Weekly or Monthly charts can be used.  Arithmetic Vs Logarithmic Scale: On an Arithmetic Scale, Price change shows an equal distance for each unit of price change whereas in an Logarithmic Scale, Price change shows an equal distance for equal percentage change. @ B.V.RUDRAMURTHY 26
  27. 27. OPEN INTEREST:  Open Interest is the total number of outstanding future contract that are held by the market participants at the end of the day.  Open interest is the number of outstanding contracts held by the longs or the shorts and not the total of the both.  Generally Volume and Open interests will be small at the early stages of futures contract life and expands as it reaches the maturity period and again drop during close to expiration stage.  For trading purpose, avoid stocks with lower volumes and lower open interest. @ B.V.RUDRAMURTHY 27
  28. 28. TREND ANALYSIS: “ALWAYS TRADE IN THE DIRECTION OF THE TREND” “TREND IS YOUR FRIEND” “NEVER BUCK THE TREND” It is the direction of the PEAKS and TROUGHS that constitutes market trend. A Trend is simply the indicator of the direction of the market. @ B.V.RUDRAMURTHY 28
  29. 29. TYPES OF TREND:  AN UPTREND. Series of successive higher peaks and troughs.  A DOWN TREND. Series of declining peaks and troughs.  SIDEWAYS TREND. Series of Horizontal peaks and troughs. @ B.V.RUDRAMURTHY 29
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  33. 33. TREND STRATEGY:  In an Uptrend, go LONG (BULLISH).  In a Downtrend, go SHORT (BEARISH).  In a Sideways trend, DO NOTHING.  Trend is classified into 3 categories based on their time period: a) Major Trend. b) Intermediate Trend. c) Minor Trend. @ B.V.RUDRAMURTHY 33
  34. 34. SUPPORT AND RESISTANCE: SUPPORT: It is an area or level on the chart where buying interest is sufficiently strong to overcome selling pressure i.e. Demand > Supply. In short, the troughs or reaction lows are called as Support. For an Uptrend to continue, each successive lows, (Supports) must be greater than the preceding low. @ B.V.RUDRAMURTHY 34
  35. 35. SUPPORT AND RESISTANCE: RESISTANCE: It is an area or level on the chart where Selling pressure is sufficiently strong enough to overcome buying interest i.e. Supply > Demand. In short, the peaks or reaction highs are called as Resistance. For an Uptrend to continue, each successive highs, (Resistances) must be greater than the preceding highs. @ B.V.RUDRAMURTHY 35
  36. 36. SUPPORT AND RESISTANCE: CAUTION: If the corrective dip in an uptrend comes all the way to previous low or breaches it, it is an early signal of reversal of a trend (downward move) or beginning of sideway movement. @ B.V.RUDRAMURTHY 36
  37. 37. SUPPORT AND RESISTANCE: BETTER CONFIRMATION:  More the trading that takes place in the Support or Resistance area, more significant it becomes.  Amount of time spent in the support or resistance area is a sign of better confirmation.  Volume also acts as a pivotal point in determination of better future prices and confirms better the support or resistance levels. @ B.V.RUDRAMURTHY 37
  38. 38. SUPPORT AND RESISTANCE:  Support becomes resistance and vice versa if a Support level is penetrated (Broken out) with a significant margin and similarly in case of a break out of resistance levels.  In an uptrend, previous resistance levels which have been broken by a significant margin become supports.  In a downtrend, violated support levels becomes resistance levels on subsequent bounces. @ B.V.RUDRAMURTHY 38
  39. 39. TREND LINES:  It is a simple but very valuable technical tool.  Uptrend: It is a straight line drawn from left to right along with every successive lows.  Downtrend: It is a straight line drawn from left to right. along with every successive highs.  AN UPTREND OR A DOWNTREND SHALL BE CONFIRMED BY JOINING OF ATLEAST 3POINTS.  Days low or highs shall be considered for drawing a trend line. @ B.V.RUDRAMURTHY 39
  40. 40. TREND LINES:  Trendline shall include all price action.  Trendline break on a closing basis is considered more valid than on intraday basis.  Valid trend line break is generally considered with a limit of 3% to 5% from the neckline.  Deciding the levels of tolerance is left to the risk levels of the investor.  A minimum 2day close below or above the trend line break is also generally considered.  Few of them even consider a weekly break of trend line as a valid signal. @ B.V.RUDRAMURTHY 40
  41. 41. FAN PRINCIPLE:  Sometimes after the violation of an uptrend line, prices will decline a bit before rallying back to the bottom of the old uptrend line, which is now acting as the resistance.  The breaking of the 3rd trend line in an UPTREND signals the reversal of the trend. Generally the broken trend line 1 and 2 becomes the Resistance levels.  The breaking of the 3rd trend line in a DOWNTREND signals the reversal of the trend. Generally the broken trend line 1 and 2 becomes the Support levels. @ B.V.RUDRAMURTHY 41
  42. 42. Steepness of the Trendline:  Generally most important trendlines approximate 0 an average slope of 45 .  Generally if trendlines are too steep or flat, it may not be an indication of a sustainable Trendline projections and the same shall not be trusted for.  Multiple trends like major, intermediate and short term are studied in tandem for a better picture.  Thus it is said, “Remember the Rembrandt” i.e. the big picture. @ B.V.RUDRAMURTHY 42
  43. 43. @ B.V.RUDRAMURTHY 43
  44. 44. CHANNEL LINES:  Channel line also called as Return line is an area between two parallel lines i.e. the basic trendline and the channel line drawn parallel to the basic trendline.  Generally on an Upward trendline, supports form the basic trendline and the resistance the upper channel.  Confirmation of an existence of channel is proved by the price action within the two parallel lines.  Failure to reach the channel line in an upward trend is an early signal of beginning of weakness. @ B.V.RUDRAMURTHY 44
  45. 45. CHANNEL LINES:  Once a breakout occurs from an existing price channel, prices usually travel a distance equal to the width of the channel from the point at which trend line is broken.  Out of the 2 trendlines constituting a channel, the basic trendline is by far the most important and reliable one.  The Channel line is a secondary use of the trendline technique.  The failure to reach the upper end of the channel line is an early warning that the lower line (Basic trend line) may be broken in the near future. @ B.V.RUDRAMURTHY 45
  46. 46. @ B.V.RUDRAMURTHY 46
  47. 47. PERCENTAGE RETRACEMENT LINES:  After a particular move, Prices generally retrace a portion of the previous move, before resuming the trend in the original direction.  These counter trend moves are called as retracements and are generally to the extent of 50% of the previous move.  Besides 50% retracements, there are minimum (1/3) and maximum (2/3) retracements too.  Percentage retracements are applicable to all types of trends. @ B.V.RUDRAMURTHY 47
  48. 48. PERCENTAGE RETRACEMENT LINES:  If the prior trend is to be maintained, 66.67% or 2/3 retracement is a critical point not to be breached.  66.67% retracement is low risk area to buy in an uptrend or to sell on a downtrend.  If prices move beyond the 66.67% retracement, then the odds favour a trend reversal rather than just a retracement. The move in such situations usually retrace 100% of the previous trend. @ B.V.RUDRAMURTHY 48
  49. 49. SPEED RESISTANCE LINES:  It combines percentage retracements and trendline techniques.  This technique was developed by Edson Gould.  Speed lines measure the rate of ascent or descent of a trendline.  Speed lines are always drawn vertically in the opposite direction from the highest or the lowest point. @ B.V.RUDRAMURTHY 49
  50. 50. SPEED RESISTANCE LINES:  If an uptrend is in the process of correcting itself, the downside correction will usually stop at the higher speed line (2/3). If not prices will fall to the lower speed line (1/3). If the lower line is also broken then prices may move down to retrace 100% of the previous trend. Fall in prices below this point is a signal of reversal of the trend.  Incase of a downtrend, breaking of the lower lines is an indication of the prices rallying towards the upper line. If it is broken too then it is a signal of reversal of the trend. @ B.V.RUDRAMURTHY 50
  51. 51. SPEED RESISTANCE LINES:  Fibonacci lines are drawn in same as to speed lines, but at 38% and 62% levels.  Gann lines are also similar to speed resistance where the most important Gann line is drawn at 450 angle. Steeper Gann lines are drawn in an uptrend at 63.750 and 750 angle. Flatter Gann lines are drawn at 26.250 and 150 angles. @ B.V.RUDRAMURTHY 51
  52. 52. REVERSAL DAYS:  It should not be studied in isolation.  It should be considered along with other technical indicators.  A Reversal day takes place either at the top or at the bottom.  Wider the range for the day, and higher the volumes, more significant is the trend reversal pattern.  Generally both the highs and lows on the reversal days, exceed the range for the previous day. (OUTSIDE DAY) @ B.V.RUDRAMURTHY 52
  53. 53. TOP REVERSAL DAY:  A Top Reversal Day is defined as setting of a new high in an uptrend (Generally during the, opening or early part of the day) and it is followed by a lower close on the same day, sometimes the close being below the lows of the previous day close. @ B.V.RUDRAMURTHY 53
  54. 54. BOTTOM REVERSAL DAY:  A Bottom Reversal Day is defined as setting of a new low in an down trend (Generally during the, opening or early part of the day) and it is followed by a higher close on the same day, sometimes the close being higher than the previous days close. @ B.V.RUDRAMURTHY 54
  55. 55. SIGNIFICANT REVERSAL DAYS: REVERSAL DAYS ARE MORE KEENLY WATCHED ON WEEKLY AS WELL AS MONTHLY CHARTS. CHARTISTS GIVE MORE SIGNIFICANCE TO WEEKLY CHART REVERSAL THANDAILY CHART REVERSAL AND MORE SIGNIFICANCE TO MONTHLY THAN WEEKLY.  VOLUME CONFIRMATION ON A REVERSAL DAY IS ALSO SEEN FOR BETTER PREDICTIONS. @ B.V.RUDRAMURTHY 55
  56. 56. GAPS:  It is the area on the bar chart where no trading has taken place.  UPSIDE GAPS are gaps opened due to Open price being greater than the previous days high and that upside gap opened are not filled in during the day.  DOWN SIDE GAPS are gaps opened due to days high price being below the previous days low.  Upside gaps are signs of Market strength whereas Downside gaps are signs of market weakness.  Gaps on weekly and monthly charts are considered more significant to that of gaps on a daily chart. @ B.V.RUDRAMURTHY 56
  57. 57. TYPES OF GAPS:  BREAK AWAY GAPS.  RUNAWAY GAPS.  EXHAUSTION GAPS. @ B.V.RUDRAMURTHY 57
  58. 58. BREAKAWAY GAPS:  It usually occurs at the end of an important price pattern and signifies beginning of an important market move.  The breaking of an important RESISTANCE or SUPPORT through a breakaway gap is a solid confirmation of a beginning of a major and steep up move or a downward move.  Break away gaps usually occur with heavy volumes.  Break away gaps are generally not filled.  Break away gaps on the upside acts as an support and on a downtrend acts as resistance. @ B.V.RUDRAMURTHY 58
  59. 59. @ B.V.RUDRAMURTHY 59
