Report

Technical Analysis and Application of Elliott Wave Theory on Indian Stock Market
1.1 Introduction:
We are in a rapidly changing complex business world where the market dynamics are changing form minute by minute, hour by hour. From an individual investor to corporate investor, all the market participants are exposed to the changing dynamics and thereby its inherent price risk. Simple remedy to mitigate such risk could be by price forecasting. But how simple is this price forecasting? Is a big question to be answered? There have been two main approaches to analyse the securities market - the fundamental approach and the technical approach. The fundamental approach stresses the influence of a firms basic earnings and risk on the market price of its shares, whereas the technical approach concentrates on the patterns of stock market prices. The technical approach states that past share prices and volumes tend to follow a pattern and they can be used to predict future price movements. Forces of demand and supply determine the share prices; however, the fundamentalists think that they are a function of rational factors, while technicians attribute it to psychological factors. The technical analysis approach to capital market evaluation has received little attention and acceptance as compared to fundamental analysis. But in recent years the popularity of technical school of thought is increasing amongst academicians and practitioners. There has been some empirical research on technical analysis, for developed capital markets. However similar empirical work for developing markets especially India is limited. In this light, an empirical testing of technical indicators for Indian stock market is considered important.
1.2 INTRODUCTION TO TECHNICAL ANALYSIS Technical analysis is the examination of past price movements to the forecast future price movements. Technical analysts are sometimes referred to as chartists because they rely almost exclusively on charts for their analysis.
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Technical analysis is applicable to stocks, indices, commodities, and futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low or close for a given security over a specific timeframe. The time frame can be based on intraday (tick, 5-minute, 15-minute or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action. The ability to make price forecast is only the first step in the price decision making process. The second and often more difficult step is market timing. Since futures markets are so highly leveraged (initial margin requirements are generally around 20% of a contract value) minor price moves can have a dramatic impact on trading performances. Therefore the precise timing of entry and exit points is an indispensable aspect of any market commitment. Timing is everything when dealing in the stock markets and timing is almost purely technical in nature. This is where a practical application of charting principles becomes absolutely essential in the price forecasting and risk management process.
1.3 ASSUMPTIONS OF TECHNICAL ANALYSIS Three key assumptions on which technical analysis is based are1. The Market 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.
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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 provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze 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.
1.4 Strengths of Technical Analysis Focus on Price: To predict the future price, technicians believe that one should focus on price movements. Price movements usually precede fundamental developments. By focusing on price action, technicians are automatically focusing on the future. Even though the market is prone to sudden knee-jerk reactions, hints usually develop before significant moves. A technician will refer to periods of accumulation as evidence of an impending advance and periods of distribution as evidence of an impending decline.
Supply, Demand, and Price Action: Many technicians use the open, high, low and close when analyzing the price action of a security. Separately, these will not be able to tell much. However, taken together, the open, high, low and close reflect forces of supply and demand.
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Support/Resistance: Simple chart analysis can help identify support and resistance levels. These are usually marked by periods of congestion (trading range) where the prices move within a confined range for an extended period, telling us that the forces of supply and demand are deadlocked. When prices move out of the trading range, it signals that either supply or demand has started to get the upper hand. If prices move above the upper band of the trading range, then demand is winning. If prices move below the lower band, then supply is winning.
Pictorial Price History: A price chart can offer plenty of valuable information. It is an easy to read historical account of a security's price movement over a period of time. Charts are much easier to read than a table of numbers. On most stock charts, volume bars are displayed at the bottom. With this historical picture, it is easy to identify the following:
Reactions prior to and after important events. Past and present volatility. Historical volume or trading levels. Relative strength of a security versus the overall market.
Assist with Entry Point: Technical analysis can help with timing a proper entry point. Some analysts use fundamental analysis to decide what to buy and technical analysis to decide when to buy. Technical analysis can help spot demand (support) and supply (resistance) levels as well as breakouts. Waiting for a breakout above resistance or buying near support levels can improve returns.
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1.5 Weaknesses of Technical Analysis Analyst Bias: Just as with fundamental analysis, technical analysis is subjective and our personal biases can be reflected in the analysis. It is important to be aware of these biases when analyzing a chart. Open to Interpretation: Furthering the bias argument is the fact that technical analysis is open to interpretation. Even though there are standards, many times two technicians will look at the same chart and paint two different scenarios or see different patterns. Both will be able to come up with logical support and resistance levels as well as key breaks to justify their position. While this can be frustrating, it should be pointed out that technical analysis is more like an art than a science, somewhat like economics.
Too Late: Technical analysis has been criticized for being too late. By the time the trend is identified, a substantial portion of the move has already taken place. After such a large move, the reward to risk ratio is not great. Lateness is a particular criticism of Dow Theory.
Trader's Remorse: Not all technical signals and patterns work. When you begin to study technical analysis, you will come across an array of patterns and indicators with rules to match. For instance: A sell signal is given when the neckline of a head and shoulders pattern is broken. Even though this is a rule, it is not steadfast and can be subject to other factors such as volume and momentum. In that same vein, what works for one particular script may not work for another.
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1.6 CRITICS OF TECHNICAL ANALYSIS SAY. No one or group of trading rules seems to work consistently. Some price moves are self fulfilling because so many chartist trades on breakouts often are temporary. Most of the trading rules require a great deal of subjective judgment. Many methods which will work? When price volatility goes down technical profits may also fall. 1.7 TECHNICAL ANALYSIS ON STOCK MARKETS The main assumption behind technical analysis is the early indication in prices to the expected fundamental information that is available to the public. This prior response allows the chartists to identify and exploit price trends.
The basic input to the Technical analysis is price, volume and open interest. Chartist use bar charts candlestick or point and figure charts to look for patterns which may indicates future price movements. Volume and other indicators are also put under the radar. Ardent chartists dont care about fundamental at all. Chartists believe that price movement are not random and based on this one can improve the timing of purchases or sales.
1.8 FUNDAMENTAL vs. TECHNICAL ANALYSIS

Technical analysis studies the reasons or causes for prices going up or down whereas technical analysis studies the effect of the price movement itself.
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Technical analysis claims that market moves in trends and by charting market price one can predict price movements. Technical analysis also believe that by combining the use of price charts with appropriate marketing tools and pricing strategies one can have a major impact on his profitability. Charting can be used by itself without considering any fundamental information. Technical analysts believe that prices are ruled by 85% psychology and 15% logic whereas fundamental analysts believe that prices are ruled vice versa.
1.9
STATICAL
TOOLS
AND
CHART
PATTERNS
USED
IN
TECHNICAL ANALYSIS
1.9.1 PRICE CHARTS A price chart is a sequence of prices plotted over a specific timeframe. In statistical terms, charts are referred to as time series plots. On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right. The timeframe is for forming a chart depends on the compression of the data: intra-day, daily, weekly, monthly or annual data as the case may be. Less compressed the data, the more detail it will be displayed.
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Fig 1.1 Technicians, technical analysts and chartists use charts to analyze a wide array of stocks and forecast future price movements. Any security with price data over a period of time can be used to form a chart for analysis.
Most commonly used charts are:

Line Chart Bar charts Candlestick charts
1.9.1.1 Line Chart:

The line chart is one of the simplest charts. It is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a
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period of time, creates the line. Line charts are also used when open, high and low data points are not available. (Fig 1.2)
Fig 1.2
1.9.1.2 Bar Chart:
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Perhaps the most popular charting method is the bar chart. The high, low and close are required to form the price plot for each period of a bar chart. The high and low are represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. On a daily chart, each bar represents the high, low and close for a particular day. Weekly charts would have a bar for each week based on Fridays close and the high and low for that week. Bar charts can also be displayed using the open, high, low and close. The only difference is the addition of the open price, which is displayed as a short horizontal line extending to the left of the bar. The top of the bar represents the high price and the bottom represents the low price. (Fig.1.3)
Fig 1.3
1.9.1.3 Candlestick Chart:
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Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For a candlestick chart, the open, high, low and close are all required. A daily candlestick is based on the open price, the intraday high and low, and the close. A weekly candlestick is based on Mondays open, the weekly high-low range and Fridays close. Many traders and investors believe that candlestick charts are easy to read, especially the relationship between the open and the close. White (clear) candlesticks form when the close is higher than the open and black (solid) candlesticks form when the close is lower than the open. The white and black portion formed from the open and close is called the body (white body or black body). The lines above and below are called shadows and represent the high and low.
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Fig 1.4 1.9.2 CHART PATTERNS

What is a Pattern? The trend is the essential ingredient in chart analysis. The theory is that once a trend is in motion, it will continue in that direction. To the Technical Analyst this means that prices will move in trends. A Technical Analyst therefore always tries to determine the directions, strength and duration of the trend. The earlier the trend can be identified, followed and traded upon, the more profit can be made.
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That trend line whether it be up (a bullish trend) or down (a bearish trend) is never a completely straight line. Some time one can find that prices trend to form zigzag or forms waves. The zigzag movement is the foundation of all chart patterns and is the key to their forecasting value. The movements that prices make as they zigzag their way along a chart form patterns. Studies over many years show that these patterns tend to repeat themselves. Technical Analysts looks to this history of repeating patterns as having a predictive value. These patterns fall under two basic categories: Consolidation or Continuation patterns and Reversal patterns
Consolidation or Continuation patterns:

