Technical Analysis

KISHINCHAND CHELLARAM COLLEGE
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USES OF TECHNICAL ANALYSIS IN FINANCIAL MARKETS

Technical Analysis
In finance, technical analysis is a security analysis discipline for
forecasting the direction of prices through the study of past market data,
primarily price and volume. Behavioral economics and quantitative
analysis incorporate substantial aspects of technical analysis, which being
an aspect ofactive management stands in contradiction to much of modern
portfolio theory. According to the weak-form efficient-market hypothesis,
such forecasting methods are valueless, since prices follow a random
walk or are otherwise essentially unpredictable.

History
The principles of technical analysis derive from the observation of financial
markets over hundreds of years. The oldest known hints of technical
analysis appear in Joseph de la Vega's accounts of the Dutch markets in
the 17th century. In Asia, the oldest example of technical analysis is
thought to be a method developed by Homma Munehisa during early 18th
century which evolved into the use of candlestick techniques, and is today
a main charting tool. In the 1920s and 1930s Richard W. Schabacker
published several books which continued the work of Dow and William
Peter Hamilton in his booksStock Market Theory and
Practice and Technical Market Analysis. At the end of his life he was joined
by his brother in law, Robert D. Edwards who finished his last book. In
1948 Edwards and John Magee published Technical Analysis of Stock
Trends which is widely considered to be one of the seminal works of the
discipline. It is exclusively concerned with trend analysis and chart patterns
and remains in use to the present. It is now in its 9th edition. As is obvious,
early technical analysis was almost exclusively the analysis of charts,
because the processing power of computers was not available for statistical
analysis. Charles Dow reportedly originated a form of chart analysis used
by technicianspoint and figure analysis.

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Dow Theory is based on the collected writings of Dow Jones co-founder
and editor Charles Dow, and inspired the use and development of modern
technical analysis from the end of the 19th century. Other pioneers of
analysis techniques include Ralph Nelson Elliott, William Delbert
Gann and Richard Wyckoffwho developed their respective techniques in
the early 20th century.
Many more technical tools and theories have been developed and
enhanced in recent decades, with an increasing emphasis on computer-
assisted techniques using technical analysis software.

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Characteristics:-
Technical analysis employs models and trading rules based on price and
volume transformations, such as the relative strength index, moving
averages, regressions, inter-market and intra-market price
correlations, business cycles, stock market cycles or, classically, through
recognition of chart patterns.
Technical analysis stands in contrast to the fundamental analysis approach
to security and stock analysis. Technical analysis analyzes price, volume
and other market information, whereas fundamental analysis looks at the
actual facts of the company, market, currency or commodity. Most large
brokerage, trading group, or financial institutions will typically have both a
technical analysis and fundamental analysis team.
In a recent review, Irwin and Park reported that 56 of 95 modern studies
found that it produces positive results but noted that many of the positive
results were rendered dubious by issues such as data snooping, so that the
evidence in support of technical analysis was inconclusive; it is still
considered by many academics to bepseudoscience. Academics such
as Eugene Fama say the evidence for technical analysis is sparse and is
inconsistent with the weak form of the efficient-market hypothesis. Users
hold that even if technical analysis cannot predict the future, it helps to
identify trading opportunities.
In the foreign exchange markets, its use may be more widespread
than fundamental analysis. This does not mean technical analysis is more
applicable to foreign markets, but that technical analysis is more
recognized there as to its efficacy there than elsewhere. While some
isolated studies have indicated that technical trading rules might lead to
consistent returns in the period prior to 1987, most academic work has
focused on the nature of the anomalous position of the foreign exchange
market. It is speculated that this anomaly is due to central bank
intervention, which obviously technical analysis is not designed to
predict. Recent research suggests that combining various trading signals
into a Combined Signal Approach may be able to increase profitability and
reduce dependence on any single rule.

