Technical analysis

1
TECHNICAL ANALYSISTECHNICAL ANALYSISTECHNICAL ANALYSISTECHNICAL ANALYSIS
(A Project Report)
Under the Guidance of
Lect. Amit Bagga
The Indian Institute of Financial Planning

2
DECLARATIONDECLARATIONDECLARATIONDECLARATION
I, Mr Haarshal, MBA Student of The Indian Institute of Financial
Planning, New Delhi, hereby declare that I have completed the project titled
“Technical analysis”.
The report work is original and the information/data included in the report is
true to the best of my Knowledge. Due credit is extended on the work of
Literature/Secondary Survey by endorsing it in the Bibliography as per
prescribed format.
Signature of the Student with Date
Haarshal

3
CERTIFICATECERTIFICATECERTIFICATECERTIFICATE
I, Lectr. Amit Bagga hereby certify that Mr Haarshal, MBA Student of The
Financial Institute of Financial Planning, New Delhi has completed a project
titled Technical analysis. The work of the student is original and the
information included in the project is true to the best of my Knowledge.
Signature of Guide with Date
Lectr. Amit Jha
The Indian Institute of Financial Planning

4
TABLE OF CONTENTSTABLE OF CONTENTSTABLE OF CONTENTSTABLE OF CONTENTS
S.NO. PARTICULARS PAGE
NO.
i) Declaration 2
ii) Certificate 3
1. Introduction 5
2. Technical analysis 8
3 Dow Theory 16
4 Fundamental vs Technical Analysis 19
5 Chart Types 20
6 Candlesticks 27
7 Trends In Technical Analysis 42
8 Volume and Open Interest 51
9 Chart Patterns 55
10 Moving Averages 66
11 Major Indicators and Oscillators 78
12 Elliott Waves 94
13 Fibonacci Sequence 99
14 Fibonacci Retracement 101
15 Bibliography 104

5
INTRODUCTION:INTRODUCTION:INTRODUCTION:INTRODUCTION:
EQUITY ANALYSIS
Professional investor will make more money & less loss than, who let
their heart rule. Their head eliminate all emotions for decision making. Be
ruthless & calculating, you are out to make money. Decision should be based on
actual movement of share price measured both in money & percentage term &
nothing else. Greed must be avoided
Patience may be a virtue, but impatience can frequently be profitable.
In Equity Analysis anticipated growth, calculations are based on considered
FACTS & not on HOPE. Equity analysis is basically a combination of two
independent analyses, namely Fundamental analysis & Technical analysis.
The subject of Equity analysis, i.e. the attempt to determine future share price
movement & its reliability by references to historical data is a vast one,
covering many aspect from the calculating various FINANCIAL RATIOS,
plotting of CHARTS to extremely sophisticated indicators.

6
A general investor can apply the principles by using the simplest of tools:
pocket calculator, pencil, ruler, chart paper & your cautious mind, watchful
attention. It should be pointed out that, this equity analysis does not discuss how
to buy & sell shares, but does discuss a method which enables the investor to
arrive at buying & selling decision. The financial analysts always need
yardsticks to evaluate the efficiency & performances of any business unit at the
time of investment. Fundamental analysis is useful in long term investment
decision. In Fundamental analysis a company s goodwill,
It’s performances, liquidity, leverage, turnover, profitability & financial health
was checked & analysis with the help of ratio analysis for the purpose of long
term successful investment.
Technical analysis refers to the study of market generated data like prices
& volume to determine the future direction of prices movements.
Technical analysis mainly seeks to predict the short term price travels.
The focus of technical analysis is mainly on the internal market data, i.e. prices
& volume data. It appeals mainly to short term traders.
It is the oldest approach to equity investment dating back to the late 19th
century.

7
Assumption’s for the Equity Analysis.
1. Works only in normal share-market conditions with great reliability, it also
works in abnormal share-market conditions, but with low reliability.
2. Equity analysis is purely based on the INVESTMENT PHILOSOPHY, so the
investment object has vital importance associated to return along with risk.
3. Cash management gets the magnitude role, because the scenario of equity
analysis is revolving around the term money
4. Portfolio management, risk management was up to the investor s knowledge.
5. Capital market trend is always a friend, whether it is short run or long run.
6. You are buying stock & not companies, so don t are curious or panic to do
Post-mortem of companies’ performances
7. History repeats: investors & speculators react the same way to the same types
of events homogeneously.
8. Capital market has a typical market psychology along with other issues like;
perceptions, the crowd Vs the individual, tradition s & trust.
9. An individual perceptions about the investment return & associated risk may
differ from individual to individual.
10. Although the equity analysis is art as well as sciences so, it also has some
exceptions.

8
TECHNICAL ANALYSISTECHNICAL ANALYSISTECHNICAL ANALYSISTECHNICAL ANALYSIS:
“Technical analysis refers to the study of market generated data like
prices & volume to determine the future direction of prices movements.”
Technical Analysis is the forecasting of future financial price
movements based on an examination of past price movements. Like
weather forecasting, technical analysis does not result in absolute
predictions about the future. Instead, technical analysis can help
investors anticipate what is "likely" to happen to prices over time.
Technical analysis uses a wide variety of charts that show price over
time.
Technical analysis mainly seeks to predict the short term price travels. It
is important criteria for selecting the company to invest. It also provides the
base for decision-making in investment. The one of the most frequently used
yardstick to check & analyse underlying price progress. For that matter a verity
of tools was consider.
EQUITY ANALYSIS
TECHNICAL ANALYSIS FUNDAMENTAL ANALYSIS

9
This Technical analysis is helpful to general investor in many ways. It
provides important & vital information regarding the current price position of
the company.
Technical analysis involves the use of various methods for charting,
calculating & interpreting graph & chart to assess the performances & status of
the price. It is the tool of financial analysis, which not only studies but also
reflecting the numerical & graphical relationship between the important
financial factors.
The focus of technical analysis is mainly on the internal market data, i.e.
prices & volume data. It appeals mainly to short term traders. It is the oldest
approach to equity investment dating back to the late 19th century.
It uses charts and computer programs to study the stock’s trading volume
and price movements in the hope of identifying a trend.
In fact the decision made on the basis of technical analysis is done only
After inferring a trend and judging the future movement of the stock on
the basis of the trend. Technical Analysis assumes that the market is efficient
and the price has already taken into consideration the other factors related to the
company and the industry. It is because of this assumption that many think
technical analysis is a tool, which is effective for short-term investing.

10
ASSUMPTIONS OF TECHNICAL ANALYSIS
1. Price Discounts Everything
A major criticism of technical analysis is that it only considers price movement,
ignoring the fundamental factors of the company. However, technical analysis
assumes that, at any given time, a stock's price reflects everything that has or
could affect the company - including fundamental factors. Technical analysts
believe that the company's fundamentals, along with broader economic factors
and market psychology, are all priced into the stock, removing the need to
actually consider these factors separately. This only leaves the analysis of price
movement, which technical theory views as a product of the supply and demand
for a particular stock in the market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This
means that after a trend has been established, the future price movement is more
likely to be in the same direction as the trend than to be against it. Most
technical trading strategies are based on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself,
mainly in terms of price movement. The repetitive nature of price movements is
attributed to market psychology; in other words, market participants tend to

11
provide a consistent reaction to similar market stimuli over time. Technical
analysis uses chart patterns to analyse market movements and understand
trends. Although many of these charts have been used for more than 100 years,
they are still believed to be relevant because they illustrate patterns in price
movements that often repeat themselves
History of Technical Analysis:
Technical Analysis as a tool of investment for the average investor
thrived in the late nineteenth century when Charles Dow, then editor of the Wall
Street Journal, proposed the Dow Theory. He recognized that the movement is
caused by the action/reaction of the people dealing in stocks rather than the
news in itself.
Technical analysis is a method of evaluating securities by analysing the
Statistics generated by market activity, such as past prices and volume.
Technical analysts do not attempt to measure a security's intrinsic value, but
instead use charts and other tools to identify patterns that can suggest future
activity. Just as there are many investment styles on the fundamental side,
There are also many different types of technical traders. Some rely on chart
patterns; others use technical indicators and oscillators, and most use some
combination of the two. In any case, technical analysts' exclusive use of
historical price and volume data is what separates them from their fundamental
counterparts. Unlike fundamental analysts, technical analysts don't care whether

