2. Learning outcome
To learn that how historical share price are used to
estimate the future prices of the shares.
To identify various buying and selling opportunities
basis on the graphs and patterns.
To learn how technical indicators are used to asses
the market condition.
Prepared By Sumit Goyal- LPU
3. Technical Analysis
A process of identifying trend reversals at an
earlier stage to formulate the buying and selling
strategy.
Technical analyst study the relationship between
price-volume and supply-demand for the overall
market and the individual stock.
The rational behind technical analysis is that
share price behavior repeats itself over time and
analyst attempt to derive methods to predict this
repetition.
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4. The basic premise of technical analysis is that price
move in trend or waves which may be upward or
downward in the long run.
Thus, technical analysis is really a study of past or
historical price and volume movements so as to
predict the future stock price behavior.
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5. Assumptions
The market value of the scrip is determined by
the interaction of supply and demand.
The market discounts everything.
The market always moves in trend.
History repeats itself. It is true to the stock
market also.
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6. TECHNICAL ANALYSIS VERSUS
FUNDAMENTAL ANALYSIS
Technical Analysis Fundamental Analysis
• Predicts short-term • Establishes long-term values
price movements
• Focuses on internal market • Focuses on fundamental
data factors
• Appeals to short-term traders • Appeals to long-term
investors
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7. CHARTING TECHNIQUES
• THE DOW THEORY
• BAR AND LINE CHARTS
• POINT AND FIGURE CHART
• MOVING AVERAGE ANALYSIS
• RELATIVE STRENGTH ANALYSIS
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8. Origin of Technical Analysis
Technical analysis is based on the doctrine given
by Charles H. Dow in 1884, in the Wall Street
Journal.
A. J. Nelson, a close friend of Charles Dow
formalised the Dow theory for economic
forecasting.
Analysts used charts of individual stocks and
moving averages in the early 1920s.
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9. THE DOW THEORY
The market has three movements, all going at the same
time:
• Daily fluctuations : Random day-to-day wiggles
• Secondary movements : Corrections that last for a few
weeks or months
• Primary trends : Representing bull and bear
phases of the market
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10. Dow Theory
Dow developed his theory to explain the
movement of the indices of Dow Jones
Averages.
The theory is based on certain hypothesis:
The first hypothesis is that no single individual or
buyer can influence the major trend of the market.
The second hypothesis is that market discounts
every thing. It means that the daily prices are affected
by different factors.
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11. According to Dow theory the trend is divided
into
The primary movement is the long range cycle that
carries the entire market up or down. This is long
run trend in the market.
The secondary reactions act as a restraining force
on the primary movement. These are in the
opposite direction to the primary movement. These
are also known as corrections.
The third movement in the market is the day to day
fluctuations.
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12. Primary Trend
The security price trend may be either increasing or
decreasing.
When the market exhibits the increasing trend, it is
called ‘bull market’ and when it exhibits a
decreasing trend it is called ‘bear market’.
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13. Bull Market
Each peak is higher than the previous peak.
The bottoms are also higher than the previous
bottoms.
T1
T2
T3
B1
B2
Speculation
phase
Good corporate
earnings
Revival
of market
confidence
phase-1
Y
P
R
I
C
E
X
Bull market
Days
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14. Bear Market
The market exhibits falling trend.
The peaks are lower than the previous peaks.
The bottoms are also lower than the previous
bottoms.
P
R
I
C
E
Y
Loss of hope (phase-1)
Recession in business (phase-2)
B1
B2
B3
T1
T2
Distress selling
(phase-3)
X
Days
Bear market
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15. The Secondary Trend
The secondary trend or the intermediate trend
moves against the main trend and leads to
correction.
Compared to the time taken for the primary
trend, secondary trend is rapid and quicker.
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16. Minor Trends
Minor trends or tertiary moves are called random
wriggles.
They are simply the daily price fluctuations.
Minor trend tries to correct the secondary trend
movement.
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23. Price charts
Four types of prices are prevailing in the market on
each trading day.
Highest price of the day
Lowest price of the day
Closing price
Opening price
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24. Line chart
In this the closing prices of a share price are plotted
on the XY graph on day to day basis. All these points
would be connected by a straight line which would
predict the trend of the share price.
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26. Bar chart
Most popular chart used for technical analysis.
In this the highest, lowest and closing price of each
day are plotted on a day to day basis.
A bar is formed by joining the highest price and
lowest price of a particular day by a vertical line.
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28. Japanese candlestick chart
This chart shows the highest price, lowest price,
opening price and closing price of shares on a day to
day basis.
The opening price and closing price of the day which
would fall between the highest and lowest price
would be represented by a rectangle so that the
price bar chart looks like a candlestick.
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29. Types of candlestick
White candlestick is used to represent the situation
where the closing price of day is higher than the
opening price.
A black candlestick is used when closing price is <
opening price.
A Doji opening price and closing are the same.
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32. Chart patterns
When the price bar charts of several days are drawn
close together, certain patterns emerge. These
patterns are used by the technical analyst to identify
the trend reversals and predict the future movement
of prices.
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33. Classification of charts
Support and resistance pattern
Reversal patterns
Continuation patterns
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34. Support and Resistance Level
In the support level, the fall in the price may be
halted for the time being or it may result even in
price reversal.
In this level, the demand for the particular scrip is
expected.
In the resistance level, the supply of scrip would
be greater than the demand.
Further rise in price is prevented.
Selling pressure is greater and the increase in price is
halted for the time being.
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35. Pattern Study
Support and resistance lines
Support- A support is a horizontal floor where interest
in buying a commodity is strong enough the pressure
to sell.