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Principles:-
Technicians say that a market's price reflects all relevant information, so
their analysis looks at the history of a security's trading pattern rather than
external drivers such as economic, fundamental and news events. Price
action also tends to repeat itself because investors collectively tend toward
patterned behavior hence technicians' focus on identifiable trends and
conditions.
Market action discounts everything:
Based on the premise that all relevant information is already reflected by
prices, technical analysts believe it is important to understand what
investors think of that information, known and perceived; studies such as
by Cutler, Poterba, and Summers titled "What Moves Stock Prices?" do not
cover this aspect of investing.
Prices move in trends:
Technical analysts believe that prices trend directionally, i.e., up, down, or
sideways (flat) or some combination. The basic definition of a price trend
was originally put forward by Dow Theory.
An example of a security that had an apparent trend is AOL from
November 2001 through August 2002. A technical analyst or trend follower
recognizing this trend would look for opportunities to sell this security. AOL
consistently moves downward in price. Each time the stock rose, sellers
would enter the market and sell the stock; hence the "zig-zag" movement in
the price. The series of "lower highs" and "lower lows" is a tell tale sign of a
stock in a down trend. In other words, each time the stock moved lower, it
fell below its previous relative low price. Each time the stock moved higher,
it could not reach the level of its previous relative high price.
Note that the sequence of lower lows and lower highs did not begin until
August. Then AOL makes a low price that does not pierce the relative low
set earlier in the month. Later in the same month, the stock makes a
relative high equal to the most recent relative high. In this a technician sees
strong indications that the down trend is at least pausing and possibly
ending, and would likely stop actively selling the stock at that point.

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History tends to repeat itself:
Technical analysts believe that investors collectively repeat the behavior of
the investors that preceded them. To a technician, the emotions in the
market may be irrational, but they exist. Because investor behavior repeats
itself so often, technicians believe that recognizable (and predictable) price
patterns will develop on a chart.
Technical analysis is not limited to charting, but it always considers price
trends. For example, many technicians monitor surveys of investor
sentiment. These surveys gauge the attitude of market participants,
specifically whether they are bearish or bullish. Technicians use these
surveys to help determine whether a trend will continue or if a reversal
could develop; they are most likely to anticipate a change when the surveys
report extreme investor sentiment Surveys that show overwhelming
bullishness, for example, are evidence that an uptrend may reverse; the
premise being that if most investors are bullish they have already bought
the market (anticipating higher prices). And because most
investors are bullish and invested, one assumes that few buyers remain.
This leaves more potential sellers than buyers, despite the bullish
sentiment. This suggests that prices will trend down, and is an example
of contrarian trading.
Recently, Kim Man Lui, Lun Hu, and Keith C.C. Chan have suggested that
there is statistical evidence of association relationships between some of
the index composite stocks whereas there is no evidence for such a
relationship between some index composite others. They show that the
price behavior of these Hang Seng index composite stocks is easier to
understand than that of the index.

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Efficient market hypothesis:-
The efficient-market hypothesis (EMH) contradicts the basic tenets of
technical analysis by stating that past prices cannot be used to profitably
predict future prices. Thus it holds that technical analysis cannot be
effective. Economist Eugene Fama published the seminal paper on the
EMH in the Journal of Finance in 1970, and said "In short, the evidence in
support of the efficient markets model is extensive, and (somewhat
uniquely in economics) contradictory evidence is sparse."
Technicians say that EMH ignores the way markets work, in that many
investors base their expectations on past earnings or track record, for
example. Because future stock prices can be strongly influenced by
investor expectations, technicians claim it only follows that past prices
influence future prices. They also point to research in the field of behavioral
finance, specifically that people are not the rational participants EMH
makes them out to be. Technicians have long said that irrational human
behavior influences stock prices, and that this behavior leads to predictable
outcomes. Author David Aronson says that the theory of behavioral finance
blends with the practice of technical analysis:
By considering the impact of emotions, cognitive errors, irrational
preferences, and the dynamics of group behavior, behavioral finance offers
succinct explanations of excess market volatility as well as the excess
returns earned by stale information strategies.... cognitive errors may also
explain the existence of market inefficiencies that spawn the systematic
price movements that allow objective TA [technical analysis] methods to
work.
EMH advocates reply that while individual market participants do not
always act rationally (or have complete information), their aggregate
decisions balance each other, resulting in a rational outcome (optimists
who buy stock and bid the price higher are countered by pessimists who
sell their stock, which keeps the price in equilibrium). Likewise, complete
information is reflected in the price because all market participants bring
their own individual, but incomplete, knowledge together in the market.