  60. 60. RUNAWAY GAPS:  It is also called as Measuring gaps which usually occurs at the midway of a major move.  It is a signal of markets moving effortlessly with comfortable volumes.  It signifies the continuation of the major move which started with the Breakaway gap.  It is also used to set up price targets.  Run away gaps are also not filled.  Run away gaps on the upside acts as an support and on a downtrend acts as resistance. @ B.V.RUDRAMURTHY 60
  61. 61. EXHAUSTION GAPS:  It usually occurs at the END of a major move.  An analyst should expect runaway gaps after break away and Exhaustion gap after Run away gaps.  It signifies the END of the major move which started with the Breakaway gap and continued with a Run away gap.  It is used to exit positions on the either side.  Exhaustion gaps are generally filled.  Exhaustion gaps on the upside or downside acts as the neckline and breach of the same is a strong signal of reversal. @ B.V.RUDRAMURTHY 61
  62. 62. ISLAND REVERSAL:  It occurs after an exhaustion gap, generally with a time period of 2 days or weeks.  An Exhaustion gap to the upside followed by a breakaway gap to the downside completes the ISLAND REVERSAL PATTERN and indicates reversal of trend. @ B.V.RUDRAMURTHY 62
  63. 63. @ B.V.RUDRAMURTHY 63
  64. 64. CHART PATTERNS:  It is a formation that appears on a price chart that can be classified into different categories which have future predictive value.  Chart Patterns can be classified into 2 broad categories, namely: a) Reversal Patterns. b) Continuation Patterns.  Volume plays a very important role in confirming the above pattern formations and future predictions. @ B.V.RUDRAMURTHY 64
  65. 65. REVERSAL PATTERNS: HEAD AND SHOULDER:  There shall exist a prior Uptrend before the formation of an Head and Shoulder pattern.  The peak of the head shall be higher than the peaks of the either shoulders.  Generally peaks are with heavy volumes and troughs with lighter volumes.  Generally rally into the newer highs is on lighter volumes in comparison with the previous highs rally.  Breach of neckline which forms the support line is important. @ B.V.RUDRAMURTHY 65
  66. 66. REVERSAL PATTERNS:  Breach of neckline is considered on the closing basis and not on intraday basis.  Volume should increase on the breaking of the neckline.  3% to 5% breach below the neckline is also considered for better confirmation.  Usually a Return move develops which is a bounce back to the bottom of the neckline (support) breached, now acting as a stiff Resistance.  If the initial breaking of the neckline is on heavy volumes, the probability of bounce back or the return move is less and vice versa.  After the breach of neckline, prices should not re-cross the neckline again, if crossed it is a failure pattern. @ B.V.RUDRAMURTHY 66
  67. 67. HEAD AND SHOULDER: MEASURING IMPLICATIONS:  Price Objective is based on the Height of the Pattern.  The distance from the top of the head to the neckline (Vertical line) is the expected price downtrend from the point of breach of the neckline.  The above Price objective is a minimum target and the maximum price target might be the retracement of the full previous move. (100% RETRACEMENT OF PREVIOUS MOVE)  ½ and 2/3 retracements of previous move can also be considered for the price targets to adjust.  Gaps, Previous trends break, Previous supports and resistances shall also be considered while fixing the @ B.V.RUDRAMURTHY 67 price target.
  68. 68. @ B.V.RUDRAMURTHY 68
  69. 69. INVERSE HEAD AND SHOULDER:  It is a mirror image of the Head and Shoulder top Pattern.  The volume from the head should see heavier volumes and a burst of volumes in breaking of the neckline.  Return move back to the neckline acting as support line is seen more often in a inverse pattern rather on top pattern. @ B.V.RUDRAMURTHY 69
  70. 70. INVERSE HEAD AND SHOULDER: MEASURING IMPLICATIONS:  Price Objective is based on the Height of the Pattern.  The distance from the top of the inverted head to the neckline (Vertical line) is the expected price upside from the point of breach of the neckline.  The above Price objective is a minimum target and the maximum price target might be the retracement of the full previous move. (100% RETRACEMENT OF PREVIOUS MOVE)  ½ and 2/3 retracements of previous move can also be considered for the price targets to adjust.  Gaps, Previous trends break, Previous supports and resistances shall also be considered while fixing the @ B.V.RUDRAMURTHY 70 price target.
  71. 71. COMPLEX HEAD AND SHOULDER PATTERNS:  It is a variation of Head and Shoulder Pattern which are rarely found.  These are patterns where 2heads may appear along with a right and a left shoulder.  It can also be a double left and a double right shoulder.  They have the same forecasting implications to that of Normal Head and shoulder pattern.  A lot of anticipatory buying takes place during the formation of the right shoulder and aggressive traders take positions before the confirmation of the pattern itself.  If the initial positions prove right, additional positions can be added at the breach of neckline. @ B.V.RUDRAMURTHY 71
  72. 72. CAUTION:  HEAD AND SHOULDER PATTERN CAN ALSO ACT AS A CONSOLIDATION PATTERN, RATHER THAN REVERSAL PATTERN. @ B.V.RUDRAMURTHY 72
  73. 73. TRIPLE TOPS AND BOTTOMS:  It is a slight variation of Head and Shoulder pattern which is very rare as a chart pattern.  The three Peaks or Troughs in the Triple Top or a Triple bottom formation is at the same level.  Volumes tend to decline with each successive peaks and increase at the breakout point.  The measuring technique and the return move is same as that of the Head and Shoulder Pattern.  A Triple bottom is a mirror image of triple top.  Study of previous trend before the formation of a triple top or a triple bottom is crucial. @ B.V.RUDRAMURTHY 73
  74. 74. DOUBLE TOPS AND BOTTOMS:  It is a common reversal chart pattern found very frequently.  This pattern must have two peaks at about the same level.  Volumes is generally low on the second peak and picks up on the break of the neckline.  The measuring technique and the return move is same as that of the Head and Shoulder Pattern.  A Double bottom is a mirror image of double top.  Study of previous trend before the formation of a double top or a double bottom is crucial. @ B.V.RUDRAMURTHY 74
  75. 75. DOUBLE TOPS AND BOTTOMS:  A double top is commonly referred to as “M” formation and a double bottom as “W” formation.  A normal pull back from a previous peak before the resumption of the uptrend should not be studied as Double top formation. (Till the breach of neckline, the double top formation is not complete)  The longer the time period between the peaks or bottoms and greater the height, more reliable is the chart pattern.  Generally Valid Double tops and bottoms should at least have a months gap between the two peaks or troughs. @ B.V.RUDRAMURTHY 75
  76. 76. VARIATIONS FROM THE IDEAL PATTERNS:  Use of filters by traders to deal with variations in chart patterns.  On occasions the second peak will not reach the levels of first peak.  Most chartists want a close beyond the previous resistance on a closing basis and not on intra day basis.  Percentage penetration criteria of 3% to 5% is also considered.  The two day penetration rule is also used as a time filter.  A Friday close beyond the previous peak is also considered. @ B.V.RUDRAMURTHY 76
  77. 77. SAUCERS AND SPIKES:  It is also called as rounding bottoms.  It is a very slow and gradual turn from down to side ways and then to an uptrend.  Longer they last, more significant they are.  Spikes are “V” patterns that happens very quickly with little or no transition period.  They usually occur in markets which so over extended, that a sudden piece of adverse news will turn the trend abruptly without giving signals of slowing down or a turn in trend.  Volumes is the only tool that can help in predicting a “Spike”. @ B.V.RUDRAMURTHY 77
  78. 78. CONTINUATION PATTERNS:  It is an indication of a sideways price action, which is a pause in the prevailing trend and the next move will be in the same direction of the trend which preceded the formation.  Continuation patterns are generally of a shorter duration in comparison to that of reversal patterns. @ B.V.RUDRAMURTHY 78
  79. 79. TRIANGLES:  Triangle patterns are generally considered as Continuation patterns even though sometimes they act as Reversal Patterns.  There are 3 types of triangles, namely: d) SYMMETRICAL TRIANGLES. e) ASCENDING TRIANGLES. f) DESCENDING TRIANGLES. @ B.V.RUDRAMURTHY 79
  80. 80. SYMMETRICAL TRIANGLES:  Symmetric Triangles are also called as “COILS”  These triangles show 2 Converging trend lines, the Upper line descending and the Lower line ascending.  The Vertical line measuring the height of the pattern is referred to as “BASE”. (AB)  The point of intersection of the above 2 trend lines is called as the “APEX”. (C)  A close outside either of the trend lines, completes the pattern. A C B @ B.V.RUDRAMURTHY 80
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  82. 82. ASCENDING TRIANGLES:  It is similar to that of a Symmetric Triangle with a rising lower line except for the flat or horizontal Upper line.  The Vertical line measuring the height of the pattern is referred to as “BASE”.  The point of intersection of the above 2 trend lines is called as the “APEX”.  A close outside either of the trend lines, completes the pattern.  This is generally a “Bullish Pattern”. A C B @ B.V.RUDRAMURTHY 82
  83. 83. DESCENDING TRIANGLES:  It is similar to that of a Symmetric Triangle with a declining Upper line except for the flat or horizontal Down line.  The Vertical line measuring the height of the pattern is referred to as “BASE”.  The point of intersection of the above 2 trend lines is called as the “APEX”.  A close outside either of the trend lines, completes the pattern.  This is generally a “Bearish Pattern”. A C B @ B.V.RUDRAMURTHY 83
  84. 84. @ B.V.RUDRAMURTHY 84
  85. 85. TRIANGLES:  A Symmetric triangle pattern is a continuation pattern which represents pause in the existing trend after which the previous trend continues.  The study of previous trend before the formation of a triangle is highly significant for accurate interpretation.  If the previous trend were to be an uptrend, the implications of symmetric triangle is bullish and if it were to be a down trend, it would have bearish implications.  A triangle should have minimum 4 reversal points i.e. each trend line must be touched at least twice. Few of them also have 6 reversal points. @ B.V.RUDRAMURTHY 85
  86. 86. MEASUREMENT OF TRIANGLES:  As a general rule prices should break out in the direction of the Prior Trend somewhere between 2/3 to 3/4 of the Horizontal width of the triangle.  Horizontal width is the distance between the BASE at the left of the pattern to the APEX at the right of the pattern.  If prices remain within the triangle beyond the 3/4 point, then the triangle loses its significance and prices may reach to the APEX point.  Trend reversal is given by closing penetration of one of the trendlines.  Return move is rarely found in Triangles, and the broken line acts as Support in @ B.V.RUDRAMURTHY and resistance in a 86 an up trend down trend.