This pattern breaks out in the direction of the previous trend. In other words, the patterns confirms the existing trend suggesting that investors are considering whether the market is overbought or oversold but ultimately deciding to confirm the existing trend. Examples of this type of pattern include ascending triangles, descending triangles symmetrical triangles flags and pennant (which are discussed in the following pages).
Reversal Patterns:
These patterns breakout in a direction opposite to the previous trend. They mark a change in the direction of the price of the stock. After pausing to consider their investment strategies investors decide to reverse an existing trend in a stocks price. Examples of this type of patterns include Head and Shoulders tops and bottoms Double bottoms or tops Triple bottoms or tops and Wedges.
1.9.3 TRENDLINES
Technical analysis is built on the assumption that prices move trend. Trendlines are an important tool in technical analysis for both trend identification and confirmation. A trendline
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is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. Many of the principles applicable to support and resistance levels can be applied to trendlines as well. Up Trendline An up trendline has a positive slope and is formed by connecting two of more low points. The second low must be higher than the first for the line to have a positive slope. Up trendlines act as support for the price movements. As long as prices remain above the trendline, the uptrend is considered solid and intact. A break below the up trendline indicates that net-demand has weakened and a change in trend could be imminent. The uptrend is shown in the following chart of Gold futures for the month of February 2005 at MCX. At 1, the prices started rising and after a short time they came down and finally stopped at 2. But 2 is at a higher price level than 1. Again it started its upward journey at increased pace and came down a bit at 3. This shows that even there small fall in prices, the uptrend continues and is called as primary trend in Dow Theory. The small falls are due to supply and demand forces and get adjusted soon and the primary trend continues. (Fig. 1.5)
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Fig: 1.5
Down Trendline A down trendline has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Down Trendlines act as resistance. As long as prices remain below the down trendline, the
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downtrend is considered solid and intact. A break above the down trendline indicates that netsupply is decreasing and a change of trend could be imminent.
This is the opposite of uptrend. The down trend is shown in the following chart of Gold futures for the month of February 2005 at NCDEX. The prices started falling and after a short time they came down and finally stopped at 1. Then it was constant till a point and again started falling. Again it stopped at 2 and maintained same level till some point of time and then started its downward journey. This shows that even there are some hiccups the down trend continues. (Fig.1.6)
Fig: 1.6
1.9.4 SUPPORT AND RESISTANCE
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Support and resistance represent key junctures where the forces of supply and demand meet. In the stock markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.
SUPPORT: Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. Support does not always hold and a break below support signals that the bears have won out over the bulls. Support levels are usually below the current price, but it is uncommon for a security to trade at or near support. Technical analysis is not exact science hence sometimes it is very difficult to set exact price level. Because, during volatile market, the prices may break support briefly before bouncing back. For this reason some traders and investors establish support zones instead of any particular price. (Fig.1.7)
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Fig: 1.7
RESISTANCE
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Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.
Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at higher prices. Like support, some analysts use resistance zone instead of any particular price level.
1.9.5 CONTINUATION PATTERN 1.9.5.1 Flags &Pennants

Flags and pennants are short term continuation patterns that make a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline and with heavy volume. Characteristics of Flags & Pennants Sharp move: To consider patterns as continuation patterns there should be an evidence of a prior trend. Flags and Pennant require evidence of a sharp advance or decline on heavy volume. This move usually represents the first leg of a significant advance or decline and the flag and pennant are merely a pause. Flagpole: The flagpole is the first resistance or support break to the high or low of the flag/pennant. The sharp advance (or decline).
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Fig 1.8
Fig 1.9
Flag: A flag is a small rectangle pattern that slopes against the previous trend. If the previous move was up then the flag will slope down. If the move was down then the flag will slope up. Because flags are usually too short in duration to actually have reaction highs and lows, the price action just needs to be contained within two parallel trendlines. (Fig.1.8)
Pennant: A pennant is a small symmetrical triangle that begins wide and converges as the patterns matures (like a cone). The slope is usually neutral. Sometimes there will not be specific reaction highs and lows from which to draw the trend lines and the price action should just be contained within the converging trend lines. (Fig 1.10)
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Fig: 1.10 1.9.5.2 Volume and Open Interest

Volume Volume represents the total amount of trading activity or contracts that have changed hands in a given security market for a single trading day. The greater the amount of trading during a market session the higher will be the trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier for that day. Another way to look at this is that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse. Technicians believe that volume precedes price, meaning that the loss of upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart. Open Interest Open Interest is the total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market.
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For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both. Each trade completed on the floor of a futures exchange has an impact upon the level of open interest for that day. For example: If both parties to the trade are initiating a new position (one new buyer and one new seller), open interest will increase by one contract. If both traders are closing an existing or old position (one old buyer and one old seller) open interest will decline by one contract. The third and final possibility is one old trader passing off his position to a new trader (one old buyer sells to one new buyer). In this case the open interest will not change. By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the days activity can be drawn. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. Knowledge of open interest can prove useful toward the end of major market moves. A levelling off of steadily increasing open interest following a sustained price advance is often an early warning of the end to an up trending or bull market. The relationship between the prevailing price trend, volume, and open interest can be summarized by the following table.
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Price Rising Rising Falling Falling
Volume Rising Falling Rising Falling
Open Interest Rising Falling Rising Falling
Interpretation Market is Strong Market is Weakening Market is Weak Market is Strengthening
1.9.5.3 TRIANGLES
Symmetrical Triangle Ascending Triangle Descending Triangle SYMMETRICAL TRIANGLE A symmetrical triangle, which is also referred to as a coil, usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. It is looks as a contracting wedge, wide at the beginning and narrowing over time.
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Fig: 1.11
ASCENDING TRIANGLE The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. Sometimes ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. Regardless of where they form, ascending triangles are bullish patterns that indicate accumulation. (Fig. 1.12)
Fig 1.12
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DESCENDING TRIANGLE The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution. (Fig.1.13)
Fig 1.13
1.9.6 REVERSAL PATTERNS 1.9.6.1 DOUBLE TOP/ BOTTOM

The double top is a major reversal pattern that forms after an extended uptrend. As its name implies, the pattern is made up of two consecutive peaks that are roughly equal, with a moderate trough in between. (fig.1.14)
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Fig: 1.14
Although there can be variations, the classic double top marks at least an intermediate change, if not long-term change, in trend from bullish to bearish. Many potential double tops can form along the way up, but until key support is broken, a reversal cannot be confirmed.
The double bottom is a major reversal pattern that forms after an extended downtrend. As its name implies, the pattern is made up of two consecutive troughs that are roughly equal, with a moderate peak in between. The following figure shows the double bottom. (Fig.1.15)
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Fig 1.15
1.9.6.2 HEAD AND SHOULDER TOP/ BOTTOM

A head and shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline. (Fig.1.16)
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Fig: 1.16 The head and shoulders bottom is sometimes referred to as an inverse head and shoulders. The pattern shares many common characteristics with its comparable partner, but relies more on volume patterns for confirmation (Fig.1.17). As a major reversal pattern, the head and shoulders bottom forms after a downtrend, and its completion marks a change in trend.
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Fig 1.17 1.9.6.3 WEDGES

Falling Wedge The falling wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. The falling wedge can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing trend. Regardless of the type (reversal or continuation), falling wedges are regarded as bullish pattern. (Fig 1.18).
Fig: 1.18
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Rising Wedge The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias. (Fig.1.19) As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the prevailing trend. Regardless of the type (reversal or continuation), rising wedges are bearish.
Fig: 1.19
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1.9.7 TECHNICAL INDICATORS

A technical indicator is a series of data points that are derived by applying a formula to the price data of a security.. Price data includes any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced. By creating a time series of data points, a comparison can be made between present and past levels. For analysis purposes, technical indicators are usually shown in a graphical form above or below a securitys price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison.
TYPES OF INDICATORS There are two types of indicators: Leading Indicators Lagging Indicators
1.9.7.1 LEADING INDICATORS

Leading indicators represent a form of price momentum over a fixed look-back period, which is the number of periods used to calculate the indicator. Leading indicators are designed to lead price movements. With early signals comes the prospect of higher returns and with higher returns comes the reality of greater risk. More signals and earlier signals mean that the chances of false signals
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and whipsaws increase. False signals will increase the potential for losses. Whipsaws can generate commissions that can eat away profits and test trading stamina.
1.9.7.2 LAGGING INDICATORS

Lagging indicators follow the price action and are commonly referred to as trend-following indicators. Rarely these indicators lead the price of a security. Trend-following indicators work best when markets or securities develop strong trends. They are designed to get traders in and keep them in as long as the trend is intact. As such, these indicators are not effective in trading or sideways markets. If used in trading markets, trend-following indicators will likely lead to many false signals and whipsaws. Some popular trend-following indicators include Moving Averages (exponential, simple, weighted, and variable) and MACD.
1.9.8 OSCILLATOR
An oscillator is an indicator that fluctuates above and below a centreline or between set levels as its value changes over time. Oscillators can remain at extreme levels (overbought or oversold) for extended periods, but they cannot trend for a sustained period. As the indicator comparison chart shows, oscillator movements are more confined and sustained movements (trends) are limited, no matter how long the time period. There are different types of oscillators and some belong to more than one category. The breakdown of oscillator types begins with two types: centered oscillators which fluctuate above and below a center point or line, and banded oscillators which fluctuate between overbought and oversold extremes. Centered Oscillators Centered oscillators fluctuate above and below a central point or line. These oscillators are good for identifying the strength or weakness, or direction, of momentum behind a security's move. . In its purest form, momentum is positive (bullish) when a centered oscillator is
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trading above its center line and negative (bearish) when the oscillator is trading below its center line. Example: MACD & Rate-of-change (ROC) Banded Oscillators Banded oscillators fluctuate above and below two bands that signify extreme price levels. The lower band represents oversold readings and the upper band represents overbought readings. These set bands are based on the oscillator and change little from security to security, allowing the users to easily identify overbought and oversold conditions. Examples: The Relative Strength Index (RSI) and the Stochastic Oscillator. Oscillator Signals Oscillators generate buy and sell signals in various ways. Some signals are geared towards early entry, while others appear after the trend has begun. In addition to buy and sell signals, oscillators can signal that something is amiss with the current trend or that the current trend is about to change. Even though oscillators can generate their own signals, it is important to use these signals in conjunction with other aspects of technical analysis. Most oscillators are momentum indicators and only reflect one characteristic of a security's price action. Volume, price patterns and support/resistance levels should also be taken into consideration. Positive and Negative Divergences Divergence is a key concept behind many signals for oscillators as well as other indicators. Divergences can serve as a warning that the trend is about to change or set up a buy or sell signal. There are two types of divergences: positive and negative. In its most basic form, a positive divergence occurs when the indicator advances and the underlying security declines. A negative divergence occurs when an indicator declines and the underlying security advances.
Overbought and Oversold Extremes
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Banded oscillators are designed to identify overbought and oversold extremes. Since these oscillators fluctuate between extremes, they can be difficult to use in trending markets. Banded oscillators are best used in trading ranges or with securities that are not trending. If a security is in a strong uptrend, buying on oversold conditions will work much better than selling on overbought conditions.
During a strong downtrend, selling when oscillators reach overbought conditions would work much better.
The first step in using banded oscillators is to identify the upper and lower bands that mark the extremities. For RSI, anything below 30 and above 70 represents an extremity. For the Stochastic Oscillator, anything below 20 and above 80 represents an extremity. Identification of an overbought or oversold condition should serve as an alert to monitor other technical aspects (price pattern, trend, support, resistance, candlesticks, volume or other indicators) with extra vigilance.
The simplest method to generate signals is to note when the upper and lower bands are crossed. If a security is overbought (above 70 for RSI and 80 for the Stochastic Oscillator) and moves back down below the upper band, then a sell signal is generated.
Centerline Crossovers As the name implies, centerline crossover signals apply mainly to centered oscillators that fluctuate above and below a centerline. Most banded oscillators, such as RSI and Stochastic, rely on divergences and overbought/oversold levels to generate signals. The middle ground is a bit of a no man's land for banded oscillators. The analysis of
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centerline crossovers will focus on centered oscillators such as MACD and Rate-ofChange (ROC).
A centerline crossover is sometimes interpreted as a buy or sell signal. A buy signal would be generated with a cross above the centerline and a sell signal with a cross below the centerline. For MACD or ROC, a cross above or below zero would act as a signal. Movements above or below the centerline indicate that momentum has changed from either positive to negative or negative to positive. When a centered momentum oscillator advances above its centerline, momentum turns positive and could be considered bullish. When a centered momentum oscillator declines below its centerline, momentum turns negative and could be considered bearish.
1.9.9 MOVING AVERAGES

Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays. (Fig.1.20)
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Fig 1.20
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). They are described in more detail below. Simple Moving Average 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.
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Fig 1.21
The chart above (Fig.1.21) is a plot that contains the data sequence in the table. The simple moving average begins on day 10 and continues.
Exponential Moving Average 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. More weight will be applied to the most recent price, if the EMA period is shorter.
Fig 1.22
1.9.10 RELATIVE STRENGTH INDEX

The Relative Strength Index (RSI) was developed by J. Welles Wilder and introduced in his 1978. The RSI is an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. The term RSI is slightly misleading, as the RSI does not compare the relative strength of two securities, but rather the internal strength of single security. Wilder recommended using 14 day RSI, but other timeframes has become popular over the years.
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RSI= 100-[100/ (1+RS)] RS= Average of N days price gains/ Average of N days price losses. Interpretation of RSI Overbought/Oversold Generally, if the RSI rises above 30 it is considered bullish for the underlying security. Conversely, if the RSI falls below 70, it is a bearish signal. Some traders identify the longterm trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points.
Fig 1.23
Centerline Crossover
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The centerline for RSI is 50. Readings above and below can give the indicator a bullish or bearish tilt. On the whole, a reading above 50 indicates that average gains are higher than average losses and a reading below 50 indicates that losses are winning the battle. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals. Trendlines RSI Trend-lines can provide good signals, particularly when used in conjunction with price patterns. The RSI lends itself to support and resistance study such as trend-line penetration and price patterns. When both price and RSI trend-lines are violated within a short period you could have an important buy or sell signal.
1.9.11 STOCHASTIC OSCILLATORS

Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure). It was developed by George C. Lane in the late 1950s. A 14-day %K (14-period Stochastic Oscillator) would use the most recent close, the highest high over the last 14 days and the lowest low over the last 14 days. The number of periods will vary according to the sensitivity and the type of signals desired. As with RSI, 14 is a popular number of periods for calculation. %K is a percentage or ratio, it will fluctuate between 0 and 100. A 3-day simple moving average of %K is usually plotted alongside to act as a signal or trigger line, called %D. Readings below 20 are considered oversold and readings above 80 are considered overbought. Buy and sell signals can be given when %K crosses above or below %D.
1.9.12 MOVING AVERAGE CONVERGENCE DIVERGENCE
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Moving Average Convergence Divergence (MACD) is one of the simplest and most reliable indicators available. It was developed by Gerald Appel. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply. MACD is the difference between two moving averages. One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for very long. By using exponential moving averages, as opposed to simple moving averages, some of the lag has been taken out. As a momentum indicator, MACD has the ability to foreshadow moves in the underlying security. MACD divergences can be key factors in predicting a trend change. MACD can be applied to daily, weekly or monthly charts. MACD represents the convergence and divergence of two moving averages.
1.9.13 DOW THEORY

The Dow Theory has been around for almost 100 years, yet even in todays volatile and technology-driven markets, the basic components of Dow Theory still remain valid. Developed by Charles Dow, refined by William Hamilton and articulated by Robert Rhea, the Dow Theory addresses not only technical analysis and price action, but also market philosophy. Many of the ideas and comments put forth by Dow and Hamilton became axioms of Wall Street. While there are those who may think that it is different this time, a read through The Dow Theory will attest that the stock market behaves the same today as it did almost 100 years ago.
Even though the theory is not meant for short-term trading, it can still add value for traders. No matter what your time frame, it always helps to be able to identify the primary trend.
According to Hamilton (writing in the early part of the 20th century), those who successfully applied the Dow Theory rarely traded more than four or five times a year. Both Hamilton and Dow recommended close study of the markets on a daily basis, but they also sought to minimize the effects of random movements and concentrate on the primary trend.
Market Movements
Dow and Hamilton identified three types of price movements: primary movements, secondary movements and daily fluctuations. Primary Movements Primary movements represent the broad underlying trend of the market and can last from a few months to many years. These movements are typically referred to as bull and bear markets. Once the primary trend has been identified, it will remain in effect until proven otherwise. Hamilton believed that the length and the duration of the trend were largely indeterminable. Secondary Movements Secondary movements run counter to the primary trend and are reactionary in nature. In a bull market a secondary move is considered a correction. In a bear market, secondary moves are sometimes called reaction rallies. Based on historical observation, Hamilton estimated that secondary movements retrace 1/3 to 2/3 of the primary move, with 50% being the typical amount Hamilton also noted that secondary moves tend to be faster and sharper than the preceding primary move. At the end of the secondary move, there is usually a dull period just before the turnaround. Little price movement, a decline in volume, or a combination of the two can mark this dullness.
Daily Fluctuations
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Daily fluctuations, while important when viewed as a group, can be dangerous and unreliable individually. Due to the randomness of the movements from day to day, the forecasting value of daily fluctuations is limited at best. Too much emphasis on daily fluctuation will lead to forecasting errors and possibly losses. Getting too caught up in the movement of one or two days can lead to hasty decisions that are based on emotion. Daily price movements are important, but only when grouped with other days to form a pattern for analysis. Hamilton did not disregard daily fluctuations, quite to the contrary. The study of daily price action can add valuable insight, but only when taken in context of the larger picture.
Fig 1.24
1.9.14 ELLIOTT WAVE THEORY

R. N. Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series (1-2-3-5-8-13-21...). According to the Elliott Wave Theory, stock prices tend to move in a predetermined number of waves consistent with the
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Fibonacci series. Specifically, Elliott believed the market moved in five distinct waves on the upside and three distinct on the downside. The basic shape of the wave is shown below. (Fig.1.25)
Fig: 1.25
Waves one, three and five represent the 'impulse', or minor up-waves in a major bull move. Waves two and four represent the 'corrective or minor down-waves in the major bull move. B represents the one up-wave in a minor bear wave. Elliott proposed that the waves existed at many levels, meaning there could be waves within waves. To clarify, this means that the chart above not only represents the primary wave pattern, but it could also represent what occurs just between points 2 and 4.
Trading using Elliott Wave patterns is quite simple. The trader identifies the main wave or Super cycle, enters long, and then sells or shorts, as the reversal is determined. This continues in progressively shorter cycles until the cycle completes and the main wave resurfaces. The caution to this is that much of the wave identification is taken in hindsight and disagreements arise between Elliott Wave technicians as to which cycle the market is in. Elliott Wave theory ascribes names to the waves in order of descending size:
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1. Grand Supercycle 2. Supercycle 3. Cycle 4. Primary 5. Intermediate 6. Minor 7. Minute 8. Minuette 9. Sub-Minuette The major waves determine the major trend of the market, and minor waves determine minor trends. This is similar to the way Dow Theory postulates primary and secondary trends.
Here is an example of a classic Elliott Wave cycle that occurred in the NASDAQ Composite in late 2003: (Fig 1.26)
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Fig: 1.26
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2.1 Introduction
There have been two main approaches to analyse the securities market - the fundamental approach and the technical approach. The fundamental approach stresses the influence of a firms basic earnings and risk on the market price of its shares, whereas the technical approach concentrates on the patterns of stock market prices. The technical approach states that past share prices and volumes tend to follow a pattern and they can be used to predict future price movements. Forces of demand and supply determine the share prices; however, the fundamentalists think that they are a function of rational factors, while technicians attribute it to psychological factors. The technical analysis approach to capital market evaluation has received little attention and acceptance as compared to fundamental analysis. But in recent years the popularity of technical school of thought is increasing amongst academicians and practitioners. There has been some empirical research on technical analysis, for developed capital markets. However similar empirical work for developing markets especially India is limited. In this light, an empirical testing of technical indicators for Indian stock market is considered important.
2.2 Literature review

Technical analysis involves searching for recurrent and predictable patterns in stock prices. This type of analysis has a long history and dates back to the Japanese rice traders trading on the Dojima Rice Exchange in Osaka as early as 1600s. It evolved into Chartism in the early 20th century with mechanical trading rules to generate signals. This development has since been aided by the introduction of electronics which took the tedium out of complex mathematical manipulations. As computers have become more powerful and its use more widespread, analysts are found to combine fundamental economic data with the more traditional price and volume data to produce new indicators. More recently, concepts like chaos theory, fuzzy logic, artificial neural network, genetic algorithms, and so on, have been applied to the financial markets. This could well be the next stage of the evolution of technical analysis.
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Frankel and Froot (1990b) suggested that the over-pricing of the U.S. dollar in the 1980s with respect to the underlying economic fundamentals could be due to the influence of technical analysis. Shiller (1984, 1987) found that irrational investor behaviour resulted in excess bond and stock market volatility. He also suggested that the October 1987 world-wide stock market crash could be due largely to technical analysis. Fama and French (1988) proposed a mean reverting model to explain stock price movements. They also found that autocorrelation of returns become strongly negative for a 3-5 year horizon. DeBondt and Thaler (1985, 1987) found that stocks that were extreme losers over a 3-5 year period tend to have strong returns relative to the market during the following years. Conversely, extreme winners tend to have weaker returns in subsequent years. Sy (1990) had argued against Sharpes (1975) conclusion, saying that there was no need for the predictive accuracy to be as high as 70 percent for the gains to be large. In addition, he demonstrated that market timing would be increasingly rewarding when the difference in returns between cash and stocks were narrowed and when market volatility increased. Frankel and Froot (1990) noted that market professionals tend to include technical analysis in forecasting the market. There is also a shift away from the fundamentals to technical analysis in the 1980s, according to a survey done by Euromoney (see Frankel and Froot, 1990).
2.3 Statement of Problem

Indian stock market has given varied returns in the past. Nifty lost more than 65% from the peak within a period of 10 months leaving no scope for explanation from fundamental analysis. In this rapidly changing complex business world where the market dynamics are changing form minute by minute, hour by hour. From an individual investor to corporate investor, all the market participants are exposed to the changing dynamics and thereby its inherent price risk. Simple remedy to mitigate such risk could be by price forecasting
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Hence the study entitled TECHNICAL ANALYSIS AND APPLICATION OF ELLIOTT WAVE THEORY ON INDIAN STOCK MARKET has been carried out from the point of view of investors to achieve superior returns with help of technical tools.
2.4 Objectives of the Study

