Technical Analysis.pdf Notes for a ug/ pg management students

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1. Technical Analysis

2. Introduction
FUNDAMENTAL ANALYSIS ( helps in finding out the share prices using
economic industry, and company analysis). IF THE SHARE PRICE IS
HIGHER THAN THE INTRINSIC VALUE HE SELLS AND MAKES PROFIT
AND VICE VERSA.
TECHNICAL ANALYSIS STUDIES THE STOCK PRICE MOVEMENT IN THE
MARKET.( trends in the market is the key) IF THERE IS AN UPTREND
THEN HE BUYS AND VICE VERSA.THE AIM IS TO GET BETTER RETURN
ON INVESTMENT.

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TECHNICAL ANALYSIS.
•IT IS A PROCESS OF IDENTIFYING TREND REVERSALS AT AN EARLIER
STAGE TO FORMULATE THE BUYING AND SELLING STRATEGY.
•TECHNICAL ANALYSIS INVOLVES A STUDY OF MARKET GENERATED
DATA LIKE PRICES ANDS VOLUMES TO DETERMINE THE FUTURE
DIRECTION OF PRICE MOVEMENT.

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TECHNICAL ANALYSIS: ASSUMPTIONS.
1.MARKET VALUE OF THE SCRIP IS DETERMINED BY THE INTERACTION OF
DEMAND AND SUPPLY.
2. SUPPLY AND DEMAND ARE INFLUENCED BY A VARIETY OF FACTORS BOTH
RATIONAL/IRRATIONAL (LIKE INSIDER INFORMATION, PSYCHOLOGY).
3.MARKET ALWAYS MOVES IN TRENDS. EXCEPT FOR MINOR DEVIATIONS.THE
TREND MAY BE INCREASING/DECREASING.
4.SHIFTS IN DEMAND AND SUPPLY BRINGS ABOUT CHANGES IN TRENDS.
5.SHIFTS IN DEMAND AND SUPPLY CAN BE DETECTED WITH THE HELP OF
CHARTS.
6.BECAUSE OF PERSISTENCE OF TRENDS AND PATTERNS, ANALYSIS OF PAST
MARKET DATA CAN BE USED TO PREDICT FUTURE PRICE BEHAVIOUR

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DIFFERENCES:- FUNDAMENTAL AND TECHNICAL
ANALYSIS
1.TECHNICAL ANALYSIS PREDICTS SHORT TERM PRICE MOVEMENTS.
FUNDAMENTAL –LONG TERM PRICE MOVEMENTS.
2.TECHNICAL- Internal market data(prices and volume)
FUNDAMENTAL-economy/industry.
3. TECHNICAL-short term traders
FUNDAMENTAL-appeals primarily to long term investors.

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CHARTING TECHNIQUES:-BASIC CONCEPTS
1.PERSISTENCE OF TRENDS:- STOCKS PRICES TEND TO MOVE IN FAIRLY
PERSISTENT TRENDS. THE BEHAVIOUR OF STOCK PRICE IS CHARACTERISED BY
INERTIA. (i.e. price movement goes on up/down until opposed that means
change in demand and supply relationship)
2. RELATIONSHIP BETWEEN VOLUME AND TRENDS:- ANALYSTS BELIEVE
THAT VOLUME AND TREND GO HAND IN HAND.WHEN A MAJOR UPTURN
BEGINS THE VOLUME OF TRADING INCREASES AS PRICE Increases. IN A MAJOR
DOWN-TURN THE OPPOSITE HAPPENS; THE VOLUME OF TRADING INCREASES
AS THE PRICES DECLINES AND DECREASES.
3.ANALYSTS BELIEVE THAT IT IS DIFFICULT FOR THE PRICE TO RISE ABOVE A
CERTAIN LEVEL CALLED AS RESISTENCE LEVEL AND FALL BELOW A
CERTAIN LEVEL CALLED SUPPORT LEVEL.( because investors hold on in
the hope of recovery) AND WHEN PRICE RECOVERS TO THEIR PURCHASE
PRICE THEY SELL AS A SIGH OF RELIEF.THIS STIMULATES SUPPLY

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TECHNICAL TOOLS
1.DOW THEORY.
2.VOLUME OF TRADING
3.BARS AND LINE CHARTS.
4.MOVING AVERAGES AND OSCILLATORS.
5.Japanese Candlestick