12
a stock is undervalued the only thing that matters is a security's past trading
data and what information this data can provide about where the Security might
move in the future.
Basic premises of technical analysis:
1. Market prices are determined by the interaction of supply & demand forces.
2. Supply & demand are influenced by variety of supply & demand affiliated
Factors both rational & irrational
3. These include fundamental factors as well as psychological factors.
4. Barring minor deviations stock prices tend to move in fairly persistent
trends.
5. Shifts in demand & supply bring about change in trends.
6. This shift s can be detected with the help of charts of manual & computerized
action, because of the persistence of trends & patterns analysis of past market
data can be used to predict future prices behaviours.
Drawbacks / limitations of technical analysis:
1. Technical analysis does not able to explain the rezones behind the
employment or selection of specific tool of Technical analysis.
2. The technical analysis failed to signal an uptrend or downtrend in time.

13
3. The technical analysis must be a self-defeating proposition. As more & more
people use, employ it the value of such analysis trends to reduce.
Why we use TECHNICAL ANALYSIS?
1) Technical analysis provides information on the best entry and
Exit points for a trade.
2) On a chart, the trader can see where momentum is rising, a
Trend is forming, a price is dipping or other events are developing that show the
best entry point and time for the most profitable trade. With the constant
movement of various currencies against each other in the Forex market, most
Traders will focus on using technical indicators to find and place their trades.
IS TECHNICAL ANALYSIS DIFFICULT?
1) Technical analysis is not difficult, but it requires studying
different types of charts such as the hourly or daily charts, knowing which
technical indicators to use and how to use them.
2) Computers and the Internet have made this process much easier.
Most brokers provide basic charts and technical indicators for free or at a very
low cost.
3) One way to avoid getting frustrated by all the lines, colours, and
graphics are to focus on using only a few indicators that will

14
provide you with the information needed. Try not to clutter the
Chart with too much information.
Usually the following tools & instruments are used
to do the technical analysis:
Price Fields
Technical analysis is based almost entirely on the analysis of price and volume.
The fields which define a security's price and volume are explained below.
Open - This is the price of the first trade for the period (e.g., the first trade of
the day). When analysing daily data, the Open is especially important as it is the
consensus price after all interested parties were able to "sleep on it."
High - This is the highest price that the security traded during the period. It is
the point at which there were more sellers than buyers (i.e., there are always
sellers willing to sell at higher prices, but the High represents the highest price
buyers were willing to pay).
Low - This is the lowest price that the security traded during the period. It is
the point at which there were more buyers than sellers (i.e., there are always
buyers willing to buy at lower prices, but the Low represents the lowest price
sellers were willing to accept).
Close - This is the last price that the security traded during the period. Due to
its availability, the Close is the most often used price for analysis. The
relationship between the Open (the first price) and the Close (the last price) are

15
considered significant by most technicians. This relationship is emphasized in
candlestick charts.
Volume - This is the number of shares (or contracts) that were traded during
the period. The relationship between prices and volume (e.g., increasing prices
accompanied with increasing volume) is important.
Open Interest - This is the total number of outstanding contracts (i.e., those
that have not been exercised, closed, or expired) of a future or option. Open
interest is often used as an indicator.
Bid - This is the price a market maker is willing to pay for a security (i.e., the
price you will receive if you sell).
Ask - This is the price a market maker is willing to accept (i.e., the price you
will pay to buy the security).

16
DOW THEORY:DOW THEORY:DOW THEORY:DOW THEORY:
• “Charles H. Dow” who was editor of Wall Street Journal in 1900 is
known for the most important theory developed by him with technical
indicators. In fact, the theory gained so much significance that the theory
was named after him.
• The Dow Theory has been further developed by other technical analysts
and it forms the basis of the technician’s theory.
• The theory predicts trends in the market for individual and total existing
securities. It also shows reversals in stock prices.
• According to ‘Dow theory’, the market always has three movements and
the movements are simultaneous in the nature. These movements may be
described as:-
• The narrow movement which occurs from day to day.
• The short swing which usually moves for short time like two weeks and
extends up to a month; this movement can be called a short term
movement, and
• The third movement is also the main movement and it covers for years in
its duration.
• According to the type of movements, they have been given special
names.

17
• The narrow movement is called ‘fluctuations’ the short swing is better
known as ‘secondary movements’ and the main movement is also called
the ‘primary trends’.
• Narrow movements are called ‘fluctuations’. Secondary movements are
those which last only for a short while and they are also known as
“corrections”. Primary trends are, therefore, the main movement in the
stock market. It is also called ‘Bears” and ‘Bulls” market.
• According to the Dow Theory, the price movements in a market can be
identified by means of a line-chart.
• In this chart the technical analyst should plot the price of the share. With
it, he should also mark the market average every day.
• This would help in identifying the primary and secondary movements.
• Dow theorists believe in ‘momentum’, which, according to them, keeps
the price moving in the same direction.
• They believe in primary trends, which according to them are momentum
or bear and bull markets. The momentum will carry the prices further but
momentum of primary trend will be halted by the terminology used by
technical analysts called ‘support areas’ and ‘resistance areas’.

18
Criticisms of Dow Theory
• The Dow Theory is subject to various limitations in actual practice.
• Dow has developed this theory to depict the general trend of the market
but not with the intention of projecting the future trend or to diagnose the
buy and sell signals in the market.
• These applications of the Dow Theory have come in the light of
analytical studies of financial analysts.
• This theory is criticized on the ground that it is too subjective and based
on historical interpretation; it is not infallible as it depends on the
interpretative ability of the analyst.
• The results of this theory do not also give meaningful and conclusive
evidence of any action to be taken in terms of buy and sell operations.
Candlestick Charting
• The candle is comprised of two parts, the body and the shadows. The
body encompasses the open and closing price for the period. The candle
body is black if the security closed below the open, and white if the close
was higher than the open for the period. The candlestick shadow
encompasses the intra period high and low.

19
Fundamental vs. Technical Analysis
Technical analysis and fundamental analysis are the two main schools of
thought in the financial markets. As I've mentioned, technical analysis looks at
the price movement of a security and uses this data to predict its future price
movements. Fundamental analysis, on the other hand, looks at economic
factors, known as fundamentals.
Fundamental analysis takes a relatively long-term approach to
analysing the market compared to technical analysis. While technical
analysis can be used on a timeframe of weeks, days or even minutes,
fundamental analysis often looks at data over a number of years.

20
PRICE STYLES (CHARTS TYPES)PRICE STYLES (CHARTS TYPES)PRICE STYLES (CHARTS TYPES)PRICE STYLES (CHARTS TYPES)::::
Price in a chart can be displayed in four styles:
1. Bar Chart.
2. Line Chart.
3. Candlestick Chart.
4. Point and Figure Charts.
1) Bar Charts:
The bar chart expands on the line chart by adding several more key pieces of
information to each data point. The chart is made up of a series of vertical lines
that represent each data point. This vertical line represents the high and low for
the trading period, along with the closing price. The close and open are
represented on the vertical line by a horizontal dash. The opening price on a bar
chart is illustrated by the dash that is located on the left side of the vertical bar.
Conversely, the close is represented by the dash on the right. Generally, if the
left dash (open) is lower than the right dash (close) then the bar will be shaded
black, representing an up period for the stock, which means it has gained value.
A bar that is coloured red signals that the stock has gone down in value over
that period. When this is the case, the dash on the right (close) is lower than the
dash on the left (open).