1. To test whether Market is Efficient 2. To find the Relevance of Technical Analysis 3. To find whether there is significant occurrence of defined patterns 4. To find the relevance of Elliott Wave Theory
2.5 Scope of the Study

This study includes 50 stocks which are included in National Index NIFTY. The period considered for the study is from 2001 to 2008.
2.5Operational Definitions.
Technical Analysis- An approach to investment which is essentially a reflection of the idea that prices move in trends that are determined by the changing attitudes of investors toward a variety of economic, monetary, political, and psychological forces In this study we have tried to develop Empirical tool using logical tests to detect patterns. The tool can be customized to suit any pattern even including complex wave patterns like Elliot waves. Series of random numbers have been generated to find the occurrence of patterns. We have carried out 500 iterations to see the average number of similar patterns generated in random series. Actual number pattern detected in each scrip are compared to see whether there is any significant difference in the patterns detected. If Z value is positive and pattern is significant (right tale) this means given pattern occurrence is high in the considered scrip. If Z value is negative and pattern is significant (left tale) this means there is absence of that pattern in considered scrip. If the pattern occurrence is insignificant this means that pattern occurrence in that scrip is in line with the pattern occurrence in random number series.
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Patterns varying from basic patterns to some of the complex patterns like Elliot wave have been considered. The following terms used to define some of the patterns that have been tested: PATTERN1: It is a four day pattern such that there is gain or loss on the alternative day i.e. +-+-.+ signifies gain in the scrip on that day and -signifies loss in the scrip on that day. PATTERN2: It is seven day pattern which looks like basic pattern of Elliot wave. The pattern is ++-++-+.+ signifies gain in the scrip on that day and -signifies loss in the scrip on that day. TREND 1: A series of time S time interval are considered. The time interval is in the ratio of Fibonacci Series. The ratio of return in the Time Interval-3 to that of Time Interval-1 is more than 1.6 and the ratio of the Time Interval-5 to Time Interval-3 is more than 1.6 times.
As mentioned time intervals are in the ratio of Fibonacci number. For e.g. If Time Interval-1 is considered 200 days, Time Interval-2 is considered 76 days which is 0.38 times the Time Interval-1( 0.382 Fibonacci ratio). Time Interval-3 is 324 days which is 1.6 times the Time Interval-1 (1.618 Fibonacci ratio). Similarly Time Interval-4 and Time Interval-5 are for 123
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days (0.382 times the Time Interval-3) and 324 days (1.618 times the Time Interval3) respectively. WAVE1: The WAVE1 is more similar like TREND1 here also 5 time intervals are in the Fibonacci ratio and returns in the Time Intervals -1, 3 and 5 are in the ratio 1.6 and an extra condition here is that Time Interval-2 and Time Interval-4 should have given negative returns. ELLIOTTWAVE1: This wave resembles the general Elliot wave. Time Intervals are similar as considered in the previous patterns TREND1 and WAVE1. In the Time Interval-2 & 4 of Elliot wave there retracements is about 38% of previous uptrend. The retracements usually will be in the range 30% to 50%. Hence an extra condition about retracements is considered i.e. retracements should not be less than 30% and should not be more than 50%.
2.7 Methodology
a) Type of the Study:
This study is exploratory and descriptive in nature. Exploratory because new patterns are defined and new empirical tools are developed to find those patterns. Descriptive because we are examining the relevance of wave theory in Indian stock market.
b) Type of Data and Information

Objective 1: To test whether Market is Efficient Objective 2: To find the Relevance of Technical Analysis
Objective 3: To find whether there is significant occurrence of defined patterns
Objective 4: To find whether there is significant occurrence of defined patterns
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For all above objectives we need the daily prices the stocks considered. The daily closing prices of all the stocks which constituting NSE-NIFTY INDEX and the Index Itself. In total 51 scrips are under consideration.
d) Sampling Method and Size of Sample

The sampling method adopted for the study was Judgmental Sampling. The sample size was 51. All the NIFTY INDEXs stocks and Index itself.
e) Techniques of analysis
For all the data required, an in-depth analysis has been done. The data collected has been filtered down to the core. Tabulation succeeds this stage, where the data is mentioned in a tabular form. New patterns are defined and new empirical tools are developed to find those patterns. The patterns so detected are checked whether there is significant.
2.8 Limitations of the study