  87. 87. TRIANGLES:  Volume should diminish as the price swings narrow within the triangle.  Volume should pick up noticeably at the penetration point.  Measurement of symmetrical triangles are based on the Height of the BASE or by drawing a parallel line upward from the top of the BASE, parallel to the lower line. D A C B @ B.V.RUDRAMURTHY 87
  88. 88. VOLUME PATTERNS ON TRIANGLES:  In an Ascending Triangle pattern, volumes tend to increase on bounces and contracts on dips.  In a Descending Triangle, Volumes should be heavier on the downside and lighter during the bounces.  A Triangle is considered to be an intermediate continuation pattern which generally take a month to 3months for its formation. @ B.V.RUDRAMURTHY 88
  89. 89. BROADENING PATTERNS:  It is an inverted triangle or triangle turned backwards.  A Broadening pattern should not show a converging trend line Pattern.  Volume tend to behave the opposite way as to a triangle wherein it tends to expand along with the wider price swings.  It usually occurs at market tops which shows three successive higher peaks and two declining troughs.  The violation of the second trough completes the formation of the Broadening pattern.  An Expanding pattern is generally a bearish signal as it appears at the market top. @ B.V.RUDRAMURTHY 89
  90. 90. BROADENING PATTERNS: E C A B D F @ B.V.RUDRAMURTHY 90
  91. 91. FLAGS AND PENNANTS PATTERNS:  They represent brief pauses in Dynamic market moves.  It is preceded by a sharp or straight line move before its formation.  A Flag usually occurs after a sharp move and represent pause in the trend. The flag should slope against the trend.  Volume should dry up on the formation and burst on the breakout.  A Flag generally occurs near the midpoint of a move. @ B.V.RUDRAMURTHY 91
  92. 92. FLAGS AND PENNANTS PATTERNS:  Both patterns are relatively short term and should be completed within 1 to 3 weeks.  It can also form on a down trend (Inverted flag and pennant) signifying continuation of the previous trend.  Both patterns occur about the midpoint of the previous up move or down move signifying half the previous way remaining from the breakout.  Both patterns take less time to form in a down trend. @ B.V.RUDRAMURTHY 92
  93. 93. FLAGS AND PENNANTS PATTERNS:  A Pennant represents the formation of a small symmetric triangle preceded by a sharp up move.  Volume should be light on the formation and burst on the breakout.  A Pennant is identified by 2 Converging trend lines. @ B.V.RUDRAMURTHY 93
  94. 94. WEDGE FORMATION:  A Wedge is similar to that of a symmetric triangle both in terms of its shape and time except for its slant.  A Wedge usually lasts more than 1 month but not more than 3 months.  A Wedge has a noticeable slant either to the upside or the downside which is opposite to that of prior trend i.e. it slants against the previous trend. (Like flag pattern)  A Wedge can either be a falling Wedge or a raising Wedge. @ B.V.RUDRAMURTHY 94
  95. 95. WEDGE FORMATION:  A Falling Wedge is considered to be bullish and a raising wedge bearish.  Wedges often occur within the existing trend and are usually continuation patterns. However appearance of wedge at the top or bottom signifies reversal of the trend.  A raising wedge at the end of a top is an early signal of beginning of a down trend.  A falling wedge at the bottom signifies end of the bear trend.  Whether a Wedge appear at the middle or end of the move, the general rule of raising wedge is a bearish signal and a falling wedge is a bullish signal should be @ B.V.RUDRAMURTHY 95 kept in mind.
  96. 96. FALLING WEDGE (BULLISH): E C A G D B F @ B.V.RUDRAMURTHY 96
  97. 97. @ B.V.RUDRAMURTHY 97
  98. 98. RAISING WEDGE (BEARISH): A E C D B F @ B.V.RUDRAMURTHY 98
  99. 99. RECTANGLE FORMATION:  It is a continuation pattern, where price moves sideways in between two parallel horizontal lines.  Volume should be heavy on breakout.  Short term traders buy at the lower band of the rectangle and sell at the higher end.  Similar to that of a channel line except the trend is sideways.  Formation of a rectangle takes 1 to 3 months.  The height of the trading range can be used as a measuring yard to fix price target from the breakout point. @ B.V.RUDRAMURTHY 99
  100. 100. CONTINUATION H & S PATTERN:  If an Head and Shoulder pattern occurs on a down trend or an Inverted Head and Shoulder pattern on an uptrend, it is considered to be a continuation pattern instead of reversal pattern.  Prior trend before the formation of an head and shoulder pattern identifies whether it is a reversal or a continuation pattern. @ B.V.RUDRAMURTHY 100
  101. 101. VOLUME AND OPEN INTEREST:  Among the 3 indicators used in technical analysis, Price is always considered as the Primary indicator, whereas Volume and Open interest are considered to be secondary indicators.  Volume is the number of entities traded or exchanged hands in a particular time period.  Volumes are predominantly used in daily charts and weekly charts, but are very rarely used in monthly charts.  Volume precedes price and hence chartist consider it as an early signal of future Price Movements. @ B.V.RUDRAMURTHY 101
  102. 102. OPEN INTEREST:  Open Interest refers to the total number of outstanding or un liquidated contracts at the end of the day.  Open interest represents the total number of Outstanding longs or shorts contracts and not the total of the both.  One contract is represented by both buyer as well as seller. @ B.V.RUDRAMURTHY 102
  103. 103. CHANGES IN OPEN INTEREST: BUYER SELLER CHANGE 1. Buys new Sells new INCREASES long short 2. Buys new Sells old long NO CHANGE long 3. Buys old Sells new NO CHANGE short short 4. Buys old Sells old long DECREASES short @ B.V.RUDRAMURTHY 103
  104. 104. OPEN INTEREST:  Thus if both participants in a trade are initiating a new position, the Open Interest will increase.  If both the participants are liquidating their old positions, the Open Interest will decline.  However if one is initiating a new position and an other liquidating his old position, there is no change in the open interest. @ B.V.RUDRAMURTHY 104
  105. 105. STUDY OF VOLUME AND OPEN INTEREST: PRICE VOLUME OPEN MARKET INTEREST RISING UP UP STRONG RISING DOWN DOWN WEAK DECLINING UP UP WEAK DECLINING DOWN DOWN STRONG @ B.V.RUDRAMURTHY 105
  106. 106. On Balance Volume (OBV):  Developed and Popularized by Joseph Granville in 1963.  OBV is a curved line which confirms the continuation of the previous trend or warns the beginning of a reversal trend.  If Price and OBV lines converges, then it is a bullish pattern and divergence of these lines indicate reversal of the trend. @ B.V.RUDRAMURTHY 106
  107. 107. @ B.V.RUDRAMURTHY 107
  108. 108. MONEY FLOW INDEX:  Developed and Popularized by Laszlo Birinyi.  It is a minor variation over OBV where the level of Volume on each price range is determined to know the money flow into and outside the stock.  If Price and MFI lines converges, then it is a bullish pattern and divergence of these lines indicate reversal of the trend. @ B.V.RUDRAMURTHY 108
  109. 109. @ B.V.RUDRAMURTHY 109
  110. 110. @ B.V.RUDRAMURTHY 110
  111. 111. MONEY FLOW INDEX:  Developed and Popularized by Laszlo Birinyi.  It is a minor variation over OBV where the level of Volume on each price range is determined to know the money flow into and outside the stock.  If Price and MFI lines converges, then it is a bullish pattern and divergence of these lines indicate reversal of the trend.  Calculation of Put - Call open interest ratio. @ B.V.RUDRAMURTHY 111
  112. 112. LONG TERM CHART ANALYSIS:  On the Weekly and Monthly charts, each bar represents one week and one months price action respectively.  The purpose of weekly and monthly charts is to compress the price action so as to expand the time horizon and to look at the bigger picture.  Followers of Random walk theory criticize the use of short term charts, whereas the long term charts are against the claim of @ B.V.RUDRAMURTHY 112 random walk.