21
Figure: Bar Chart
Interpretation:
The highs and lows of an Axis Bank stock is plotted in a chart above and the
points are joined with vertical lines (bars). A small horizontal tick to the left
denotes the opening level while a small horizontal tick to the right represents
the closing price of each interval.
2) Line Chart:
It gives the detailed information about every aspect. The exchange rates for
each time period are plotted in a diagram and the points are joined. Prices on the
y-axis, time on the x-axis.
The line chart chooses for example the closing price of consecutive time
periods, but can also work with daily, official fixings. The relatively easy
handling of line charts is a great advantage. Line charts do not show price

22
movements within a time period. This can be a problem because important
information for exchange rate analysis can be lost. This Problem was
remedied with the development of bar charts that represent a more sophisticated
form of line chart.
Figure: Line Chart
Interpretation:
The single zigzag line, in the above chart shows the Line Chart. It helps us in knowing the high
and low of price of the stocks.
3) Candlestick Chart:
The candlestick chart is similar to a bar chart, but it differs in the way that it is
visually constructed. Similar to the bar chart, the candlestick also has a thin
vertical line showing the period's trading range. The difference comes in the
formation of a wide bar on the vertical line, which illustrates the difference
between the open and close. And, like bar charts, candlesticks also rely heavily
on the use of colours to explain what has happened during the trading period. A

23
major problem with the candlestick colour configuration, however, is that
different sites use different standards; therefore, it is important to understand the
candlestick configuration used at the chart site you are working with. There are
two colour constructs for days up and one for days that the price falls. When the
price of the stock is up and closes above the opening trade, the candlestick will
usually be white or clear. If the stock has traded down for the period, then the
candlestick will usually be red or black, depending on the site. If the stock's
price has closed above the previous day's close but below the day's open, the
candlestick will be black or filled with the colour that is used to indicate an up
day.
Figure: Candlestick Chart
Interpretation:
The above chart shows the candlestick chart of Axis Bank stock.

24
4)Point and Figure Charts:
The point and figure chart is not well known or used by the average
Investor but it has had a long history of use dating back to the first technical
traders. This type of chart reflects price movements and is not as concerned
about time and volume in the formulation of the points. The point and figure
chart removes the noise, or insignificant price movements, in the stock, which
can distort traders' views of the price trends. These types of charts also try to
neutralize the skewing effect that time has on chart analysis.

25
Figure: Point and Figure Chart
Interpretation:
Looking at the point and figure chart, will notice a series of Xs and Os. The Xs represent
upward price trends and the Os represent downward price trends. There are also numbers
and letters in the chart; these represent months, and give investors an idea of the date.
Each box on the chart represents the price scale, which adjusts depending on the price of
the stock: the higher the stock's price the more each box represents. On most charts where
the price is between 20 and 100, a box represents 1, or 1 point for the stock. The other
critical point of a point and figure chart is the reversal criteria. This is usually set at three
but it can also be set according to the chartist's discretion. The reversal criteria set how
much the price has to move away from the high or low in the price trend to create a new
trend or, in other words, how much the price has to move in order for a column of Xs to
become a column of Os, or vice versa. When the price trend has moved from one trend to
another, it shifts to the right, signalling a trend change.

27
CANDLESTICKSCANDLESTICKSCANDLESTICKSCANDLESTICKS
Histoty
In the 1600s, the Japanese developed a method of technical analysis to analyse
the price of rice contracts. This technique is called candlestick charting. Steven
Nison is credited with popularizing candlestick charting and has become
recognized as the leading expert on their interpretation.
Candlestick charts display the open, high, low, and closing prices in a format
similar to a modern-day bar chart, but in a manner that extenuates the
relationship between the opening and closing prices. Candlestick

28
Charts are simply a new way of looking at prices, they don't involve any
calculations. Because candlesticks display the relationship between the open,
high, low, and closing prices, they cannot be displayed on securities that only
have closing prices, nor were they intended to be displayed on securities that
lack opening prices.
The interpretation of candlestick charts is based primarily on patterns. The most
popular patterns are explained below.
Bullish Patterns
Bullish engulfing lines. This pattern is strongly bullish if it occurs after a
significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small
bearish (filled-in) line is engulfed by a large bullish (empty).
Figure: Showing Bullish Engulfing Candlesticks
Interpretation:
In the above chart, after a downward trend there is a Bullish Patterns on 26 Nov. 2013 which gives
a buying signal at Rs.175.00 Next day we will enter the market at this stage and will continue to
follow the bull market till there is a sign of trend reversal. On the safer side we will exit the market
at Rs.208.00.

29
1. Hammer. This is a bullish line if it occurs after a significant downtrend.
If the line occurs after a significant up-trend, it is called a Hanging Man.
A Hammer is identified by a small real body (i.e., a small range between
the open and closing prices) and a long lower shadow (i.e., the low is
significantly lower than the open, high, and lose). The body can be empty
or filled-in.
Figure: Showing Hammer Candlestick
Interpretation:
In the above chart, on 28 Aug. 2013 there is a Hammer pattern confirmation which gives a buying
signal at Rs.870.00 Next day we will enter the market at this stage and exit the market at
Rs.1175.00.

30
2. Piercing line. This is a bullish pattern and the opposite of a dark cloud
cover. The first line is a long black line and the second line is a long
white line. The second line opens lower than the first line's low, but it
closes more than halfway above the first line's real body.
Figure: Showing Piercing Line Candlestick
Interpretation:
Piercing Line formed on 22 Jan. 2014, as long dark candle is followed by a gap lower open during
the session, but closes halfway the prior candlestick. So one can but at Rs1165 and can sell at
Rs1230.
3. Bullish Harami: Bullish Harami is a bullish reversal pattern. It is
characterized by a large black candle, followed by a small white candle.
The white candle is contained completely within the previous black
candle. The pattern appears in a downtrend. A long black candle is seen,
which is followed by a small white candle, which is completely engulfed
by the previous day candle. Shadows need not be compulsorily engulfed,

31
but real body should be. The market is entering in an indecision or
congestion phase post Bullish Harami.
Figure: Showing Bullish Harami Candlestick
Interpretation:
After a minor downtrend, formed Bullish Harami on 21 Oct 2013 as dark candlestick is followed by half the
size white candlestick and can continue to have the profit.
4. Morning star. This is a bullish pattern signifying a potential bottom. The
"star" indicates a possible reversal and the bullish (empty) line confirms
this. The star can be empty or filled-in.

32
Figure: Showing Morning Star Candlestick
Interpretation:
Morning Star formed on 2 March 2014, as preceding candlestick is dark coloured and third
day is again white colour candlestick.
Bullish doji star: A "star" indicates a reversal and a doji indicates in decision.
Thus, this pattern usually indicates a reversal following an indecisive period.
You should wait for a confirmation (e.g., as in the morning star, above) before

33
trading a doji star. The first line can be empty or filled in.
Figure: Showing Doji Candlestick on 13 June 2013
Bearish Patterns
Bearish Engulfing line. This pattern is strongly bearish if it occurs after a
significant uptrend (i.e., it acts as a reversal pattern). It occurs when a small

34
Bullish (empty) line is engulfed by a large bearish (filled-in) line.
Figure: Showing Bearish Engulfing Line
Interpretation:
Bearish Engulfing formed on19 Oct 2013, during upward trend dark candlestick eclipses
the smaller white one. One can sell the stock the every next session, so to avoid the loss as
the market fall.
1) Hanging Man. These lines are bearish if they occur after a significant
uptrend. If this pattern occurs after a significant downtrend, it is called a
Hammer. They are identified by small real bodies (i.e., a small range
between the open and closing prices) and a long lower shadow (i.e., the
low was significantly lower than the open, high, and close). The bodies
can be empty or filled-in.