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Random walk hypothesis:-
The random walk hypothesis may be derived from the weak-form efficient
markets hypothesis, which is based on the assumption that market
participants take full account of any information contained in past price
movements (but not necessarily other public information). In his book A
Random Walk Down Wall Street, Princeton economist Burton Malkiel said
that technical forecasting tools such as pattern analysis must ultimately be
self-defeating: "The problem is that once such a regularity is known to
market participants, people will act in such a way that prevents it from
happening in the future."
In the late 1980s, professors Andrew Lo and Craig McKinlay published a
paper which cast doubt on the random walk hypothesis. In a 1999
response to Malkiel, Lo and McKinlay collected empirical papers that
questioned the hypothesis' applicability that suggested a non-random and
possibly predictive component to stock price movement, though they were
careful to point out that rejecting random walk does not necessarily
invalidate EMH, which is an entirely separate concept from RWH. In a 2000
paper, Andrew Lo back-analyzed data from U.S. from 1962 to 1996 and
found that "several technical indicators do provide incremental information
and may have some practical value".
Technicians say that the EMH and random walk theories both ignore the
realities of markets, in that participants are not completely rational and that
current price moves are not independent of previous moves.

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Procedure for Technical Analysis:-
Technical analysis is based on the principle that price discounts every
aspect and information in the market. Technical analysis also depends on
the belief that price movements are never totally arbitrary and follow
a certain trend. A technical analyst believes that it's possible to identify an
ongoing trend, identify the trade based on the trend and generate profits as
and when the trend unfolds. The methods that are used for technical
analysis include:
1. Moving averages: This method is used to discover various support
and resistance levels for short term and long term. The most widely
used moving averages are the 30-day moving average (DMAs) and
the 200-day moving average (DMAs).
2. Charts and patterns: Extensive charts are made depending on
historical data on movements of prices. These charts help in
identifying patterns and shapes, such as double bottom, double top,
head and shoulders and triple bottom.

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Basic Assumptions in Technical Analysis:
Technical analysis is based on following three assumptions
1. The Market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
1. The Market Discounts Everything
A major criticism on technical analysis is that it only considers price
movements, leaving aside the fundamental factors of a company. In
reality, technical analysis assumes that, at any given time, the price
of a stock reflects everything that has or can affect the company -
including the fundamental factors. Technical analysts are of the
opinion that the company's fundamentals, along with the broader
economic factors as well as market psychology, are all priced into the
stock, thus removing the need to actually consider all these factors
separately. This only leaves the analysis of price movements, which
technical analysis views as a product of supply and demand for a
particular stock in the market.
2. Price Moves in Trends:
Technical analysis believes that price movements
follow certain trends. This indicates that once a trend has been
established, then the future price movement is more likely to be in the
same direction as this trend than to be against it.
3. History Tends To Repeat Itself:
Technical analysis also assumes an important idea that history tends
to repeat itself, mainly in terms of the price movement. The repetitive
nature of the price movements is attributed to the market psychology;
indicating that, market participants tend to provide a steady reaction
to similar market stimuli over a period of time. Technical analysis
makes use of chart patterns in order to analyze market movements
and understand trends. Even though many of these charts have been
used for over 100 years, they are still assumed to be relevant
because they illustrate patterns in price movements which often
repeat themselves

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What is Technical Analysis?
Technical Analysis is the forecasting of future financial price movements
based on an examination of past price movements. Like weather
forecasting, technical analysis does not result in absolute predictions about
the future. Instead, technical analysis can help investors anticipate what is
"likely" to happen to prices over time. Technical analysis uses a wide
variety of charts that show price over time.