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DOW THEORY.(CHARLES H DOW 1984
THIS THEORY WAS PROPOSED IN THE WALL STREET JOURNAL IS ONE
OF THE OLDEST THEORY OF TECHNICAL ANALYSIS. HYPOTHESIS:-
1.No single buyer can influence a major market trend. He can affect the
daily price movement by buying /selling a huge quantum of a scrip.
2.THE MARKET DISCOUNTS EVERYTHING. THE MAJOR NATURAL
CALAMITIES DO AFFECT ONLY FOR A SHORT TERM AFTER WHICH THE
NORMALCY OCCURS. (earth quake, Bombay blasts, riots etc)
3. THIS THEORY IS NOT INFALLIBLE. IT IS NOT A TOOL TO BEAT THE
MARKET BUT ONLY TO UNDERSTAND IT BETTER.

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WORDS OF CHARLES DOW.
“THE MARKET IS ALWAYS CONSIDERED AS HAVING THREE
MOVEMENTS, ALL GOING AT THE SAME TIME.THE FIRST IS THE
NARROW MOVEMENT FROM DAY TO DAY. THE SECOND IS THE
SHORT TERM SWING FROM TWO WEEKS OR MORE AND THIRD IS THE
MAIN MOVEMENT COVERING AT LEAST FOUR YEARS TERM.

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DOW THEORY:- 3 MOVEMENTS
a)DAILY FLUCTUATIONS (random daily changes)
b)SECONDARY CHANGES (CORRECTIONS)( lasting a for a few weeks
to some months).
c)PRIMARY TRENDS (bull and bear phase in the market.)

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TRENDS.
•TREND IS THE DIRECTION OF THE MOVEMENT.
•SHARE PRICES CAN RISE, FALL OR REMAIN UNALTERED.
•THE PRICES DO NOT RISE/FALL IN A STRAIGHT LINE.
•EVERY RISE/FALL IN PRICE EXPERIENCES A COUNTER MOVE.
•IF THE SHARE PRICE IS INCREASING, THE COUNTER MOVE WILL BE A
FALL IN THE PRICE AND VICE VERSA.
•THE SHARE PRICES MOVE IN A ZIGZAG MANNER.

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TREND AND TREND REVERSAL
THE TREND LINES ARE STRAIGHT LINES DRAWN CONNECTING EITHER
THE TOPS OR BOTTOMS OF THE PRICE MOVEMENT. TO DRAW A
TRENDLINE THE ANALYST SHOULD HAVE AT LEAST TWO TOPS OR
BOTTOMS.
TREND REVERSAL :- THE RISE/FALL IN THE SHARE PRICE CANNOT GO
ON FOREVER.

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TREND REVERSAL
THE SHARE PRICE MOVEMENT MAY REVERSE ITS DIRECTION. BEFORE
THE CHANGE OF DIRECTION CERTAIN PATT-ERN IN PRICE MOVEMENT
EMERGES. THE CHANGE IN THE DIRECTION OF THE TREND IS SHOWN
BY VIOLATION OF THE TREND LINE.IF A SCRIP PRICE CUTS THE TREND
LINE FROM ABOVE IT IS A VIOLATION OF THE TREND LINE AND
SIGNALS THE FALL IN THE PRICE.

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TREND REVERSAL.

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TECHNICAL INDICATOR-VOLUME OF TRADE.
LARGE VOLUME WITH RISE IN PRICE INDICATES BULLISH MARKET AND
LARGE VOLUME WITH FALL IN PRICE INDICATES BEARISH MARKET.
IF THE VOLUME DECLINES FOR FIVE CONSECUTIVE DAYS, THEN IT WILL
CONTINUE FOR ANOTHER FOUR DAYS AND THE SAME IS TRUE IN
INCREASING VOLUME.

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TECHNICAL INDICATORS-BREADTH OF THE
MARKET.
•BREADTH OF THE MARKET IS THE TERM USED TO STUDY THE ADVANCES
AND DECLINES THAT HAVE OCCURRED IN THE STOCK MARKET.
•ADVANCES MEANS THE NUMBER OF SHARES WHOSE PRICES HAVE
INCREASED FROM THE PREVIOUS DAY’S TRADING.
•DECLINES INDICATE THE NO OF SHARES WHOSE PRICES HAVE FALLEN
FROM THE PREVIOUS DAY.
•THE NET DIFFERENCE BETWEEN THE NUMBER OF STOCKS ADVANCED AND
DECLINED DURING THE SAME PERIOD IS THE BREADTH OF THE MARKET.
•A CUMULATIVE INDEX OF NET DIFFERENCES MEASURES THE MARKET
BREADTH.