35
Figure: Showing Hanging Man
2) Dark cloud cover. This is a bearish pattern. The pattern is more
significant if the second line's body is below the centre of the previous
line's body (as illustrated).
Figure: Showing Dark Cloud Cover
Interpretation:
Dark Cloud Cover formed on 20 Nov 2013 during upward trend and gap next session,there is also decrease
in volume .This is a perfct time for exit at the next session .

36
5) Evening star. This is a bearish pattern signifying a potential top. The
"star" indicates a possible reversal and the bearish (filled-in) line confirms this.
The star can be empty or filled in.
Figure: Showing Evening Star Candlestick
Interpretation:
As seen above Evening Star formed on 15 Nov 2013, it is a top reversal pattern that occurs at the top of
an uptrend. The following day gaps up and the third day as it is a dark candle represents the fact that the
bears have now control.
Doji Star. A star indicates a reversal and a doji indicates indecision.
Thus, this pattern usually indicates a reversal following an indecisive period.
You should wait for a confirmation (e.g., as in the evening star illustration)

37
before trading a doji star.
Figure: Showing Doji Star on 7July 2013 & 22 Oct 2013
7) Shooting star. This pattern suggests a minor reversal when it appears
after a rally. The star's body must appear near the low price and the line
should have a long upper shadow.

38
Figure:Showing Shoting Star
Interpretation:
Shooting Star can be seen formed on 14 Nov 2013,also a large volume on the shooting star
increases the chances that a blow off day has occurred.There is a downward trend after that
shooting day.
Some of the charts below representing different Candlesticks:

42
TRENDS IN TECHNICAL ANALYSISTRENDS IN TECHNICAL ANALYSISTRENDS IN TECHNICAL ANALYSISTRENDS IN TECHNICAL ANALYSIS
The Use of Trends
One of the most important concepts in technical analysis is that of trend.
The meaning in finance isn't all that different from the general definition
of the term - a trend is really nothing more than the general direction in
which a security or market is headed. Take a look at the chart below:
Isn’t it hard to see that the trend is up? However, it's not always this easy to
see a trend.

43
There are lots of ups and downs in this chart, but there isn't a clear indication of
which direction this security is headed.
A More Formal Definition
Unfortunately, trends are not always easy to see. In other words,
defining a trend goes well beyond the obvious. In any given chart, you
will probably notice that prices do not tend to move in a straight line in
any direction, but rather in a series of highs and lows. In technical
analysis, it is the movement of the highs and lows that constitutes a trend.
For example, an uptrend is classified as a series of higher highs and
higher lows, while a downtrend is one of lower lows and lower highs.

44
It is an example of an uptrend. Point 2 in the chart is the first high, which is
determined after the price falls from this point. Point 3 is the low that is
established as the price falls from the high. For this to remain an uptrend each
successive low must not fall below the previous lowest point or the trend is
deemed a reversal.
Types of Trend
There are three types of trend:
1. Uptrend
2. Downtrend
3. Sideways/Horizontal Trends

45
As the names imply, when each successive peak and trough is higher, it's
referred to as an upward trend. If the peaks and troughs are getting lower, it's a
downtrend. When there is little movement up or down in the peaks and troughs,
it's a sideways or horizontal trend. If you want to get really technical, you might
even say that a sideways trend is actually not a trend on its own, but a lack of a
well-defined trend in either direction. In any case, the market can really only
trend in these three ways: up, down or nowhere.
Trend Lengths
Along with these three trend directions, there are three trend
classifications. A trend of any direction can be classified as a long-term
trend, intermediate trend or a short-term trend. In terms of the stock
market, a major trend is generally categorized as one lasting longer than a
year. An intermediate trend is considered to last between one and three
months and a near-term trend is anything less than a month. A long-term
trend is composed of several intermediate trends, which often move
against the direction of the major trend. If the major trend is upward and
there is a downward correction in price movement followed by a
continuation of the uptrend, the correction is considered to be an
intermediate trend. The short-term trends are components of both major

46
and intermediate trends. Take a look a Figure 4 to get a sense of how
these three trend lengths might look.
When analysing trends, it is important that the chart is constructed to best
reflect the type of trend being analysed. To help identify long-term
trends, weekly charts or daily charts spanning a five-year period are used
by chartists to get a better idea of the long-term trend. Daily data charts
are best used when analysing both intermediate and short-term trends. It
is also important to remember that the longer the trend, the more
important it is; for example, a one-month trend is not as significant as a
five-year trend.

47
Trend Lines
A trend line is a simple charting technique that adds a line to a chart to
represent the trend in the market or a stock. Drawing a trend line is as
simple as drawing a straight line that follows a general trend. These lines
are used to clearly show the trend and are also used in the identification
of trend reversals.
An upward trend line is drawn at the lows of an upward trend. This
line represents the support the stock has every time it moves from a high
to a low. Notice how the price is propped up by this support. This type of
trend line helps traders to anticipate the point at which a stock's price will
begin moving upwards again. Similarly, a downward trend line is drawn
at the highs of the downward trend. This line represents the resistance
level that a stock faces every time the price moves from a low to a high.

48
Figure: Showing Downward Trend
Channels
A channel, or channel lines, is the addition of two parallel trend
lines that act as strong areas of support and resistance. The upper trend
line connects a series of highs, while the lower trend line connects a
series of lows. A channel can slope upward, downward or sideways but,
regardless of the direction, the interpretation remains the same. Traders
will expect a given security to trade between the two levels of support
and resistance until it breaks beyond one of the levels, in which case
traders can expect a sharp move in the direction of the break. Along with

49
clearly displaying the trend, channels are mainly used to illustrate
important areas of support and resistance.
Figure: Showing Channel
A descending channel on a stock chart; the upper trend line has been
placed on the highs and the lower trend line is on the lows. The price has
bounced off of these lines several times, and has remained range-bound
for several months. As long as the price does not fall below the lower line
or move beyond the upper resistance, the range-bound downtrend is
expected to continue.

50
The Importance of Trend
It is important to be able to understand and identify trends so that you
can trade with rather than against them. Two important sayings in technical
analysis are "the trend is your friend" and "don't buck the trend," illustrating
how important trend analysis is for technical traders

51
VOLUME:VOLUME:VOLUME:VOLUME:
What Is Volume?
Volume is simply the number of shares or contracts that trade over a given
period of time, usually a day. The higher the volume the more active the
security. To determine the movement of the volume (up or down), chartists look
at the volume bars that can usually be found at the bottom of any chart. Volume
bars illustrate how many shares have traded per period and show trends in the
same way that prices do.
Figure: Showing Volume

52
IMPORTANCE OF VOLUME:
Volume is an important aspect of technical analysis because it is
used to confirm trends and chart patterns. Any price movement up or
down with relatively high volume is seen as a stronger, more relevant
move than a similar move with weak volume. Say, for example, that a
stock jumps 5% in one trading day after being in a long downtrend. Is
this a sign of a trend reversal? This is where volume helps traders. If
volume is high during the day relative to the average daily volume, it is a
sign that the reversal is probably for real. On the other hand, if the
volume is below average, there may not be enough conviction to support
a true trend reversal. Volume should move with the trend. If prices are
moving in an upward trend, volume should increase (and vice versa). If
the previous relationship between volume and price movements starts to
deteriorate, it is usually a sign of weakness in the trend. For example, if
the stock is in an uptrend but the up trading days are marked with lower
volume, it is a sign that the trend is starting to lose its legs and may soon
end. When volume tells a different story, it is a case of divergence, which

53
refers to a contradiction between two different indicators. The simplest
example of divergence is a clear upward trend on declining volume.
Volume and Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such
as head and shoulders, triangles, flags and other price patterns can be
confirmed with volume, a process which we'll describe in more detail
later in this tutorial. In most chart patterns, there are several pivotal
points that are vital to what the chart is able to convey to chartists.
Basically, if the volume is not there to confirm the pivotal moments of a
chart pattern, the quality of the signal formed by the pattern is weakened.
Volume Precedes Price
Another important idea in technical analysis is that price is preceded by
volume. Volume is closely monitored by technicians and chartists to form ideas
on upcoming trend reversals. If volume is starting to decrease in an uptrend, it
is usually a sign that the upward run is about to end. Now that we have a better
understanding of some of the important factors of technical analysis, we can

54
move on to charts, which help to identify trading opportunities in prices
movements.