The study covers only 50 stocks of NSE. The data observed is only for the period 2001 to 2008. All the results are drawn from historical data. It is no guarantee for future markets.
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3.1 INDIAN ECONOMY- An Overview: 3.1.1 INTRODUCTION: India is the seventh largest and second most populous country in the world. A new spirit of economic freedom is now stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. GE Capital terms the Indian Economy unique, PepsiCo finds it one of the fastest growing and Motorola is sure it will turn into a major sourcing center. Indian operations have occupied center stage in these giants' global networks. India's process of economic reform is firmly rooted in a political consensus that spans her diverse political parties. India's democracy is a known and stable factor, which has taken deep roots over nearly half a century. Importantly, India has no fundamental conflict between its political and economic systems. Its political institutions have fostered an open society with strong collective and individual rights and an environment supportive of free economic enterprise. India's time-tested institutions offer foreign investors a transparent environment that guarantees the security of their long-term investments. These include a free and vibrant press, a judiciary that can and does overrule the government, a sophisticated legal and accounting system, and a user-friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity. It accounts for over 75 per cent of its Gross Domestic Product and offers considerable scope for joint ventures and collaborations. Today, India is one of the most exciting emerging markets in the world. Skilled managerial and technical manpower that match the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition
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Sometimes India is described as a re-emerging economy. Back in the 18 th century, this geographical area had accounted for about a quarter of world output but that is part of history. The annual growth rate of GDP in the geographical area of India in the first half of 20th century is estimated to be around an average of 0.9 per cent per annum and per capita income at an average rate of 0.1 per cent per annum. The economy of independent India which is of contemporary interest had to be built upon the overhang issues of second World War, the trauma of partition, the integration of princely states numbering over 500 and a low level of GDP. From an annual average growth rate of 3.5 per cent during 1950 to 1980, the growth rate of the Indian economy accelerated to around 6.0 per cent in the 1980s and 1990s. In the last few years, the Indian economy has grown by 9 per cent. There is, thus, tangible evidence of self-accelerating growth. Goldman Sachs, one of the worlds leading Financial Services and Research Company, has predicted that India's GDP in current prices is expected to become 3rd largest economy of the world behind US and China by 2035. India has been one of the best performers in the world economy in recent years, but rapidly rising inflation followed by global recession then disinflation and the complexities of running the worlds biggest democracy are proving challenging. India has to compete ever harder in the energy market place in particular and has not been as adept at securing new fossil fuel sources as the Chinese. The Indian Government is looking at alternatives, and has signed a wide-ranging nuclear treaty with the US, in part to gain access to nuclear power plant technology that can reduce its oil thirst. This has proved contentious though, leading to leftist members of the ruling coalition pulling out of the government still government could win trust vote and nuclear deal was signed. As part of the fight against inflation a tighter monetary policies were implemented, which backfired, coupled with global recession now India is facing economic slowdown. As a result of this, monetary policies were relaxed and stimulus packages were announced to boost economy. The results are yet to be seen.
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The Indian stock market has fallen more than 50% in since January 2008 high. Billions of foreign funds has flowed out of the country in that period, reacting both to slowing economic growth and perceptions that the market was over-valued. It is not all doom and gloom, however. A growing number of investors feel that the market may now be undervalued and are seeing this as a buying opportunity. If their optimism about the long term health of the Indian economy is correct, then this will be a needed correction rather than a downtrend. The Indian government certainly hopes that is the case. It views investment in the creaking infrastructure of the country as being a key requirement, and has ear-marked 23.8 trillion rupees, approximately $559 billion, for infrastructure upgrades during the 11th five year plan. It expects to fund 70% of project costs, with the other 30% being supplied by the private sector. Ports, airports, roads and railways are all seen as vital for the Indian Economy and have been targeted for investment.
Further hope comes from the confidence of Indias home bred companies. As well as taking over the domestic reins, where they now account for most of the economic activity, they are also increasingly expanding abroad. India has contributed more new members to the Forbes Global 2000 than any other country in the last four years.
Some Highlights Reflecting the favorable prospect of growth rate of Indian economy, the orders received Indian companies have increased by a whopping 68.6 per cent to US$ 32.48 billion during January-October 2008 compared to US$ 19.26 billion in the same period last year.
India is among the five countries sharing 50 per cent of the world production (or GDP).
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FDI inflows have jumped by almost three times to US$ 15.7 billion in 2006-07 as against US$ 5.5 billion in 2005-06.
The aggregate income of the top 500 companies rose by 28.4 per cent in 2006-07 to total US$ 469.51 billion.
India's National Stock Exchange (NSE) ranks first in the stock futures and second in index futures trade in the world.
Twenty Indian firms have made it to the list of Boston Consulting Group's 100 New Global Challenger Giants list.
According to a study by the McKinsey Global Institute (MGI), India's consumer market will be the world's fifth largest (from twelfth) in the world by 2025.
The number of companies incorporated has increased at an annual average of 55,000 companies in the last two years to 865,000, from 712,000 companies at the end of 2005.
Four Indians and seven Indian microfinance companies make it to the Forbes list of Top10 world's wealthiest CEOs World's Top 50 Microfinance Institutions, respectively.
India has the most number of private equity (PE) funds operating amongst the BRIC markets.
Mumbai has been ranked tenth among the world's biggest centers of commerce in terms of the financial flow volumes by a survey compiled by MasterCard Worldwide.
Another significant aspect has been the broad-based nature of the growth process. While new economy industries like Information Technology and biotechnology have been growing around 30 per cent, significantly old economy sectors like steel have also been major contributors in the Indian growth process. For example, India has moved up two places to become the fifth largest steel producer in the world.
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And with its manufacturing and service sectors on a searing growth path, Lehman Brothers Asia estimates India to grow by as much as 10 per cent every year in the next decade The highlights of macroeconomic and monetary developments during 2008-09 are: Overview
The global economic conditions deteriorated sharply during the year 2008 with several advanced economies experiencing their sharpest declines. The associated adverse shocks spread across emerging market economies (EMEs) particularly by the fourth quarter of the year and accentuated the synchronized global slowdown.
Inflation conditions witnessed sharp volatility during the year as headline inflation in major advanced economies firmed up considerably up to July 2008, but declined sharply thereafter.
The global financial environment entered a crisis phase in mid-September 2008, following the growing distress among large international financial institutions.
The knock-on effect of these unprecedented adverse global developments became evident in the macroeconomic performance of the Indian economy, as it experienced some loss of growth momentum with major drivers witnessing moderation. While private consumption and investment are witnessing moderation, the fiscal stimulus along with other committed expenditures of the Government could, however, arrest the moderation in growth.
Output
The global financial crisis interrupted the growth momentum of India, despite the strong dominance of domestic sources of growth. There was clear moderation in growth by the third quarter of 2008-09. In relation to the agricultural sector, industry and services sectors have been affected more by the adverse external shocks, with
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some contribution to their growth deceleration arising from cyclical slowdown in certain sectors after a prolonged phase of high growth.
The Central Statistical Organization (CSO)'s estimates (February 2009) of real GDP growth was placed at 5.3 per cent during the third quarter of 2008-09 as compared with 8.9 per cent during the corresponding quarter of the previous year, reflecting deceleration in growth of all its constituent sectors.
During 2008-09, the area covered under sowing of various crops declined marginally during the kharif season on account of moderate shortfall in rainfall. On the other hand, the prospects for rabi production remain favorable with area sown under rabi crops being higher than a year ago. Total food grains production during 2008-09 was placed at 227.9 million tonnes (Second Advance Estimates) as compared with 230.8 million tonnes during 2007-08.
In the wake of a near normal long range monsoon forecast of the India Meteorological Department (April 17, 2009) during the South-West monsoon season 2009, the prospects for agricultural production remain satisfactory.
The loss of growth momentum in the industrial sector was evident as the year-on-year expansion in the Index of Industrial Production was of 2.8 per cent during 2008-09 (April-February) as against 8.8 per cent in the corresponding period of the previous year. The manufacturing sector and the electricity sector registered growth of 2.8 per cent and 2.4 per cent as compared with 9.3 per cent and 6.6 per cent, respectively, during the above period.
The infrastructure sector recorded growth of 3.0 per cent during 2008-09 (AprilFebruary), down from 5.8 per cent during the corresponding period of the previous year, reflecting deceleration in all the sectors except coal.
In the context of the severity of the impact of the crisis on the real economy of countries around the world, the growth outcome reflects the resilience of the Indian economy. Aggregate Demand
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The role of aggregate demand in a phase of weakening growth impulses came to the forefront of public policy in 2008-09. The sharp contraction in external demand - as evident in falling global output, employment and global trade clearly affected Indias export performance.
Domestic demand, in the form of both private consumption and investment expenditure moderated, particularly in the third quarter of 2008-09. However, Government final consumption, however, rose on account of discretionary fiscal stimulus measures and committed expenditures of the Central Government.
During 2008-09, the combined finances of the Central and State Governments were adversely impacted due to the economic slowdown. The Central Government finances came under stress during 2008-09, both on the revenue and the expenditure sides, on account of fiscal measures taken to reduce inflationary pressures during the first half and to arrest the moderation of economic growth in the second half of the year. As a result, the key deficit indicators viz., revenue deficit and fiscal deficit widened to 4.4 per cent and 6.0 per cent, respectively, in the revised estimates for 2008-09 from 1.0 per cent and 2.5 per cent, respectively, in the budget estimates.
The Union Interim Budget for 2009-10 has indicated the relaxation in the FRBM targets for 2008-09 and 2009-10, in order to ensure expansion in aggregate demand through fiscal stimulus measures. However, as a medium-term objective, it has recognized the need to revert to fiscal consolidation process at the earliest.
Corporate performance remained subdued during 2008-09 with the impact on profitability being particularly adverse during the third quarter.
The rate of Gross Domestic Saving (GDS) peaked at 37.7 per cent GDP in 2007-08, mainly due to improved saving performance of the private corporate and public sectors. The rate of Gross Domestic Capital Formation (GDCF) also peaked to 39.1 per cent of GDP in 2007-08. The saving-investment balance widened during 2007-08 reflecting continuous surge in investment activity ahead of the saving rate. The slowing of economic activity in 2008-09 may, however, affect both saving and investment rates for the year.
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The External Economy
In the face of deteriorating external environment, the adverse effects of the contagion transmitting through different components of India's balance of payments (BoP) could largely be contained through policy actions. A noteworthy feature during 2008-09 was that the effect of external shocks transmitting to India through the BoP could be contained with loss of reserves mainly in the third quarter of the year, when the global crisis deepened and spread significantly with more visible real effects.
Indias BoP position in 2008-09 (April-December) was characterised by a widened trade deficit leading to a higher current account and lower net capital inflows. In the face of deteriorating external environment, the adverse effects of the contagion transmitting through different components of India's balance of payments (BoP) remained largely contained.
The rapid contraction in the global trade was reflected in negative growth experienced during the third quarter, which was last observed in 2001-02. The growth in imports also decelerated to single digit level during the third quarter, led by lower crude oil prices and weakening domestic demand. The merchandise trade deficit further widened to US$ 113.8 billion during April-February 2008-09 (US $ 82.2 billion a year ago).
Net surpluses under invisibles increased in April-December 2008, primarily led by private transfers and software services, though a moderation in such inflows set in the third quarter. Thus, the current account deficit widened to a level of US$ 36.5 billion (US$ 15.5 billion in April-December 2007)
The adverse impact of the global financial market turmoil was also felt in terms of reduced inflow of the long and short-term debt and reversal of portfolio inflows. A positive development was, however, relative resilience of FDI inflows (US $ 31.7 billion in April-February 2008-09) in the face of reversal of capital flows, reflecting the attractiveness of India as a long term investment destination.
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As on April 10, 2009, the foreign exchange reserves stood at US $ 253 billion, showing a decline of US$ 56.7 billion (including valuation) over the level at endMarch 2008.
Indias external debt, debt sustainability indicators and the level of foreign exchange reserves continue to remain at comfortable levels and would ensure external stability.
Monetary Conditions
The global crisis, which created intense uncertainties for funding liquidity in the face of tight market liquidity for financial instruments trading in almost all financial markets, brought to the fore the strong interactions between funding liquidity and market liquidity. As the global liquidity crisis started to affect the domestic money and foreign exchange markets in the last quarter of 2008, the Reserve Bank ensured adequate provision of both domestic and foreign exchange liquidity to the market through banks, with the aim of restoring normal functioning of the market, and thereby facilitating adequate flow of credit to the productive sectors of the economy.
The monetary policy stance of the Reserve Bank shifted from concerns related to inflation in the first half of 2008-09 to maintaining financial stability and arresting the moderation of growth in the second half. While money supply evolved consistent with indicative projections, credit to private sector reflected the conditions evolving in the real sector of the economy.
Growth in broad money (M3), year-on-year (y-o-y), was 18.4 per cent at end-March, 2009 as compared with 21.2 per cent a year ago, reflecting deceleration in the expansion of bank credit and capital inflows.
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Aggregate deposits of banks, y-o-y, was 18.8 per cent at end-March 2009 as compared with 21.7 per cent a year ago.
Non-food credit growth (y-o-y) of SCBs to the commercial sector remained strong up to October 2008 on the backdrop of drying up of other sources of funds to industry but witnessed sustained deceleration thereafter. Non-food credit by SCBs was moderated to 17.5 per cent, y-o-y, at end-March 2009 as compared with 23.0 per cent a year ago.
The contractionary impact of decline in net foreign exchange assets on reserve money and domestic liquidity was offset by expansion through open market operations (OMOs), unwinding of MSS and other measures to augment rupee liquidity. Adjusted for the first round effect of the changes in CRR, reserve money growth (y-o-y) as on March 31, 2009 was lower at 19.0 per cent as compared with 25.3 per cent a year ago.
3.1.2 ECONOMIC INDICATORS: A. GDP Growth Rate: The Central Statistical Organization (CSO)'s estimates (February 2009) of real GDP growth was placed at 5.3 per cent during the third quarter of 2008-09 as compared with 8.9 per cent during the corresponding quarter of the previous year, reflecting deceleration in growth of all its constituent sectors.
B. Inflation Inflation was matter of the concern during this fiscal year. It was surged to over 13 percent in the mid of the fiscal year. Over the period, it fell down to a six-year-low of 2.43% for the week ended February 28 from 3.03% in the previous week and it has raised possibilities of further rate cuts. Analysts expect it to reach 0% by the end of this month. Lower prices of food items and manufactured products resulted in a fall in the inflation.
C. Interest Rates:
Presently the interest rates are as follows: Bank rate: 6% Reverse Repo rate: 3.25% Repo rate: 4.75 CRR (Cash Reserve Rate): 5.0% SLR (Statutory Liquidity Rate): 24% Prime Lending Rate: 12.75%-13.25% Savings bank Rate: 3.5% and Deposit Rate: 7.5%-9.6%