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TECHNICAL INDICATORS-BREADTH OF THE
MARKET.
THE A/D LINE IS COMPARED WITH THE MARKET INDEX.
•IN A BULLISH MARKET BEARISH SIGNAL IS GIVEN WHEN THE A/D LINE
SLOPES DOWN WHILE THE BSE-SENSEX IS RISING.
•IN A BEAR MARKET A BULLISH SIGNAL IS GIVEN WHEN THE A/D LINE
BEGINS RISING AS THE SENSEX IS DECLINING TO A NEW LOW.

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MOVING AVERAGE.
•THE MARKET INDICES DO NOT MOVE IN A STRAIGHT LINE.
•THE UPWARD AND DOWNWARD MOVEMENT ARE INTERRUPTED BY
COUNTER MOVES.
•THE TRENDS CAN BE SMOOTHENED BY MOVING AVERAGES
TECHNIQUE.
•HERE THE CLOSING PRICE OF THE STOCKS ARE USED.
•THE MOVING AVERAGES ARE USED TO STUDY THE MOVEMENT OF
THE MARKET AS WELL AS THE INDIVIDUAL SCRIPS.

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MOVING AVERAGE.
•THE MOVING AVERAGE INDICATES THE UNDERLYING TREND IN THE
SCRIP.
•FOR IDENTIFYING THE SHORT TERM TREND 10-30 DAYS MOVING
TREND IS USED.
•FOR MEDIUM TERM 50-120 DAYS ARE USED,
•AND OVER 200 DAYS FOR LONG TERM TREND.
•IF THE MOVING AV OF THE STOCK PENETRATES THE STOCK MARKET
INDEX FROM THE ABOVE THEN IT IS A SELL SIGNAL AND VICE VERSA.

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OSCILLATORS.
OSCILLATORS INDICATE THE MARKET MOMENTUM OR SCRIP
MOMENTUM. IT SHOWS THE SHARE PRICE MOMENTUM ACROSS A
REFERENCE POINT FROM ONE EXTREME TO ANOTHER.THE
MOMENTUM INDICATES:-
1.OVERBOUGHT/OVERSOLD CONDITIONS.
2.SIGNALLING THE TREND REVERSAL.
3.RISE OR DECLINE IN THE MOMENTUM

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RELATIVE STRENGTH INDEX.
RSI WAS DEVELOPED BY WELLS WILDER. IT IS AN OSCILLATOR USED TO
IDENTIFY THE INHERENT TECHNICAL STRENGTH AND WEAKNESSES OF
A PARTICULAR SCRIP OR MARKET.
RSI= 100-(100/(1+RS))
RS=AV GAIN PER DAY/AV LOSS PER DAY.

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RELATIVE STRENGTH INDEX.
•THE RSI CAN BE CALCULATED FOR ANY NUMBER OF DAYS.
•NORMALLY IT IS DONE FOR 5, 7, 9 AND 14 DAYS.
•IF MORE NO OF DAYS ARE TAKEN THE CHANCES OF GETTING WRONG
SIGNALS IS REDUCED.
• THE RULE IS THAT IF RSI CROSSES 70 SELL THE SCRIP AND IF AT 30 OR
LESS PICKUP THE SCRIP.

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RELATIVE STRENGTH INDEX
•IF THE SHARE PRICES IS FALLING AND THE RSI IS RISING, A
DIVERGENCE IS SAID TO HAVE OCCURRED.
•DIVERGENCE INDICATES THE TURNING POINT OF THE MARKET.
•IF THE RSI IS RISING IN THE OVERBOUGHT ZONE, IT WOULD
INDICA-TE THE DOWNFALL OF THE PRICE.
•IF RSI FALLS IN THE OVERBOUGHT ZONE IT GIVES A CLEAR SIGNAL OF
‘SELL’.