55
CHART PATTERNS:CHART PATTERNS:CHART PATTERNS:CHART PATTERNS:
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.
In the first section of this tutorial, we talked about the three
assumptions of technical analysis, the third of which was that in technical
analysis, history repeats itself. The theory behind chart patterns is based on this
assumption. The idea is that certain patterns are seen many times, and that these
patterns signal a certain high probability move in a stock. Based on the historic
trend of a chart pattern setting up a certain price movement, chartists look for
these Patterns to identify trading opportunities. While there are general ideas
and components to every chart pattern, there is no chart pattern that will tell you
with 100% certainty where a security is headed. This creates some leeway and
debate as to what a good pattern looks like, and is a major reason why charting
is often seen as more of an art than a science. There are two types of patterns
within this area of technical analysis, reversal and continuation. A reversal
pattern signals that a prior trend will reverse upon completion of the pattern. A
continuation pattern, on the other hand, signals that a trend will continue once

56
the pattern is complete. These patterns can be found over charts of any
timeframe. In this section, we will review some of the more popular chart
patterns.
SUPPORT AND RESISTANCE:
Support and resistance are price levels at which movement should stop and
reverse direction. Think of support/resistance (S/R) as levels that act as a floor
or a ceiling to future price movements.
Support - A price level below the current market price, at which buying interest
should be able to overcome selling pressure and thus keep the price from going
any lower.
Resistance - A price level above the current market price, at which selling
pressure should be strong enough to overcome buying pressure and thus keep
the price from going any higher. One of two things can happen when a stock
price approaches a support/resistance level. On the one hand, it can act as a
reversal point: in other words, when a stock price drops to a support level, it
will go back up. On the other hand, S/R levels may reverse roles once they are
penetrated.
For example - When the market price falls below a support level, that former
support level will then become a resistance level when the market later trades

57
back up to that level.
Figure: Support and resistance
Interpretation:
The above chart shows Support established with the November low around Rs567.5. In December,
the stock returned to support in the mid-thirties and formed a low around Rs555. Finally, in
January the stock again returned to the support scene and formed a low around Rs565. After each
bounce off support, the stock traded all the way up to resistance. Resistance was first established by
the November support break at Rs623. After a support level is broken, it can turn into a resistance
level. From the November lows, the stock advanced to the new support-turned resistance level
around Rs620.
The Importance of Support and Resistance
Support and resistance analysis is an important part of trends because it
can be used to make trading decisions and identify when a trend is reversing.
Support and resistance levels both test and confirm trends and need to be

58
monitored by anyone who uses technical analysis. As long as the price of the
share remains between these levels of support and resistance, the trend is likely
to continue. It is important to note, however, that a break beyond a level of
support or resistance does not always have to be a reversal.
For example, if prices moved above the resistance levels of an upward trending
channel, the trend have accelerated, not reversed. This means that the price
appreciation is expected to be faster than it was in the channel.
Being aware of these important support and resistance points should affect the
way that you trade a stock. Traders should avoid placing orders at these major
points, as the area around them is usually marked by a lot of volatility. If you
feel confident about making a trade near a support or resistance level, it is
important that you follow this simple rule: do not place orders directly at the
support or resistance level. This is because in many cases, the price never
actually reaches the whole number, but flirts with it instead. So if you're bullish
on a stock that is moving toward an important support level, do not place the
trade at the support level. Instead, place it above the support level, but within a
few points. On the other hand, if you are placing stops or short selling, set up
your trade price at or below the level of support.

59
Head and Shoulders:
This is a chart formation resembling an "M" in which a stock's price:
o Rises to a peak and then declines, then
o Rises above the former peak and again declines, and then
o Rises again but not to the second peak and again declines.
The first and third peaks are shoulders, and the second peak forms the head.
This pattern is considered a very bearish indicator.
Figure: Showing Head and Shoulder

60
Cup and Handle:
This is a pattern on a bar chart that can be as short as seven weeks and as long
as 65 weeks. The cup is in the shape of a "U". The handle has a slight
downward drift. The right-hand side of the pattern has low trading volume. As
the stock comes up to test the old highs, the stock will incur selling pressure by
the people who bought at or near the old high. This selling pressure will make
the stock price trade sideways with a tendency towards a downtrend for
anywhere from four days to four weeks, then it will take off.
Figure: Showing Cup and Handle
Double Bottoms:
This pattern resembles a "W" and occurs when a stock price drops to a similar
price level twice within a few weeks or months. You should buy when the price
passes the highest point in the handle. In a perfect double bottom, the second
decline should normally go slightly lower than the first decline to create a
shakeout of jittery investors. The middle point of the "W" should not go into

61
new high ground. This is a very bullish indicator. The belief is that, after two
drops in the stock price, the jittery investors will be out and the long-term
investors will still be holding on.
Figure: Showing Double Bottoms
Double Tops:
Double tops point out a weakness of the uptrend and warn for a change of trend
generally a selling crazy starts when this formation is indicates.

62
Figure: Double Tops
Triangles:
Triangles are some of the most 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.

63
Symmetrical Triangles: All triangles formations are
consolidation formations. In symmetrical triangle direction of the trend is
not known. It is only can be identified after one of the line broken. Prices
go up if upper line broken. And go down if lower line broken. Volume is
very important for triangle formations. Volume should decrease during
the formations.
Figure: Symmetrical Triangles

64
Descending triangles: It is a signal for down trend. Price target can be
found approximately by drawing a parallel line to descending line.
Figure: Descending Triangle

65
Ascending Triangles: It is a signal for uptrend. By drawing a parallel
line to descending line, price target can be calculated approximately.
Figure: Ascending Chart

66
MOVING AVERAGES:MOVING AVERAGES:MOVING AVERAGES:MOVING AVERAGES:
Most chart patterns show a lot of variation in price movement. This can
make it difficult for traders to get an idea of a security's overall trend. One
simple method traders use to combat this is to apply moving averages. A
moving average is the average price of a security over a set amount of time. By
plotting a security's average price, the price movement is smoothed out. Once
the day-to-day fluctuations are removed, traders are better able to identify the
true trend and increase the probability that it will work in their favour.
Types of Moving Averages:
There are a number of different types of moving averages that vary in the
way they are calculated, but how each average is interpreted remains the same.
The calculations only differ in regards to the weighting that they place on the
price data, shifting from equal weighting of each price point to more weight
being placed on recent data. The three most common types of moving averages
are simple, linear and exponential.

67
1. Simple Moving Average (SMA)
A simple moving average is formed by computing the average (mean) price of a
security over a specified number of periods. While it is possible to create
moving averages from the Open, the High, and the Low data points, most
moving averages are created using the closing price. For example: a 5-day
simple moving average is calculated by adding the closing prices for the last 5
days and dividing the total by 5.
10+ 11 + 12 + 13 + 14 = 60
(60 / 5) = 12
The calculation is repeated for each price bar on the chart. The averages are then
joined to form a smooth curving line - the moving average line. Continuing our
example, if the next closing price in the average is 15, then this new period
would be added and the oldest day, which is 10, would be dropped. The new 5-
day simple moving average would be calculated as follows:
11 + 12 + 13 + 14 +15 = 65
(65 / 5) = 13
Over the last 2 days, the SMA moved from 12 to 13. As new days are added, the old days
will be subtracted and the moving average will continue to move over time.

