Chapter 1

EXECUTIVE SUMMARY

Technical analysis is a financial term used to denote a security analysis for

forecasting the direction of prices through the study of past market data, primarily
price and volume. Behavioural economics and quantitative analysis incorporate
technical analysis.

The principles of technical analysis are derived from hundreds of years of financial
market data. 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 at the end of the 19th century. Other pioneers of analysis techniques
include Ralph Nelson Elliott, William Delbert Gann and Richard Wyckoff who
developed their respective techniques in the early 20th century. More technical tools
and theories have been developed and enhanced in recent decades, with an increasing
emphasis on computer-assisted techniques using specially designed computer
software.

While fundamental analysts examine earnings, dividends, new products, research and
the like, technical analysts examine what investors fear or think about those
developments and whether or not investors have the wherewithal to back up their
opinions; these two concepts are called psych (psychology) and supply/demand.
Technicians employ many techniques, one of which is the use of charts. Using charts,
technical analysts seek to identify price patterns and market trends in financial
markets and attempt to exploit those patterns. Technicians use various methods and
tools, the study of price charts is but one.

Technicians using charts search for archetypal price chart patterns, such as the well-
known head and shoulders or double top/bottom reversal patterns, study technical
indicators, moving averages, and look for forms such as lines of support, resistance,
channels, and more obscure formations such as flags, pennants, cup and
handle patterns.

Technical analysts also widely use market indicators of many sorts, some of which are
mathematical transformations of price, often including up and down volume,
advance/decline data and other inputs. These indicators are used to help assess
whether an asset is trending, and if it is, the probability of its direction and of
continuation. Technicians also look for relationships between price/volume indices
and market indicators. Examples include the relative strength index, and MACD.

There are many techniques in technical analysis. Adherents of different techniques

(for example, candlestick charting, Dow Theory, and Elliott wave theory. may ignore
the other approaches, yet many traders combine elements from more than one
technique. Some technical analysts use subjective judgment to decide which pattern(s)
a particular instrument reflects at a given time and what the interpretation of that
pattern should be. Others employ a strictly mechanical or systematic approach to
pattern identification and interpretation.

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Chapter 2

2.1 INTRODUCTION:

Technical analysis is frequently contrasted with fundamental analysis, the study

of economic factors that influence the way investors price financial markets.
Technical analysis holds that prices already reflect all such trends before investors are
aware of them. Uncovering those trends is what technical indicators are designed to
do, imperfect as they may be. Fundamental indicators are subject to the same
limitations, naturally. Some traders use technical or fundamental analysis exclusively,
while others use both types to make trading decisions which conceivably is the most
rational approach.
Users of technical analysis are often called market technicians. Some prefer the term
market technical analyst or chartist.

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 2.2 OBJECTIVE OF THE STUDY

 To analyze and interpret the direction of share price movement in

the stock market through various tools of technical analysis

 To analyze the price fluctuation in equity stock

 To assess the technical condition of the market

 To evaluate the usefulness of technical analysis

SCOPE OF THE STUDY

Technical analysis is the most widely used tool for analyzing and
predicting the trend of the stock market. This approach is the oldest
approach to equity investment. Technical analysis helps to study the
behaviour of the price of the stock to determine the future prices of the
stock. Hence it is helpful for buying and selling of shares online.

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 2.3 RESEARCH METHODOLOGY

Research Methodology can be defined as the process used to collect information

and data for the purpose of making business decisions.

This study is based on primary as well secondary data. Research methodology has its
importance in identifying the problem, collecting, analysing the required information
data and providing the various solution to the problem. The research methodology
may include publication research, interviews, surveys and other research techniques,
and could include both present and historical information.

2.4 Data sources & Sampling

The research is based upon primary data, which has been done by interacting
with various people, as well as secondary data, which has been collected
through various journals, newspaper and websites.

Sampling procedure

The sample was selected randomly in the area of Badlapur. It was also
collected through online surveys to persons, by formal and informal talks and
through filling up the questionnaire prepared.

Sample size and presentation

The sample size of my project is limited to 30 people only.

Data has been presented with the help of pie charts.

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 2.5 LIMITATION OF THE STUDY

There may be a chance of inaccuracy in data collection because many of

respondent may have not provided definite answers of my questionnaire.

All the response given by the respondent were on the basis of their knowledge
& there perception so some biasness may be present.

Respondent didn’t give proper response, as there was lack of time.

Sample size is limited to 30 persons. The sample size may not adequately
represent the whole market.

Research was only limited to the area of Badlapur , which is still progressive area,
people may not be that well-informed about the current market status.

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Chapter 3

Data Analysis and

Findings

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 3.1 Data Analysis

PRINCIPLES

1. 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.

2. 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.

3. 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. They gauge the
attitude of market participants, specifically whether they are bearish or bullish.
Technicians then 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.

Although technical analysis can be applicable to all financial assets, it might be

possible that some methods are more suitable in certain markets, meaning that no
method is universally effective over all the markets.

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 CONCEPTS

Resistance — a price level that may prompt a net increase of selling activity.
Support — a price level that may prompt a net increase of buying activity.

Breakout — the concept whereby prices forcefully penetrate an area of

prior support or resistance, usually, but not always, accompanied by an increase in
volume.

Trend — the phenomenon by which price movement tends to persist in one direction
for an extended period of time.

Chart pattern — distinctive pattern created by the movement of security prices on a

chart.

Dead cat bounce — the phenomenon whereby a spectacular decline in the price of a
stock is immediately followed by a moderate and temporary rise before resuming its
downward movement.

Elliott wave principle and the golden ratio to calculate successive price movements
and retracements.

Fibonacci ratios — used as a guide to determine support and resistance.

TYPES OF CHARTS
Line chart — Connects the closing price values with line segments.

Open-high-low-close chart — OHLC charts, also known as bar charts, plot the span
between the high and low prices of a trading period as a vertical line segment at the
trading time, and the open and close prices with horizontal tick marks on the range
line, usually a tick to the left for the open price and a tick to the right for the closing
price.

Candlestick chart — Of Japanese origin and similar to OHLC, candlesticks widen and
fill the interval between the open and close prices to emphasize the open/close
relationship. In the West, often black or red candle bodies represent a close lower than
the open, while white, green or blue candles represent a close higher than the open
price.

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 OVERLAYS
Overlays are generally superimposed over the main price chart.
Resistance — a price level that may act as a ceiling above price.
Support — a price level that may act as a floor below price.
Trend line — a sloping line described by at least two peaks or two troughs.
Channel — a pair of parallel trend lines.
Moving average — the last n-bars of price divided by "n" -- where "n" is the number
of bars specified by the length of the average. A moving average can be thought of as
a kind of dynamic trend-line.
Bollinger bands — a range of price volatility.
Parabolic SAR — Wilder's trailing stop based on prices tending to stay within
a parabolic curve during a strong trend.
Pivot point — derived by calculating the numerical average of a particular currency's
or stock's high, low and closing price.

PRICE-BASED INDICATORS

These indicators are generally shown below or above the main price chart.
Average Directional Index — a widely used indicator of trend strength
MACD — moving average convergence/divergence
Momentum — the rate of price change
Relative Strength Index (RSI) — oscillator showing price strength
Stochastic oscillator — close position within recent trading range

VOLUME-BASED INDICATORS

Accumulation/distribution index — based on the close within the day's range

Money Flow — the amount of stock traded on days the price went up
On-balance volume — the momentum of buying and selling stocks

MARKET ANALYSIS – DOW THEORY

Charles Dow developed the Dow Theory from his analysis of market price action in
late 19th century.
Six basic tenets of Dow Theory
The market has three movements
(1) The "main movement", primary movement or major trend may last from less than
a year to several years. It can be bullish or bearish. (2) The "medium swing",
secondary reaction or intermediate reaction may last from ten days to three months
and generally retraces from 33% to 66% of the primary price change since the
previous medium swing or start of the main movement. (3) The "short swing" or
minor movement varies with opinion from hours to a month or more. The three