D. Capital Inflows: Foreign investment inflows into India grew 90% in the first eight months of the current fiscal year, indicating that the country continues to be an attractive destination for investors despite a fall in economic growth rates. Foreign direct investment (FDI) inflows during the April-November period stood at Rs 85,700 crores compared with Rs 45,000 crores in the corresponding period of the previous fiscal, despite most of the developed world reeling under the impact of a global recession. According to the FDI data compiled by the commerce and industry ministry, investments from three Asian countries Mauritius, Singapore and Japan contributed more than 55% of the total inflows during the period. The services sector has also been attracting a large amount of investment. Both the financial and non-financial segments of the sector attracted US$ 13.05 billion over the period April 2000 to March 2008, accounting for 22.64 per cent of total foreign direct investment (FDI) into the country. Apart from this, various other sectors like telecommunication, consultancy, tourism and other services have attracted a huge amount of FDI.
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3.1.3 ISSUES AND PRIORTIES FOR INDIA: Sustaining the growth momentum and achieving an annual average growth of 7-9 % in the next five years. Boosting agricultural growth through diversification and development of agro processing. Sustaining the industrial and services growth rate of 10% to integrate the surplus labour in agriculture. Developing world-class infrastructure. Allowing foreign investment in more areas. Increasing savings and investments rates further to provide funds for corporates and government. Making Indian financial system more credible in terms of efficiency and safety, and growing investor base and increasing awareness about the various investment opportunities.
3.2 FINANCIAL SERVICES INDUSTRY AN OVERVIEW India has a well established capital market mechanism where in effective and efficient transfer of money capital or financial resources from the investing class to the entrepreneur class in the private and public sector of the economy occurs. Indian capital market has a long history of organized trading which started with the transaction in loan stocks of the East India Company from that time it has undergone drastic changes to meet the requirements of the globalization. The Indian Capital Market had been dormant in the 70's and 80's has witnessed unprecedented boom during the recent years. There has been a shift of household savings from physical assets to financial assets, particularly the risk bearing securities such as shares and debentures. Capital markets structure has also undergone sea changes with number of financial services and banking companies, private limited companies coming in to the scene which made the competition in the market stiffer.
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Changes in the Indian economy since liberalization in the early 1990s have had an impact on the Indian Financial Sector. The financial sector is in a process of rapid transformation. Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The role of an integrated financial infrastructure is to stimulate and sustain economic growth. Several new instruments and products have been introduced. Banks, capital market instruments and insurers have developed a wide range of products and services to suit customer requirements. New private players are also influencing the financial service sector The liberalization and globalization of the Indian economy led to a process of restructuring and consolidation across several sectors of the economy. India has made considerable progress in the last decade. The countrys macroeconomic fundamentals have improved and external vulnerability has been sharply reduced. Reforms in the financial sector have appropriately addressed the pre-1991 weaknesses in the sector and improved its competitive strength domestically as well as globally. Top companies from the UK and the USA among others are already active in Indias financial markets. Foreign Institutional Investors (FIIs) have been allowed to invest in the stocks and securities markets with rights of full repatriation and withdrawal. Their presence has added a new dynamism to the market. The Indian financial market consists of venture capitalists, banks, mutual funds, insurers and capital markets. 3.2.1 Capital Markets The capital market consists of primary and secondary markets. The primary market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares and debt instruments. The secondary market or stock exchange is a market for trading and settlement of securities that have already been issued. The investors can buy or sell the securities through registered brokers/sub-brokers of the stock exchange.
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Bombay Stock Exchange (BSE), Asias oldest stock exchange started way back in the year 1875 by the group of brokers. National Stock Exchange (NSE), which Indias first stock exchange managed by professionals started its operation in the year 1992.These stock exchange increased the reach of capital market manifold which in turn increased the number of investors participating in the capital market and thus creates the possibility of a bad delivery. The cost & time spend by the brokers for rectification of this bad delivery tends to be higher with the geographical spread of the clients. The increase in trade volumes leads to exponential rise in the back office operation. The inconvenience faced by the investors (in area that are far long & away from the main metros) in the settlement of the trade also limits the opportunity for such investors in participating in auction trading. This created difficulty in dealing in capital market. The erstwhile settlement system on Indian stock exchanges was inefficient and increased risk, due to the time that elapsed before trades was settled. The transfer was by physical movement of papers. There had to be a physical delivery of securities - a process fraught with delays and resultant risks. The second aspect of the settlement related to transfer of shares in favor of the purchaser by the company. The system of transfer of ownership was grossly inefficient as every transfer involves physical movement of paper securities to the issuer for registration, with the change of ownership being evidenced by an endorsement on the security certificate. In many cases the process of transfer would take much longer than the two months stipulated in the Companies Act and a significant proportion of transactions would end up as bad delivery due to faulty compliance of paper work. Theft, forgery, mutilation of certificates and other irregularities were rampant. In addition, the issuer had the right to refuse the transfer of a security. All this added to costs and delays in settlement, restricted liquidity and made investor grievance redress time consuming and, at times, intractable. To obviate these problems, the Depositories Act, 1996 was passed. It provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security.
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Key progressive initiatives in recent years include: The depository and share dematerialization systems that have enhanced the efficiency of the transaction cycle Replacing the flexible, but often exploited, forward trading mechanism with rolling settlement, to bring about transparency The InfoTech-driven National Stock Exchange (NSE) with a national presence (for the benefit of investors across locations) and other initiatives to enhance the quality of financial disclosures. Corporatisation of stock exchanges. The Securities and Exchange Board of India (SEBI) has effectively been functioning as an independent regulator with statutory powers. Indian capital markets have rewarded Foreign Institutional Investors (FIIs) with attractive valuations and increasing returns. Many new instruments have been introduced in the markets, including index futures, index options, derivatives and options and futures in select stocks. The number of shareholders in India is estimated at 25 million. However, only an estimated ten lakh people actively trade in stocks. There has been a dramatic improvement in the country's stock market trading infrastructure. Being from an unorganized sector, the intermediaries like stock brokers are now moving to the next level. By making the business more professional and customizing it. In the last ten years, the average daily trading volumes at the NSE have risen from Rs. 2400 crores to Rs. 45000 crores in the year 2006. Online trading volumes are increasing too an indication of the growing sophistication of the market. Besides trading, the brokers now offer full range of financial services, from wealth management to mutual fund to insurance to many more.
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The companys Act 1956 introduced the concept of limited liability in India, served to stimulate the activity in the stock market. During the last decade, the market capitalization of the whole world it grew from US$14 trillion in 1995 to US$40 trillion by 2006. The turnover of all markets taken together has grown from US$8 trillion to US$75 trillion in 2005. The US markets are alone accounted about 60% of worldwide turnover in 2005. Despite having a larger number of companies listed in stock exchanges, India accounted for a merge of 0.59% in total turnover in 2005.The stock markets worldwide have grown in size as well as depth over the last one decade. During the decade 1990-2000, the worlds market capitalization GDP ratio is more than doubled from the 51% to 120%. The combined market capitalization of the 22 emerging economies increased from US$539 billion in 1990 to US$4.5 trillion in 2000 The Indias market capitalization grew from US$39 billion at the end of 1990 to US $1.07 trillion in May 2007. Turnover of stock increased from US$21 billion in 1990 to US$250 billion in 2006. Market capitalization as a percentage of GDP grew from 12.2% in 1999 to 102% in May 2007. The number of listed companies in India was 6,203 as at the end of 2006. 3.2.2 Venture Capital India has sustained its economic growth above 8% for last 4 year. To sustain this growth rate for a long period, there is a need for risk finance and venture capital (VC) funding to leverage innovation, promote technology and harness knowledge based ideas. According to a survey conducted by Thomson Financial and Prime Database, India ranked as the third most active venture capital market in Asia Pacific (excluding Japan). There is an increased interest in India: 70 VC funds operate in India with the total assets under management worth about US$ 6 billion. 3.2.3 Banks Banking system has a large geographic and functional coverage. Presently the total asset size of the Indian banking sector is US$450 billion, while the total deposits amount to US$380 billion with a branch network exceeding 67,000 branches across the country. The primary operations of banks include:
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Keeping money safe while also allowing withdrawals when needed Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post Provision of loans and mortgage loans (typically loans to purchase a home, property or business) Issuance of credit cards Allow financial transactions at branches or by using Automated Teller Machines (ATMs) Facilitation of standing orders and direct debits, so payments for bills can be made automatically Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account. Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
Provide cheques guaranteed by the Bank itself prepaid by the customer which are the recognized as valid by other Banks; sometimes called travelers cheques. 3.2.4 Mutual Funds This industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players. Today Reliance mutual fund is the largest mutual fund controlling a corpus of nearly Rs.67,000 crores. With the growth in the securities markets and tax advantages granted for investment in mutual fund units, mutual funds are becoming popular. The foreign owned AMCs are the ones which are now setting the pace for the industry. They are introducing New products Setting new standards of customer service Improving disclosure standards Experimenting with new types of distribution.
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3.2.5 Insurance Foreign and private Indian players are keen to convert untapped market potential into opportunities by providing tailor-made products. The presence of a host of new players in the sector has resulted in a shift in approach and the launch of innovative products, services and value-added benefits. Foreign majors have entered the country and announced joint ventures in life and non-life areas. With competition, the erstwhile state sector companies have become aggressive in terms of product offerings, marketing and distribution. The size of the market presents immense opportunities to new players with only 20 per cent of the countrys insurable population currently insured. There are 4 public sector and 13 private sector insurance companies operating in general/nonlife insurance business with a premium income of over US$5 billion.
3.2.6 DEPOSITORY: In India, the Depository Act defines a depository to mean, A company formed and registered under the companies act, 1956 and which has been granted a certificate of registration under sub-section (1a) of section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992. Depository is an organization where the securities of a shareholder are held in the electronic from at the request of the shareholder through a medium of a depository participant (DP). The principal function of a depository is to dematerialize securities and enable their transactions in book from electronically. Depository functions like a security bank, where the dematerialized securities are traded and held in custody. This facilitates faster, risk-free and low cost settlement similar to bank.
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The following table compares Banks with Depository: BANK Hold funds in account Transfer funds between accounts Transfer without physically handling money Safekeeping of money DEPOSITORY Hold securities in accounts Transfer securities between accounts Transfer without physically handling securities Safekeeping of securities
Rights and Obligations of Depositories: 1. Every depository should have adequate mechanisms for reviewing monitoring and evaluating the controls, systems, procedures and safeguards. 2. Annual inspections of the procedures and same should be reported to SEBI. 3. To ensure that the integrity of automatic data processor systems is maintained to safeguard information. 4. Adequate measures including insurances, to protect the interests of the beneficial owners against any risk.
3.2.7 DEPOSITORY PARTICIPANTS Depository participants (DPS) are described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an arrangement made between the two under the depositories act. In a strictly legal sense a DPS is an entity who is registered as such with SEBI under the provisions of the SEBI Act. As per the provisions of this act a DPS can offer depository services only after obtaining a certificate of registration from SEBI
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GOVERNING BODIES OF DEPOSITORY PARTICIPANT National Securities Depository Limited (NSDL) National securities depository limited is the first depository to be set up in India. It was incorporated on December 12, 1995. The Industrial Development Bank Of India (IDBI) the largest development bank in India, UTI the largest Indian mutual fund and the National Stock Exchange in India sponsored the setting up of NSDL and subscribed to the initial capital. NSDL commenced operations on November 8, 1996.
Central Depository Services Of India Limited (CDSL) Central depository services of India ltd were the second depository to be granted the commencement certificate by SEBI on 8 February 1999, inaugurated on 15 July 1999. It is promoted by the Bombay stock exchange, in association of bank of India. Both NSDL and CDSL interface with investors through their service providers known as DP. The depository is interconnected. It is possible to transfer shares from one depository to another.
LEGAL FRAMEWORK: The depositories Act 1956 provides for regulation of depositories in securities and for a matter connected there with on incidental there to and came into from 20 th of the September 1995. SEBI formulated the Depositories and participants Regulation Act, 1996 to oversee the matter regarding admission and working of Depositories and its participant. The Depositories Act passed by parliament received the presidents assents on August 10, 1996. The Act enables the setting up of multiple depositories in the country. Only a company registered under the companies Act (1956) and sponsored by the specified categories of institution can set up depository in India. The Depository offers services relating to holding of securities and processing of transaction in such securities in the book entry form. The
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transaction handled by depositories includes settlement of market trades, settlement of offmarket trades, securities lending and borrowing pledge & hypothecations
4.1 Introduction There have been two main approaches to analyse the securities market - the fundamental approach and the technical approach. The fundamental approach stresses the influence of a firms basic earnings and risk on the market price of its shares, whereas the technical approach concentrates on the patterns of stock market prices. The technical approach states that past share prices and volumes tend to follow a pattern and they can be used to predict future price movements. Forces of demand and supply determine the share prices; however, the fundamentalists think that they are a function of rational factors, while technicians attribute it to psychological factors. The technical analysis approach to capital market evaluation has received little attention and acceptance as compared to fundamental analysis. But in recent years the popularity of technical school of thought is increasing amongst academicians and practitioners. There has been some empirical research on technical analysis, for developed capital markets. However similar empirical work for developing markets especially India is limited. In this light, an empirical testing of technical indicators for Indian stock market is considered important. 4.2 Analysis and Interpretation
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Table 4.1: Showing Mean and Standard Deviation for different patterns generated in random number (500 iterations)
Pattern PATTERN1 PATTERN2 TREND1 Time Interval-1 Period Mean Standard Deviation 123.83 12.06 0 0 5 days 60.372 11.117 21 days 89.318 31.937 55 days 145.44 81.984 200 days 229.76 181.91
Table 4.1 (continued)