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RATE OF CHANGE.
•ROC MEASURES THE RATE OF CHANGE BETWEEN THE CURRENT PRICE
AND THE PRICE ‘n’ NUMBER OF DAYS IN THE PAST.
•IT HELPS TO FIND OUT THE OVERBOUGHT AND OVERSOLD
POSITIONS IN A SCRIP.
•IT IS ALSO USED IN IDENTIFYING THE TREND REVERSAL.
•CLOSIING PRICES ARE USED TO CALCULATE THE ROC.
•DAILY CLOSING PRICES/WEEKLY CLOSING PRICES ARE USED FOR
WEEKLY ROC.
•CALCULATION OF ROC FOR 12 WEEKS OR 12 MONTHS IS MOST
POPULAR.

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RATE OF CHANGE.
. ROC CAN BE CALCULATED BY TWO METHODS:-
ROC=(TODAYS PRICE/PRICE ‘n” DAYS BACK) *100
OR
( TODAYS PRICE/PRICE ‘n’ DAYS BACK) *100 -100

1.CURRENT CLOSING PRICE IS EXPRESSED AS A PERCENTAGE OF THE 12 DAYS.
SUPPOSE THE SHARE PRICE OF A COMPANY IS Rs 12 AND 12 DAYS AGO IT WAS
RS 10 THEN ROC= 12/10 *100= 120%.
2. THE PRICE VARIATION BETWEEN THE CURRENT PRICE AND PRICE 12 DAYS IN THE
PAST IS CALCULATED.
12/10*100-100 =20%.
ROC CAN ALSO BE SHOWN BY A GRAPH.

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RATE OF CHANGE.
THE MAIN ADVANTAGE OF ROC IS THE IDENTIFICATION OF THE
OVERBOUGHT OR OVERSOLD ZONE.
•THE HISTORIC HIGH AND LOW VALUES OF THE ROC SHOULD BE
IDENTIFIED AT FIRST TO LOCATE THE OVERBOUGHT AND OVERSOLD
ZONE.
•IF THE SCRIP’S ROC REACHES THE HISTORIC HIGH VALUES THE SCRIP
IS IN THE OVERBOUGHT ZONE AND FALL IN VALUE IS EXPECTED.

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CHARTS
CHARTS ARE THE VALUABLE AND EASIEST TOOLS IN THE TECHNICAL
ANALYSIS.THE GRAPHIC PRESENTATION OF DATA HELPS THE INVESTOR TO
FIND OUT THE TREND OF THE PRICE WITHOUT ANY DIFFICUL-TY. THE
CHARTS ALSO HAVE THE FOLLOWING USES:-
1.SPOTS THE CURRENT TREND FOR BUYING AND SELLING.
2. INDICATES THE PROBABLE FUTURE ACTION OF THE MARKET BY
PROJECTION.
3. SHOWS THE PAST HISTORIC MOVEMENT
4. INDICATES THE IMPORTANT AREAS OF SUPPORT AND RESISTENCE.
THE INTERPRETATION OF THE ANALYST DEPENDS ON HIS SKILL AND
EXPERIENCE

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BAR CHARTS.
•THIS IS THE SIMPLEST TOOL USED.
•HERE A DOT IS ENTERED TO REPRESENT THE HIGHEST PRICE ON ANY
DAY.
•ANOTHER DOT SHOWS THE LOWEST PRICE OF THE DAY.
•BOTH ARE CONNECTED. A LINE IS DRAWN TO CONNECT BOTH THE
POINT. A HORIZONTAL NUB IS DRAWN TO MARK THE CLOSING PRICE.
LINE CHARTS ARE USED TO INDICATE THE PRICE MOVEMENTS.

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CHART PATTERNS.
1.V FORMATION:-IN THIS FORMATION THERE IS A LONG SHARP
DECLINE AND A FAST REVERSAL.THIS PATTERN OCCURS MOSTLY IN
POPULAR STOCKS WHERE THE MARKET INTEREST CHANGES QUIC-KLY
FROM HOPE TO FEAR AND VICE VERSA.IT IS THE REVERSE IN THE
CASE OF INVERTED ‘V’.

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TOPS AND BOTTOMS.
.
•THE INVESTOR HAS TO BUY AFTER THE UP TREND HAS STARTED EXIT
BEFORE THE TOP IS REACHED.
•GENERALLY TOPS AND BOTTOMS ARE FORMED AT THE BEGINNING
OR END OF THE NEW TREND. TOPS AND BOTTOMS INDICATES THE
BUY AND SELL SIGNAL.