68
Source: stockcharts.com
In the example above, using closing prices from Eastman Kodak (EK), day 10 is
the first day possible to calculate a 10-day simple moving average. As the
calculation continues, the newest day is added and the oldest day is subtracted.
The 10-day SMA for day 11 is calculated by adding the prices of day 2 through
day 11 and dividing by 10. The averaging process then moves on to the next day
where the 10-day SMA for day 12 is calculated by adding the prices of day 3
through day 12 and dividing by 10.
The chart above is a plot that contains the data sequence in the table. The simple
moving average begins on day 10 and continues.

69
Figure: Showing Moving Average
2. Linear Weighted Average
This moving average indicator is the least common out of the three and is used
to address the problem of the equal weighting. The linear weighted moving
average is calculated by taking the sum of all the closing prices over a certain
time period and multiplying them by the position of the data point and then
dividing by the sum of the number of periods. For example, in a five-day linear
weighted average, today's closing price is multiplied by five; yesterday's by
four and so on until the first day in the period range is reached. These numbers

70
are then added together and divided by the sum of the multipliers.
Figure: Showing Weighted Average
I n
i
3. Exponential Moving Average (EMA)
In order to reduce the lag in simple moving averages, technicians often use
exponential moving averages (also called exponentially weighted moving
averages). EMA's reduce the lag by applying more weight to recent prices
relative to older prices. The weighting applied to the most recent price depends
on the specified period of the moving average. The shorter the EMA's period,
the more weight that will be applied to the most recent price. For example: a 10-
period exponential moving average weighs the most recent price 18.18% while
a 20-period EMA weighs the most recent price 9.52%. As we'll see, the
calculating and EMA is much harder than calculating an SMA. The important
thing to remember is that the exponential moving average puts more weight on

71
recent prices. As such, it will react quicker to recent price changes than a simple
moving average. Here's the calculation formula.
Exponential Moving Average Calculation
Exponential Moving Averages can be specified in two ways - as a percent-based
EMA or as a period-based EMA. A percent-based EMA has a percentage as its
single parameter while a period-based EMA has a parameter that represents the
duration of the EMA.
The formula for an exponential moving average is:
EMA (current) = ((Price (current) - EMA (prev)) x Multiplier) + EMA (prev)
For a percentage-based EMA, "Multiplier" is equal to the EMA's specified
percentage. For a period-based EMA, "Multiplier" is equal to 2 / (1 + N) where
N is the specified number of periods.
For example, a 10-period EMA's Multiplier is calculated like this:
(2 / (Time periods + 1)) = (2 / (10 + 1)) = 0.1818 (18.18%)
This means that a 10-period EMA is equivalent to an 18.18% EMA.
Below is a table with the results of an exponential moving average calculation
for Eastman Kodak. For the first period's exponential moving average, the
simple moving average was used as the previous period's exponential moving
average (yellow highlight for the 10th period). From period 11 onward, the
previous period's EMA was used. The calculation in period 11 breaks down as
follows:
(C - P) = (57.15 - 59.439) = -2.289

72
(C - P) x K = -2.289 x .181818 = -0.4162
(C - P) x K) + P = -0.4162 + 59.439 = 59.023
*The 10-period simple moving average is used for the first calculation only.
After that the previous period's EMA is used.
Note that, in theory, every previous closing price in the data set is used in the
calculation of each EMA that makes up the EMA line. While the impact of
older data points diminishes over time, it never fully disappears. This is true
regardless of the EMA's specified period. The effects of older data diminish
rapidly for shorter EMA's, than for longer ones but, again, they never
completely disappear.

73
Figure: Showing Exponential Average
Major Uses of Moving Averages:
Moving averages are used to identify current trends and trend reversals
as well as to set up support and resistance levels. Moving averages can be used
to quickly identify whether a security is moving in an uptrend or a downtrend
depending on the direction of the moving average. When a moving average is
heading upward and the price is above it, the security is in an uptrend.
Conversely, a downward sloping moving average with the price below can be
used to signal a downtrend.

74
Another method of determining momentum is to look at the order of a pair of
moving averages. When a short-term average is above a longer-term average,
the trend is up. On the other hand, a long-term average above a shorter-term
average signals a downward movement in the trend.
Moving average trend reversals are formed in two main ways: when the
price moves through a moving average and when it moves through moving
average crossovers. The first common signal is when the price moves through
an important moving average. For example, when the price of a security that
was in an uptrend falls below a 50-period moving average, it is a sign that the
uptrend may be reversing.

75
The other signal of a trend reversal is when one moving average crosses
through another. For example, if the 15-day moving average crosses above the
50-day moving average, it is a positive sign that the price will start to increase.

76
If the periods used in the calculation are relatively short, for example 15 and 35,
this could signal a short-term trend reversal. On the other hand, when two
averages with relatively long time frames cross over (50 and 200, for example),
this is used to suggest a long-term shift in trend.
Another major way moving averages are used is to identify support and
resistance levels. It is not uncommon to see a stock that has been falling stop its
decline and reverse direction once it hits the support of a major moving
average. A move through a major moving average is often used as a signal by
technical traders that the trend is reversing. For example, if the price breaks

77
through the 200-day moving average in a downward direction, it is a signal that
the uptrend is reversing.
Moving averages are a powerful tool for analysing the trend in a security. They
provide useful support and resistance points and are very easy to use. The most
common time frames that are used when creating moving averages are the 200-
day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be
a good measure of a trading year, a 100-day average of a half a year, a 50-day
average of a quarter of a year, a 20-day average of a month And 10 – day
average of two weeks. Moving averages help technical traders smooth out
some of the noise that is found in day-to-day price movements, giving traders a
clearer view of the price trend. So far we have been focused on price
movement, through charts and averages. In the next section, we'll look at some
other techniques used to confirm price movement and patterns.

78
MAJORMAJORMAJORMAJOR OSCILLATORSOSCILLATORSOSCILLATORSOSCILLATORS::::
Moving average convergence/divergence (MACD):
Common, the “MACD” is a trend following, momentum indicator that shows
the relationship between two moving averages of prices. To Calculate the
MACD subtract the 26-day EMA from a 12-day EMA. A 9-day dotted EMA of
the MACD called the signal line is then plotted on top of the MACD. There are
3 common methods to interpret the MACD:
Crossover – When the MACD falls below the signal line it is a signal to sell.
Vice versa when the MACD rises above the signal line.
Divergence – When the security diverges from the MACD it signals the end of
the current trend.
Overbought/Oversold – When the MACD rises dramatically (shorter moving
average pulling away from longer term moving average) it is a signal the
security is overbought and will soon return to normal levels.
Other less common moving averages include triangular, variable, and weighted
moving average. All of them being slight deviations from the++ ones above
and are used to detect different characteristics such as volatility, and weighting
different time spans.

79
One of the easiest indicators to understand, the moving average, shows the
average value of a security’s price over a period of time. To find the 50-day
moving average, you would add up the closing prices (but not always – explain
later) from the past 50 days and divide them by 50. Because prices are
constantly changing, the moving average will move as well. It should also be
noted that moving averages are most as well. It should also be noted that
moving averages are most often used then compared or used in conjunction with
other indicators such as moving average convergence divergence (MACD) and
exponential moving (EMA).
The most commonly used moving averages are 20, 30, 50,100 and 200 days.
Each moving average provides a different interpretation on what the stock will
do-there is not one right time frame. The longer the time spans, the less
sensitive the moving average will be to daily price changes. Moving averages
are used to emphasize the direction of a trend and smooth out price and volume
fluctuations that can confuse interpretation.

