TECHNICAL ANALYSIS

TECHNICAL ANALYSIS
 SHRUTI

ROLL NO. 43
 What is meant by Technical Analysis?
• It’s a method of evaluating securities
– Assumptions that market data
– Such as charts, volume, etc.
– Can help predict future market trends
• Technical analysts believe that
– Predict future price of a stock
– Historical prices and trading variables
 Why study Price???

“The market price reflects…the hopes and

fears and guesses and moods, rational and
irrational, of hundreds of potential buyers and
sellers… Price is the only figure that counts.”
Definitions
• A method of market and security analysis that
studies investor attitudes and psychology as
revealed in charts of stock price movements and
trading volumes. This analysis may be used to
assess possible future price action.
• Research and examination of the market and
securities as it relates to their supply and demand
in the marketplace. The technician uses charts
and computer programs to identify and project
price trends.
Assumptions of Technical Analysis
1. Price discounts everything.
• In a nut shell, this first assumption
seeks to incorporate all the
fundamental, political, macro and
micro economic data as well as
the risk component of a stock into
the current market price at any
one period.
• This infers that the market price
can be heavily influenced by an
investor's perception of supply
and demand, as well as the
general broad economic overview
at the time the price is captured.
Cont…
2. Prices usually always move in trends
This theory is based on the fact that
markets are ‘efficient’ and information
dissemination occurs instantaneously across
the market. In the real world however, this is
never entirely achievable because of a varying
number of factors and therefore complete
randomness – in its true form – is never
absolutely reflected.
Cont…

3. History repeats itself over time.

• The most significant factor to realize is that
you are not the only person motivated by
profit. All traders tend to react in the same
way each time they encounter a situation
which is similar.
• While it is true that some traders react positively
from any mistakes made and learn from them,
other participants decide to leave the market and
therefore create a balancing pendulum of traders
entering and leaving the market.
• Consequently, the same oversights are made by
each generation of traders in the market which
infers that history tends to repeat itself as time
moves forward
ALPESH SHAH
ROLL NO.46
 Technical v/s Fundamental analysis

Fundamental analysis Technical analysis

 Long term values Short term price
movements.

 Decisions depend upon Decisions depend

upon only Company, industry and price and volume
Financial analysis.

85% logical and 15% 85% psychological

and 15% Psychological. Logical.

Appeals long term appeal short term traders.

Investors.
Several ways the technicians thinks and acts :-

 Technicians believe that behind the fundamentals are

important factors.

 Technicians are not committed to a buy and hold policy.

 Technicians do not separate income from capital gains.

Total returns = Realized price – (price paid + dividend received)

 Technicians act more quickly to make commitments and to

take profits and losses.
Cont…
 Technicians recognize that the more experience one has with the
technical indicators, the more alert one becomes to pitfalls and
failure of investing.

 Technicians insist that the market always repeats.

 Technicians believe that breakouts from previous trends are

important signals.

 Technicians recognize that the securities of strong company are

often weak and vice versa.

 Technicians use charts to confirm fundamentals.