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DOUBLE TOP AND BOTTOM
THIS TYPE OF FORMATION SIGNALS THE END OF ONE TREND AND THE
BEGINN-ING OF ANOTHER TREND.DOUBLE TOP MAY INDICATE THE
ONSET OF THE BEAR MARKET. BUT THE RESULTS SHOULD BE
CONFIRMED WITH VOLUME AND TREND. DOUBLE BOTTOM
RESEMBLES ‘W’ AND SIGNALS THE COMING OF A BULL MARKET.

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HEADS AND SHOULDERS
IN THE HEAD AND SHOULDER PATTERN THERE ARE THREE RALLIES
RESEMBLING THE LEFT SHOULDER, A HEAD AND A RIGHT SHOULDER.
A NECKLINE IS DRAWN CONNECTING THE LOWS OF THE TOPS. WHEN
THE STOCK PRICE CUTS THE NECKLINE FROM ABOVE IT SIGNALS THE
BEAR MARKET.

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INVERTED HEADS AND SHOULDERS
HERE THE REVERSE OF THE PREVIOUS PATTERN HOLDS TRUE. THE
PRICE OF STOCKS FALLS AND RISES THAT MAKES A INVERTED RIGHT
SHOULDER. AS THE PROCESS OF FALL AND RISE IN PRICE CONTINUES
THE HEADS AND LEFT SHOU-LDERS ARE CREATED. CONNECTING THE
TOPS OF THE INVERTED HEADS AND SH-OULDER GIVES THE
NECKLINE.

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INVERTED HEADS AND SHOULDERS
WHEN THE PRICE PIERCES THE NECKLINE FROM BELOW,INDICATES THE
END OF THE BEAR MARKET AND THE BEGINNING OF THE BULL
MARKET.THESE PATTERNS HAVE TO BE CONFIRMED WITH THE
VOLUME AND TREND OF THE MARKET.

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43. Japanese Candle Stick
•In order to create a candlestick chart, you must have a data set that
contains open, high, low and close values for each time period you
want to display.
•The hollow or filled portion of the candlestick is called “the body”
(also referred to as “the real body”).
•The long thin lines above and below the body represent the high/low
range and are called “shadows” (also referred to as “wicks” and
“tails”).
•The high is marked by the top of the upper shadow and the low by
the bottom of the lower shadow.

44. Japanese Candle Stick
•If the stock closes higher than its opening price, a hollow candlestick
is drawn with the bottom of the body representing the opening price
and the top of the body representing the closing price.
•If the stock closes lower than its opening price, a filled candlestick is
drawn with the top of the body representing the opening price and
the bottom of the body representing the closing price.

45. Japanese Candle Stick

46. Japanese Candle Stick
•Hollow candlesticks, where the close is greater than the open,
indicate buying pressure.
•Filled candlesticks, where the close is less than the open, indicate
selling pressure.

47. Japanese Candle Stick

48. Long Versus Short Bodies

49. Long Versus Short Bodies
•Long white candlesticks show strong buying pressure. The longer the
white candlestick is, the further the close is above the open. This
indicates that prices advanced significantly from open to close and
buyers were aggressive
•Long black candlesticks show strong selling pressure. The longer the
black candlestick is, the further the close is below the open. This
indicates that prices declined significantly from the open and sellers
were aggressive

50. Marubozu

51. Marubozu
•Marubozu do not have upper or lower shadows and the high and low
are represented by the open or close. A White Marubozu forms when
the open equals the low and the close equals the high. This indicates
that buyers controlled the price action from the first trade to the last
trade. Black Marubozu form when the open equals the high and the
close equals the low. This indicates that sellers controlled the price
action from the first trade to the last trade.

52. Doji

53. Doji
•Doji form when a security's open and close are virtually equal.
•Alone, doji are neutral patterns
•Doji convey a sense of indecision or tug-of-war between buyers and
sellers. Prices move above and below the opening level during the
session, but close at or near the opening level. The result is a
standoff. Neither bulls nor bears were able to gain control and a
turning point could be developing.

54. Doji and Trend

•The relevance of a doji depends on the preceding trend or preceding
candlesticks. After an advance, or long white candlestick, a doji
signals that the buying pressure is starting to weaken. After a decline,
or long black candlestick, a doji signals that selling pressure is starting
to diminish. Doji indicate that the forces of supply and demand are
becoming more evenly matched and a change in trend may be near