The document discusses technical analysis and its key concepts. It defines technical analysis as identifying trend reversals using indicators to analyze relationships between price, volume, and demand/supply. The assumptions of technical analysis are that the market discounts all information and moves in trends. Charting techniques discussed include Dow theory, identifying primary/secondary trends, and support/resistance levels. Technical indicators examined include moving averages, where crossing the average provides buy/sell signals. Sentiment indicators like volume and odd-lot trading are also summarized.

1. Technical Analysis
Dr. Mohammed Arif Pasha
Principal
Brindavan College
Bangalore - 560063

2. Concept of Technical Analysis
•Technical Analysis is the process of identifying trend
reversals at an earlier stage
• to formulate the buying and selling strategy with the help of
several indicators
• to analyze the relationship between Price, volume of supply-
demand for the overall market and the individual stock.
•Attempts to exploit stock price patterns for profit.
•Assumes prices adjust slowly to their true equilibrium values

3. Assumptions of Technical Analysis
1) The market value is determined by interaction of demand
and supply.
2) The market discounts everything. (fears, hopes, inside
information, right issue, bonus shares, earnings, loss etc.)
3) The market always moves in a trend. (increasing or
decreasing)
4) In rising market, prices move up and falling markets, prices
fall.
5) It assumes that past prices predict the future.

6. The Dow Theory
•Uses price and volume trends to predict stock prices.
•Identifies primary, secondary, and tertiary trends.
•Predicts support and resistance price levels.
The theory has three types of market movements
• the primary trend, the intermediate trend and the short term trend.
• The primary trend may be the broad upward or downward movement which
can often last a year or more.
• The intermediate trend is corrective movement, which can move against the
primary trend and may last for one month to several months.
• The short term trend refers to day to day price movements testing for few
hours to few days.
• These trends are compared to tide waves and ripples of the sea, which are
called fluctuations.

7. The Dow Theory
• It employs two of the Dow Jones averages,
• the industrial average and
• the transportation average.
• The theory is based on the assertion that
• measures of stock prices tend to move together.
• If the Dow Jones industrial average is rising, then the transportation
average should also be rising. Such simultaneously price movements
suggest a strong bull market.
• Conversely, a decline in both industrial and transportation averages
moving in the opposite direction, the market is uncertain as to the
direction of future stock prices.

8. Dow Jones Industrial Averages in 1988

9. Hypothesis of Dow Theory
Charles Dow developed this theory to explain the movement of indices on the
basis of certain hypothesis.
1) No single individual can influence the major trend of the market.
2) Market discounts every thing (calamities, fire etc.)
3) It is not a tool but provides way to understand the theory better.

10. LIMITATIONS OF DOW THEORY
Following are the limitations of Dow Theory:
• It is not a theory but only an interpretation of known data.
• A theory should be able to explain why a phenomenon occurs.
• No attempt is made to explain why the two averages should be able
to forecast future prices.
• Since it does not explain why two averages to forecast future stock
prices, it is not acceptable in its forecast.
• Because there was a considerable lag between the actual turning
points and those indicated by the forecast.
• The Dow Theory has poor predictive power and lack accuracy.
• Therefore it has been subject to much criticism, as the results are less
accurate.

11. Trend
• A trend is a direction of movement.
• Share prices can either increase or fall or remain flat
• These directions are known as rising, falling and flat trend
• But share prices do not rise or fall in straight line
• The rise or fall in price experiences a counter move
• If a share price increase, the counter move will be a fall in price and vice versa.
• The share prices move in a zig zag manner

12. TREND LINE
Y
RISING TREND LINE
P FLAT TREND LINE
R
I
C
E
FALLING TREND LINE
X
DAYS

13. PRIMARY TREND
• The prices of a stock may be either move up or come down.
• Upward trend in the market is called “bull market” which shows three peaks.
• Each peak is higher then the previous one.
• Similarly the downward trend.
• The reactions after peak halts before the previous bottom leading to revival after
three peaks.
• The upward trend is characterized by three stages namely
• accumulative, gig and excess.
• The phases leading to peaks improve the corporate profit margin and encourage
more investors to buy stocks and attract speculation.
•
• Similarly in second phase, the corporate prices rise further and in the third phase,
prices advance due to speculation and inflation.
• The three phases of bull market are shown in the chart below,
• If the market shows a downward trend, it is called “bear market” in the case of bear
market, the reverse will happen.