- NISARG SHUKLA
ROLL NO .47
CHARTING AS A TECHNICAL TOOL
• This graphical representation
of a chart allows us to
perform a visual
interpretation of a security's
price behavior.
• Technical indicators or studies
can be plotted on a chart to
help you see what prices have
done in the past, what they
are currently doing, and what
they may do in the future.
CHARTING AS A TECHNICAL TOOL
• A chart displays the price
movement of a specific
symbol, this price data can
be displayed as Bars,
Candlesticks or Lines.
• Every chart has a base
security. This base security
is the security or the ticker
symbol that was selected
when the chart was
originally created.
 LINE CHART
• In the line chart, only the CLOSING PRICE of
the stock is plotted on the chart for each
successive day.
• Many chartists believe that because of the
closing price is the most critical price of the
trading day, a LINE (or close only) chart is
more valid measure for price activity.
LINE CHART
 BAR CHART
• The daily bar chart has already been
acknowledged as most widely used types of
charts in Technical analysis.
• It is called as bar charts because they show
each day’s/month’s/year’s range is
represented in vertical bars.
• It shows open ,close, high & lows.
• The tic of RIGHT SIDE is closing price
• The tic of LEFT SIDE is opening price
BAR CHART
 POINT-AND-FIGURE CHART
• This chart shown the same price action but in
more compressed formats.
• Here, To notice the X’s and O’s in alternating
column.
• The X column shows RISING IN PRICE while O
column shows DECLINING IN PRICES
• DUE TO MORE FLEXIBLITY, this chart is more
easier & precise to spot buying & selling
signals than Bar charts.
POINT-AND-FIGURE CHART
 CANDELESTICK CHART
• Started in Japan in 1700s for RICE TRADE.
• There’s link between price & supply & demand of
rice but there’s also EMOTIONS OF TRADERS.
• Thus, There’s a difference between the price and
the value of rice caused by trader emotion.
• The candlestick chart analysis measures the
MARKET EMOTIONS.
• So, It reflects the SHORT-TERM OUTLOOKS.
 CANDELESTICK CHART(types)
• LONG BODY:-
a. Prices of stock was in wide range during trading session.
b. Open near low/high and closed near high/low of the day.
c. Tells us… bearish or bullish
• SMALL BODY:-
a. Prices are in variations…,
b. Open and closed near the same price.
c. It is neutral or indecisive of market
d. Look @ the trend of market preceding the patterns
CANDELESTICK CHART
 Hanging Man
– when it is after a rally, it can
suggest a beginning of a downward trend.
• There are also types of various clusters of
clusters have their exotic names such as………
1.Dark cloud cover
2.Doji star
3.Harmani cross
4.Two day tweezers tops
 Hanging MAN
Lucent Technologies
• 3 days of stock price rising • Then hanging man
• Next day, stock price drops over 20%

GAP OF 20%
CANDELESTICK CHART
 CANDELESTICK CHART
• This chart shown a bars in black candles & white
candles augmenting the daily trading range lines.
• BLACK CANDLES :- IF the opening prices exceeds
the closing prices the body of candle is black.
• WHITE CANDLES:- When the stock is up(the close
exceeds the open), represent the stock advances
• REAL BODY:- THE THICK PORTION OF AN ENTRY
• WICK:- THE VERTICAL LINES
 LIMITATIONS OF CHARTS
• Duo to difference in
interpretations, we can make as
many assumptions as we think.
• Every chartist following its own
method & change frequently its
method .
• Most of them followers are
those investors who either know
little or nothing about company
in which they have invested(i.e.
they only follow the chart)
 PANKTI
ROLL NO.45
• Proposed by CHARLES DOW – DOW THEORY
editor of the wall street
journal in U.S.A.
• Believed in fundamental analysis
• “Provides a time tested method of
reading the stock market
barometer”.
• Might work only when a long,
wide, upward or downward
movement is registered in the
market
 THREE TRENDS
• Primary/major market trend
• Secondary intermediate trend
• Minor trend

THREE AVERAGES
• Industrial average
• Transportation average
• Utility average
1.revival of confidence

2. improvement in
corporate earnings

3. speculation & inflation

1. abandonment of hopes

2. reporting lower profits

& lower dividends

3. distress selling
 PROBLEMS

• Not a theory but an interpretation of knowing data

• Not explain the averages should be able to forecast future
stock prices
• Not attempt to explain a pattern of the stock price movement

It is mostly unsuitable reverse for short & intermediate

trend & suitable only primary trend
TREND & TECHNICAL ANALYSIS
MONI RAWAT
ROLL NO.41
 TREND
• MEANING
– Trend is the direction of the movement in the share price

Share prices do not rise or fall in a straight line

 Trend reversal..
• The rise or fall in share
price cannot go on
forever

• Up trend
• Down trend
• TYPES
Primary trend
Secondary trend
Minor trend
 PRIMARY TREND
• Bull market
– Each peak is higher than prev. peak .
– Bottoms are also higher than prev. bottom

CAUSES
Revival – encourage investor
Improvement in corporate profits – further price rise
speculation -price advances due to inflation
• BEAR MARKET
 First fall
 Chance of moving back to prev. high is
less.
 sale of shares.
• CAUSES
– Lower profit & dividend
– (-) flow of information in mkt
– Global mkt effect
 THE SECONDARY TREND
• Intermediate trends moves against the main
trend & lead to correction.
• In bull mkt the ST would result in fall of the
earlier rise.
• In the bear mkt the secondary trend carries
the price upward & correct the main trend.
 MINOR TREND