Is the price level at which sufficient demand exist,
halt a downward movement in prices
A fall below support level indicates more willingness
to sell and lack of willingness to buy
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36. Resistance level
A horizontal ceiling where the pressure to sell is
greater than the pressure to buy
Is a price at which sufficient supply exist to, halt an
upward movement
Break in the resistance level shows more willingness
to buy or lack of incentive to sell
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39. Reversals patterns
Head and shoulder formation
Inverse head and shoulder formation
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40. Head and shoulder
It occurs at the end of a long uptrend.
It exhibits a hump or top followed by a still higher top
or peak and then another hump or lower top.
The first hump, known as the left shoulder, is formed
when reach the top under a strong buying impulse
then a downward swing.
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41. This formation usually occurs at the end of a bull
phase and is indicative of reversal of trend after
breaking the neckline is expected to decline sharply.
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44. Flags
They represent a brief pause in a fast moving
market. They occur mid way between a sharp rise in
price or a steep fall in price.
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45. Elliot wave theory
Formulated by Ralph Elliot in 1934 after analysing
seventy five years of stock price movement and
charts.
A wave is a movement of the market price from one
change in the direction to the next change in same
direction.
A movement in a particular direction can be
represented by five distinct waves.
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46. Of these five waves, three waves are in the direction
of the movement and termed as impulse waves.
Two waves are against the direction of the
movement and termed as corrective waves or
reaction waves.
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47. Theory Interpretation
The Elliott Wave Theory is interpreted as follows:
1. Every action is followed by a reaction.
2. Five waves move in the direction of the main trend
followed by three corrective waves (a 5-3 move).
3. A 5-3 move completes a cycle.
4. This 5-3 move then becomes two subdivisions of
the next higher 5-3 wave.
5. The underlying 5-3 pattern remains constant,
though the time span of each may vary.
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48. Breadth indicators-THE ADVANCE-
DECLINE
By evaluating how many stocks are increasing or
decreasing in price and how many trades investors are
placing for these stocks, breadth indicators can show
whether overall market sentiment is bullish (positive
market breadth) or bearish (negative market breadth).
Investors can also use breadth indicators to evaluate
the behaviour of a particular industry or sector, or to
analyse the magnitude of a rally or retreat.
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49. NEW HIGHS AND LOWS
Technical analysts consider the market as bullish
when a significant number of stocks hit the 52-week
high each day. On the other hand, if market indices
rise but few stocks hit new highs, technical analysts
view this as a sign of trouble.
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50. Volume
Volume analysis is an important part of
technical analysis. Other things being equal,
a high trading volume is considered a bullish
sign. If heavy volumes are accompanied by
rising prices, it is considered even more
bullish.
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51. Sentiment Indicators
A graphical or numerical indicator designed to show
how a group feels about the market, business
environment or other factor.
A sentiment indicator seeks to quantify how various
factors, such as unemployment, inflation,
macroeconomic conditions.
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52. Sentiments indicators
SHORT-INTEREST RATIO
The short interest ratio is defined as follows:
Total number of shares sold short
Average daily trading volume
A technical analyst considers a high short-interest
ratio as a sign of bearish market
53. ODD LOT Trading
Shares sold in smaller lots, fewer than 100 called
odd lot.
When the professional investors dominate the
market, the stock market is technical strong if the
odd lotters dominate the market, the market is
considered to be technically weak.
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54. Point and figure chart
The daily closing price of stock as follows:
31, 31.5, 32, 32.50, 33.75, 34, 33.5, 33.75, 34,33,
32.5,32, 32.5, 34, 34.5, 36,
When the price rises by 1 Rs over previously price,
record an X.
When the price falls by 1 Rs over previously price,
record an 0.
when the direction is changed, the price is recorded
in the next column to the right.
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56. Mathematical Indicators
Simple moving averages- An average is the sum of
share price for a specific number of days divided by
the number of days.
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57. Moving Average
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.
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.
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58. Analysis
If a stock’s price is below the 200-day moving
average, then the stock is said to be bearish, hence
it can test newer lows.
If the short-term moving average crosses from below
to above the long term simple moving average, it
gives a buying opportunity.
When it crosses from above to below the long term
simple moving average, it gives a selling opportunity.
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59. Exponential moving average
A type of moving average that is similar to a simple
moving average, except that more weight is given to
the latest data. The exponential moving average is
also known as "exponentially weighted moving
average“
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60. Example
EMA for 22 days will be calculated as follows.
EMA = Price(t) * k + EMA(y) * (1 – k)
t = today, y = yesterday,, k = 2/(N+1), N = number of
days in EMA
1) Start by calculating k for the given timeframe. 2 / (22
+ 1) = 0.0869
2) Add the closing prices for the first 22 days together
and divide them by 22.
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61. EMA
3) You’re now ready to start getting the first EMA day
by taking the following day’s (day 23) closing price
multiplied by k, then multiply the previous day’s
moving average by (1-k) and add the two.
4) Do step 3 over and over for each day that follows to
get the full range of EMA.
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62. EMA
This type of moving average reacts faster to recent
price changes than a simple moving average.
The 12- and 26-day EMAs are the most popular
short-term averages, and difference of these both
used to create indicator like the moving average
convergence divergence (MACD) .
A nine-day EMA of the MACD, called the "signal
line", is then plotted on top of the MACD, functioning
as a trigger for buy and sell signals.
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63. Moving Average Convergence
Divergence - MACD
Crossovers - when the MACD falls below the signal
line, it is a bearish signal, which indicates that it may
be time to sell.
Conversely, when the MACD rises above the signal
line, the indicator gives a bullish signal, which
suggests that the price of the asset is likely to
experience upward momentum.
Prepared By Sumit Goyal- LPU