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movements may be simultaneous, for instance, a daily minor movement in a bearish
secondary reaction in a bullish primary movement.
Market trends have three phases
Dow Theory asserts that major market trends are composed of three phases: an
accumulation phase, a public participation phase, and a distribution phase. The
accumulation phase (phase 1) is a period when investors are actively buying (selling)
stock against the general opinion of the market. During this phase, the stock price
does not change much because these investors are in the minority -absorbing stock
that the market at large is supplying . Eventually, the market catches on to these astute
investors and a rapid price change occurs (phase 2). This occurs when trend followers
and other technically oriented investors participate. This phase continues until
rampant speculation occurs. At this point, the astute investors begin to distribute their
holdings to the market (phase 3).
The stock market discounts all news
Stock prices quickly incorporate new information as soon as it becomes available.
Once news is released, stock prices will change to reflect this new information.
Stock market averages must confirm each other
To Dow,, if manufacturers' profits are rising, it follows that they are producing more.
If they produce more, then they have to ship more goods to consumers. Hence, if an
investor is looking for signs of health in manufacturers, he or she should look at the
performance of the companies that ship the output of them to market, the railroads.
The two averages should be moving in the same direction. When the performance of
the averages diverge, it is a warning that change is in the air.
Trends are confirmed by volume
Dow believed that volume confirmed price trends. When prices move on low volume,
there could be many different explanations why. An overly aggressive seller could be
present for example. But when price movements are accompanied by high volume,
Dow believed this represented the "true" market view. If many participants are active
in a particular security, and the price moves significantly in one direction, Dow
maintained that this was the direction in which the market anticipated continued
movement. To him, it was a signal that a trend is developing.
Trends exist until definitive signals prove that they have ended
Dow believed that trends existed despite "market noise". Markets might temporarily
move in the direction opposite to the trend, but they will soon resume the prior move.
The trend should be given the benefit of the doubt during these reversals. Determining
whether a reversal is the start of a new trend or a temporary movement in the current
trend is not easy. Technical analysis tools attempt to clarify this but they can be
interpreted differently by different investors.
The Three Stages of Primary Bull Markets and Primary Bear Markets

PRIMARY BULL MARKET - STAGE 1 – ACCUMULATION

The first stage of a bull market is largely indistinguishable from the last reaction rally
of a bear market. Pessimism, which is excessive at the end of the bear market, still
reigns at the beginning of a bull market. It is a period when the public is out of stocks,
the news from corporate world is bad and valuations are usually at historical lows.
However, it is at this stage that the so-called "smart money" begins to accumulate
stocks. This is the stage of the market. when those with patience see value in owning
stocks for the long haul. Stocks are cheap, but nobody seems to want them. This is the

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stage where Warren Buffet stated in the summer of 1974 that now was the time to buy
stocks and become rich. Everyone else thought he was crazy.

In the first stage of a bull market, stocks begin to find a bottom and quietly firm up.
When the market starts to rise, there is widespread disbelief that a bull market has
begun. After the first leg peaks and starts to head back down, the bears come out
proclaiming that the bear market is not over. It is at this stage that careful analysis is
warranted to determine if the decline is a secondary movement (a correction of the
first leg up). If it is a secondary move, then the low forms above the previous low.
When the previous peak is surpassed, the beginning of the second leg and a primary
bull will be confirmed.

PRIMARY BULL MARKET - STAGE 2 - BIG MOVE

The second stage of a primary bull market is usually the longest, and sees the largest
advance in prices. It is a period marked by improving business conditions and
increased valuations in stocks. Earnings begin to rise again and confidence starts to
mend. This is considered the easiest stage to make money as participation is broad
and the trend followers begin to participate.

PRIMARY BULL MARKET - STAGE 3 - EXCESS

The third stage of a primary bull market is marked by excessive speculation and the
appearance of inflationary pressures. (Dow formed these theorems about 100 years
ago, but this scenario is certainly familiar.) During the third and final stage, the public
is fully involved in the market, valuations are excessive and confidence is
extraordinarily high. This is the mirror image to the first stage of the bull market. A
Wall Street axiom: When the taxi cab drivers begin to offer tips, the top cannot be far
off.

PRIMARY BEAR MARKET - STAGE 1 - DISTRIBUTION

Just as accumulation is the hallmark of the first stage of a primary bull market,
distribution marks the beginning of a bear market. As the "smart money" begins to
realize that business conditions are not quite as good as once thought, they start to sell
stocks. The public is still involved in the market at this stage and become willing
buyers. There is little in the headlines to indicate a bear market is at hand and general
business conditions remain good. However, stocks begin to lose a bit of their luster
and the decline begins to take hold. While the market declines, there is little belief
that a bear market has started and most forecasters remain bullish. After a moderate
decline, there is a reaction rally (secondary move) that retraces a portion of the
decline. Reaction rallies during bear markets were quite swift and sharp; a large
percentage of the losses would be recouped in a matter of days or perhaps weeks. This
quick and sudden movement would invigorate the bulls to proclaim the bull market
alive and well. However, the reaction high of the secondary move would form and be
lower than the previous high. After making a lower high, a break below the previous
low would confirm that this was the second stage of a bear market.

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 PRIMARY BEAR MARKET - STAGE 2 - BIG MOVE

As with the primary bull market, stage two of a primary bear market provides the
largest move. This is when the trend has been identified as down and business
conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit
margins shrink and revenues fall. As business conditions worsen, the sell-off
continues.

PRIMARY BEAR MARKET - STAGE 3 - DESPAIR

At the top of a primary bull market, hope springs eternal and excess is the order of the
day. By the final stage of a bear market, all hope is lost and stocks are frowned upon.
Valuations are low, but the selling continues as participants seek to sell no matter
what. The news from corporate world is bad, the economic outlook bleak and not a
buyer is to be found. The market will continue to decline until all the bad news is fully
priced into stocks. Once stocks fully reflect the worst possible outcome, the cycle
begins again.

Fig.1

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 Fig.2

ELLIOTT WAVE THEORY

The Elliot Wave Theory represents a development of the well-known Dow theory. It
applies to any freely traded assets, liabilities, or goods (shares, obligations, oil, gold,
etc.). The Wave Theory was proposed by accountant and business expert Ralph
Nelson Elliott in his study titled "The Wave Principle" published in 1938.

The Elliott Wave Theory is based on a certain cyclic laws in human behavior
psychology. According to Elliott, the market price behavior can be clearly estimated
and shown in the chart as waves (wave is here an explicit price move). The Elliott
Wave Theory says that the market can be in two large phases: Bull Market and Bear
Market.
Elliott proposes, as well, that all price moves on the market are divided into:
five waves in the direction of the main trend (waves 1 to 5 )+three corrective waves
(waves A, B, C )
Fibonacci Numbers provide the mathematical foundation for the Elliott Wave Theory.
Fibonacci numbers play an important role in the construction of the complete market
cycle described with the Elliott's waves. Each of the cycles Elliott defined are
comprised of a total wave count that falls within the Fibonacci number sequence.

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 Wave Classical Relations between Waves
1 -
2 0.382, 0.5, or 0.618 of Wave 1 length
3 1.618, 0.618, or 2.618 of Wave 1 length
4 0.382 or 0.5 of Wave 1 length
5 0.382, 0.5, or 0,618 of Wave 1 length
A 1, 0.618 or 0.5 of of Wave 5 length
B 0.382 or 0.5 of Wave A length
C 1.618, 0.618, or 0.5 of Wave A length
Table.1
`
Wave 1-Happens when the «market psychology» is practically bearish. News are still
negative. As a rule, it is very strong if it represents a leap (change from bear trend to
the bull trend, penetration into the might resistance level, etc.). In a state of
tranquillity, it usually demonstrates insignificant price moves in the background of
general wavering.
Wave 2-Happens when the market rapidly rolls back from the recent, hard-won
profitable positions. It can roll back to almost 100% of Wave 1, but not below its
starting level. It usually makes 60% of Wave 1 and develops in the background of
prevailing amount of investors preferring to fix their profits.
Wave 3-Is what the Elliott's followers live for. Rapid increase of investors' optimism
is observed. It is the mightest and the longest wave of rise (it can never be the
shortest) where prices are accelerated and the volumes are increased. A typical Wave
3 exceeds Wave 1 by, at least, 1.618 times, or even more.
Wave 4-Often difficult to identify. It usually rolls back by no more than 38% of Wave
3. Its depth and length are normally not very significant. Optimistic moods are still
prevailing in the market. Wave 4 may not overlap Wave 2 until the five-wave cycle is
a part of the end triangle.

Wave 5-Is often identified using momentum divergences. The prices increases at
middle-sized trade volumes. The wave is formed in the background of mass agiotage.
At the end of the wave, the trade volumes often rise sharply.
Wave A-Many traders still consider the rise to make a sharp come-back. But there
appear some traders sure of the contrary. Characteristics of this wave are often very
much the same as those of Wave 1.
Wave B-Often resembles Wave 4 very much and is very difficult to identify. Shows
insignificant movements upwards on the rests of optimism.
Wave C-A strong decreasing wave in the background of general persuasion that a
new, decreasing trend has started. In the meantime, some investors start buying
cautiously. This wave is characterized by high momentum (five waves) and
lengthiness up to 1.618-fold Wave 3.

Rule 1: Wave 2 cannot retrace more than 100% of Wave 1.

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Rule 2: Wave 3 can never be the shortest of the three impulse

Rule 3: Wave 4 can never overlap Wave 1.