Pattern WAVE1 Time Interval-1 Period Mean Standard Deviation 5 days 11.938 3.998 21 days 13.99 6.13 55 days 16.694 10.962 200 days 12.564 16.974 ELLIOTT WAVE Time Interval-1 Period 5 days 0.158 0.391 21 days 0.254 0.523 55 days 0.454 0.8098 200 days 0.668 2.607
Table 4.2: Showing the Pattern occurrences in the scrip ABB Ltd.
PATTERN1 PATTERN2 TREND1 Time Interval-1 Period 5 days Pattern 21 days 55 days 200 days WAVE1 Time Interval-1 Period 5 days 21 days 55 days 200 days ELLIOTT WAVE1 Time Interval-1 Period 5 days 21 days 55 days 200 days
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Very High occurrence
High occurrence
High occurrence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, TREND1 (21 days), WAVE1 (5 days) and ELLIOTT WAVE1 (21 days) are significantly present in the ABB Ltd scrip.
Table 4.3: Showing the Pattern occurrences in the scrip ACC Ltd.
No significance
No significance
No significance
No significance
No significance
No significance
No significance
High occurrence
No significance
High occurrence
No significance
No significance No significance
Pattern Occurrence
PATTERN2, WAVE1 (55 days) and ELLIOTT WAVE1 (5 days) are significantly present in the ACC Ltd scrip.
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No significance
No significance
Table 4.4: Showing the Pattern occurrences in the scrip Ambuja Cements Ltd.
No significance
High occurrence
No significance
No significance
No significance
No significance
No significance
High occurrence
High occurrence
No significance
High occurrence
Pattern Occurrence
PATTERN2, TREND1 (5 days), WAVE1 (55,200 days) and ELLIOTT WAVE1 (21 days) are significantly present in the Ambuja Cements Ltd scrip. Table 4.5: Showing the Pattern occurrences in the scrip Bharti Airtel Ltd.
No significance
No significance
Pattern Pattern Occurrence
PATTERN2 Very High occurrence
PATTERN2 is significantly present in the Bharti Airtel Ltd scrip.
Table 4.6: Showing the Pattern occurrences in the scrip Bharat Heavy Electricals Ltd.
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Technical Analysis and Application of Elliott Wave Theory on Indian Stock Market NoPATTERN1 significance Very High PATTERN2 occurrence
High occurrence
High occurrence
High occurrence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
TREND1
WAVE1
ELLIOTT WAVE1
Time Interval-1 Period 5 days 21 days 55 days
200 days
200 days
No significance No significance
200 days
Pattern
High occurrence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Patter n Occur rence
Pattern Occurrence
PATTERN2, TREND1 (21 days) and WAVE1 (21,200 days) are significantly present in the Bharat Heavy Electricals Ltd scrip. Table 4.7: Showing the Pattern occurrences in the scrip Bharat Petroleum Corporation Ltd. PATTERN2 and ELLIOTT WAVE1 (5 days) are significantly present in the Bharat Petroleum Corporation Ltd scrip. Table 4.8: Showing the Pattern occurrences in the scrip Cairn India Ltd.
Pattern Pattern Occurrence PATTERN2 Very High occurrence
PATTERN2 is significantly present in the Cairn India Ltd scrip.
No significance
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No significance
No significance
Table 4.9: Showing the Pattern occurrences in the scrip Cipla Ltd.
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Cipla Ltd scrip. Table 4.10: Showing the Pattern occurrences in the scrip DLF Ltd.
PATTERN2 is significantly present in the DLF Ltd scrip.
No significance
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No significance
Table 4.11: Showing the Pattern occurrences in the scrip GAIL(India) Ltd.
PATTERN1 PATTERN2
TREND1 Time Interval-1 Period 5 days 21 days 55 days 200 days
WAVE1 Time Interval-1 Period 5 days 21 days 55 days 200 days
ELLIOTT WAVE1 Time Interval-1 Period 5 days 21 days 55 days 200 days
Pattern
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, is significantly present in the GAIL(India) Ltd scrip.
No significance
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No significance
Table 4.12: Showing the Pattern occurrences in the scrip Grasim Industries Ltd.
PATTERN1 PATTERN2
Pattern
Absence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Grasim Industries Ltd scrip. Absence of PATTERN1 is observed in the Grasim Industries Ltd scrip.
No significance
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No significance
Table 4.13: Showing the Pattern occurrences in the scrip HCL Technologies Ltd.
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the HCL Technologies Ltd scrip. Absence of TREND1 (5days) is observed in the HCL Technologies Ltd scrip.
No significance
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No significance
Absence
Table 4.14: Showing the Pattern occurrences in the scrip HDFC Bank Ltd.
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the HDFC Bank scrip.
No significance
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No significance
Table 4.15: Showing the Pattern occurrences in the scrip Housing Development Finance Corporation Ltd. PATTERN1 PATTERN2 TREND1 Time Interval-1 Period 5 days Pattern 21 days 55 days 200 days WAVE1 Time Interval-1 Period 5 days 21 days 55 days 200 days ELLIOTT WAVE1 Time Interval-1 Period 5 days 21 days 55 days 200 days
Absence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Housing Development Finance Corporation Ltd scrip. Absence of PATTERN1 is observed in the Housing Development Finance Corporation Ltd scrip.
No significance
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No significance
Table 4.16: Showing the Pattern occurrences in the scrip Hero Honda Motors Ltd.
PATTERN1 PATTERN2
Pattern
No significance
High occurrence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 and TREND1 (21 days) are significantly present in the Hero Honda Motors Ltd scrip.
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No significance
No significance
Table 4.17: Showing the Pattern occurrences in the scrip Hindalco Industries Ltd.
Absence
No significance
No significance
No significance
High occurrence
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 and WAVE1 (5 days) are significantly present in the Hindalco Industries Ltd scrip.
No significance
Page 2
No significance
Table 4.18: Showing the Pattern occurrences in the scrip Hindustan Unilever Ltd.
PATTERN1 PATTERN2
Pattern
High Occurrence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 and ELLIOTT WAVE (5 days) are significantly present in the Hindustan Unilever scrip.
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No significance
No significance
Table 4.19: Showing the Pattern occurrences in the scrip ICICI Bank Ltd.
No significance
No significance
No significance
No significance
No significance
High occurrence
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, WAVE1 (200 days), ELLIOTT WAVE1 (5 days)are significantly present in the ICICI Bank scrip.
Table 4.20: Showing the Pattern occurrences in the scrip Idea Cellular Ltd.
No significance
Page 2
No significance
PATTERN2 is significantly present in the Idea Cellular Ltd scrip.
Table 4.21: Showing the Pattern occurrences in the scrip Infosys Technologies Ltd.
Absence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Infosys Technologies Ltd scrip. Absence of PATTERN1 is observed in the Infosys Technologies Ltd scrip.
No significance
Page 2
No significance
Table 4.22: Showing the Pattern occurrences in the scrip ITC Ltd.
No significance
No significance
No significance
No significance
High occurrence
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, WAVE1 (21 days) and ELLIOTT WAVE1 (21 days) are significantly present in the ITC Ltd scrip.
No significance
Page 2
No significance
Table 4.23: Showing the Pattern occurrences in the scrip Larsen and Tourbo Ltd.
Absence
High occurrence
High occurrence
No significance
No significance
High occurrence
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, TREND1(21,55 days), WAVE1 (21,55 days) and ELLOIT WAVE1(55 days) are significantly present in the Larsen and Tourbo Ltdscrip. Absence of PATTERN1 is observed in the Larsen and Tourbo Ltd scrip.
No significance
Page 2
No significance
Table 4.24: Showing the Pattern occurrences in the scrip Mahindra & Mahindra Ltd.
Absence
High occurrence
No significance
No significance
No significance
No significance
No significance
High occurrence
High occurrence
No significance
No significance
Pattern Occurrence
PATTERN2, TREND1(5 days), ELLIOTT WAVE1(5,55 days) are significantly present in the Mahindra & Mahindra Ltd scrip. Absence of PATTERN1 is observed in the Mahindra & Mahindra Ltd scrip.
Table 4.25: Showing the Pattern occurrences in the scrip Maruti Suzuki Ltd.
No significance
Page 2
No significance
PATTERN2 is significantly present in the Maruti Suzuki Ltd scrip.
Table 4.26: Showing the Pattern occurrences in the scrip National Aluminum Company Ltd.
PATTERN1 PATTERN2
Pattern
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, ELLIOTT WAVE1 (55 days) are significantly present in the National Aluminum Company Ltd scrip. Table 4.27: Showing the Pattern occurrences in the scrip NTPC Ltd.
Pattern PATTERN2
No significance
Page 2
No significance
Pattern Occurrence
PATTERN2 is significantly present in the NTPC Ltd scrip.
Table 4.28: Showing the Pattern occurrences in the scrip Oil and Natural Gas Corporation Ltd.
PATTERN1 PATTERN2
Pattern
Absence
Absence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Oil and Natural Gas Corporation Ltd scrip. Absence of PATTERN1 and TREND1 (5 days) is observed in the Oil and Natural Gas Corporation Ltd scrip. Table 4.29: Showing the Pattern occurrences in the scrip Punjab National Bank Ltd.
Pattern PATTERN2
No significance
Page 2
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Punjab National Bank Ltd scrip.
Table 4.30: Showing the Pattern occurrences in the scrip Power Grid Corporation of India Ltd.
PATTERN2 is significantly present in the Power Grid Corporation of India Ltd scrip. Table 4.31: Showing the Pattern occurrences in the scrip Ranbaxy Laboratories Ltd.
PATTERN1 PATTERN2
Pattern
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Ranbaxy Laboratories Ltd scrip.
No significance
Page 2
No significance
Table 4.32: Showing the Pattern occurrences in the scrip Reliance Communication Ltd.
PATTERN2 is significantly present in the Reliance Communication Ltd scrip. Table 4.33: Showing the Pattern occurrences in the scrip Reliance industries Ltd.
PATTERN1 PATTERN2
Pattern
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Reliance industries Ltd scrip.
No significance
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No significance
Table 4.34: Showing the Pattern occurrences in the scrip Reliance Infrastructure Ltd.
PATTERN1 PATTERN2
Pattern
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Reliance Infrastructure Ltd scrip. Table 4.35: Showing the Pattern occurrences in the scrip Reliance Petroleum Ltd.
PATTERN2 is significantly present in the Reliance Petroleum Ltd scrip. Table 4.36: Showing the Pattern occurrences in the scrip Reliance Power Ltd.
No significance
Page 2
No significance
PATTERN2 is significantly present in the Reliance Power Ltd scrip. Table 4.37: Showing the Pattern occurrences in the scrip Satyam Computer Services Ltd.
PATTERN1
PATTERN2
Pattern
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
High occurrence
No significance
No significance
Pattern Occurrence
PATTERN2 and ELLIOTT WAVE1 (5 days) are significantly present in the Satyam Computer Services Ltd scrip.
No significance
Page 2
No significance
Table 4.38: Showing the Pattern occurrences in the scrip Siemens Ltd.
PATTERN1 PATTERN2
Pattern
No significance
High occurrence
No significance
No significance
No significance
High occurrence
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, TREND1 (5 days) and WAVE1 (5 days) are significantly present in the Siemens Ltd scrip. Siemens
No significance
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No significance
Table 4.39: Showing the Pattern occurrences in the scrip State Bank Of India Ltd.
No significance
No significance
Absence
No significance
No significance
No significance
No significance
No significance
High occurrence
No significance
Pattern Occurrence
PATTERN2 and ELLOIT WAVE1(5,21 days) are significantly present in the State Bank Of India Ltd scrip. Absence of TREND1 (21 days) is observed in the State Bank Of India Ltd scrip.
No significance
Page 2
No significance
Table 4.40: Showing the Pattern occurrences in the scrip Steel Authority of India Ltd.
Absence
No significance
No significance
No significance
No significance
Absence
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Steel Authority of India Ltd scrip. Absence of PATTERN1 and WAVE1 (5 days) is observed in the Steel Authority of India scrip.
No significance
Page 2
No significance
Table 4.41: Showing the Pattern occurrences in the scrip Sterlite Industries Ltd.
Absence
High occurrence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, TREND1 (5 days) and ELLIOTT WAVE1 (21 days) are significantly present in the Sterlite Industries Ltd scrip. Absence of PATTERN1 is observed in the Sterlite Industries Ltd scrip.
No significance
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No significance
Table 4.42: Showing the Pattern occurrences in the scrip Sun Pharmaceuticals Industries Ltd.
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Sun Pharmaceuticals Industries Ltd scrip. Table 4.43: Showing the Pattern occurrences in the scrip Suzolon Energy Ltd.
PATTERN2 is significantly present in the Suzolon Energy Ltd scrip.
No significance
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No significance
Table 4.44: Showing the Pattern occurrences in the scrip Tata Communications Ltd.
PATTERN1
PATTERN2
Pattern
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Tata Communications Ltd scrip. Table 4.45: Showing the Pattern occurrences in the scrip Tata Consultancy Services Ltd.
PATTERN2 is significantly present in the Tata Consultancy Services Ltd scrip.
No significance
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No significance
Table 4.46: Showing the Pattern occurrences in the scrip Tata Motors Ltd.
No significance
No significance
High occurrence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 andTREND1 (21 days) are significantly present in the Tata Motors Ltd scrip.
No significance
Page 2
No significance
Table 4.47: Showing the Pattern occurrences in the scrip Tata Power Ltd.
No significance
High occurrence
No significance
No significance
No significance
No significance
High occurrence
No significance
No significance
No significance
Pattern Occurrence
PATTERN2, TREND (5 days), WAVE1 (21 days) and ELLIOTT WAVE1 (21 days) are significantly present in the Tata Power Ltd scrip.
No significance
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No significance
Table 4.48: Showing the Pattern occurrences in the scrip Tata Steel Ltd.
Absence
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Tata Steel Ltd scrip. Absence of PATTERN1 is observed in the Tata Steel Ltd scrip.
Table
4.49: Showing the Pattern occurrences in the scrip Unitech Ltd.