  113. 113. LONG TERM CHART ANALYSIS:  Interpretation of Price patterns on a Long term chart is same as that of a daily chart.  The practical approach to study of charts at different time periods should be from long term charts to short term charts. (Zeroing down Approach)  It is a policy of moving from Macro to Micro approach or moving big to small picture.  Long term charts should not be used for timing the market and for trading purposes. @ B.V.RUDRAMURTHY 113
  114. 114. INDICATORS IN CHART ANALYSIS @ B.V.RUDRAMURTHY 114
  115. 115. 1. OBV. 2. MFI. 3. MOVING AVERAGE. 4. BOLLINGER BANDS. 5. 4 WEEK RULE. 6. OSCILLATORS. 7. CCI 8. RSI 9. STOCASTICS 10. MACD 11. ACCUMULATION – DISTRIBUTION 12. ATR. 13. WILLIAMS % R. 14. WILLIAMS A/D 15. CHAIKIN OSCILLATORS @ B.V.RUDRAMURTHY 115
  116. 116. MOVING AVERAGES @ B.V.RUDRAMURTHY 116
  117. 117. MOVING AVERAGES:  It is a simple trend analysis technique which averages out the prices for a particular period of time.  In short it is a Curving Trend line which helps in identifying the beginning of a new trend line or end of a old trend line.  It is only an indicator tool and not a leading tool. It only reacts and never anticipates. @ B.V.RUDRAMURTHY 117
  118. 118. MOVING AVERAGES:  Moving averages lag the market price action and smoothens the noise in price action.  Shorter term Moving Averages are more sensitive to price action in comparison to longer duration moving averages.  Moving averages can be Simple or Weighted or Exponential Moving averages. @ B.V.RUDRAMURTHY 118
  119. 119. MOVING AVERAGES:  When the Closing Prices move above the Moving Average, a Buy signal is generated and if it moves below the moving average, a Sell signal is generated.  A Shorter period Moving average gives an early signal in comparison to longer period average, it also generates lots of noise and whipsaws.  The longer average works better when the trend remains in motion and shorter averages work better when the trend is reversing. @ B.V.RUDRAMURTHY 119
  120. 120. MOVING AVERAGES:  Using 2 averages to generate signals is called as “Double Cross Over Technique”.  A Buy Signal is generated when the Shorter one crosses the longer one and vice-versa.  5 and 20days (Popular among future traders), 10 and 50 days (Popular among stock traders) moving averages are considered to be very popular cross over periods.  The double cross over technique produces lesser whipsaws in comparison to Single moving averages. @ B.V.RUDRAMURTHY 120
  121. 121. MOVING AVERAGES:  Using 3 averages to generate signals is called as “Triple Cross Over Technique”.  4-9-18 days moving averages are considered to be very popular Triple Cross over periods.  The shorter the moving average period, more closer they move towards the price. Thus in an uptrend, 4 day average should be higher than 9 day average, and 9 day higher than 18 day average and vice-versa in a down trend. @ B.V.RUDRAMURTHY 121
  122. 122. @ B.V.RUDRAMURTHY 122
  123. 123. MOVING AVERAGES:  A buy signal alert is given when in an down trend, 4day crosses over 9day and it is confirmed when 9day crosses over 18days.  A Sell signal alert is given when in an Uptrend, 4day crosses down wards over 9day and it is confirmed when 9day crosses down wards over 18days. @ B.V.RUDRAMURTHY 123
  124. 124. MOVING AVERAGES:  Moving average works only incase of trending market and not incase of sideways market.  Moving averages can be used not only on Price but also on any technical data like Volume, Open interest etc. @ B.V.RUDRAMURTHY 124
  125. 125. BOLLINGER BANDS @ B.V.RUDRAMURTHY 125
  126. 126. BOLLINGER BANDS:  Developed by John Bollinger.  Using Standard deviation, Upper and Lower bands are fixed above and below the moving average.  Prices are said to be overextended if they touch the upper band and are considered to be oversold if they touch the lower band.  Generally they are plotted around a 20 day moving average and standard deviation on the either side covers at around 95% of the price data. @ B.V.RUDRAMURTHY 126
  127. 127. BOLLINGER BANDS:  It is also used on Weekly charts so as to predict overbought and oversold situations.  The Upper band and the Lower band is used as Price Targets on the either sides and the 20day moving average as the neckline.  Bollinger band expands or contracts based on the last 20days volatility of the script.  If the distance between the upper and lower band narrows, it is an early signal of anticipated reversal in trend.  Bollinger Bands are never to be studied in isolation, instead to be studied along with other indicators. @ B.V.RUDRAMURTHY 127
  128. 128. @ B.V.RUDRAMURTHY 128
  129. 129. @ B.V.RUDRAMURTHY 129
  130. 130. 4 WEEK RULE @ B.V.RUDRAMURTHY 130
  131. 131. 4 Week Rule:  It is used primarily for derivatives and commodity markets.  Cover Short positions and Buy long whenever Prices exceed the highs of the 4 preceding Calendar weeks.  Liquidate Long Positions and sell short whenever the Prices fall below the 4 preceding Calendar weeks.  According to this rule, the trader is always in the market either Long or Short. @ B.V.RUDRAMURTHY 131
  132. 132. 4 Week Rule:  The above tool can be used without the aid of the computer.  It doesn’t catch the market tops or bottoms.  Weekly breakouts can be used as confirming signals for other technical indicators. (In particular for Moving averages)  The time period employed can be expanded or contracted based on the sensitivity and risk management levels.  1week or 2weeks low can be used as stop losses to exit previous longs. @ B.V.RUDRAMURTHY 132
  133. 133. OSCILLATORS @ B.V.RUDRAMURTHY 133
  134. 134. Oscillators:  They are extremely useful in trend less markets where other tools don’t work.  It helps the trader in recognizing the overbought or over sold situation.  It also helps the trader in understanding the trend which is loosing momentum i.e. trend nearing completion by displaying certain divergence.  Oscillator is only a secondary indicator which may be a subordinate to basic trend analysis.  Oscillators are extremely useful towards the end of a market move rather than at the beginning. @ B.V.RUDRAMURTHY 134
  135. 135. General Rules for Oscillators Interpretation:  Oscillators generally trade within a horizontal range or band and few oscillators also has a midpoint value, that divides the horizontal range into 2 equal half's.  When oscillators reach an extreme range either on the upper side or the lower side of the band, this suggests that the current price move has gone too far and is due for a correction.  The trader should buy when the Oscillator line is in the lower end of the band and selling in the Upper end.  The crossing of the midpoint line is often used to generate buy and sell signals. @ B.V.RUDRAMURTHY 135
  136. 136. Oscillators Use:  Oscillator is most useful when its value reaches an extreme reading on either side of the range.  The market is said to be overbought when it is near the upper extreme and over sold when it is near the lower extreme.  A divergence between the Oscillator and the Price when the Oscillator is in an extreme position is very significant.  The crossing of the midpoint line can give important trading signals in the direction of the Price trend. @ B.V.RUDRAMURTHY 136
  137. 137. Oscillators and Momentum:  The study of momentum is the basic study done in Oscillator analysis.  Momentum measures the VELOCITY of Price change as opposed to actual price change.  Market momentum is measured by continually taking the price differences for a fixed period of time. (10days)  M = V – Vx; where V is the latest closing price and Vx is the closing price x days ago. @ B.V.RUDRAMURTHY 137
  138. 138. Oscillators:  If the latest closing price is greater than that of 10days ago, a positive value above the Zero mark is plotted and vice-versa.  A shorter period Oscillator is more sensitive to that of a longer period one which is much smoother.  Momentum measures the acceleration or deceleration in the current advance or decline in the price trend.  The Momentum line leads the price action and gives an early signal for change in trend. @ B.V.RUDRAMURTHY 138
  139. 139. Oscillators:  Crossing of Zero line is considered as a trading signal where crossing above the zero line is a buy signal and below the zero line is a sell signal.  Oscillators signals should not be used against the basic price trend. i.e. buy positions should be initiated on crossing above the zero line only if the market trend is up and vice-versa.  Similarly Short positions should be initiated only if the crossing below the zero line is complemented with a basic down trend in prices.  AN OSCILLATOR IS A LEADING INDICATOR WHICH TURNS EARLY TO THAT OF THE PRICE LINE. @ B.V.RUDRAMURTHY 139
  140. 140. Oscillators:  The upper and lower boundary limits can be fixed based on the previous momentum history.  There are 3 types of Oscillators: 1. Momentum Oscillators. (V-Vx) 2. Rate of change Oscillators. (V/Vx) 3. Moving Average Oscillators. (Histogram) @ B.V.RUDRAMURTHY 140
  141. 141. COMMODITY CHANNEL INDEX:  CCI technique was developed by DONALD LAMBERT.  While constructing CCI, current price is compared with a moving average of selected time period. (Usually 5,10,20 and 40days)  While CCI was originally developed for Commodity trading, it is now a days popularly used for stocks.  CCI is a simple tool which indicates over bought or over sold market. @ B.V.RUDRAMURTHY 141
  142. 142. COMMODITY CHANNEL INDEX:  CCI is used as a timing tool which is best applied to securities that have cyclical movements.  CCI does not determine the length of the cycle, whereas it used to determine when the cycle begins or ends.  Reading over +100 is considered to be Over bought market and below -100 are considered to be Over sold market.  Study of divergence signal is also popular in CCI. @ B.V.RUDRAMURTHY 142
  143. 143. @ B.V.RUDRAMURTHY 143
  144. 144. @ B.V.RUDRAMURTHY 144
  145. 145. RELATIVE STRENGTH INDEX @ B.V.RUDRAMURTHY 145
  146. 146. RELATIVE STRENGTH INDEX:  RSI technique was developed by J.Welles Wilder.  It is the most popular and trusted Oscillator tool used by most of the traders, which smoothens the noise found in most of the other Oscillator tools.  RSI = 100 – 100 / (1+RS)  RS = Average of x days UP close Average of x days DOWN close  14days is popularly used for the calculation of RSI and 14weeks in case of a Weekly chart being used. However variations of 14 days are also used. Shorter the time period, more sensitive the oscillator becomes and wider is its amplitude. @ B.V.RUDRAMURTHY 146
  147. 147. RELATIVE STRENGTH INDEX:  RSI works best at the extreme points of the band.  5,7 and 9 days are used as variations of the shorter time period RSI and 21 or 28 days is used for the longer time duration.  The 14 days RSI becomes Over bought above 70 and oversold below 30.  The study of chart patterns are equally applicable to even RSI as they are drawn to regular price charts.  RSI – PRICE Divergence: If prices are rising or flat and RSI is decreasing, look for turn down in prices. If prices are declining or flat @ B.V.RUDRAMURTHY 147 and RSI is increasing, expect prices to move higher.