Fig.3

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Fig.4

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Fig.5

Fig.6
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 Fig.7

FIBONACCI RETRACEMENT

It is a very popular tool among technical traders and is based on the

key numbers identified by mathematician Leonardo Fibonacci in the thirteenth
century. However, Fibonacci's sequence of numbers is not as important as the
mathematical relationships, expressed as ratios, between the numbers in the series. In
technical analysis, Fibonacci retracement is created by taking two extreme points
(usually a major peak and trough) on a stock chart and dividing the vertical distance
by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Once these
levels are identified, horizontal lines are drawn and used to identify
possible support and resistance levels. Before we can understand why these ratios
were chosen, we need to have a better understanding of the Fibonacci number series.

The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
144, etc. Each term in this sequence is simply the sum of the two preceding terms and
sequence continues infinitely. One of the remarkable characteristics of this numerical
sequence is that each number is approximately 1.618 times greater than the preceding
number. This common relationship between every number in the series is the
foundation of the common ratios used in retracement studies.

The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the
golden mean" - is found by dividing one number in the series by the number that
follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

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The 38.2% ratio is found by dividing one number in the series by the number that is
found two places to the right. For example: 55/144 = 0.3819.

The 23.6% ratio is found by dividing one number in the series by the number that is
three places to the right. For example: 8/34 = 0.2352.

In addition to the ratios described above, many traders also like using the 50% and
78.6% levels. The 50% retracement level is not really a Fibonacci ratio, but it is used
because of the overwhelming tendency for an asset to continue in a certain direction
once it completes a 50% retracement.

For reasons that are unclear, these ratios seem to play an important role in the stock
market, just as they do in nature, and can be used to determine critical points that
cause an asset's price to reverse. The direction of the prior trend is likely to continue
once the price of the asset has retraced to one of the ratios listed above. The following
chart illustrates how Fibonacci retracement can be used. Notice how the price changes
direction as it approaches the support/resistance levels.

Fig.8

FIBONACCI EXTENSIONS
Fibonacci Extensions Means- Levels used in Fibonacci retracement to forecast areas
of support or resistance. Extensions consist of all levels drawn beyond the standard
100% level and are used by many traders to determine areas where they will wish to
take profits. The most popular extension levels are 138.2%, 150%, 161.8%, 238.2%,
261.8%, 361.8% and 423.6%.

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 Fig.9

A price chart is a sequence of prices plotted over a specific time.

1. LINE CHART 2. BAR CHART 3.CANDLESTICK CHART

LINE CHARTS
represents only the closing prices over a set period of time. The line is formed by
connecting the closing prices over the time frame. Line charts do not provide visual
information of the trading range for the individual points such as the high, low and
opening prices. However, the closing price is often considered to be the most
important price in stock data.

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 Fig.10

BAR CHART

The chart is made up of a series of vertical lines that represent High and Low points.
The opening price on a bar chart is illustrated by the dash that is located on the left
side of the vertical bar. Conversely, the close is represented by the dash on the right.

Fig.11

CANDLESTICK
Compared to traditional bar charts, many traders consider Japanese candlestick charts
more visually appealing and easier to interpret. Each candlestick provides an easy-to-
decipher picture of price action. Immediately a trader can see compare the

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relationship between the open and close as well as the high and low. The relationship
between the open and close is considered vital information and forms the essence of
candlesticks. Green/white candlesticks, where the close is greater than the open,
indicate buying pressure. Red/black candlesticks, where the close is less than the
open, indicate selling pressure. Candlestick charts are an effective way of visualizing
price movements.

Fig.12 Page | 22
 CANDLESTICK PATTERNS
The power of Candlestick Charts is with multiple candlesticks forming reversal and
continuation patterns

DOJI
The Doji is a powerful Candlestick formation, signifying indecision between bulls and
bears. A Doji is quite often found at the bottom and top of trends and thus is
considered as a sign of possible reversal of price direction, but the Doji can be viewed
as a continuation pattern as well. A Doji is formed when the opening price and the
closing price are equal.

Fig.13

A long-legged Doji, often called a "Rickshaw Man" is the same as a Doji, except the
upper and lower shadows are much longer than the regular Doji formation.

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After the open, bulls push prices higher only for prices to be rejected and pushed
lower by the bears. However, bears are unable to keep prices lower, and bulls then
push prices back to the opening price.

Spinning Top
Spinning Tops are Candlesticks that have small bodies with upper and lower
shadows/wicks that are longer than the body. This candle is often regarded as
neutral and used to signal indecision about the future direction of the underlying asset.

If a spinning top formation is found after a prolonged uptrend, it suggests that the
bulls are losing interest in the stock and that a reversal may be in the cards. On the
other hand, if this formation is found in an defined downtrend, it suggests that the
sellers are losing conviction and that a bottom may be forming.

Fig.14
DRAGONFLY DOJI
The Dragonfly Doji is a significant bullish reversal candlestick pattern that mainly
occurs at the bottom of downtrends. The most important part of the Dragonfly Doji is
the long lower shadow.

The long lower shadow implies that the market tested to find where demand was
located and found it. Bears were able to press prices downward, but an area of support
was found at the low of the day and buying pressure was able to push prices back up
to the opening price. Thus, the bearish advance downward was entirely rejected by the
bulls.

GRAVESTONE DOJI
The Gravestone Doji is a significant bearish reversal candlestick pattern that mainly
occurs at the top of uptrends. The long upper shadow is generally interpreted by

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technicians as meaning that the market is testing to find where supply and potential
resistance is located.

The construction of the Gravestone Doji pattern occurs when bulls are able to press
prices upward.

However, an area of resistance is found at the high of the day and selling pressure is
able to push prices back down to the opening price. Therefore, the bullish advance
upward was entirely rejected by the bears.

Fig.15

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 HAMMER
The Hammer candlestick formation is a significant bullish reversal candlestick pattern
that mainly occurs at the bottom of downtrends.

The long lower shadow of the Hammer implies that the market tested to find where
support and demand was located. When the market found the area of support, the lows
of the day, bulls began to push prices higher, near the opening price. Thus, the bearish
advance downward was rejected by the bulls.

HANGING MAN
The Hanging Man candlestick formation, as one could predict from the name, is a
bearish sign. This pattern occurs mainly at the top of uptrends and is a warning of a
potential reversal downward. It is important to emphasize that the Hanging Man
pattern is a warning of potential price change, not a signal, in and of itself, to go short.
After a long uptrend, the formation of a Hanging Man is bearish because prices
hesitated by dropping significantly during the day. Granted, buyers came back into the
stock, future, or currency and pushed price back near the open, but the fact that prices
were able to fall significantly shows that bears are testing the resolve of the bulls.
What happens on the next day after the Hanging Man pattern is what gives traders an
idea as to whether or not prices will go higher or lower.

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 Fig.16
SHOOTING STAR
The Shooting Star candlestick formation is a significant bearish reversal candlestick
pattern that mainly occurs at the top of uptrends.

The Shooting Star formation is considered less bearish, but nevertheless bearish when
the open and low are roughly the same. The bears were able to counteract the bulls,
but were not able to bring the price back to the price at the open.

The long upper shadow of the Shooting Star implies that the market tested to find
where resistance and supply was located. When the market found the area of
resistance, the highs of the day, bears began to push prices lower, ending the day near
the opening price. Thus, the bullish advance upward was rejected by the bears.

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 INVERTED HAMMER
The Inverted Hammer candlestick formation occurs mainly at the bottom of
downtrends and is a warning of a potential reversal upward. It is important to note that
the Inverted pattern is a warning of potential price change, not a signal, in and of
itself, to buy.

After a long downtrend, the formation of an Inverted Hammer is bullish because

prices hesitated their move downward by increasing significantly during the day.
Nevertheless, sellers came back into the stock, future, or currency and pushed prices
back near the open, but the fact that prices were able to increase significantly shows
that bulls are testing the power of the bears. What happens on the next day after the
Inverted Hammer pattern is what gives traders an idea as to whether or not prices will
go higher or lower.

Fig.17

Harami
The Harami (meaning "pregnant" in Japanese) Candlestick Pattern is a reversal
pattern. The pattern consists of two Candlesticks:

Larger Bullish or Bearish Candle (Day 1)

Smaller Bullish or Bearish Candle (Day 2)

Bearish Harami: A bearish Harami occurs when there is a large bullish green candle
on Day 1 followed by a smaller bearish or bullish candle on Day 2. The most
important aspect of the bearish Harami is that prices gapped down on Day 2 and were
unable to move higher back to the close of Day 1. This is a sign that uncertainty is
entering the market.

Bullish Harami: A bullish Harami occurs when there is a large bearish red candle on
Day 1 followed by a smaller bearish or bullish candle on Day 2. Again, the most
important aspect of the bullish Harami is that prices gapped up on Day 2 and price
was held up and unable to move lower back to the bearish close of Day 1.

