2. TECHNICAL ANALYSIS
The share price movement is analysed broadly with two approaches,
namely
Fundamental approach
Technical approach
Fundamental approach analyses the share price on the basis of economic,
industry and economic statistics .if the price of share is lower than
intrinsic value ,investor buy it ,if he finds the price of the share higher
than the intrinsic value he sells and gets profits.
The technical analyst mainly studies the stock price movement of the
security market if there is an uptrend in the price movement investor
may purchase the scrip, if fall in the price he may sell it and move from
the scrip.
Basically fundamental analysts and the fundamental analyst aim at good
return on investment.
3. Meaning of technical analysis
It is a process of identifying trend reversals at an earlier stage to
formulate the buying and selling strategy .With the help of
several indicators they analyse the relationship between price
volume and supply demand for the overall market and the
individual stock .Volume is favourable on the upswing i.e. the
number of shares traded is greater than before and on the
downside the number of shares traded dwindles.
4. ASSUMPTIONS
The market value of the scrip is determined by the interaction of
supply and demand .
The market discount everything .Insider information regarding the
issuing of bonus shares and right issues may support the prices. the
loss of earning may fall the prices.
The security prices move in trends or waves which can be both
upward or downward depending upon the sentiments ,psychology
and emotions of operators or traders .
Except minor variations, stock price tend to move in trends which
continue to persists for an applicable length of time.
Change in trends in stock prices are caused whenever there is a shift
in the demand and supply factors.
Shifts in demand and supply, no matters when and why they occurs
,can be detected through charts specially to show market actions .
5. Differences between technical and
fundamental analysis
Technical analysis
Technical analysis try to predict short
term price movements
The focus of technical analysis is
mainly on internal market
particularly, price and volume data
Speculators who want to make quick
money mostly use results of technical
analysis.
Technical analysis is a simple and
quick method of forecasting behaviour
of stock prices.
Technical analysts feel that their own
techniques and charts are quicker
Fundamental analysis
Fundamental analysts try to predict
short term price movements.
Fundamental analysis is on the
factors relating to the economy,
industry and company.
Investor who invest in long term
basis use of results of fundamental
analysis.
Fundamental analysis is a complex
,time consuming and tedious in
nature .
Fundamental analysis is along term
approach .even if an analyst identifies
an under priced security, market may
take time to bid its price up.
6. Tools and techniques of technical
analysis
Price : when there is change in price of securities ,it is
reflected in the changes in investor attitude and demand and
supply of securities.
Time :The degree of movement in price is a function of
time .The long it takes for a reversal in trend, greater will be
the price change that follows.
Volume : It measures the number of a stock's shares that
are traded on a stock exchange in a day or a period of time.
Volume is important because it confirms trend directions.
Width : A technical analysis theory that predicts the
strength of the market according to the number of stocks
that advance or decline in a particular trading day.
7. History of technical analysis
The technical analysis is based on the doctrine given
by Charles H.Dow in 1884,in the wall street journal.
the analysts used charts of individual stocks and
moving averages in the early 1920s. Later on, with
the aid of calculators and computers ,sophisticated
techniques came into vogue.
8. Dow theory
According to Charles Dow : The market is always
considered as having three movements and all going
at the same time.
The first is narrow movement from day to day.
The second is the short swing ,running from two
weeks to a month or more.
The third movement covering at least 4 years in its
duration.
The theory advocates that stock behaviour is 90%
psychological and 10% logical.
9. Basic hypothesis of Dow theory
The first hypothesis is that, no single individual or buyer can
influence the major trend of the market. However an
individual investor can affect the daily price movement by
buying or selling huge quantum of particular scrip.
The second hypothesis is that market discount everything.
Even natural calamities such as earthquake also get quickly
discounted in the market.
His third hypothesis is that theory is not infalliable,it is not a
tool to bear the market but provide a way to understand it.
10.
11. Trend Lines
There are three basic kinds of
trends:
An Up trend where prices are generally
increasing.
A Down trend where prices are
generally decreasing.
A flat trend line
12.
13. Primary trend
The security price may be either increasing or decreasing.
when market exhibit the increasing trend, it is called bull
market. The bull market shows the three clear cut peaks.