  148. 148. RELATIVE STRENGTH INDEX:  FAILURE SWINGS: A Top failure swing occurs when the RSindex rises above 70, declines to a lower level (fail point), raises again from that level attempting to break the previous high, but falls below the fall point, it is a Bearish sign. A Bottom failure swing occurs when the RSindex falls below 30, recovers and again falls attempting to break the previous low, but fails and breaks the Fall point, it is a Bullish sign. @ B.V.RUDRAMURTHY 148
  149. 149. Negative Divergence: @ B.V.RUDRAMURTHY 149
  150. 150. Over Bought and Over Sold Situation: @ B.V.RUDRAMURTHY 150
  151. 151. Top Failure Swing: @ B.V.RUDRAMURTHY 151
  152. 152. Bottom Failure Swing: @ B.V.RUDRAMURTHY 152
  153. 153. STOCHASTICS @ B.V.RUDRAMURTHY 153
  154. 154. STOCHASTICS:  It is based on the observation that as price increases, closing price will be closer to day’s high on an uptrend and on a downtrend, closing price will be closer to day’s low.  %K line and %D line are the two lines used in Stochastics.  Stochastic observes where the most recent closing price is in relation to the price range for a chosen time period. (14days is generally used) @ B.V.RUDRAMURTHY 154
  155. 155. STOCHASTICS:  %K = 100[(C – Lx) / (Hx – Lx)] where: C = Latest closing price. Lx= Lowest close for the last “X” days. Hx= Highest close for the last “X” days.  The above formula measures the % of closing price in relation to the total price range for the selected time period.  %D is the 3 period moving average of the %K line. (FS)  3 period moving average of %D gives Slow @ B.V.RUDRAMURTHY 155 Stochastics
  156. 156. STOCHASTICS:  Most traders use Slow Stochastic to avoid too much noise and to have a smooth curve.  K line is the faster line and D line is the slower line.  20% and 80% are considered to be the bands of Over bought and Over sold areas (Dline).  Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.  Crossovers above the upper band (80) and below the lower band (20) are more powerful than within the band. @ B.V.RUDRAMURTHY 156
  157. 157. STOCHASTICS:  Failure swing applied in RSI can also be applied for interpreting Stochastic.  Negative Divergence between Stochastics and Price can also be interpreted as done in case of RSI.  Weekly Stochastics is used to forecast the market direction and daily Stochastics can be used for timing the market.  Stochastics are also popularly used on intra day charts for effective day trading.  RSI and Stochastics both confirming a particular signal is very strong. @ B.V.RUDRAMURTHY 157
  158. 158. @ B.V.RUDRAMURTHY 158
  159. 159. Negative Divergence: @ B.V.RUDRAMURTHY 159
  160. 160. MOVING AVERAGE CONVERGENCE AND DIVERGENCE (MACD) @ B.V.RUDRAMURTHY 160
  161. 161. MACD:  MACD was developed by Gerald Appel.  It combines Oscillator technique with that of Dual Moving average cross over approach.  The faster line called the MACD line is the difference between the 2 exponentially smoothed moving average of the closing prices (Usually 12 and 26 days).  The slower line called the Signal line is usually a 9 period exponentially smoothed average of MACD line.  (12-26-9) @ B.V.RUDRAMURTHY 161
  162. 162. MACD:  The crossing over of the faster MACD line above the slower signal line is a BUY SIGNAL.  A crossing over of the faster line below the slower line is a SELL SIGNAL.  MACD line resembles an OSCILLATOR by fluctuating between above and below zero line.  An overbought situation exists when the lines are too far above the zero line and over sold situation when the lines are too far below the zero line. @ B.V.RUDRAMURTHY 162
  163. 163. @ B.V.RUDRAMURTHY 163
  164. 164. ACCUMULATION - DISTRIBUTION @ B.V.RUDRAMURTHY 164
  165. 165. Accumulation-Distribution Pattern:  It is a variation of On balancing Volume which attempts to confirm changes in prices by comparing the volumes associated with it.  It is a momentum indicator which associates changes in Price and Volume.  The indicator is based on the premise that more the volume that accompanies a price move, more significant is the move. @ B.V.RUDRAMURTHY 165
  166. 166. Accumulation-Distribution Pattern: Σ {(C - L) – (H – C)} * Volume (H – L) Where: C = Close. L = Low. H = High.  The nearer the close is to the high’s of the day, more volume is added to the cumulative total and vice-versa.  If the close is exactly between the days high and low, then nothing is added or deducted to the cumulative total. @ B.V.RUDRAMURTHY 166
  167. 167. Accumulation-Distribution Pattern:  When security is being accumulated, the A/D moves up and when the security is being distributed, the A/D moves downwards.  When a Negative Divergence occurs between Price and A/D pattern, Price will usually change to confirm the A/D. @ B.V.RUDRAMURTHY 167
  168. 168. @ B.V.RUDRAMURTHY 168
  169. 169. AVERAGE TRUE RANGE @ B.V.RUDRAMURTHY 169
  170. 170. AVERAGE TRUE RANGE:  It is a measure of Volatility introduced by Welles Welder.  The True Range indicator is the greatest of the following: a) The distance between today’s high and today’s low. b) The distance between Yesterday’s close to today’s high. c) The distance between Yesterday’s close to today’s low.  The Average True Range is the 14 day moving @ B.V.RUDRAMURTHY 170 average of the true ranges.
  171. 171. AVERAGE TRUE RANGE:  High ATR values suggests market bottoms following a Panic selling. (BULLISH)  Low ATR values suggests long sideways period and signals of market topping.  As prices bottom, Volatility is very high.  Low Volatility generally accompanies consolidation phase before the prices break out. @ B.V.RUDRAMURTHY 171
  172. 172. Topping of ATR suggesting market bottoming @ B.V.RUDRAMURTHY 172
  173. 173. WILLIAMS % “R” @ B.V.RUDRAMURTHY 173
  174. 174. WILLIAMS %”R”:  It is a Momentum indicator introduced by Larry Williams.  %R = {Highest high in n periods – Latest close} * - 100 {Highest high in n periods – Lowest low in n periods}  The interpretation of Williams %R is very similar to that of a Stochastic.  Reading over 80 or below 20 indicate the market extremes of overbought or oversold situations.  It is wise to sell after price starts turning down, rather than simply selling because it is overbought. %R may remain at overbought situations for an extended period when price still continues its upward move. @ B.V.RUDRAMURTHY 174
  175. 175. WILLIAMS %”R”:  %R is a strong leading indicator which forms a peak and turns down a few day before the security price peaks and turns down.  Similarly %R usually creates a bottom and turns up few days before the security price turns up.  William %R popularly uses 14 days time period.  5-10-20-28-56 are also popularly used as variations to 14 days time period. @ B.V.RUDRAMURTHY 175
  176. 176. @ B.V.RUDRAMURTHY 176
  177. 177. WILLIAMS ACCUMULATION AND DISTRIBUTION @ B.V.RUDRAMURTHY 177
  178. 178. WILLIAMS ACCUMULATION-DISTRIBUTION:  Accumulation indicates market controlled by buyers and Distribution indicates markets controlled by sellers.  How to Calculate? STEP-1: Determine “True Range High” and “True Range Low” i.e. “TRH” and “TRL”. TRH = Yesterday’s close or today’s high which ever is Greater. TRL = Yesterday’s close or today’s low which ever @ B.V.RUDRAMURTHY 178 is Lower.