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 Fig.18

BULLISH ENGULFING PATTERN

The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern, usually

occurring at the bottom of a downtrend. The pattern consists of two Candlesticks:

Smaller Bearish Candle (Day 1)

Larger Bullish Candle (Day 2)
The bearish candle real body of Day 1 is usually contained within the real body of the
bullish candle of Day 2.

On Day 2, the market gaps down; however, the bears do not get very far before bulls
take over and push prices higher, filling in the gap down from the morning's open and
pushing prices past the previous day's open.

The power of the Bullish Engulfing Pattern comes from the incredible change of
sentiment from a bearish gap down in the morning, to a large bullish real body candle
that closes at the highs of the day. Bears have overstayed their welcome and bulls
have taken control of the market.

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 Fig.19

Bearish Engulfing Pattern

The Bearish Engulfing Candlestick Pattern is a bearish reversal pattern, usually
occuring at the top of an uptrend. Generally, the bullish candle real body of Day 1 is
contained within the real body of the bearish candle of Day 2.

The market gaps up (bullish sign) on Day 2; but, the bulls do not push very far higher
before bears take over and push prices further down, not only filling in the gap down
from the morning's open but also pushing prices below the previous day's open.

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With the Bullish Engulfing Pattern, there is an incredible change of sentiment from
the bullish gap up at the open, to the large bearish real body candle that closed at the
lows of the day. Bears have successfully overtaken bulls for the day and possibly for
the next few periods.

DARK CLOUD COVER

Dark Cloud Cover is a bearish candlestick reversal pattern, similar to the Bearish
Engulfing Pattern (see: Bearish Engulfing Pattern).

A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the
middle of Day 1's candle. In addition, price gaps up on Day 2 only to fill the gap and
close significantly into the gains made by Day 1's bullish candlestick.

The rejection of the gap up is a bearish sign in and of itself, but the retracement into
the gains of the previous day's gains adds even more bearish sentiment. Bulls are
unable to hold prices higher, demand is unable to keep up with the building supply.

Piercing Line Pattern

The Piercing Pattern is a bullish candlestick reversal pattern .A Piercing Pattern
occurs when a bullish candle on Day 2 closes above the middle of Day 1's bearish
candle. Moreover, price gaps down on Day 2 only for the gap to be filled and closes
significantly into the losses made previously in Day 1's bearish candlestick. The
rejection of the gap up by the bulls is a major bullish sign, and the fact that bulls were
able to press further up into the losses of the previous day adds even more bullish
sentiment. Bulls were successful in holding prices higher, absorbing excess supply
and increasing the level of demand.

Fig.20 Page | 31
Evening Star
The Evening Star Pattern is a bearish reversal pattern, usually occuring at the top of
an uptrend. The pattern consists of three candlesticks:

The first part of an Evening Star reversal pattern is a large bullish green candle. On
the first day, bulls are definitely in charge, usually new highs were made.

The second day begins with a bullish gap up. It is clear from the opening of Day 2
that bulls are in control. However, bulls do not push prices much higher. The
candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e.Doji).

Generally speaking, a bearish candle on Day 2 is a stronger sign of an impending

reversal. But it is Day 3 that is the most significant candlestick.

Day 3 begins with a gap down, (a bearish signal) and bears are able to press prices
even further downward, often eliminating the gains seen on Day 1.

Morning Star
The Morning Star Pattern is a bearish reversal pattern, usually occuring at the bottom
of a downtrend. The pattern consists of three candlesticks:

The first part of a Morning Star reversal pattern is a large bearish red candle. On the
first day, bears are definitely in charge, usually making new lows. The second day
begins with a bearish gap down. It is clear from the opening of Day 2 that bears are in
control. However, bears do not push prices much lower. The candlestick on Day 2 is
quite small and can be bullish, bearish, or neutral (i.e. Doji).

Generally speaking, a bullish candle on Day 2 is a stronger sign of an impending

reversal. But it is Day 3 that holds the most significance. Day 3 begins with a
bullish gap up, and bulls are able to press prices even further upward, often
eliminating the losses seen on Day 1.

Fig.21

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Tweezer Tops and Bottoms

The Tweezer Top formation is a bearish reversal pattern seen at the top of uptrends
and the Tweezer Bottom formation is a bullish reversal pattern seen at the bottom of
downtrends. sometimes Tweezer Tops or Bottoms have three candlesticks.

A bearish Tweezer Top occurs during an uptrend when bulls take prices higher,
often closing the day off near the highs (a bullish sign). However, on the second day,
traders feel (i.e. their sentiment) reverses completely. The market opens- makes
almost equal high of Day 1- and goes straight down, often eliminating the entire
gains of Day 1.

The reverse, a bullish Tweezer Bottom occurs during a downtrend when bears
continue to take prices lower, usually closing the day near the lows (a bearish sign).
Nevertheless, Day 2 is completely opposite because prices open -makes almost equal
low of Day 1-and go nowhere but upwards. This bullish advance on Day 2 sometimes
eliminates all losses from the previous day.

Candlestick Pattern Dictionary

Abandoned Baby: A rare reversal pattern characterized by a gap followed

by a Doji, which is then followed by another gap in the opposite direction. The
shadows on the Doji must completely gap below or above the shadows of the first and
third day.

Dark Cloud Cover: A bearish reversal pattern that continues the uptrend
with a long white body. The next day opens at a new high then closes below the
midpoint of the body of the first day.

Doji: Doji form when a security's open and close are virtually equal. The
length of the upper and lower shadows can vary, and the resulting candlestick looks
like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or
tug-of-war between buyers and sellers. Prices move above and below the opening
level during the session, but close at or near the opening level.

Downside Tasuki Gap: A continuation pattern with a long, black body

followed by another black body that has gapped below the first one. The third day is
white and opens within the body of the second day, then closes in the gap between the
first two days, but does not close the gap.

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Dragonfly Doji: A Doji where the open and close price are at the high of
the day. Like other Doji days, this one normally appears at market turning points.

Engulfing Pattern: A reversal pattern that can be bearish or bullish,

depending upon whether it appears at the end of an uptrend (bearish engulfing
pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a
small body, followed by a day whose body completely engulfs the previous day's
body.

Evening Doji Star: A three day bearish reversal pattern similar to the
Evening Star. The uptrend continues with a large white body. The next day opens
higher, trades in a small range, then closes at its open (Doji). The next day closes
below the midpoint of the body of the first day.

Evening Star: A bearish reversal pattern that continues an uptrend with a

long white body day followed by a gapped up small body day, then a down close with
the close below the midpoint of the first day.

Falling Three Methods: A bearish continuation pattern. A long black

body is followed by three small body days, each fully contained within the range of
the high and low of the first day. The fifth day closes at a new low.

Gravestone Doji: A doji line that develops when the Doji is at, or very
near, the low of the day.

Hammer: Hammer candlesticks form when a security moves significantly

lower after the open, but rallies to close well above the intraday low. The resulting
candlestick looks like a square lollipop with a long stick. If this candlestick forms
during a decline, then it is called a Hammer.

Hanging Man: Hanging Man candlesticks form when a security moves

significantly lower after the open, but rallies to close well above the intraday low. The
resulting candlestick looks like a square lollipop with a long stick. If this candlestick
forms during an advance, then it is called a Hanging Man.

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Harami: A two day pattern that has a small body day completely contained
within the range of the previous body, and is the opposite color.

Harami Cross: A two day pattern similar to the Harami. The difference is
that the last day is a Doji.

Inverted Hammer: A one day bullish reversal pattern. In a downtrend, the

open is lower, then it trades higher, but closes near its open, therefore looking like an
inverted lollipop.

Long Day: A long day represents a large price move from open to close,
where the length of the candle body is long.

Long-Legged Doji: This candlestick has long upper and lower shadows
with the Doji in the middle of the day's trading range, clearly reflecting the indecision
of traders.

Long Shadows: Candlesticks with a long upper shadow and short lower
shadow indicate that buyers dominated during the first part of the session, bidding
prices higher. Conversely, candlesticks with long lower shadows and short upper
shadows indicate that sellers dominated during the first part of the session, driving
prices lower.

Marubozu: A candlestick with no shadow extending from the body at

either the open, the close or at both. The name means close-cropped or close-cut in
Japanese, though other interpretations refer to it as Bald or Shaven Head.

Morning Doji Star: A three day bullish reversal pattern that is very similar
to the Morning Star. The first day is in a downtrend with a long black body. The next
day opens lower with a Doji that has a small trading range. The last day closes above
the midpoint of the first day.

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Morning Star: A three day bullish reversal pattern consisting of three
candlesticks - a long-bodied black candle extending the current downtrend, a short
middle candle that gapped down on the open, and a long-bodied white candle that
gapped up on the open and closed above the midpoint of the body of the first day.