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Technical analysis is applicable to stocks, indices, commodities, 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 time frame. The time frame can
be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-
minutes 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.

General Steps to Technical Evaluation:-
Many technicians employ a top-down approach that begins with broad-
based macro analysis. The larger parts are then broken down to base the
final step on a more focused/micro perspective. Such an analysis might
involve three steps:
1. Broad market analysis through the major indices such as the S&P 500,
Dow Industrials, NASDAQ and NYSE Composite.
2. Sector analysis to identify the strongest and weakest groups within the
broader market.
3. Individual stock analysis to identify the strongest and weakest stocks
within select groups.
The beauty of technical analysis lies in its versatility. Because the principles
of technical analysis are universally applicable, each of the analysis steps
above can be performed using the same theoretical background. You don't
need an economics degree to analyze a market index chart. You don't
need to be a CPA to analyze a stock chart. Charts are charts. It does not
matter if the time frame is 2 days or 2 years. It does not matter if it is a
stock, market index or commodity. The technical principles of support,
resistance, trend, trading range and other aspects can be applied to any
chart. While this may sound easy, technical analysis is by no means easy.
Success requires serious study, dedication and an open mind.

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Chart Analysis:-
Technical analysis can be as complex or as simple as you want it. The
example below represents a simplified version. Since we are interested in
buying stocks, the focus will be on spotting bullish situations.

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Overall Trend: The first step is to identify the overall trend. This can be
accomplished with trend lines, moving averages or peak/trough analysis.
As long as the price remains above its uptrend line, selected moving
averages or previous lows, the trend will be considered bullish.
Support: Areas of congestion or previous lows below the current price
mark support levels. A break below support would be considered bearish.
Resistance: Areas of congestion and previous highs above the current
price mark the resistance levels. A break above resistance would be
considered bullish.
Momentum: Momentum is usually measured with an oscillator such as
MACD. If MACD is above its 9-day EMA (exponential moving average) or
positive, then momentum will be considered bullish, or at least improving.
Buying/Selling Pressure: For stocks and indices with volume figures
available, an indicator that uses volume is used to measure buying or
selling pressure. WhenChaikin Money Flow is above zero, buying pressure
is dominant. Selling pressure is dominant when it is below zero.
Relative Strength: The price relative is a line formed by dividing the
security by a benchmark. For stocks it is usually the price of the stock
divided by the S&P 500. The plot of this line over a period of time will tell us
if the stock is outperforming (rising) or under performing (falling) the major
index.
The final step is to synthesize the above analysis to ascertain the following:
Strength of the current trend.
Maturity or stage of current trend.
Reward to risk ratio of a new position.
Potential entry levels for new long position.

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Top-Down Technical Analysis
For each segment (market, sector and stock), an investor would analyze
long-term and short-term charts to find those that meet specific criteria.
Analysis will first consider the market in general, perhaps the S&P 500. If
the broader market were considered to be in bullish mode, analysis would
proceed to a selection of sector charts. Those sectors that show the most
promise would be singled out for individual stock analysis. Once the sector
list is narrowed to 3-4 industry groups, individual stock selection can begin.
With a selection of 10-20 stock charts from each industry, a selection of 3-4
of the most promising stocks in each group can be made. How many
stocks or industry groups make the final cut will depend on the strictness of
the criteria set forth. Under this scenario, we would be left with 9-12 stocks
from which to choose. These stocks could even be broken down further to
find the 3-4 of the strongest of the strong.