80
Figure: Moving Average Convergence Divergences (MACD)
Here in the chart, in September the stock price dropped well below its 50-day
average (the green line) there has been a steady downward trend since then and
no really strong divergence until the end of December when it rose above its 50-
days average and continued to rise for several weeks.
Typically, when a stock price moves below its moving average it is a bad sign
because the stock is moving on a negative trend. The opposite is true for stock
that exceed their moving average-in this case, hold on for the ride.
BOLLINGER BANDS WIDTH:
Developed by John Bollinger, Bollinger Bands are an indicator that allows users
to compare volatility and relative price levels over a period time. The indicator

81
consists of three bands designed to encompass the majority of a security's price
action. The purpose of Bollinger Bands is to provide a relative definition of high
and low. By definition prices are high at the upper band and low at the lower
band. This definition can aid in rigorous pattern recognition and is useful in
comparing price action to the action of indicators to arrive at systematic trading
decisions.
Bollinger Bands consist of a set of three curves drawn in relation to securities
prices. The middle band is a measure of the intermediate-term trend, usually a
simple moving average that serves as the base for the upper and lower bands.
The interval between the upper and lower bands and the middle band is
determined by volatility, typically the standard deviation of the same data that
were used for the average. The default parameters, 20 periods and two standard
deviations, may be adjusted to suit your purposes:

82
Middle Bollinger Band = 20-period simple moving average
Upper Bollinger Band = Middle Bollinger Band + 2 * 20-period standard
deviation
Lower Bollinger Band = Middle Bollinger Band - 2 * 20-period standard
deviation
Standard deviation is a statistical unit of measure that provides a good
assessment of a price plot's volatility. Using the standard deviation ensures that
the bands will react quickly to price movements and reflect periods of high and
low volatility. Sharp price increases (or decreases), and hence volatility, will
lead to a widening of the bands.
Figure: Bollinger Bands Width

83
The centre band is the 20-day simple moving average. The upper band is the 20-
day simple moving average plus 2 standard deviations. The lower band is the
20-day simple moving average less 2 standard deviations.
On-Balance Volume
The on-balance volume (OBV) indicator is well-known technical indicators that
reflect movements in volume. It is also one of the simplest volume indicators to
compute and understand. Joe Granville introduced the On Balance Volume
(OBV) indicator in his 1963 book, Granville's New Key to Stock Market
Profits. This was one of the first and most popular indicators to measure
positive and negative volume flow. The concept behind the indicator: volume
precedes price. OBV is a simple indicator that adds a period's volume when the
close is up and subtracts the period's volume when the close is down. A
cumulative total of the volume additions and subtractions form the OBV line.
This line can then be compared with the price chart of the underlying security to
look for divergences or confirmation.
Calculation
As stated above, OBV is calculated by adding the day's volume to a running
cumulative total when the security's price closes up, and subtracts the volume
when it closes down.

84
For example, if today the closing price is greater than yesterday's closing price,
then the new
OBV = Yesterday's OBV + Today's Volume
If today the closing price is less than yesterday's closing price, then the new
OBV = Yesterday's OBV - Today's Volume
If today the closing price is equal to yesterday's closing price, then the new
OBV = Yesterday's OBV
Use
The idea behind the OBV indicator is that changes in the OBV will precede
price changes. A rising volume can indicate the presence of smart money
flowing into a security. Then once the public follows suit, the security's price
will likewise rise.

85
Like other indicators, the OBV indicator will take a direction. A rising (bullish)
OBV line indicates that the volume is heavier on up days. If the price is likewise
rising, then the OBV can serve as a confirmation of the price uptrend. In such a
case, the rising price is the result of an increased demand for the security, which
is a requirement of a healthy uptrend.
However, if prices are moving higher while the volume line is dropping, a
negative divergence is present. This divergence suggests that the uptrend is not
healthy and should be taken as a warning signal that the trend will not persist.
The numerical value of OBV is not important, but rather the direction of the
line. A user should concentrate on the OBV trend and its relationship with the
security's price.
Figure: On-Balance Volumes

86
This chart shows how the OBV line can be used as confirmation of a price
trend. The peak in September was followed by lower price movements that
corresponded with volume spikes, thus implying that the downtrend was going
to continue.
William %R:
Developed by Larry Williams, William % R is a momentum indicator that
works much like the Stochastic Oscillator. It is especially popular for measuring
overbought and oversold levels. The scale ranges from 0 to -100 with readings
from 0 to -20 considered overbought, and readings from -80 to -100 considered
oversold.
William %R, sometimes referred to as %R, shows the relationship of the close
relative to the high-low range over a set period of time. The nearer the close is
to the top of the range, the nearer to zero (higher) the indicator will be. The
nearer the close is to the bottom of the range, the nearer to -100 (lower) the
indicator will be. If the close equals the high of the high-low range, then the
indicator will show 0 (the highest reading). If the close equals the low of the
high-low range, then the result will be -100 (the lowest reading).
Calculation
%R = [(highest high over? periods - close) / (highest high over? periods -
lowest low over? periods)] * -100

87
Typically, Williams % R is calculated using 14 periods and can be used on
intraday, daily, weekly or monthly data. The time frame and number of periods
will likely vary according to desired sensitivity and the characteristics of the
individual security.
Use
It is important to remember that overbought does not necessarily imply time to
sell and oversold does not necessarily imply time to buy. A security can be in a
downtrend, become oversold and remain oversold as the price continues to trend
lower. Once a security becomes overbought or oversold, traders should wait for
a signal that a price reversal has occurred. One method might be to wait for
Williams %R to cross above or below -50 for confirmation.
Price reversal confirmation can also be accomplished by using other indicators
or aspects of technical analysis in conjunction with Williams %R.
One method of using Williams %R might be to identify the underlying trend
and then look for trading opportunities in the direction of the trend. In an
uptrend, traders may look to oversold readings to establish long positions. In a

88
downtrend, traders may look to overbought readings to establish short positions.
Figure: Williams % R
The chart of Weyerhaeuser with a 14-day and 28-day Williams % R illustrates
some key points:
o 14-day %R appears quite choppy and prone to false signals.
o 28-day %R smoothed the data series and the signals became less frequent
and more reliable.
o When the 28-day %R moved to overbought or oversold levels, it typically
remained there for an extended period and the stock continued its trend.

89
o Some good entry signals were given with the 28-day %R by waiting for a
move above or below -50 for confirmation.
Relative strength index (RSI):
There are a few different tools that can be used to interpret the strength of a
stock. One of these is the Relative Strength Index (RSI), which is a comparison
between the days that a stock finishes up and the days it finishes down. This
indicator is a big tool in momentum trading.
The RSI is a reasonably simple model that anyone can use. It is calculated using
the following formula.
RSI = 100 - [100/(1 + RS)]
RS = (Avg. of n-day up closes)/(Avg. of n-day down closes)
n = days (most analysts use 9 - 15 day RSI)
The RSI ranges from 0 to 100. At around the 70 levels, a stock is considered
overbought and you should consider selling. In a bull market some believe that
80 is a better level to indicate an overbought stock since stocks often trade at
higher valuations during bull markets. Likewise, if the RSI approaches 30, a
stock is considered oversold and you should consider buying. Again, make the
adjustment to 20 in a bear market.

90
The smaller the number of days used, the more volatile the RSI is and the more
often it will hit extremes. A longer term RSI is more rolling, fluctuating a lot
less. Different sectors and industries have varying threshold levels when it
comes to the RSI. Stocks in some industries will go as high as 75-80 before
dropping back, while others have a tough time breaking past 70. A good rule is
to watch the RSI over the long term (one year or more) to determine at what
level the historical RSI has traded and how the stock reacted when it reached
those levels.
The RSI is a great indicator that can help you make some serious money. Be
aware that big surges and drops in stocks will dramatically affect the RSI,
resulting in false buy or sell signals. Most investors agree that the RSI is most
effective in "backing up" or increasing confidence before making an investment
decision - don't invest simply based on the RSI numbers.