Piercing Line: A bullish two day reversal pattern. The first day, in a
downtrend, is a long black day. The next day opens at a new low, then closes above
the midpoint of the body of the first day.

Rising Three Methods: A bullish continuation pattern in which a long

white body is followed by three small body days, each fully contained within the
range of the high and low of the first day. The fifth day closes at a new high.

Shooting Star: A single day pattern that can appear in an uptrend. It opens
higher, trades much higher, then closes near its open. It looks just like the Inverted
Hammer except that it is bearish.
Short Day: A short day represents a small price move from open to close,
where the length of the candle body is short.

Spinning Top: Candlestick lines that have small bodies with upper and
lower shadows that exceed the length of the body. Spinning tops signal indecision.

Stars: A candlestick that gaps away from the previous candlestick is said
to be in star position. Depending on the previous candlestick, the star position
candlestick gaps up or down and appears isolated from previous price action.

Stick Sandwich: A bullish reversal pattern with two black bodies

surrounding a white body. The closing prices of the two black bodies must be equal.
A support price is apparent and the opportunity for prices to reverse is quite good.

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Three Black Crows: A bearish reversal pattern consisting of three
consecutive long black bodies where each day closes at or near its low and opens
within the body of the previous day.

Three White Soldiers: A bullish reversal pattern consisting of three

consecutive long white bodies. Each should open within the previous body and the
close should be near the high of the day.

Upside Gap Two Crows: A three day bearish pattern that only happens in
an uptrend. The first day is a long white body followed by a gapped open with the
small black body remaining gapped above the first day. The third day is also a black
day whose body is larger than the second day and engulfs it. The close of the last day
is still above the first long white day.

Upside Tasuki Gap: A continuation pattern with a long white body

followed by another white body that has gapped above the first one. The third day is
black and opens within the body of the second day, then closes in the gap between the
first two days, but does not close the gap.

Support and Resistance

Support and Resistance is one of the most important and fundamental part of technical
analysis. The price level which, historically, a stock has had difficulty falling below.
It is thought of as the level at which a lot of buyers tend to enter the stock.
Often referred to as the "support level".

If the price of a stock falls towards a support level it is a test for the stock: the support
will either be reconfirmed or wiped out. It will be reconfirmed if a lot of buyers move
into the stock (thinking it cheap and opportunity to buy), causing it to rise and move
away from the support level. It will be wiped out if buyers will not enter the stock and
the stock falls below the support.

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Resistance
The price at which a stock or market can trade, but not exceed, for a certain period of
time.
Often referred to as "resistance level".

The stock or market stops rising because sellers start to outnumber buyer or the
supply exceeds the demand. Also the profit booking intensifies.

When support and resistance has been firmly established:

Buy Signal-Buy when price touches the support line

Sell Signal-Sell when price touches the resistance line.

Breaking Support & Resistance

Another fundamental concept of support and resistance is listed next and is shown in
the chart below of Alcoa (AA) stock:

If price breaks below support, then that support level becomes the new resistance
level.
If price breaks above support, then that resistance level becomes the new support
level.

Trendlines are a very basic yet powerful tool used in technical analysis (analyzing
stock charts). They are used to illuminate the general direction of a stock’s price
movement.
Trendlines are straight lines that are drawn on a stock chart along at least two price
highs or price lows and a third point confirms the validity of the line (it's taken
seriously). The price highs or lows are the points.The trendline becomes more
significant (stronger) as more prices touch the line.
There are three types of trends:
Downward Trend (Bearish)
Upward Trend (Bullish)
Side to Side (Channeling)
Trendlines are primarily used to manage trades and to help you see when or if the
trend is changing. It can be assumed that prices will continue in the direction of the
trend until the trend is broken.

Downward Trendlines

A downward trendline is used when prices have been falling. You construct a
downward trendline by drawing a straight line "down and to the right" across price
highs. All price action is below the trendline.

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Make sure to get as many price highs to touch the line as you can, but not all points
have to be exactly on the line.As long as prices stay below the trendline, the
downward trend is considered intact.

Bearish trading strategies and downward trendlines are a great compliment to each
other.

Upward Trendlines
An upward trendline is used when prices have been rising. An upward trendline is
constructed by drawing a straight line "up and to the right" across price lows. Make
sure to get as many price lows to touch the line as you can, but not all points have to
be exactly on the line.

As long as prices stay above the trendline the uptrend is considered intact.

Bullish trading strategies and upward trendlines are a great compliment to each other.

Side to Side Trend

A side to side trend is often called a channel. It's when stock prices have been moving
up and down between two parallel price barriers.
To construct the trendlines for a channel you draw a horizontal line across price highs
AND across price lows. The area between these two lines is called the channel. Prices
are bound by the two parallel price barriers which are illuminated by the lines. The
upper line is commonly referred to as the resistance level and the lower line is
referred to as the support level.
While this may be the case, there are generally three situations that can occur if the
stock closes outside of the trendline:
Using a trendline can help you maximize profits and minimize losses. You can also
use them for trade entry and exit signals.

Trading with Trendlines

Trendline breaks are trend reversal trades. They occur when prices break or drift
outside of the current trend and start a new trend.
you would buy when prices break outside of the downward trendline.
It's the opposite for an upward trendline. As an upward trendline is broken you would
sell.

If a stock closes outside of a trendline, always asses the volume and "how" it broke
outside of the trend. Because of the higher volume (aggressive movement), this would
be considered an "upside breakout". The high volume and gap in prices strengthens
the possibility that this is a valid trend change.

Trendline bounces are trend continuation trades. You would participate in this type of
trade if you expect prices to continue in the direction of the trend.

A trendline bounce occurs when prices move (dip) toward the line, touch it, then
bounces off and reverses back into their original direction:

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If we have an upward trend. Ideally you would buy when prices touch the trendline
(blue arrows). After the stock bounces off the line and continues back upward, your
stock price will begin to gain value.

Once your stock price gains enough value, you can sell it for a profit and wait for the
next opportunity to "buy on the dip".

This method of trading is also suitable for stocks that are trending in a channel.

GAPS

A gap in a chart is essentially an empty space between one trading period and the
previous trading period. They usually form because of an important and material
event that affects the security, such as an earnings surprise or a merger agreement.

This happens when there is a large-enough difference in the opening price of a trading
period where that price and the subsequent price moves do not fall within the range of
the previous trading period. For example, if the price of a company’s stock is trading
near Rs.40 and the next trading period opens at Rs.45, there would be a large gap up
on the chart between these two periods.

Gap price movements can be found on bar charts and candlestick charts but will not
be found on basic line charts. The reason for this is that every point on line charts are
connected.

It is often said when referring to gaps that they will always fill, meaning that the price
will move back and cover at least the empty trading range. However, before you enter
a trade that profits the covering, note that this doesn’t always happen and can often
take some time to fill.

There are four main types of gaps: common, breakaway, runaway (measuring),
and exhaustion. Each are the same in structure, differing only in their location in the
trend and subsequent meaning for chartists.

Common Gap
As its name implies, the common gap occurs often in the price movements of a
security. For this reason, it's not as important as the other gap movements but is still
worth noting. These types of gaps often occur when a security is trading in a range
and will often be small in terms of the gap's price movement. They can be a result of
commonly occurring events, such as low-volume trading days or after an
announcement of a stock split.

These gaps often fill quickly, moving back to the pre-gap price range.

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BreakawayGap
A breakaway gap occurs at the beginning of a market move - usually after the security
has traded in a consolidation pattern, which happens when the price is non-trending
within a bounded range. It is referred to as a breakaway gap as the gap moves the
security out of a non-trending pattern into a trending pattern.

A strong breakaway gap out of a period of consolidation gives an indication of a large

increase in sentiment in the direction of the gap , leading to an extended move.

The strength of this gap can be confirmed by high volume which indicates that
security will continue in the direction of the gap, also reducing the chances of it being
filled.
The gap will often provide support or resistance for the resulting move. For an
upward breakaway gap, the lowest point of the second candlestick provides support.
A downward breakaway gap provides resistance for a move back up at the highest
price in the second candlestick. The breakaway gap is a good sign that the new trend
has started.

Runaway Gap (Measuring Gap)

A runaway gap is found around the middle of a trend, usually after the price has
already made a strong move. It is a healthy sign that the current trend will continue as
it indicates continued, and even increasing, interest in the security
After a security has made a strong move, many of the traders that have been on the
sideline waiting for a better entry or exit point decide that it may not be coming and if
they wait any longer they will miss the trade. It is this increased buying or selling that
creates the runaway gap and continuation of the trend.