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Strengths of Technical Analysis
Focus on Price:-
If the objective is to predict the future price, then it makes sense to focus on
price movements. Price movements usually precede fundamental
developments. By focusing on price action, technicians are automatically
focusing on the future. The market is thought of as a leading indicator and
generally leads the economy by 6 to 9 months. To keep pace with the
market, it makes sense to look directly at the price movements. More often
than not, change is a subtle beast. 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. There is information to be gleaned from each bit
of information. 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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The annotated example above shows a stock that opened with a gap up.
Before the open, the number of buy orders exceeded the number of sell
orders and the price was raised to attract more sellers. Demand was brisk
from the start. The intraday high reflects the strength of demand (buyers).
The intraday low reflects the availability of supply (sellers). The close
represents the final price agreed upon by the buyers and the sellers. In this
case, the close is well below the high and much closer to the low. This tells
us that even though demand (buyers) was strong during the day, supply
(sellers) ultimately prevailed and forced the price back down. Even after
this selling pressure, the close remained above the open. By looking at
price action over an extended period of time, we can see the battle
between supply and demand unfold. In its most basic form, higher prices
reflect increased demand and lower prices reflect increased supply.
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:-
Even if you are a tried and true fundamental analyst, a price chart can offer
plenty of valuable information. The price chart 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 stock versus the overall market.

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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. It is no secret that timing can play an important role in
performance. Technical analysis can help spot demand (support) and
supply (resistance) levels as well as breakouts. Simply waiting for a
breakout above resistance or buying near support levels can improve
returns.
It is also important to know a stock's price history. If a stock you thought
was great for the last 2 years has traded flat for those two years, it would
appear that Wall Street has a different opinion. If a stock has already
advanced significantly, it may be prudent to wait for a pullback. Or, if the
stock is trending lower, it might pay to wait for buying interest and a trend

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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. If the analyst is a perpetual bull,
then a bullish bias will overshadow the analysis. On the other hand, if the
analyst is a disgruntled eternal bear, then the analysis will probably have a
bearish tilt.
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. Is the cup half-empty
or half-full? It is in the eye of the beholder.
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.
Always Another Level:-
Even after a new trend has been identified, there is always another
"important" level close at hand. Technicians have been accused of sitting
on the fence and never taking an unqualified stance. Even if they are
bullish, there is always some indicator or some level that will qualify their
opinion.

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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 stock may not
work for another. A 50-day moving average may work great to identify
support and resistance for IBM, but a 70-day moving average may work
better for Yahoo. Even though many principles of technical analysis are
universal, each security will have its own idiosyncrasies.

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How to Use Technical Analysis in Forex and Stock Trading?
Technical analysis is the science or skill of forecasting of the future
movements of the price using the past movements and data.
Obviously the past movements can not guarantee the future movements
and so technical analysis is not a hundred percent accurate and surefire
forecasting but if you learn the technical analysis properly, you can make
more correct predictions and so you will be in profit at the end.
Technical analysis rules, techniques and tools are 99% the same in the
stock and forex market. So if you learn technical analysis, you can use it
both in stock and forex market.
It is impossible to cover everything about the technical analysis in one
article. So here I just try to talk about technical analysis in general but write
more detailed articles about it.
If you read my daily forex market analysis reports, you will see that
technical analysis is the main thing that I use in the market analysis.
I do not use indicators in the big time frames like 4 hours, daily and weekly
charts because I believe indicators are too delayed to be used on big time
frames. They show the signals far after a breakout and a big move
happens. So it can be too late to enter to any trade.
In technical analysis we work on the price charts. The price chart is a two
dimensional chart. The vertical axis shows the price and the horizontal axis
shows the time.