Each peak is higher than the previous peak. The bottoms are
also higher than the previous bottoms. The phases leading to
three peaks are revival, improvement in corporate profit and
speculation. The revival period encourage more and more
investors to buy scrip', their expectations about the future
being high. In the second phase, increased profits of
corporate would result in further price rise. In the third
phase ,prices advances due to inflation and speculation.
19. Bar charts
In this chart prices are
indicated on vertical axis and
time on horizontal axis .
The vertical part of the line
shows the high and low
prices at which the stock
traded or price moved.
A short horizontal tick on
the vertical line indicates the
price level at which stock.
20. Point and figure chart
In PFC there is no time scale ,
only price movement are plotted .
As a share price rises ,a vertical
column of crosses is plotted.
When it falls ,a circle is plotted
in the next column and this
is continued downward
While the price continues to fall.
When it rises again , a new vertical
21. Resistance and support level
The peak price of a stock is called the resistance
area.
Resistance level is the price level to which the stock
or
market rises and then falls from repeatedly.
This occurs during uptrend or a sideway trend .
It is a price level to which the market advances
repeatedly but cannot break through.
Support level it is a price level to which stock or
market price falls or bottom out repeatedly and
then bounce up again .
22. Head and Shoulders
This formation is characterized by
two small peaks on either side of a
larger peak.
This pattern occurs at the end of
bull market and characterized by
two similar advances flanking a
higher advance just as head lies in
between two shoulders.
This is a reversal pattern, meaning
that it signifies a change in the
trend.
Head
Head
Left Shoulder
Left Shoulder
Right Shoulder
Right Shoulder
Neckline
Neckline
H&S Top
H&S Bottom
23. Tops and Bottoms
Tops and Bottoms are formed at the beginning or end of a new trend. The investor should buy
at the bottom and exit before the top has been reached.
Double Tops and Bottoms
This chart pattern that signals a trend reversal - it is considered to be one of the most reliable
and is commonly used. These patterns are formed after a sustained trend and signal that the
trend is about to reverse. The pattern is created when a price movement tests support or
resistance levels twice and is unable to break through. This pattern is often used to signal
intermediate and long-term trend reversals.
In the case of the double top pattern , the price movement has twice tried to move above a
certain price level. After two unsuccessful attempts at pushing the price higher, the trend
reverses and the price heads lower.
In the case of a double bottom , the price movement has tried to go lower twice, but has
found support each time. After the second bounce off of the support, the security enters a new
trend and heads upward.
24.
25. Chart pattern
A chart pattern is a distinct formation on a stock chart that creates a
trading signal, or a sign of future price movements. Chartists use these
patterns to identify current trends and trend reversals and to trigger buy
and sell signals.
26. V Formation
As the name indicates in the V formation there is a long sharp decline and a fast reversal. In the V
pattern the market interest changes quickly from hope to fear and vice versa. In inverted V first the
price rise occurs and then it declines
27. Moving Average
Markets do not rise in a straight line. The underlying trend in the market can be
studied by smoothening the data. This is done by using moving averages.
The word moving means that the body of data moves ahead to include the recent
observation.
The moving average indicates the underlying trend in the scrip.
They also form the building blocks for many other technical indicators and overlays,
such as Bollinger Bands, MACD etc.
For identifying short-term trend, 10 to 30 days moving averages are used.
In the case of medium-term trend 50 to 125 days are adopted.
To identify long-term trend 200 days moving average is used.
The two most popular types of moving averages are the Simple Moving Average
(SMA) and the Exponential Moving Average (EMA)
28. Why the term moving average
The Simple Moving Average is arguably the most
popular technical analysis tool used by traders. The
Simple Moving Average (SMA) is often used to
identify trend direction, but can be used to
generate potential buy and sell signals. The SMA is
an average, or in statistical speak - the mean. An
example of a Simple Moving Average is presented
below:
The prices for the last 5 days were 25, 28, 26, 24, 25.
The average would be (25+28+26+26+27)/5 = 26.4.
Therefore, the SMA line below the last days price of 27
would be 26.4. In this case, since prices are generally
moving higher, the SMA line of 26.4 could be acting as
29. Indicators
Volume of Trade
Volume expands along with the bull market and narrows down in the bear
market.
Technical analyst use volume as an excellent method of confirming the trend.
In a bullish market the volume of trade is large with rise in price whereas in
bearish market the volume of trade is large with fall in price
Volume confirm chart patterns
Breadth of the Market
The net difference between the number of stock advanced and declined during
the same period is the breadth of the market.