Volume in a runaway gap is not as important as it is for a breakaway gap but

generally should be marked with average volume. If the volume is too extreme, it
could signal that the runaway gap is actually an exhaustion gap (see next paragraph),
which signals the end of a trend. The runaway gap forms support or resistance in the
exact same manner as the breakaway gap. Likewise, the measuring gap does not often
fill.

Exhaustion Gap
This is the last gap that forms at the end of a trend and is a negative sign that the trend
is about to reverse. This usually occurs at the last thrusts of a trend (typically marked
with panic or hype).

The exhaustion gap usually coincides with an irrational market philosophy, such as
the security being touted as "a can't-miss opportunity" or conversely as something to
"avoid at all costs".
the gap should be marked with a large amount of volume. The strength of this signal
is also increased when it occurs after the security has already made a substantial
move.
Because the exhaustion gap signals a trend reversal, the gap is expected to fill. After
the exhaustion gap, the price will often move sideways before eventually moving
against the prior trend.

Island Reversal

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One of the most well-known gap patterns is the island reversal, which is formed by a
gap followed by flat trading and then confirmed by another gap in the opposite
direction. This pattern is a strong signal of a top or bottom in a trend, indicating a
coming shift in the trend. see an example of an island-bottom reversal that occurs at
the end of a downtrend. It's formed when an exhaustion gap appears in a downtrend
followed by a period of flat trading. The pattern is confirmed when an upward
breakaway gap forms in the price pattern.

Head and Shoulders

Head and Shoulders Components
Left Shoulder: Bulls push prices upwards making new highs; however these new
highs are short lived and prices retreat.

Head: Prices don't retreat for long because bulls make another run, this time
succeeding and surpassing the previous high; a bullish sign. Prices retreat again, only
to find support yet again.

Right Shoulder: The bulls push higher again, but this time fail to make a higher high.
This is very bearish, because bears did not allow the bulls to make a new higher or
even an equal high. The bears push prices back to support (Confirmation line or

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Neckline); this is a pivotal moment - Will bulls make another push higher or have the
bears succeeded in stopping the move higher.

Head and Shoulders Sell Signal

If prices break the confirmation support line, it is clear that the bears are in charge;
thus, when price closes below the confirmation line(Neckline), a strong sell signal
is given.

Note that a downward sloping confirmation line(Neckline) is generally seen as a more

powerful Head & Shoulders pattern, mainly because a downward sloping
confirmation line means that prices are making lower lows.

The opposite of the Head & Shoulders pattern is the Reverse Head & Shoulders
pattern which is another strong pattern, this time a bottoming pattern.ic

Double Top
The Double Top technical analysis charting pattern is a common and highly effective
price reversal pattern.

First High: Bulls push prices upwards making new highs; however, these new highs
are short lived and prices retreat.
Second High: Prices don't retreat for long because bulls make another run, making a
similar high. Nevertheless, this is bearish, because bulls were unable to push prices
higher; bears held their ground at the previous high level. The bears push prices back
to support (Confirmation line); this is a pivotal moment - either bulls will make
another push higher or bears will take control and push prices even lower, more than
likely taking over for good.
Double Top Sell Signal
Sell when price closes below the confirmation line.

Double Bottom
To create a double bottom pattern, price begins in a downtrend, stops, and then
reverses trend. However, the reversal to the upside is short-term. Price breaks again to
the downside only to stop again and reverse direction upwards. With the second
bottom of the double bottom pattern, it is usually more bullish if the second low is
higher than the first low.

Double Bottom Buy Signal

The signal to buy is given when the confirmation line is penetrated to the upside.
The confirmation line is drawn across the top of the double bottom pattern.

Note that traders expect a significant increase in volume to accompany the

confirmation line break; if there is very little volume when price pierces the
confirmation line, then the move downward/upward is suspect. Small volume usually
means weak support of price movement .

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Often, after price penetrates the confirmation line, price will retrace for a short time,
sometimes back to the confirmation line. This retracement offers a second chance to
get into the market long.

Similar to Double Top and Double Bottom Patterns, Triple Top & Triple Bottom
patterns are also seen on charts.

Flag
The Flag pattern usually occurs after a significant up or down market move. After a
strong move, prices usually need to rest. This resting period usually occurs in the
shape of a rectangle, thus the word "flag". The Flag is considered a continuation
pattern because after resting, prices will usually continue in the direction they did
before.

Flag Buy Signal

When price has moved higher and prices have consolidated, creating a channel of
support and resistance, a buy signal is given when prices penetrate and close above
the upward resistance line.

Flag Sell Signal

Assuming prices previously moved downward, then after a period of price
consolidation, a sell signal is given when price penetrates and closes below the
support line.

The pennant forms what looks like a symmetrical triangle, where the support and
resistance trendlines converge towards each other. The pennant pattern does not need
to follow the same rules found in triangles, where they should test each support or
resistance line several times. Also, the direction of the pennant is not as important as
it is in the flag; however, the pennant is generally flat.

A Rounding bottom, also referred to as a saucer bottom, is a long-

term reversal pattern that signals a shift from a downtrend to an uptrend. This pattern
is traditionally thought to last anywhere from several months to several years. Due to
the long-term look of these patterns and their components, the signal and construct of
these patterns are more difficult to identify than other reversal patterns.

A rounding-bottom pattern looks similar to a cup and handle, but without the handle.
The basic formation of a rounding bottom comes from a downward price movement
to a low, followed by a rise from the low back to the start of the downward price
movement - forming what looks like a rounded bottom.

Triangles

The basic construct of this chart pattern is the convergence of two trendlines - flat,
ascending or descending - with the price of the security moving between the two

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trendlines.

There are three types of triangles, which vary in construct and significance:
the symmetrical triangle, the descending triangle and the ascending triangle.
While the either side breakouts can be expected in case of Symmetrical Triangles,
upward breakout is expected in ascending triangles and downside breakouts expected
in descending triangles.
However one should trade only after the breakout occurs, and not because of
expectations before actual breakout.

Wedges

The wedge pattern differs in that it is generally a longer-term pattern, usually lasting
three to six months. It also has converging trendlines that slant in an either upward or
downward direction, which differs from the more uniform trendlines of triangles.
There are two main types of wedges – falling and rising – which differ on the overall
slant of the pattern.
A falling wedge slopes downward, while a rising wedge slants upward. Trades can be
taken LONG (in case of falling wedge) or SHORT (in case of rising wedge ) after the
breakout occurs.

Simple Moving Average

The Simple Moving Average is arguably the most popular technical analysis tool used
by traders. The Simple Moving Average (SMA) is used mainly to identify trend
direction, but is commonly used to generate buy and sell signals. The SMA is an
average, or in statistical speak - the mean. An example of a Simple Moving Average :

The prices for the last 5 days were 25, 28, 26, 24, 25.
The average would be (25+28+26+26+27)/5 = 25.6.
Therefore, the SMA line below the last days price of 27 would be 25.6

Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) weighs current prices more heavily than
past prices. This gives the Exponential Moving Average the advantage of
being quicker to respond to price fluctuations than a Simple Moving
Average; however, that can also be viewed as a disadvantage because the EMA is
more prone to whipsaws (i.e. false signals). The main thing to notice is how much
quicker the EMA responds to price reversals; whereas the SMA lags during periods of
reversal. Since Exponential Moving Averages weigh current prices more heavily than
past prices, the EMA is viewed by many traders as quite superior to the Simple
Moving Average; however, every trader should weigh the pros and the cons of the
EMA and decide in which manner they will be using moving averages.

Weighted Moving Average(WMA)

The Weighted Moving Average places more importance on recent price moves;
therefore, the Weighted Moving Averagereacts more quickly to price changes than

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the regular Simple Moving Average (see: Simple Moving Average). A basic example
(3-period) of how the Weighted Moving Average is calculated is presented below:

Prices for the past 3 days have been Rs.5, Rs 4, and Rs 8.

Since there are 3 periods, the most recent day (Rs 8) gets a weight of 3, the second
recent day (Rs 4) receives a weight of 2, and the last day of the 3-periods (Rs 5)
receives a weight of just one.
The calculation is as follows: [(3 x Rs 8) + (2 x Rs 4) + (1 x Rs 5)] / 6 = Rs 6.17
The Weighted Moving Average value of 6.17 compares to the Simple Moving
Average calculation of 5.67. Note how the large price increase of 8 that occured on
the most recent day was better reflected in the Weighted Moving Average calculation.

Triangular Moving Average

The Triangular Moving Average is a Simple Moving Average that has been
averaged again (i.e. averaging the average); this creates an extra smooth Moving
Average line.

Generally, simple moving averages are smooth, but the re-averaging makes the
Triangular Moving Average even smoother and more wavelike.