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We have different kinds of price charts:
1- Tick chart
2- Line chart
3- Candlestick chart
4- Bar chart
5- Heikin-Ashi chart
6- Kagi chart
7- Renko chart
8- Point & Figure Chart
There are some other kinds of charts but as they are not common, I have
not mentioned them in the above list. Even Heikin Ashi, Kagi, Renko and
Point & Figure are not very common too but as I like to talk about them
because I believe some of you will become interested in using them.
Line, candlestick and Bar charts are very common and I think candlestick
chart is the most common chart and it becomes more popular everyday.
Technical analysis is based on the analysis of the charts. Finding the
trends, support and resistance levels and also consolidations like triangles,
wedges, pennants, double and triple tops and bottoms, head and shoulders
and can be done through the technical analysis rules and when you can
achieve to find these things on your charts, you will be able to predict the
next direction and movement and so you can take the proper position.
Technical analysis becomes even more helpful and valuable when you
enrich the result with some other tools like candlesticks and Fibonacci
levels. You can do your technical analysis on a simple line chart. It will not
make any difference because you will find the same trends and formations
but when you do in on a candlestick chart and pay enough attention to the
candlesticks signals, your analysis will be stronger.
If you dont know about the candlesticks signals, please read one of my
other articles which is about reading the candlesticks signals:
Learn to read the candlesticks signals

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How To Use Fibonacci Numbers in Forex and Stock Trading
1- Trend:
Trendlines are the general direction of the price. When the price goes up,
we have uptrend and when it goes down, we have downtrend.
You can find several small trends inside a big trend. Additionally each time
frame can have its own trends which can be different from other time
frames. For example while you have an uptrend in the daily chart, you can
have a downtrend in the one hour chart.
Finding the trends is the first thing we do in technical analysis.
Look a this big uptrend we have in EUR-USD since the end of the 2005:

Now look at the small uptrends and downtrends inside the same big
uptrend:

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2- Support:
Support is a level that doesnt let the price go lower.
Look at the strong support that we have had in EUR-USD since 2006. As
you see the price has gone up any time that it has touched this support
level:

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However a support level can be broken down. Usually when a support line
becomes broken down, the price goes much lower but it is important to
know that when a support level becomes broken down it will act as a
resistance and sometimes the price goes up several times to retest the
broken support.
Look at the broken support in the below chart:

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The same chart with a higher magnification:

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See how a broken support was retested as a resistance in the Eur-USD
one hour chart:

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3- Resistance:
Resistance is a level that doesnt let the price go higher.
Like the support level, the resistance level can be broken up and then act
as a support.
Look at the resistance level (the red line) in the below chart.

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And see how this resistance became broken up and then was retested as a
support line:

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It is time to tell you that finding support and resistance levels is the
foundation of technical analysis. Everything that we do in technical
analysis is based on the support and resistance levels we find on the
charts. Even patterns like triangles, wedges, pennants, double and triple
tops and bottoms, head and shoulders and are created by support and
resistance levels.

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Use of Stock Market Trend in Technical Analysis
Formal Definition Of Stock Market Trend

The formal definition of stock market trend is especially helpful in case
when defining a trend is not so obvious - since stock prices do not move in
a straight line up or down, but rather in series of highs and lows, it is the
movement of the latest that defines the trend. The stock is in a downtrend if
there is a series of lower highs and lower lows and the stock is in uptrend, if
there is a series of higher highs and higher lows. The stock continues to be
in a downtrend as long as each consecutive high is below the previous high
and the stock continues to be in an uptrend as long as each consecutive
low is higher than the previous low; otherwise the trend is deemed a
reversal.

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Types Of Stock Market Trend:-
Stocks can move up, down or nowhere. Financial theory has therefore
defined three types of trend: uptrend, downtrend and sideways. If peaks
and troughs are higher it is referred as uptrend, is peaks and troughs are
lower it is referred as downtrend, and in case of little movement up or down
in peaks and troughs, it's a sideways trend. Sideways trend, often called as
horizontal trend, is actually not a trend on its own - it is better described as
lack of defined trend in either direction: up or down.
Length Of Stock Market Trend:-
Besides three basic directions of the trend there are also three trend
classifications according to its length: long-term, intermediate and short-
term trend. In terms of stock market investing, long term trend (also known
as major trend) is lasting longer than a year - often 3-5 years, an
intermediate trend is lasting few months and short-term trend is anything
less than a month. For stock traders' different definitions of length of trend
applies; for a day-trader long-term trend lasts only few hours for example.
Long-term trend consists out of many intermediate and short-term trends,
which can move in the same or against the direction of the major trend. As
long as the major trend continues to move in the same direction, the
situation is defined as medium-term or short-term corrections, which is not
the same as stock market trend reversal, when the major trend changes its
direction of future movement.