  179. 179. WILLIAMS ACCUMULATION-DISTRIBUTION: STEP-2: 1) If today’s close is greater than yesterday’s close: Today’s W A/D = Today’s close – TRL. 2) If today’s close is less than yesterday’s close: Today’s W A/D = Today’s close – TRH. 3) If today’s close is equal to yesterday’s close: Today’s W A/D = 0 THE WILLIAMS ACCUMULATION-DISTRIBUTION IS THE CUMULATIVE TOTAL OF THESE VALUES i.e. today’s @ B.V.RUDRAMURTHY 179 A/D + (1) OR – (2) OR 0 (3) Yesterday’s cumulative A/D.
  180. 180. WILLIAMS ACCUMULATION-DISTRIBUTION:  Distribution of security is indicated by security making a new high and the William A/D indicator failing to make a new high. {Bearish Signal} (Top Failure Swing)  Accumulation of security is indicated by security making a new low and the William A/D indicator failing to make a new low. {Bullish Signal} (Bottom Failure Swing) @ B.V.RUDRAMURTHY 180
  181. 181. Bearish Signal @ B.V.RUDRAMURTHY 181
  182. 182. CHAIKIN OSCILLATOR @ B.V.RUDRAMURTHY 182
  183. 183. CHAIKIN OSCILLATOR:  Inspired by the works of Joe Granville on OBV and Williams on Accumulation and Distribution, Marc Chaikin developed a moving average oscillator.  The Chaikin Oscillator is created by subtracting a 10 period exponential moving average of the Accumulation – Distribution line from a 3 period exponential moving average of the accumulation – distribution line.  If a stock closes above its midpoint (high + close) / 2 for the day, then there was an accumulation on that particular day and if stock closes below its midpoint for the day, there was a distribution for that particular day. @ B.V.RUDRAMURTHY 183
  184. 184. CHAIKIN OSCILLATOR:  Volume is considered as the fuel which powers a healthy rally. Thus accumulation should be supported by heavy volumes and distribution by low volumes in an uptrend and vice-versa.  A Bearish divergence occurs when Prices move to newer highs and the oscillator flattens or declines.  A Bullish divergence occurs when Prices decline and creates a newer low and the oscillator flattens or moves higher. @ B.V.RUDRAMURTHY 184
  185. 185. Bullish Divergence: @ B.V.RUDRAMURTHY 185
  186. 186. ELLIOTT THEORY @ B.V.RUDRAMURTHY 186
  187. 187. ELLIOTT THEORY:  Proposed by Ralph Nelson Elliott, Wave theory was improvised by Charles J Collins.  Elliot was very much influenced by the Dow theory.  Through constant observations and nature of markets, Elliott concluded that the movements of stocks can be predicted by observing repetitive patterns of waves.  There are 3 basic tenants of Elliott wave theory: f) Pattern. g)Ratio. h)Time. @ B.V.RUDRAMURTHY 187
  188. 188. ELLIOTT THEORY:  Patterns represents the Wave Formation that comprises the most important element of the theory.  Ratios determine the Retracement Points and the Price Objectives by measuring the relationship between different waves.  Time relationships even though considered less significant are used to confirm the Patterns and Ratios.  In its most basic form, the theory says that the stock market follows a repetitive rhythm of a 5 Wave advance followed by a 3 Wave decline.  One complete cycle has 8 Waves of which 5 are advancing and 3 declining. @ B.V.RUDRAMURTHY 188
  189. 189. ELLIOTT THEORY:  Waves 1, 3 and 5 are called Rising or Impulsive Waves and Waves 2 and 4 are called Declining Waves.  After the 5 Wave advance, the 3 Wave Correction begins. (represented by a, b, c)  The Basic Pattern: 0-1 is called Wave 1, (Impulsive Wave) 1-2 is called Wave 2, (Declining Wave) 2-3 is called Wave 3, (Impulsive Wave) 3-4 is called Wave 4, (Declining Wave) 4-5 is called Wave 5, (Impulsive Wave) 5-a is Wave a, a-b is Wave b, and b-c is Wave c. @ B.V.RUDRAMURTHY 189
  190. 190. THE BASIC PATTERN: 5 b 3 1 a 4 c 2 0 @ B.V.RUDRAMURTHY 190
  191. 191. ELLIOTT THEORY:  Each larger Wave can be further sub-divided into smaller waves which follows the Fibonacci series.  The Fibonacci series 1,2,3,5,8,13,21,34,55,89,144,…..  Whether a given wave is divided into 5 or 3 is determined by the direction of the next larger wave.  Declining Waves moving against the trend (2 and 4) are subdivided only into 3 waves whereas the corrective waves a and c are subdivided into 5 waves.  Corrective waves (a) and (C) are moving in the same direction as the next larger wave 2, and hence are breakdown into 5 waves, whereas Wave (b) by comparison has only 3 waves since it is moving against the next larger wave 2. @ B.V.RUDRAMURTHY 191
  192. 192. @ B.V.RUDRAMURTHY 192
  193. 193. ELLIOTT THEORY:  It is of great importance to determine the difference between groups of 3 and 5 waves, in application of Elliott Theory to forecast the future.  A completed 5 wave move is only a completion of one of the parts of larger wave and there is more upside left unless it is 5th of 5th larger wave.  A Correction can never take place in 5 Waves, it is always of 3 Waves.  In a Bull Market if a 5 wave decline is seen, it may probably be the 1st wave of the 3 Wave (a,b,c) decline and there may be more declines to come in future.  In a Bear Market a 3 wave advance should be followed by resumption of a downtrend. @ B.V.RUDRAMURTHY 193
  194. 194. ELLIOTT THEORY:  Corrective Waves are less clearly defined and are very difficult to identify / predict.  Corrective Waves are always of 3 Waves and it can never take place in 5 Waves. (With an exception of Triangle)  Corrective Waves are classified into 3types: 1. Zig-Zags. 2. Flats. 3. Triangles. @ B.V.RUDRAMURTHY 194
  195. 195. ELLIOTT THEORY: ZIG ZAGS:  A Zig Zag is a 3 Wave Corrective Pattern against the major trend which breaks down into a 5-3-5 sequence.  Middle Wave B, falls short of the beginning of Wave A and Wave C moves well beyond the end of Wave A.  Bull Market Zig Zag (5-3-5) @ B.V.RUDRAMURTHY 195
  196. 196. ELLIOTT THEORY: ZIG ZAGS:  Bear Market Zig Zag (5-3-5) @ B.V.RUDRAMURTHY 196
  197. 197. ELLIOTT THEORY: ZIG ZAGS:  Double Zig Zag (5-3-5 (3) 5-3-5) It is a less common variation of Zig Zag which sometime Occur in big corrective patterns. It is nothing but 2 Zig Zag pattern (5-3-5) connected by an intervening a-b-c Pattern. @ B.V.RUDRAMURTHY 197
  198. 198. ELLIOTT THEORY: FLATS:  A Flat Pattern follows a 3-3-5 Pattern. Wave a is a 3 pattern wave unlike 5 incase of Zig-Zag.  Flat is more of a consolidation phase rather than correction phase. It is a sign of strength in a Bull Market. BULL MARKET FLAT: (3-3-5) Normal Correction. @ B.V.RUDRAMURTHY 198
  199. 199. ELLIOTT THEORY: FLATS: BEAR MARKET FLAT: (3-3-5) Normal Correction. @ B.V.RUDRAMURTHY 199
  200. 200. ELLIOTT THEORY: TRIANGLES: (3-3-3-3-3)  Triangles usually occur in the fourth wave and precede the final move in the direction of the major trend.  They can also appear in wave “b” in a,b,c correction.  Triangles are both Bullish and Bearish in an uptrend since they indicate resumption of an uptrend and also indicate that after an another wave up, prices will correct.  Corrective waves in case of a triangle may be of 5 waves, unlike Zig-Zag and Flats which are of 3 waves. @ B.V.RUDRAMURTHY 200
  201. 201. @ B.V.RUDRAMURTHY 201
  202. 202. ELLIOTT THEORY: TRIANGLES:  Triangles are usually continuation pattern that break downs into patterns of 5 waves, each wave having 3 waves of its own.  According to Elliot, there are 4 types of triangles namely: a) Ascending Triangles. b) Descending Triangles. c) Symmetric Triangles. d) Expanding Triangles. (Broadening Pattern)  Price Objective incase of triangles is measured based on the height of the triangle formed from the base. @ B.V.RUDRAMURTHY 202
  203. 203. ELLIOTT THEORY:  The rule of Channel lines studied earlier helps in identifying the wave counts at the point of breach of channel line.  Wave 4 in a previous bull market shall be considered as the strong support area in subsequent bear markets.  After the end of Bull market with 5 up waves and beginning of Bear market, the markets generally will not move below the 4th wave of the previous up move. It helps to identify the bottom of the bear market. @ B.V.RUDRAMURTHY 203
  204. 204. ELLIOTT THEORY: Fibonacci Numbers for Ratio’s:  The following series of Fibonacci numbers 1,2,3,5,8,13,21,34,55,89,144…… as the following salient features: a) The sum of any 2 consecutive numbers equals the next highest number. b) The ratio of any number to its next higher number approximates to 0.618. c) The ratio of any number to its next lowest number approximates to 1.618. d) The ratio of alternate number approaches to 2.618 or @ B.V.RUDRAMURTHY 204 its inverse 0.382.