Description: The triangular moving average (TMA) is a weighted average of the last
n prices (P), whose result is equivalent to a double smoothed simple moving average
(i.e. calculated twice).
Calculation:
SMA = (P1 + P2 + P3 + P4 + ... + Pn) / n

TMA = (SMA1 + SMA2 + SMA3 + SMA4 + ... SMAn) / n

Moving Average Acting as Support - Buy Signal

When price is in an uptrend and subsequently, the moving average is in an uptrend,
and the moving average has been tested by price and price has bounced off the
moving average a few times (i.e. the moving average is serving as a support line),
then buy on the next pullbacks back to the Simple Moving Average.

Moving Average Acting as Resistance Sell Signal

At times when price is in a downtrend and the moving average is in a downtrend as
well, and price tests the SMA above and is rejected a few consecutive times (i.e.
the moving average is serving as a resistance line), then buy on the next rally up to
the Simple Moving Average.

Moving Average Crossovers

Moving average crossovers are a common way traders use Moving Averages. A
crossover occurs when a faster Moving Average (i.e. a shorter period Moving
Average) crosses either above a slower Moving Average (i.e. a longer period Moving
Average) which is considered a bullish crossoveror below which is considered
a bearish crossover. the long-term 200-day Simple Moving Average is in an
uptrend; this is a signal that the market is quite strong. Generally, a buy signal is
established when the shorter-term 50-day SMA crosses above the 200-day SMA and

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contrastly, a sell signal is indicated when the 50-day SMA crosses below the 200-day
SMA. the 50-day, 200-day Simple Moving Average crossover is a very long-term
strategy.

For those traders that want more confirmation when they use Moving Average
crossovers, the 3 Moving Average crossover technique could be used, as follows:

The first crossover of the quickest SMA (in the example , the 20-day EMA) across the
next quickest EMA (50-day EMA) acts as a warning that prices are reversing trend;
however, usually a buy or sell order is not placed yet.
The second crossover of the quickest EMA (20-day) and the slowest SMA (100-day)
finally triggers the buy or sell signal.
There are numerous variants and methodologies for using the Moving Average
crossover method.
A money management technique of buying a half size when the quick MA crosses
over the next quickest MA and then the other half when the quick MA crosses over
the slower MA. Instead of halves, buy or sell one-third of a position when the quick
MA crosses over the next quickest MA, another third when the quick MA crosses
over the slow SMA, and the last third when the second quickest MA crosses over the
slow MA.

MACD
Developed by Gerald Appeal in the late seventies, the Moving Average Convergence-
Divergence (MACD) indicator is one of the simplest and most effective momentum
indicators available. The MACD turns two trend-following indicators, moving
averages, into a momentum oscillator by subtracting the longer moving average from
the shorter moving average. As a result, the MACD offers the best of both worlds:
trend following and momentum. The MACD fluctuates above and below the zero line
as the moving averages converge, cross and diverge. Traders can look for signal line
crossovers, centerline crossovers and divergences to generate signals. Because the
MACD is unbounded, it is not particularly useful for identifying overbought and
oversold levels.

There are three main components of the MACD -

MACD: The 12-period exponential moving average(EMA) minus the 26-period

EMA.

MACD Signal Line: A 9-period EMA of the MACD.

MACD Histogram: The MACD minus the MACD Signal Line.

The MACD indicator is an effective and versatile tool. There are three main ways to
interpret the MACD technical analysis indicator.

MACD Moving Average Crossovers

The primary method of interpreting the MACD is with moving average crossovers.
When the shorter-term 12-period exponential moving average (EMA) crosses over the
longer-term 26-period EMA a buy signal is generated.

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Remember that the MACD line (the blue line) is created from the 12-period and 26-
period EMA. Consequently:
When the shorter-term 12-period EMA crosses above the longer-term 26-period
EMA, the MACD line crosses above the Zero line, A buy signal is generated
When the 12-period EMA crosses below the 26-period EMA, the MACD line crosses
below the Zero line, A sell signal is generated.

Most Common MACD Buy and Sell Signals

A buy signal is generated when the MACD (blue line) crosses above the MACD
Signal Line (red line).Similarly, when the MACD crosses below the MACD Signal
Line a sell signal is generated.

MACD Histogram
The MACD Histogram is simply the difference between the MACD line (blue line)
and the MACD signal line (red line).

Convergence: The MACD histogram is shrinking in height. This occurs because

there is a change in direction or a slowdown in the stock. When the MACD histogram
is below the zero line and begins to converge towards the zero line. It is BUY signal.

Divergence: The MACD histogram is increasing in height (either in the positive or

negative direction). This occurs because the MACD is accelerating faster in the
direction of the prevailing market trend. When the MACD histogram is above the zero
line and begins to converge towards the zero line. It is SELL signal.

When a stock, future, or currency pair is moving strongly in a direction, the MACD
histogram will increase in height. When the MACD histogram does not increase in
height or begins to shrink, the market is slowing down and is a warning of a possible
reversal.

Bollinger Bands
Created by John Bollinger ; Bollinger Bands is a versatile tool combining moving
averages and standard deviations and is one of the most popular technical analysis
tools available for traders. There are three components to the Bollinger Band
indicator:

Moving Average: By default, a 20-period simple moving average is used.

Upper Band: The upper band is usually 2 standard deviations (calculated from 20-
periods of closing data) above the moving average.

Lower Band: The lower band is usually 2 standard deviations below the moving
average.

Playing the Bollinger Bands

Playing the bands is based on the premise that the vast majority of all closing prices
should be between the Bollinger Bands. That stated, then a stock's price going outside

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the Bollinger Bands, which occurs very rarely, should not last and should "revert back
to the mean", which generally means the 20-period simple moving average.

a trader buys or buys to cover when the price has fallen below the lower Bollinger
Band.

The sell is initiated when the stock, future, or currency price pierces outside the upper
Bollinger Band.

Bollinger Band Breakouts

Basically the opposite of "Playing the Bands" and betting on reversion to the mean is
playing Bollinger Band breakouts. Breakouts occur after a period of consolidation,
when price closes outside of the Bollinger Bands. Other indicators such as support
and resistance lines can prove beneficial when deciding whether or not to buy or sell
in the direction of the breakout.

STOCHASTICS
Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a
momentum indicator that shows the location of the close relative to the high-low
range over a set number of periods. According to Lane, the Stochastic Oscillator
"doesn't follow price, it doesn't follow volume or anything like that. It follows the
speed or the momentum of price. As a rule, the momentum changes direction before
price." As such, bullish and bearish divergences in the Stochastic Oscillator can be
used to foreshadow reversals. This was the first, and most important, signal that Lane
identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate
a future reversal. Because the Stochastic Oscillator is range bound, is also useful for
identifying overbought and oversold levels

Stochastic Fast
Stochastic Fast plots the location of the current price in relation to the range of a
certain number of prior bars (dependent upon user-input, usually 14-periods). In
general, stochastics are used to measure overbought and oversold conditions.
Above 80 is generally considered overbought and below 20 is considered oversold.
The inputs to Stochastic Fast are as follows:
Fast %K: [(Close - Low) / (High - Low)] x 100
Fast %D: Simple moving average of Fast K (usually 3-period moving average)

Stochastic Slow
Stochastic Slow is similar in calculation and interpretation to Stochastic Fast. The
difference is listed below:
Slow %K: Equal to Fast %D (i.e. 3-period moving average of Fast %K)
Slow %D: A moving average (again, usually 3-period) of Slow %K
The Stochastic Slow is generally viewed as superior due to the smoothing effects of
the moving averages which equates to less false buy and sell signals.
When the Stochastic is below the 20 oversold line and the %K line crosses over the
%D line, buy. When the Stochastic is above the 80 overbought line and the %K line
crosses below the %D line, sell.

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 Stochastic Price Divergences
Stochastics can be used to confirm price trend. the Stochastic indicator may spend
most of its time in the overbought area. When Stochastics get stuck in the overbought
area, lt is a sign of a strong bullish run. Signals to sellshort would be ignored.

Stock make a higher high; however, the Stochastic Slow indicator failed to make a
higher high, instead it made a lower high. This divergence coupled with a trendline
break in the price of gold would be a strong warning to futures traders that the recent
rally had probably ended and any long futures positions should be exited or at least
scaled back.
Stock making a lower low. On the other hand, the Stochastic Slow indicator was
signaling a higher low. This bullish divergence would have warned traders to exit
their shortsells, the price of stock had a strong potential of bottoming.Remember
Stochastic oscillator signal give maximum profitable signals in rangebound
market.
Relative Strength Index (RSI)
Developed by J. Welles Wilder, the Relative Strength Index (RSI) is a momentum
oscillator that measures the speed and change of price movements. RSI oscillates
between zero and 100. Traditionally, and according to Wilder, RSI is considered
overbought when above 70 and oversold when below 30. Signals can also be
generated by looking for divergences, failure swings and centerline crossovers. RSI
can also be used to identify the general trend The RSI is a versatile tool, it can be used
to:
RSI Divergences
Relative Strength Index Confirmations & Divergences
A powerful method for using the Relative Strength Index is to confirm price moves
and forewarn of potential price reversals through RSI Divergences.