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When you will be analyzing stock market trends, you should construct
the chart time-frame and time-period to best reflect the type of trend
being analyzed. As investor you should be identifying long-term trend with
weekly chart over five-year, for analyzing intermediate trend you should
use daily chart over 6 months period, and for short-term trends you should
use daily chart over last few days for example. It is very important to
remember, that long-term trends are much more powerful than short-term
trends; for example, 5-days trend is not as significant as a three-year trend.
Trendlines:-
Trendlines are simple straight lines drawn on the chart with charting tools to
more clearly represent the general trend in the market. Trendlines are
also used as identification of trend reversal.
You should connect all the major lows when drawing the trendline in the
uptrend and this line will represent the support level of the stock in every
midterm or short-term correction. Similarly, you should connect all the
major highs when drawing the trendline in the downtrend and this line will
represent resistance level of the stock in every intermediate or short-term
correction.

34
Trend Channels:-
The trend channel is constructed out of two parallel trendlines - one is
connecting series of lows and the other is connecting series of highs, which
act as strong support and resistance levels; you can notice while looking at
different stock charts, that price is bouncing off of these lines several times.
While a channel can slope downward, sideways or upward, the
interpretation is the same for all of them - traders expect a given stock to
trade within the channel lines, until the breakout occurs beyond support or
resistance; in this case a sharp move in the direction of breakout is very
common.

Importance Of Stock Market Trend
As investor or trader it very important for you to understand, that acting in
the direction of the trend is far more safe strategy than going against them -
contrarian. You have probably heard of well known saying in technical
analysis "the trend is your friend" or "Follow the money", illustrating the
importance of the trend analysis in trading or investing.

35
What does technical analysis comprise of?

Stock Charts:-
Technical analysis is a vast area of discipline and there are indeed
many subcategories in this topic. One of the first things that the student
of technical analysis will learn to use is Stock Charts.
Stock charts are the main thing that the technician will see everyday
and they come in many forms. For those who do trading, it would be
foolish to trade without charts. Which type of charts that the technician
use will depend on their preference and affinity towards it.

Chart Patterns:-
Once you have explored the many type of charts, you should learn
aboutChart Patterns. Chart patterns are the footprints of money. They
work very well because as mentioned, market prices display repetitive
patterns. Some of the famous patterns are such as double bottoms,
double tops, head and shoulders and the cup and handle patterns.
There are dozens and perhaps hundreds of chart patterns and their
variations. It is good to learn as much as you can about them. After
learning about Chart Patterns most traders will focus on trading a few
patterns and master them. These patterns will be their bread and butter
to help them make profits trading in the market.

Volume and open interest:-
The smart investor and trader also realizes that it is not only enough to
learn about chart patterns. They supplement charts and chart pattern
analysis with volume and open interest.
Volume is extremely important as a confirmation of the direction of the
trend. Volume can also end an existing trend and begin a new trend.

Trend Analysis:-
This brings us to the next thing that investors and traders should learn
in their technical analysis of stock market, Trend Analysis. This is where
the maxim 'the trend is your friend' comes true. We know that there is
always an uptrend, down trend and sideways trend. Once you have
learned about trend analysis, you will be amazed at the many times that
you have lost money just because you were trading against the trend.

36

Trend Lines:-
Closely related to trend analysis is learning how to draw Trend Lines.
Trendlines can appear in an upmarket which is called an uptrendline
and they can appear in down markets which is called a downtrend line.
Uptrend lines and downtrend lines sometimes act as support and
resistance and can offer early clues of whether the stock price will
cease to continue in the current direction.

Support and Resistance:-
The next thing that you need to learn in technical analysis of stock
market is the concept of Support and Resistance. Support and
resistance is one of the technicals that professional traders always
lookout for.
Many trades are entered or exited based on support and resistance.
There are also many trading strategies which take advantage of this
simple but important concept. The awareness of the support and
resistance area in a stock or the indexes will help you to protect your
profits and avoid losses.