91
Figure: Relative Strength Index (RSI)
Using the moving averages, trend lines divergence, support and resistance lines
along with the RSI chart can be very useful. Rising bottoms on the RSI chart
can produce the same positive trend results as they would on the stock chart.
Should the general trend of the stock price tangent from the RSI, it might spark
a warning that the stock is either over- or under bought.
Stochastic Oscillator:
The stochastic oscillator is one of the most recognized momentum indicators
used in technical analysis. The idea behind this indicator is that in an uptrend,
the price should be closing near the highs of the trading range, signalling
upward momentum in the security. In downtrends, the price should be closing
near the lows of the trading range, signalling downward momentum. The

92
stochastic oscillator is plotted within a range of zero and 100 and signals
overbought conditions above 80 and oversold conditions below 20. The
stochastic oscillator contains two lines. The first line is the %K, which is
essentially the raw measure used to formulate the idea of momentum behind the
oscillator. The second line is the %D, which is simply a moving average of the
%K. The %D line is considered to be the more important of the two lines as it is
seen to produce better signals. The stochastic oscillator generally uses the past
14 trading periods in its calculation but can be adjusted to meet the needs of the
use
Figure: Showing Stochastic Oscillator

93
Figure: Chart showing different Indicators and Oscillators

94
THE ELTHE ELTHE ELTHE ELLLLLIOTIOTIOTIOTTTTT WAVEWAVEWAVEWAVE THEORYTHEORYTHEORYTHEORY
"The Wave Principle" is Ralph Nelson Elliott's discovery that social, or crowd,
behavior trends and reverses in recognizable patterns. Using stock market data
as his main research tool, Elliott discovered that the ever-changing path of stock
market prices reveals a structural design that in turn reflects a basic harmony
found in nature. From this discovery, he developed a rational system of market
analysis. Elliott isolated thirteen patterns of movement, or "waves," that recur in
market price data and are repetitive in form, but are not necessarily repetitive in
time or amplitude. He named, defined and illustrated the patterns. He then
described how these structures link together to form larger versions of those
same patterns, how they in turn link to form identical patterns of the next larger
size, and so on. In a nutshell, then, the Wave Principle is a catalog of price
patterns and an explanation of where these forms are likely to occur in the
overall path of market development. Elliott's descriptions constitute a set of
empirically derived rules and guidelines for interpreting market action. Elliott
claimed predictive value for The Wave Principle, which now bears the name,
"The Elliott Wave Principle."
Although it is the best forecasting tool in existence, the Wave Principle is not
primarily a forecasting tool; it is a detailed description of how markets behave.
Nevertheless, that description does impart an immense amount of knowledge

95
about the market's position within the behavioral continuum and therefore about
its probable ensuing path. The primary value of the Wave Principle is that it
provides a context for market analysis. This context provides both a basis for
disciplined thinking and a perspective on the market's general position and
outlook. At times, its accuracy in identifying, and even anticipating, changes in
direction is almost unbelievable. Many areas of mass human activity follow the
Wave Principle, but the stock market is where it is most popularly applied.
Indeed, the stock market considered alone is far more important than it seems to
casual observers. The level of aggregate stock prices is a direct and immediate
measure of the popular valuation of man's total productive capability. That this
valuation has form is a fact of profound implications that will ultimately
revolutionize the social sciences. That, however, is a discussion for another
time.
R.N. Elliott's genius consisted of a wonderfully disciplined mental process,
suited to studying charts of the Dow Jones Industrial Average and its
predecessors with such thoroughness and precision that he could construct a
network of principles that covered all market action known to him up to the
mid-1940s. At that time, with the Dow in the 100s, Elliott predicted a great bull
market for the next several decades that would exceed all expectations at a time
when most investors felt it impossible that the Dow could even better its 1929
peak. As we shall see, phenomenal stock market forecasts, some of pinpoint

96
accuracy years in advance, have accompanied the history of the application of
the Elliott Wave approach.
Fundamental Concept
Elliott Wave theory suggests that stock prices move in clear trends. These
trends can be classified in two parts i.e.
A. Dominant trend (Five wave pattern)
B. Corrective trend (Three wave pattern)
A. Dominant Trend (Five wave pattern)
Basically Dominant Trend consists of five waves. These five waves can be in
either direction, up or down.
When five waves directions is up then advancing waves are known as impulsive
waves and declining waves are known as corrective waves.
Similarly when five waves directions is down then declining waves are known
as impulsive waves and advancing waves are known as corrective waves.

97
Figure: Showing The Five Wave Pattern of BHEL stock
B. Corrective trend (Three wave pattern)
Corrective Trend consists of three waves. Basically three wave corrective trend
starts when five wave dominant trend ends.
After market rallies in a basic 5 wave sequence, market top is made and markets
enter a new phase i.e. three wave downward corrective phase i.e. A, B and C.

98
Figure: Showing Three wave Pattern

99
FIBONACCI SEQUENCEFIBONACCI SEQUENCEFIBONACCI SEQUENCEFIBONACCI SEQUENCE
Fibonacci sequence is named after Leonardo Pisano Bogollo (1170-1250), and
he lived in Italy.
The Fibonacci sequence is the series of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21,
34…………..
The next number is found by adding up the two numbers before it. For example
o The 2 is found by adding the two numbers before it (1+1)
o The 3 is found by adding the two numbers before it (1+2),
o The 5 is found by adding the two numbers before it (2+3)
o and the next number in the sequence above would be 21+34 = 55
Hence Fibonacci sequence can be defined by a mathematical formula i.e.
XN= XN-1 +XN-2
Where XN and N stands for
N = 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 ...
XN = 0 1 1 2 3 5 8 13 21 34 55 89 144 233 377...
Here
XN is term number “N”
XN-1 is the previous term (N-1)
XN-2 is the term before that (N-2)

100
The Fibonacci sequence is used in many fields including stock market.
Basically for stock market trading, one needs to know only this regarding
Fibonacci sequence.
The most common Fibonacci sequence used in the stock markets is:
Multiples 1 1.618 2.618 4.23 6.85
Ratios 0.14 0.25 0.38 0.5 0.618
Basically stock price movement reflects human opinion, expectation, fear, greed
and valuation etc. Fibonacci sequence has been successfully used to predict and
analyze price trends.
Golden Ratio
In Mathematics and in arts, ratio is considered Golden, if ratio of the sum of two
quantities to the larger quantity is equal to the ratio of the larger quantity to the
smaller quantity. Let’s understand this with an example. There are two
quantities say A and B, where A is larger than B.
If (A+B)/A= A/B then answer is Golden Ratio which is 1.6180339887…
This Golden ratio is observed, if you take ratio of any two successive Fibonacci
numbers. It comes very close to 1.618034……. .

101
FIBONACCI RETRACEMENTFIBONACCI RETRACEMENTFIBONACCI RETRACEMENTFIBONACCI RETRACEMENT
Fibonacci sequence is named after Leonardo Pisano Bogollo of Italy. It’s
based on the numbers identified in Fibonacci sequence to define area of support
and resistance. It is created by taking two extreme points (usually a major peak
and trough) on a price chart and then dividing the vertical distance by key
Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, 100%. Once these levels are
identified, horizontals lines are drawn to indicate areas of support or resistance
at the key Fibonacci levels before prices continue to move in the original
direction.
Figure: Showing Fibonacci Pattern

102
Some of the other charts showing Fibonacci Pattern for Illustration:

104
BIBLIOGRAPHYBIBLIOGRAPHYBIBLIOGRAPHYBIBLIOGRAPHY
Reference taken from some of the websites and books, mentioned
below:
• Websites
www.investopedia.com
www.onlinetradingconcepts.com
www.chartink.com
www.slideshare.com
www.stockx.com
www.nseindia.com
www.stockchart.com
www.bseindia.com
• Books
Securities Analysis & Portfolio Management, Donald E Fischer
And Help taken by some of my colleagues, who all have good
knowledge of technical analysis.

Technical analysis

More Related Content

What's hot

Viewers also liked

Similar to Technical analysis

Recently uploaded

Technical analysis