14. Trends

15. Bull Market
Y
T3
P T2
R
I Speculation
C Phase 3
E T1
B2
Good corporate
earning Phase -2
B1
Revival of Market confidence Phase – 1
X
DAYS

16. Bear Market
The first phase of fall begins with loss of hopes where the increase in prices is much lower
than previous high forcing the investors to sell the securities.
In the second phase companies report low profits and declare lesser dividend which lead to
selling pressure. In the final phase there is heavy sale of shares.
The primary bear market is characterized by three stages namely distribution, big move and
despair.
Y
LOSS OF HOPE (PHASE – 1)
T1
RECESSION IN BUSINESS (PHASE -2)
T2
B1 DISTRESS
SELLING
PHASE – 3)
B2
B3
X
DAYS

17. SECONDARY OR INTERMEDIATE TREND
The intermediate trend moves against the main trend and leads to correction.
In the bull market, the intermediate trend results in fall while in the bear market, the intermediate trend carries the
price upward and corrects the primary trend and the correction would be 33% to 66% of the earlier rise or fall.
The intermediate trend is quicker compared to primary trend.
SHORT TERM TREND
The short term trend is the daily price fluctuation which tries to correct the intermediary trend movements, it
should be noted that the investors should concentrate more on primary and intermediate trends and not on the
minor trends.
The above three are the three stages of primary bull market and primary bear market.
Y BULL MARKET
P
R B
I A
C 33% to 66% of ‘B’
E 33% to 66% of ‘A’
X
DAYS

18. SUPPORT AND RESISTANCE LEVEL
• Anybody who is interested in technical analysis should possess the knowledge
of support and resistance level.
• A support level exists at a price where considerable demand for that stock is
expected to prevent further fall in the price level.
• The fall in the price may be halted for the time being or it may result even in
price reversal.
• In the support level, demand for the particular scrip is expected.
• In the resistance level, the supply of scrip would be greater than the demand
and further rise in price is prevented.
• The selling pressure is greater and the increase in the price is halted for the
time being.

19. SUPPORT AND RESISTANCE LEVEL
Y
SUPPORT LEVEL
P
R
I
C
E
SUPPORT LEVEL
X DAYS

20. RESISTANCE LEVEL
Y
P
R
I RESISTANCE LEVEL
C
E
X
DAYS
Support and resistance usually occur whenever the turnover of a large number of shares tends to be concentrated
at several price levels.
When the stock touches a certain level and then drops, this is called resistance and if the stock reaches down to
certain level and then rises there exists a support.
The levels can switch from resistance to support or from support to resistance.

21. Technical Analysis and EMH
• Technical analysis clashes with the EMH hypothesis.
• EMH predicts rapid adjustment of prices with the onset of new
information.
• Evidence for the success of technical analysis is poor.

22. Charting: Elliott Wave Theory
• Stock prices can be described by a set of wave patterns
• Long-term and short-term wave cycles are super imposed on each other
• By interpreting the cycles, one can predict broad movements

23. Point and Figure Chart

24. Candlestick Chart

25. Charting: A Warning
• Seeing patterns that don’t exists
• After the fact, one can always find patterns and trading rules that would
have generated enormous profits
• What has worked in the past may not work in the future.

26. Figure 19-7 Actual and Simulated Stock Prices for 52 Weeks

27. Technical Indicators: Sentiment Indicators
• Market Volume: Higher volume gives strong confirmation to price trend.
Trin>1: Bear Market; Trin<1: Bull Market
• Odd-lot Trading (less than 100 shares): Small investors tend to miss key market turning
points.
- Odd-lot buying heavy investors should be bearish.
- Odd-lot selling heavy investors should be bullish.
advancing
Number
advancing/
Volume
declining
Number
declining/
Volume
Trin 

28. Market Structure Indicators
Moving Averages
• Average price over some historical period (5 weeks or 200 days)
• When current price crosses the average, a trading signal occurs
• Bullish signal when the current price rises above the moving average
• Bearish sign when the current price falls below the moving average

29. Technical Indicators: Market Structure
Moving Average: Average over a given interval,
continuously updated.
Price
And
M.A.
Time
Price
Moving Average
Averaging interval
Bearish Signal
Bullish Signal

30. Moving Average for Microsoft

31. Moving Averages