An alternative way that the Relative Strength Index (RSI) gives buy and sell signals is
given below:
Buy when price and the Relative Strength Index are both rising and the RSI crosses
above the 50 Line.
Sell when the price and the RSI are both falling and the RSI crosses below the 50
Line.
A bullish divergence is registered between Low #3 and Low #4. The stock made
lower lows, but the RSI failed to confirm this price move, only making equal lows.
An astute trader would see this RSI divergence and begin taking profits from their
shortsells. alternatively new buy can also be initiated.
A bearish divergence occured when the stock made a higher high and the RSI made a
lower high. This bearish divergence warned that prices could be reversing trend
shortly. A trader should consider reducing their long position, or even completely
selling out of their long position. A short sell can also be initiated

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Average Directional Index (ADX)
The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus
Directional Indicator (+DI) represent a group of directional movement indicators that
form a trading system developed by Welles Wilder. Wilder designed ADX with
commodities and daily prices in mind, but these indicators can also be applied to
stocks. The Average Directional Index (ADX) measures trend strength without regard
to trend direction. The other two indicators, Plus Directional Indicator (+DI) and
Minus Directional Indicator (-DI), complement ADX by defining trend direction.
Used together, chartists can determine both the direction and strength of the trend.
The Average Directional Index (ADX) is used to measure the strength or weakness of
a trend, not the actual direction. Directional movement is defined by +DI and -DI. In
general, the bulls have the edge when +DI is greater than - DI, while the bears have
the edge when - DI is greater. Crosses of these directional indicators can be combined
with ADX for a complete trading system.
Directional movement is positive (plus) when the current high minus the prior high is
greater than the prior low minus the current low. This so-called Plus Directional
Movement (+DM) then equals the current high minus the prior high, provided it is
positive. A negative value would simply be entered as zero.

Directional movement is negative (minus) when the prior low minus the current low
is greater than the current high minus the prior high. This so-called Minus Directional
Movement (-DM) equals the prior low minus the current low, provided it is positive.
A negative value would simply be entered as zero.

You can also only focus on +DI buy signals when the bigger trend is up and - DI sell
signals when the bigger trend is down.

Accumulation Distribution
Accumulation Distribution uses volume to confirm price trends or warn of weak
movements that could result in a price reversal.
Accumulation: Volume is considered to be accumulated when the day's close is
higher than the previous day's closing price. Thus the term "accumulation day"
Distribution: Volume is distributed when the day's close is lower than the previous
day's closing price. Many traders use the term "distribution day"
Therefore, when a day is an accumulation day, the day's volume is added to the
previous day's Accumulation Distribution Line. Similarly, when a day is a distribution
day, the day's volume is subtracted from the previous day's Accumulation Distribution
Line.

The main use of the Accumulation Distribution Line is to detect divergences

between the price movement and volume movement.
Volume Interpretation
The basic interpretation of volume goes as follows:

Increasing and decreasing prices are confirmed by increasing volume.

Increasing and decreasing prices are not confirmed and warn of future trouble when
volume is decreasing.

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 Money Flow Index
The Money Flow Index (MFI) uses price and volume and the concept of accumulation
distribution to create an overbought and oversold indicator that is helpful in
confirming trends in prices and warning of potential reversals in prices. The inputs to
the Money Flow indicator are given below:

Typical Price: (High + Low + Close) / 3

Money Flow: Typical Price x Volume
Positive Money Flow: The Money Flow on days where the Typical Price is greater
than the previous day's Typical Price.
Negative Money Flow: The Money Flow on days where the Typical Price is less than
the previous day's Typical Price.
Money Ratio: Positive Money Flow / Negative Money Flow
Money Flow Index: 100 - [100 / (1 + Money Ratio)]
Interpreting the Money Flow Index
Below 20 is considered oversold; look for buying opportunities.
Above 80 is in overbought territory; look for sell signals

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NDS.

Fig.22

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 3.2 Findings

1. Do you use Analysts recommendations when you buy stocks ?

Yes
40% No

60%

Ans.:- 60% people use Analysts recommendations while buying the stock and 40%
don’t .

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 2. Do you use Analysts recommendations when you sell stocks?

30%

Yes No

70%

Ans.:-70% people among the group of 30 persons use Analysts recommendations

while selling the stock and rest 30% don’t.

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 3. Do you use financial statements when you buy stocks?

17%

Yes No

83%

Ans.:- 83% people watch financial statements of the companies of which they are
interested to invest and 17% not.

Page | 56
 4. Do you use financial statements when you sell stocks?

27%

Yes No

73%

Ans.:- 73% people among 30 people use to see financial statement when they sell
stocks and 27% don’t.

Page | 57
 5. Do you use support and resistance lines when you buy stocks?

30%

Yes No

70%

Ans.:- 70% of the asked people use support and resistance lines when they buy shares
and rest 30% don’t.

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 6. Do you use support and resistance lines when you sell stocks?

50% 50% Yes No

Ans.:- Half of the asked people i.e. 50% use support and resistance lines when they
sell stock and rest 50% sell not.

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 7. Do you use moving averages when you buy stocks?

40% Yes
No
60%

Ans.:- As the target area i.e. Badlapur is still growing they are not much aware about
some terms , so less people i.e. only 40% use moving averages while buying a
stock,and rest 60% choose according to their preferences .

Page | 60
 8 . Do you use the stochastic oscillator when you buy stocks?

40%
Yes

60% No

Ans.:- 40% people among 30 persons use stochastic oscillator when they buy stock
and 60% don’t.

Page | 61
 9. Do you use the RSI oscillator when you buy stocks?

Yes
40%
No

60%

Ans.:- 60% asked persons use RSI oscillator when they buy stock and 40% don’t.

Page | 62
 10. Do you use the MACD oscillator when you buy stocks?

Yes
40%
No

60%

Ans.:- 40% people among 30 persons use MACD oscillator when they buy stock and
60% don’t.

Page | 63
Chapter 4
4.1 SWOT Analysis

Strengths

 Latest Technology
 Lower Delivered Cost
 Established Product
 Committed Manpower
 Advantageous Location
 Strong finance
 Well-Known Brand Names

Weaknesses

 Loose controls
 Untrained Labour Forces
 Strained Cash Flow
 Poor Product Quality
 Family Fund
 Poor Public Image

Opportunities

 Growing Domestic Demand

 Expanding Export Market
 Cheaper Labour
 Booming Capital market
 Low Interest Rates

Threats

 Price War
 Intensive Competition
 Undependable Component
 Suppliers
 Infrastructure Bottlenecks
 Power Cuts

Page | 64
 4.2 CONCLUSION

This discussion on Technical Analysis is by no means comprehensive and in depth. It

is hoped that this article has opened up the field of Technical Analysis to the reader
and have ignited the interest of the reader in Technical Analysis so much so that the
reader would be spurred on by the new found interest to take further actions to learn
and master Technical Analysis for their trading success.

Technical Analysis is an art form. What one does is more of a matter of personal
preference and style. It is critical to use the tools that you are most comfortable with
and that of which will match well your trading philosophy. Never forget Technical
Analysis is just a forecasting tool. As with any other forecasts, it should be
continually monitored, assessed and updated when new conditions appear. Never
depend solely on a single tool to provide you with the trading signals as some will
work better than others in different situations. Back testing and paper trading might be
a good start to stress test any new trading systems before you actually take the plunge.
And never forget a sound money management is just as critical if not more important
than the Technical Analysis itself in any successful trading endeavor.

Page | 65
 A-1 Questionnaire

1. Do you use Analysts recommendations when you buy stocks ?

Yes \\ No

2. Do you use Analysts recommendations when you sell stocks?

Yes No

3. Do you use financial statements when you buy stocks?

Yes No

4. Do you use financial statements when you sell stocks?

Yes No

5. Do you use support and resistance lines when you buy stocks?
Yes No

6. Do you use support and resistance lines when you sell stocks?
Yes No

7. Do you use moving averages when you buy stocks?

Yes No

8 . Do you use the stochastic oscillator when you buy stocks?

Yes No

9. Do you use the RSI oscillator when you buy stocks?

Yes No

10. Do you use the MACD oscillator when you buy stocks?
Yes No

Page | 66
 WEBLIOGRAPHY

www.moneycontrol.com
www.googlefinance.com
www.yahoofinance.com
www.technicalanalysis.com
www.nseindia.com
www.bseindia.com
www.slideshare.net
www.stockcharts.com

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