– Daily price fluctuation

– Corrects the secondary trend movement
 SUPPORT & RESISTANCE LEVEL
• RESISTANCE LEVEL
– When the stk touches a certain level & then drops
• SUPPORT LEVEL
– If the stk reaches down to a certain level & then
rises there exist a support level.
 TECHNICAL
ANALYSIS
TOOL..
MOVING AVERAGE
Moving avg are used to provide a
smooth ref. pt for
– Individual securities
– Mkt indices
– Commodity prices
– Interest rate
– Foreign exchange rates
Moving avg changes each day
Recent day is added & oldest day is
dropped

Volatile condition
 Technicians analyze

Diff between Daily Prices & Moving

avg
 If Penetration of daily prices over the
moving avg

• TWO CONDITION
 Daily price moves down then moving avg
Sell signal
 Daily price are abv moving price
End of bull mkt may be near.
 Buying & Selling of stock
• Moving avg • Moving avg
analysts analysts
recommend buying recommend selling
stock if of stock if
– M.A lines flattens & stk – M.A lines flattens &
price moves up through stock price drops down
moving avg lines through moving avg lines
– Price of stk falls below – Stk price temporarily
MA lines that is rising rises abv a declining
moving avg line
– Stk price is above • Stk prices falls through
M.A line, falls & rise M.A lines & turns
again without around only to fall
penetrating moving again without
avg line. penetrating abv.
Moving avg line
 How moving avg is calculated?
• Strategy is more successful if M.A is calculated
over a longer time frame
• Can subscribe to chart delivery services
• Can buy years of historical daily prices and
draw own charts
• Can stimulate trading by managing
hypothetical trades.
MA – Example 1: Google (GOOG)
MA – Example 2: Apple (AAPL)
MA – Example 3: JSC Tatneft (TNT)
TECHNICAL INDICATOR

NITA SOLANKI
ROLL NO.49
 TECHNICAL INDICATORS

• Most of the technical indicators make

sense when examined individually but
when one examines many technical
indicators simultaneously, the
interpretation of their collective meaning is
often contradictory and confusing.
 TECHNICAL INDICATORS

• There are some major technical indicators

described here.
The short interest ratio theory
Confidence index
Spreads
Advance-decline Ratio
Market Breadth Index
 Cont……..
The odd-Lot Ratio
Insider Transactions
Moving Average
 Technical indicators

• THE SHORT INTEREST RATIO THEORY

The short interest ratio is derived by dividing
the reported short interest or the number of
shares sold short, by the average volume for
about 30 days. When short sales increases
relative to total volume,the indicator rises. A
ratio above 150 per cent is considered
bullish, and a ratio below 100 per cent is
considered bearish.
 Cont…….
• The logic behind this ratio is that speculators
and other investors sell stocks at high prices in
anticipation of buying them back at lower
prices.
• The increase short selling- market weakness,
• Decreasing short selling-market strength.
 Cont….

CONFIDENCE INDEX
It is the ratio of a group of a lower-grade
bonds to a group of higher-grade bonds.
According to this theory underlying this
index, when the ratio is high, investors’
confidence is likewise high, as reflected by
their purchase of relatively more of the
lower-grade securities.
 Conti……..
• When they buy relatively more of the higher
grade securities, this is taken as an indication
that confidence is low, and is reflected in a
low ratio.
 Technical indicators
• SPREADS
• Large spreads between yields indicate low
confidence and are bearish, the market
appears to require a large compensation for
business, financial and inflation risks.
• Small spreads indicate high confidence and
are bullish.
 Cont….
• In short,
• The large the spreads, the lower the ratio
and less the confidence.
the smaller the spreads, the greater the ratio,
indicating greater confidence.
 Technical Indicators
• ADVANCE-DECLINE RATIO:
• The index relating advances to declines is
called the advance decline ratio. The
Advances persistently outnumber decline- the
ratio increase. A bullish condition is said to
exist, and vice versa.
 Technical indicators
• MARKET BREADTH INDEX:
• The market breadth index is a variant of the
advance decline ratio. To compute it we take
net difference between the number of stocks
rising and the number of stocks falling.
 Cont……….
• Example:
• If in a given week 600 shares advanced, 200
shares declined, and 200 were unchanged, the
breadth would be
2[(600-2000)/200]
 Cont….
• In short,
• If the both the stock index and the market
breadth index increase, the market is bullish,
• When the stock index increases but the
breadth index does not, the market is bearish.
 Technical indicators
• THE ODD-LOT RATIO:
• Odd-lot transactions are measured by odd-lot
changes in index. Odd-lots are stock
transactions of less than, say, 100 shares. The
odd-lot ratio is sometimes referred to as a
yardstick of uniformed sentiment or an index
of contrary opinion because the odd-lot
theory assumes that buyers or sellers are not
very bright especially at tops and bottoms
when they need to be brightest.
 Technical Indicators