  205. 205. Fibonacci Numbers for Ratio’s:  One of the Impulsive waves sometimes extend and the other two waves are equal in magnitude and time. i.e. if wave 5 extends, wave 1 and 3 should be about equal and if wave 3 extends, wave 1 and 5 should be about equal.  A Minimum target for top of Wave 3 can be obtained by multiplying the length of wave 1 by 1.618 to the bottom of Wave 2.  The Top of Wave 5 can be approximated by multiplying Wave 1 by 3.236 (2 * 1.618) and adding that value to the top or bottom of wave 1 to obtain maximum and minimum targets. @ B.V.RUDRAMURTHY 205
  206. 206. Fibonacci Numbers for Ratio’s:  Where Wave 1 and 3 are of about equal, and Wave 5 is expected to extend, Price Objective for Wave 5 is the distance between the bottom of wave 1 to top of wave 3, multiplied by 1.618 from bottom of wave 4.  For Corrective Waves, in a normal 5-3-5 Zig-Zag correction, Wave C is often about equal to the length of Wave A or multiply 0.618 by the length of Wave A and subtract that result from bottom of Wave A to get the possible length of wave C.  Incase of flat 3-3-5 correction, where Wave B reaches or exceeds the top of Wave A, Wave C will be about 1.618 the length of Wave A.  In a symmetric triangle, each Wave is to its previous wave by about 0.618. @ B.V.RUDRAMURTHY 206
  207. 207. Fibonacci Percentage Retracements:  The most commonly used percentage retracements are 61.8%, 38% and 50%.  In a strong trend, a minimum retracement is usually around 38% and in a weak trend, the maximum retracement is around 62%. (Retracements are measured from bottom of an uptrend to the top of an uptrend and vice-versa) @ B.V.RUDRAMURTHY 207
  208. 208. Fibonacci Time Targets:  It is considered to be least important of the three being Price, Ratios and time.  It is very difficult to predict and since it is least important, many followers of Elliot ignore it.  Fibonacci time targets are found by counting forward from significant tops or bottoms.  Trader counts from the top or bottom the number of trading days for future top or bottom to occur on Fibonacci days i.e. 13,21,34,55 or 89th trading day.  The above time targets are used on all types of charts namely Daily, Weekly and monthly charts.  Fibonacci time targets can be taken from top to top, top to bottom, bottom to top and bottom to bottom. But however the above targets can be foundB.V.RUDRAMURTHY the fact. @ only after 208
  209. 209. Elliot Wave Summary:  A complete Bull Market cycle is made up of 8 Waves, 5 Up Waves followed by 3 Down Waves.  Waves can be expanded into longer waves and sub-divided into shorter waves.  Correction always takes place in 3 Waves.  The 2 types of Corrections are Zig-Zag (5-3-5) and Flats (3-3-5).  Triangles are usually 4th Wave or Wave B.  Sometimes one of the impulsive waves extend and the other two will be of time and magnitude.  The number of Waves follow the Fibonacci sequence.  Fibonacci ratios and retracements are used to find out Price @ B.V.RUDRAMURTHY 209 Objectives.
  210. 210. Elliot Wave Summary:  The most common retracements are 38%, 50% and 62%.  Bear markets should not fall below the bottom of the previous 4th Wave.  The theory was originally applied to Stock Market averages and does not work as well incase of individual stocks.  Elliot works very well in case of those markets which are highly liquid and followed by large number of investors and traders.  Elliot theory should be used in conjunction with other technical indicators and not against them. @ B.V.RUDRAMURTHY 210
  211. 211. @ B.V.RUDRAMURTHY 211
  212. 212. CANDLE STICKS @ B.V.RUDRAMURTHY 212
  213. 213. BAR CHARTS VS CANDLE STICKS  Candle charts pictorially displays the Supply and Demand function by showing who is winning the battle between Bulls and Bears.  Candle Sticks not only reveal the trend but also the force or lack of force behind the trend.  Candle Stick charts indicate early signals of reversal in comparison to that of Bar Charts.  It can be used on all markets and all assets with Open, High, Close and Low data. @ B.V.RUDRAMURTHY 213
  214. 214. BAR CHARTS VS CANDLE STICKS  Studies market psychology much faster and easier than bar charts. A candles extended real body demonstrate definite bullishness or bearishness. However a small real body indicates indecision or a tug of war between the bulls and the bears with no definite winner. @ B.V.RUDRAMURTHY 214
  215. 215. INTRODUCTION  Candle Sticks predict the strong psychology of the markets, its emotions and future expectations.  “What is important in market fluctuations are not the events themselves, but the HUMAN REACTIONS to these events”. @ B.V.RUDRAMURTHY 215
  216. 216. INTRODUCTION  The use of Candle Stick charts originated in JAPAN when RICE was the medium of exchange.  Munehisa Homma is considered as the father of Candle Sticks.  “NEVER PLACE A TRADE WITH A CANDLE SIGNAL WITHOUT CONSIDERING THE RISK-REWARD RATIO OF THE POTENT TRADE” @ B.V.RUDRAMURTHY 216
  217. 217. LIMITATIONS  They need a Close to confirm the Candle Signal.  They don’t give PRICE TARGETS.  Candle Patterns cannot be used in isolation to effect trades.  Cannot be used on tick charts. @ B.V.RUDRAMURTHY 217
  218. 218. DEFINTIONS  REAL BODY: It is the rectangle portion of the Candle that represents the range between the Opening and Closing Price.  WHITE (GREEN) REAL BODY: It represents Close being higher than Open.  BLACK (RED) REAL BODY: It represents Close being lower than Open. @ B.V.RUDRAMURTHY 218
  219. 219. DEFINTIONS  SHADOW: It is the Vertical line that extends above and below the real body called as Upper and Lower Shadows. The Top of the Upper shadow is the sessions high and the Bottom being the sessions low. @ B.V.RUDRAMURTHY 219
  220. 220. DEFINTIONS  SHAVEN HEAD AND BOTTOM: If the Close is at the High’s of the session, it has no upper shadow and hence it has a “Shaven Head”. If the Close is at the Low’s of the session, it has no lower shadow and hence it has a “Shaven Bottom”. The top of the upper shadow and the bottom of the lower shadow represents the high’s and low’s of the session, whether the real body is White (Green) or Black (Red). @ B.V.RUDRAMURTHY 220
  221. 221. TIME FRAME  Like BARS, each CANDLE represents action for a specific time frame. On a daily chart, each candle represents price action for a day, on a weekly chart for a week and on a 15 minute intra day chart, a 15 minute unit of time.  A Long body (either Green or Red) indicate strong market participation, whereas a Small body indicates no market participation. @ B.V.RUDRAMURTHY 221
  222. 222. SIGNALS  EXAMPLE OF A CANDLE  A Long White real body indicate, extremely POSITIVE or BULLISH sentiments as the close is many points above its open and near to its day high.  A Long Red real body indicate, extremely NEGATIVE or BEARISH sentiments as the close is many points below its open and near to its day low. @ B.V.RUDRAMURTHY 222
  223. 223. SIGNALS  The upper shadow indicates that the day’s high could not be maintained by the Bull’s because of selling pressure at higher levels or lack of buying interest at higher levels.  The lower shadow indicates that the Buying came at lower levels to support the stock price not to go further below. @ B.V.RUDRAMURTHY 223
  224. 224. SIGNALS They believe that the first hour of the day sets the tone of the day’s market. “It is said that the amateur opens the market and the professional closes it”. @ B.V.RUDRAMURTHY 224
  225. 225. MARKET STRATEGIES @ B.V.RUDRAMURTHY 225
  226. 226. MARKET STRATEGIES  Trend change or Reversal signal represents the transformation in market psychology and an investor should trade accordingly.  As the popular saying, ”TREND IS YOUR FRIEND AND ALWAYS GO ALONG WITH IT’.  On Charts, Western trend reversal patterns include Double tops/bottoms, Triple tops/bottoms, Head and Shoulder, Island tops and bottoms, Cup and Saucers etc. @ B.V.RUDRAMURTHY 226
  227. 227. MARKET STRATEGIES  A Reversal signal should be used to initiate a new position only if that signal is in the direction of the major trend.  Consider a Stock moving in a strong uptrend, and then it either consolidates sideways or moves downwards to retracement levels, and at this time if a BULLISH CANDLE signal appears, fresh Long Positions can be initiated. @ B.V.RUDRAMURTHY 227
  228. 228. MARKET STRATEGIES  A Bullish Candle signal in a bear trend should be used to either cover short or as an alert that the markets may rally and to use that rally to sell since the major trend is down.  A trend reversal signal may indicate continuation of the previous trend or reversal of the previous trend. @ B.V.RUDRAMURTHY 228
  229. 229. TREND REVERSALS  In figure 1, trend resumes after retracement, whereas in figure 2, trend breaks down. FIGURE 1 FIGURE 2 @ B.V.RUDRAMURTHY 229
  230. 230. SUPPORTS AND RESISTANCES  Identification of Support and Resistance levels are very important.  It may be a Prior high or low, trend line, Moving average or most recent high or low.  If a Bullish Candle appears at the Support, it increases the potential of the uptrend to resume, whereas a Bearish candle at the Resistance increases the potential for the downtrend to begin. @ B.V.RUDRAMURTHY 230
  231. 231. SUPPORTS AND RESISTANCES  The Previous Supports may now act as New Resistances and Previous Resistance now as New Support.  A break of Support or Resistance on a Closing Basis is considered more important than on an Intra day basis.  A sideways trend in Japanese terminology is called as BOX Range. Close of real body above or below the range is of vital importance. @ B.V.RUDRAMURTHY 231