PATTERN2 is significantly present in the Unitech Ltd scrip.
No significance
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No significance
Table 4.50: Showing the Pattern occurrences in the scrip Wipro Ltd.
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Wipro Ltd scrip.
No significance
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No significance
Table 4.51: Showing the Pattern occurrences in the scrip Zee Entertainment Enterprises Ltd.
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
No significance
Pattern Occurrence
PATTERN2 is significantly present in the Zee Entertainment Enterprises Ltd scrip.
No significance
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No significance
Table 4.52: Showing the Pattern occurrences in the scrip NIFTY

Absence
No significance
No significance
No significance
Absence
No significance
No significance
No significance
No significance
No significance
High Occurrence
Pattern Occurrence
PATTERN2 and WAVE1 (200 days) are significantly present in the NIFTY scrip. Absence of PATTERN1 is observed in the NIFTY scrip.
No significance
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No significance
Table 4.53: Showing frequency of Presence and Absence across Patterns

Absence Presence
11 0
0 51
2 5
1 5
0 1
0 0
2 3
0 4
0 3
0 4
0 7
0 7
0 3
0 0
Objective 1: To
test whether Market is Efficient
Looking at the table 4.53 it can be safely concluded that Patterns exists in the market. If the markets were to be efficient patterns should not have existed. Hence Markets are not Efficient.
Objective 2: To
find the Relevance of Technical Analysis
Since patterns exist forecasting is possible in some cases if not all. Investor can enter or exit market at appropriate time with help of technical analysis hence Technical Analysis is Relevant.
Objective 3: To
find whether there is significant occurrence of defined patterns
PATTERN1 is significantly absent in many scrips. PATTERN2 is significantly present in all the scrips.
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TREND 1 is significantly present across different scrips over short period. WAVE1 are seen across different scrips over all time periods. ELLIOTT WAVE 1 are seen across different scrips over short term and mid term.
Objective 4: To
find the relevance of Elliott Wave Theory
According to the study many Elliott Waves are seen across various scrips in different time period. Hence Elliott Wave Theory holds good.
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5.1 Summary of Findings: By examining price action to determine which force is prevailing Technical Analysis focuses directly on the bottom line like: What is the price? Where has it been? Where it is going?
Even though there are some universal principles and rules that can be applied, it must be remembered that Technical Analysis is more an art form than a science.
As an art form it is subject to interpretation. However it is also flexible in its approach and each investor should use only that which suits his or her style.
Developing a style takes time effort and dedication, but the rewards are significant as it is shown in the study that there are many reliable patterns and formations, which also repeats itself time and again.
Technical Analysis also happens to break one major jinx of fundamental analysis as it gives an exact price target and answers many questions like,
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When to enter the market? Whether to buy or sell? If buy/ sell then at what prices? How much should be the profit objective? Where should one place a stop loss?
PATTERN1 (as defined) is significantly absent in most of the stocks PATTERN2 is significantly present in all the scrips Trends, Patterns exists in the market Elliott Waves are present across scrips for different time periods
5.2 Suggestions There are many techniques to forecast prices in Technical Analysis. But investors need to be careful before choosing a technique. If three to four techniques are employed, then it leads to a better forecasting. The patterns are important indicators of price movements but they are a bit difficult to establish for a common person. If the investor has a bit more knowledge, he can effectively use the patterns. Even though Technical Analysis helps in Forecasting price, always stop-loss to be used to limit down side risk
5.3 Conclusions
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Technical Analysis seems to consider the market to be 80% psychological and 20% logical. On the contrary Fundamental Analysis considers the market to be 20% psychological and 80% logical. Whether its psychological or logical may be open to debate but there is no questioning about the current price of a security. After all, current price is supreme and it is available for all to see, as nobody doubts its legitimacy. The price set by the market reflects the sum knowledge of all participants, and we are not dealing with lightweights here. These participants have considered (discounted) everything under the sun and settled on a price to buy or sell. These are the forces of supply and demand at work. Markets are efficient Elliott Wave Theory is very much relevant Owing to all the above mentioned factors it could safely be concluded that Technical Analysis is one of the better tools for price forecasting. And in todays rapidly changing world investors look for short time returns which could better be achieved only by a superior price forecasting system and in this case using Technical Analysis.
My Learning
It was a great learning experience I had during dissertation. I got knowledge of many of the concepts. Some of my leanings are Knowledge about origin, evolution of Technical Analysis Knowledge about the origin, evolution, types, functioning, process, and the boundaries of Financial service industry. I got to know that combining different approaches can give superior results than sum of individual approaches.
Looking at Elliott Principal I have realized Law of Nature is supreme. As I have undergone the process of research in a systematic way, I clearly understood how to carry out a research. I understood various aspects of research in a more practical manner, starting from identifying a problem to eliciting the solutions to that problem. Knowledge about of statistical tools and Microsoft Excel was enhanced.
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Technical Analysis and Application of Elliott Wave Theory on Indian Stock Market

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2. Price Moves in Trends.

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1.8 FUNDAMENTAL vs. TECHNICAL ANALYSIS

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Most commonly used charts are:

1.9.1.1 Line Chart:

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1.9.1.2 Bar Chart:

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1.9.1.3 Candlestick Chart:

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Fig 1.4 1.9.2 CHART PATTERNS

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Consolidation or Continuation patterns:

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1.9.4 SUPPORT AND RESISTANCE

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1.9.5 CONTINUATION PATTERN 1.9.5.1 Flags &Pennants

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Fig: 1.10 1.9.5.2 Volume and Open Interest

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Price Rising Rising Falling Falling

Volume Rising Falling Rising Falling

Open Interest Rising Falling Rising Falling

Interpretation Market is Strong Market is Weakening Market is Weak Market is Strengthening

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1.9.6 REVERSAL PATTERNS 1.9.6.1 DOUBLE TOP/ BOTTOM

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1.9.6.2 HEAD AND SHOULDER TOP/ BOTTOM

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Fig 1.17 1.9.6.3 WEDGES

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1.9.7 TECHNICAL INDICATORS

1.9.7.1 LEADING INDICATORS

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1.9.7.2 LAGGING INDICATORS

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Overbought and Oversold Extremes

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1.9.9 MOVING AVERAGES

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1.9.10 RELATIVE STRENGTH INDEX

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1.9.11 STOCHASTIC OSCILLATORS