• INSIDER TRANSACTION:
• The hypothesis that insider activity may be
indicative of future stock prices has
received some support in the academic
literature. Since insiders may have the best
picture of how the firm is faring, some
believers of technical analysis feel that
these inside transactions offer a clue, to
future earnings, dividend and stock price
performance.
 Cont………
• If the insiders are selling heavily, it is
considered a bearish and vice-versa.
• Although the president’s reason for selling the
stock may not be related to the future growth
of the company, it is still considered bearish as
investors figure the president, as an insider,
must know something bad about the company
that they, as outsiders, do not know.
 Technical Indicators
• MOVING AVERAGE
• A moving average is a smoothed
presentation of underlying historical data.
Each data points is the arithmetic average
of a portion of the previous data.
• A 10-day / 20-days /30-days moving avg.
• measures Avg values over the previous
(10/20)days and so on.
 Cont……….
• Regardless of the time period use, each day a
new observation is included in the calculation
and the oldest is dropped. So a constant
number of points are always being averaged.
BHAGVANJI
ROLL NO.50
 Pros of Technical Analysis
1. Prominent institutions survey foreign exchange
dealers and find that the vast majority place
some weight on technical analysis.

2. There may be positive investment

opportunities even in an efficient market given
the diverse strategies and goals (e.g. hedging
and risk reduction vs. profit maximization) of
different traders.
 Pros of Tech. Ana.(Cont…)
3. Some technical analysis methods seem to
mirror natural human strategies (buy when it
breaks through a high, sell when it is declining,
etc.)
4. Many natural (e.g. daily/ annual weather
patterns) and human phenomena (e.g. meal
times) revolve around rhythms & cycles – why
not market phenomena which is a
combination of both?
 Cons of Technical Analysis
1. If you believe in market hypothesis/ random walk
theory, technical analysis cannot work because
complete knowledge of past history about stock
prices, volume and trends is reflected in the
current price.
2. In many trading theories, the patterns are
ambiguous and the trading strategies not
rigorously defined. Thus, two people can take the
opposite position on a trade while still following
the same theory. This makes the quality of the
theory doubtful.
 Cons of Tech. Ana. (Cont…)
3. The cycles of the market may be like the
cycles of a child on a swing, periodic, but
unpredictable due to irregularities of kicking
patterns and wind gusts (sudden and violent
blast of wind)
4. Short term claims of excellent performance
often just reflect luck.
5. Published studies generally reach ambiguous
conclusions.
OSCILLATORS
-NISARG SHUKLA
 Oscillators
Signal the change by comparing rate of change in price
action.
Compare to the past, has it move very far away?
• Usually signal overbought and oversold
• Be careful: it might just be the beginning of the trend,
only use it
in trading in neutral market
• Examples of oscillators used:
-Relative Strength Index (RSI)
-Moving Average Convergence Divergence (MACD)
-Stochastic
 RELATIVE STRENGTH INDEX:
Measure the buying and selling forces, range between 0 and 100
RSI = 100 - 100/(1 + RS)
RS = Average of x days’ up closes/ Average of x days’ down
closes
 Moving Average Convergence
Divergence (MACD)
• MACD line: subtracting 26-day exponential MA
from 12-day EMA
• Signal line: 9-day EMA of MACD
• What is EMA?
• - it’s a weighted MA, giving more emphasis to
more recent trading days
• Crossovers:
• MACD falls under signal line = bearish
• MACD rises above signal line = bullish
MACD
 Stochastic
Theory:
In an uptrend market, closing prices tend to be near the
highs’
In a downtrend market, closing prices tend to be near
the lows’
%K line and %D line
%K = 100[(C - L14)/(H14 - L14)]
C = current closing price
L14 = lowest low price during 14-day period
H14 = highest high during 14-day period%
D%= K smoothed over three days
Stochastic
 Conclusion

• When to use technical analysis:

• looking for short-term
• Indicators are only indicators