A cumulative index of net differences measures the market breadth.
In a bullish market , a bearish signal is given when the A/D line slopes down and
the market is rising and vise versa.
30. short selling
This is a technical indicator also known as short interest.
It refers to the selling of shares that are not owned. The bears are short
sellers who sell now in hope of buying later at a lower price.
When demand for a particular share increases, the outstanding short
positions also increase. It indicates a future rise in prices.
Short sales of a particular month are compared with the average daily
volume of the preceding month. If the ratio is less than 1, the market is
said to be weak or overbought and a decline can be expected. If the value
is above 1 it indicates a bullish trend. If it is above 2 , the market is said to
be oversold.
31. Oscillators
Oscillator shows the share price movement across a reference point
from one extreme to another. The momentum indicates:
Overbought and oversold conditions of the scrip or the market.
Signaling the possible trend reversal.
Rise or decline in the momentum.
32. Relative Strength Index (RSI)
RSI was developed by Wells Wilder.
It identifies the inherent technical strength and weakness of a particular scrip or
market. RSI can be calculated for a scrip by adopting the following formula. RSI can be
calculated for 5,7,9 and 14 days.
RSI =
Rs =
If RSI crosses 70 there may be down turn. If RSI falls below 30, there may be an
uptrend.
If the share price is falling and RSI is rising, a divergence is said to have occurred.
Divergence indicates the turning point of the market.
If RSI is rising in overbought zone, it indicates a fall in prices.
If RSI is in oversold zone, it indicates a rise in prices.
100
100
1 Rs
− ÷+
Average gain per day
Average loss per day
33. Rate of Change (ROC)
ROC measures the rate of change between the current price and the
price ‘n’ number of days in the past.
ROC helps to find out the overbought and oversold positions in a
scrip. Closing prices are used to calculate ROC. Calculation of ROC
for 12 weeks or 12 months is popular.
ROC can be calculated by two methods.
In the first method current closing price is expressed as a percentage of the 12
days or weeks in past.
In the second method, the percentage variation between the current price and
the price 12 days in the past is calculated.
34. ROC = Today’s Price 100
Price ‘n’ days back
ROC = Today’s Price 100 - 100
Price ‘n’ days back
The main advantage of ROC is that it helps in identifying overbought and
oversold positions. Historic high and low of ROC have to be identified to
locate overbought and oversold regions.
35. Filter Rule
In technical analysis, an arbitrarily set percentage of increase or decline
in a stock's price that the analyst sees as an indicator to buy or sell the
stock. ... The filter rule exists to help the investor avoid buying or selling
at insignificant changes in price.
36. An odd lot trading
An investor who purchases shares or other securities in small or unusual
quantities. Stocks are typically traded in increments of 100 shares, a
quantity known as a round lot or board lot. The cost of 100 shares of a
security may be beyond the means of an individual investor, or may
represent a larger investment than the investor wishes to make. Thus,
the investor purchases an odd lot
37. Triangles
Triangles are well-known chart patterns used in
technical analysis. The three types of triangles, which
vary in construct and implication, are the symmetrical
triangle, ascending and descending triangle. These chart
patterns are considered to last anywhere from a couple
of weeks to several months.
Symmetrical Triangle
The symmetrical triangle is a pattern in which two trend
lines converge toward each other. This pattern is neutral
in that a breakout to the upside or downside is a
confirmation of a trend in that direction
38. Ascending and Descending triangle In an ascending triangle, the upper trend
line is flat, while the bottom trend line is
upward sloping. This is generally thought of
as a bullish pattern in which chartists look
for an upside breakout.
In a descending triangle, the lower trend
line is flat and the upper trend line is
descending. This is generally seen as a
bearish pattern where chartists look for a
downside breakout.
39. Flags
Flags are a pause in the trend, where the price
becomes confined in a small price range
between parallel lines. This pause in the middle
of a trend gives the pattern a flag like
appearance.
Flags are generally short in duration, lasting
several bars, and do not contain price swings
back and forth. Flags may be parallel or upward
or downward sloping
40. Pennants
Pennants are similar to symmetrical
triangle.
There are bullish and bearish
pennants.
The bullish trend occurs when the
value of scrip move above the
upward trend line.
In the bearish pennants, upward
trend line is falling and lower trend
line is rising.