  232. 232. @ B.V.RUDRAMURTHY 232
  233. 233. STUDY OF SINGLE CANDLES  SPINNING TOPS: It refers to a Candle (either Green or Red) with a Small Real Body. Spinning Tops may have Upper and Lower Shadows or none at all. A Spinning Top indicate that Bulls and Bears are battling it out in a tug of war with neither the bulls nor bears being able to take dominant control. @ B.V.RUDRAMURTHY 233
  234. 234. STUDY OF SINGLE CANDLES  SPINNING TOPS: @ B.V.RUDRAMURTHY 234
  235. 235. STUDY OF SINGLE CANDLES  HIGH WAVE CANDLES: They also have diminutive real body (either green or red) like spinning top but also longer upper and lower shadows. The Upper and Lower shadows need not be of same size, but should be substantially long. High wave candles indicate outright CONFUSION in the minds of bulls and bears. @ B.V.RUDRAMURTHY 235
  236. 236. STUDY OF SINGLE CANDLES  HIGH WAVE CANDLES: @ B.V.RUDRAMURTHY 236
  237. 237. TREND ANALYSIS THRU SPINNING TOPS AND HIGH WAVE CANDLES UPTREND:  In an Uptrend supported by long green real body, small real body (either green or red) exerts caution on the long side.  Spinning tops are warnings not to follow this market on the long side and are more powerful in a market which are becoming over extended and are nearing resistance levels. A trend shift or reversal may be in the offering. @ B.V.RUDRAMURTHY 237
  238. 238. TREND ANALYSIS THRU SPINNING TOPS AND HIGH WAVE CANDLES SIDEWAYS TREND:  In a Sideways trend or a Box Range, Spinning Tops and High Wave candles have no implications of trend reversal or shift. It indicates markets simply resting before it breaks up or down from the price range. @ B.V.RUDRAMURTHY 238
  239. 239. TREND ANALYSIS THRU SPINNING TOPS AND HIGH WAVE CANDLES DOWN TREND:  In an Down trend supported by long red real body, small real body (either green or red) exerts caution on the short side.  Spinning tops are warnings not to follow this market on the short side and are more powerful in a market which are becoming over sold and are nearing Support levels. A trend shift or reversal may be in the offering. @ B.V.RUDRAMURTHY 239
  240. 240. HAMMER AND HANGING MAN  The Hammer and Hanging man candles have small real body (whether green or red) and should have long single sided shadow.  An HAMMER appears on a down trend at or near the bottom which suggests that the market is hammering out a base.  An HANGING MAN appears on an uptrend at or near the top which suggests that the market is creating a top. One must wait for a close under the Hanging man’s real body before becoming BEARISH. @ B.V.RUDRAMURTHY 240
  241. 241. @ B.V.RUDRAMURTHY 241
  242. 242. SHOOTING STAR  A Shooting Star is a top reversal line just like the Hanging man. A Shooting Star displays a long upper shadow and its small real body is at or near the lows of the session.  A Shooting Star shows trouble overhead. Because of the Shooting Stars long bearish upper shadow, we don’t need any confirmation like the Hanging man.  A Shooting Star is a bearish reversal signal and it must appear during a rally (Uptrend). @ B.V.RUDRAMURTHY 242
  243. 243. HAMMER, HANGING MAN AND SHOOTING STAR @ B.V.RUDRAMURTHY 243
  244. 244. EASY INTERPRETATION  “FEEL BULLISH WITH A HAMMER AFTER A FALLING MARKET AND BEARISH AFTER A RISING MARKET”. @ B.V.RUDRAMURTHY 244
  245. 245. THE DANGEROUS DOJI  The DOJI is a session in which the Opening and Closing prices are the same. It resembles a Cross.  Like a Spinning Top, Doji indicate a market in complete balance between Supply and Demand.  Doji represents market at a juncture of indecision and it can be an early warning that the preceding rally is losing steam. @ B.V.RUDRAMURTHY 245
  246. 246. THE DANGEROUS DOJI  Doji’s are extremely powerful in calling market tops, (especially after a long white candle) but however sometimes lose signal in calling the market bottoms.  A close over the Doji’s high is a signal that bulls have regained strength.  The Doji’s are more powerful when they occur rarely compare to its past history on a particular chart. @ B.V.RUDRAMURTHY 246
  247. 247. THE DANGEROUS DOJI  The Doji’s are named based on the placement of open and close prices of the session.  THE DRAGON FLY DOJI: It forms with the Open and Close near or at the high’s of the candle. This candle signal’s bullish implications. It resembles a Hammer without a real body. Doji’s are generally not important at the declines, but however Dragon Fly is an exception. In a oversold market, Dragon fly Doji is a bullish signal. @ B.V.RUDRAMURTHY 247
  248. 248. THE DANGEROUS DOJI  THE GRAVE STONE DOJI: It is the bearish counter part to the Dragon fly Doji. The Grave Stone Doji’s Open, Close and low resides at the bottom of the candle. Grave Stone Doji’s are extremely powerful in calling top reversals. If a Grave stone Doji appears on a market top and the next candle falls to the downside, it confirms the earlier Doji’s Signal of market topping. @ B.V.RUDRAMURTHY 248
  249. 249. THE DANGEROUS DOJI  Doji’s with longer upper and lower shadows are called as Long Legged Doji’s.  A Doji appearing on a rally is called as Northern Doji and that on a decline is called Southern Doji.  Doji’s give better signal when taken in the context of a prior trend, when they confirm other technical indicators or patterns and during consideration of follow through action. @ B.V.RUDRAMURTHY 249
  250. 250. TYPES OF DOJI’S @ B.V.RUDRAMURTHY 250
  251. 251. LONG REAL BODIES  These Long Real Bodies are called as “Belt Holds”.  They are very important at points of Support and Resistance levels.  Larger the size of the real body, more important are the signals generated by it.  Unlike Doji’s, Colour of Candles are very important in case of Long Real Bodies. @ B.V.RUDRAMURTHY 251
  252. 252. BELT HOLDS  BULLISH BELT HOLD: It is a tall Green candle that opens on or near the lows of the day and closes at or near the highs of the day. A Bullish belt hold appearing in a decline forecasts a potential rally and at the ascent confirms the intactness of the Bull trend. @ B.V.RUDRAMURTHY 252
  253. 253. @ B.V.RUDRAMURTHY 253
  254. 254. BELT HOLDS BEARISH BELT HOLD:  It is a Long Red Candle that Opens at or near the high’s of the day and then falls down towards the lows of the day and closes at or near the low’s of the day. Appearance of Bearish Belt Hold at the end of an uptrend signifies TOP REVERSAL. @ B.V.RUDRAMURTHY 254
  255. 255. BELT HOLDS  Belt holds appearing near the Support or Resistance areas confirm the strength of those areas and are more significant for a reversal to take place.  Belt hold lines increases the chances of a reversal signal when they have not appeared regularly on the chart in recent time. @ B.V.RUDRAMURTHY 255
  256. 256. BELT HOLDS  When a Long Position is to be closed? A Stock in an uptrend shows sign of tiredness and reversal, when a Doji or a Spinning top occurs and it is then confirmed by a Bearish Belt Hold.  When a Short Position is to be closed? A Stock in an Downtrend shows sign of tiredness and reversal, when a Hammer occurs and it is then confirmed by a Bullish Belt Hold. @ B.V.RUDRAMURTHY 256
  257. 257. BELT HOLDS  While analysing Candles, one should consider both Real body as well as Shadows projected by them.  A tall Green candle that also has a long upper shadow offsets some of its Bullish implications and similarly a tall Red candle that also has a long lower shadow offsets some of its Bearish implications. @ B.V.RUDRAMURTHY 257
  258. 258. BELT HOLDS  A market stabilizing at its Support and many shadows develop with definable long lower Bullish shadows (despite the size of real body), indicate that Buyers are accumulating each time the price comes down to that support levels.  Long positions can be initiated if the resistance levels are breached with heavy volumes. @ B.V.RUDRAMURTHY 258
  259. 259. CANDLE PATTERNS  BULLISH PIERCING PATTERN: It appears in the context of a down trend and is more important in an oversold market. A Bullish Piercing pattern consists of a red candle formed in a down trend and the next candle’s real body should be a green one which closes more than one half of the prior red body. Subsequent price action should confirm the above piercing pattern. @ B.V.RUDRAMURTHY 259
  260. 260. @ B.V.RUDRAMURTHY 260
  261. 261. CANDLE PATTERNS  DARK CLOUD COVER: It forms a top reversal pattern where the previous session is a strong green candle and the next session opens over the previous sessions high or close and end near the lows of the that session without leaving much of a lower shadow. It should ideally close below the half way of prior green candle. A Dark Cloud on a security formed at its resistance area, backed up with a steep uptrend is a good place to short. If the above pattern is supported by Volumes, it is a better confirmation. The high’s of the dark cloud can be kept as Stop Loss. @ B.V.RUDRAMURTHY 261
  262. 262. @ B.V.RUDRAMURTHY 262
  263. 263. CANDLE PATTERNS  DARK CLOUD COVER: It forms a top reversal pattern where the previous session is a strong green candle and the next session opens over the previous sessions high or close and end near the lows of the that session without leaving much of a lower shadow. It should ideally close below the half way of prior green candle. @ B.V.RUDRAMURTHY 263

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