Japanese Candlesticks:-
Technical analysis of stock market is about the analysis of price. Even
chart analysis and chart patterns are based on what happens to the
price of the stock over a few minutes, a few days or a few months.
One popular way to analyze price is through the use of Japanese
Candlesticks analysis. Japanese Candlesticks display the price of the
stock in a visual form. It is made up of the opening price, the closing
price and the tails of the candles are formed by the highs and lows of
the day.
As Japanese Candlesticks are so visual, it can give the investor or
trader who uses it a real advantage over others. Some, Japanese
candlestick patterns offer great clues and can be extremely accurate in
showing what will happen in the next few days, weeks or months
depending on the time frame used.
For example, the appearance of a shooting star can indicate that the
buyers are no longer able to support the stock with the sellers being
successful in pushing the stock down. Hence, it is very likely that the
stock will go down in the next few sessions. Many stock market
crashes are being preceded by the appearance of a shooting star.

37

Moving Averages:-
Another useful tool that astute investors and traders always use in their
technical analysis of stock market is Moving Averages. Moving
averages are actually the average price of a stock over a specified
period of time and they are continuously plotted on the chart each day
which smooths the data.
The most famous moving averages are the 50 day moving average and
the 200 day moving average. One of its usefulness is to determine
whether the stock is in a strong uptrend or not.
If the stock is trading above its 50 day and 200 day moving average,
the stock is considered to be a strong stock. Many smart investors will
not buy a stock that is below its 50 day and 200 day moving averages.
Take a read of the Moving Averages article to learn more about the
uses of moving averages.

Oscillators:-
When you begin to learn about technical analysis of stock market , you
will surely come across Oscillators like the RSI, Stochastics and the
MACD. Oscillators can be very useful in telling us whether the stock is
overbought or oversold. They are often used by traders in conjunction
with other indicators when trading.
Another great use is when divergences between the stock price and the
oscillator occur. When divergences occur, it can give warnings that the
price of the stock may soon reverse direction.

Intermarket Analysis:-
Intermarket Analysis is becoming more and more important in the
modern technical analysis of stock market. This analysis is seldom
mentioned because only the true professional are aware of its
importance. By intermarket analysis we do not mean analyzing the
foreign stock markets although that may be beneficial.
What intermarket analysis means is the study of the interlink and
connection between the stock market and other markets such as
bonds, commodities, sectors and currencies. What happens in other
markets can offer clues on the future direction of the stock market and
vice versa.

38

Sentiment, Breadth Internal and Market Internal Analysis:-
Last but not least, the study of technical analysis of stock market will
not be complete without learning about sentiment analyis, breadth
internal analysisand the market internals.
These 3 analysis is like X-raying the market. Novices are often only
taught to look at the outside of the market, namely what is happening to
the price of the Dow, S&P 500 and the Nasdaq. However, what looks
good on the outside may not reflect what is actually happening in the
inside.
The market may actually be hitting new highs while its internals are
rotting away. Sooner or later, the indexes will catch up to its bad
internals. This is also where the professional who are aware of the
internals will start selling their stocks while the public is busily
accumulating shares.

39
Conclusions:-
As shown, the study of technical analysis of stock market is indeed vast.
There are no shortcuts when it comes to making money in the stock
market. If you are only thinking of getting rich quick, you will not succeed in
the stock market. Do not donate your hard earned money, because those
of us who work hard are very glad to take them away from you.
Technical analysts consider the market to be 80% psychological and 20%
logical. Fundamental analysts consider the market to be 20% psychological
and 80% logical. Psychological or logical may be open for debate, but there
is no questioning the current price of a security. After all, it is available for
all to see and 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. By examining price action to
determine which force is prevailing, technical analysis focuses directly on
the bottom line: What is the price? Where has it been? Where is it 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 can be significant.

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