Nurshid Final Sip Project

ON INVESTOR BEHAVIOUR WITH RESPECT TO COMMODITY MARKET & FUNDAMENTAL AND TECHNICAL ANALYSIS OF COMMODITY SECTOR NIRMAL BANG
COMMODITY LIMITED (Barakhamba road,DELHI) A PROJECT SUBMITTED IN PARTIAL FULFILLMENT FOR AWARD OF DEGREE OF POST GRADUATE DIPLOMA IN MANAGEMENT Submitted By ANAND KUMAR PGDM (2010-12) ROLL NO. G21
MISS. Neeru Kumari (Industry Mentor)
1 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
DECLARATION I Anand Kumar hereby declare that I have completed this Project Report entitled with Investor behavior with respect to COMMODITY market & Fundamental and Technical analysis of COMMODITY sector in Nirmal Bang Commodity Ltd submitted in the partial fulfillment of the requirement of Post Graduate Diploma of Management (PGDM) to Institute of Productivity and Management, Ghaziabad is based on primary & secondary data found by me in various departments, books, magazines and websites & Collected by me in under guidance of MISS. Neeru Kumari. I further declare that all the facts and figures furnished in this project report are the outcome of my own intensive research and findings. Submitted byAnand Kumar Date: Acknowledgement Study of business management is all about gaining knowledge from the practical life examples. After completion of my summer internship, I have prepared project on the topic Investor behavior with respect to COMMODITY market & Fundamental and Technical analysis on COMMODITY Sector.
I am thankful to my project guide MISS. NEERU KUMARI (Regional Head, Nirmal Bang COMMODITY Broking Ltd, DELHI) who provided me guidance and deep insights throughout the preparation of my project. It helped us a great deal in brushing up my knowledge about the COMMODITY sector.
I also express my sincere thanks to our guide MISS. Neeru Kumari & other staff member of Nirmal Bang and all professors of Institute of Productivity of Management, Ghaziabad for helping me in project preparation. My special thanks to Mr.Vikas Verma (Director,IPM Ghaziabad) for constantly guiding, motivating and encouraging me. I also extend my sincere thanks to my project Guide and Finance Faculty MRS.ATIKA SINHA for giving me her valuable inputs for the project.
Finally, not to miss anyone, I thank all the people who have directly or indirectly helped me a lot throughout my project preparation.
TABLE OF CONTENTS Sr. No. Particulars Pg. No.
1 2 3 4 5 6 7 8 9
Executive summary Nirmal Bang introduction & SWOT analysis Project detail & my role in Project Investor behaviour towards COMMODITY market Fundamental & Technical analysis- Brief detail COMMODITY industry Introduction, Overview, Products, Competitors, etc. SWOT analysis of COMMODITY industry SPOT Analysis Porters Model
5 6-10 11-12 13-14 15-84 85-96 97 98102 103105 106108 109113 114119 120129 158166 167170 171 172
10
Issue Priority Matrix
11 12 13 18 19 20 21
TOWS Matrix Societal Level Strategy of Major Players Fate analysis Finding and Analysis Research Methodology Conclusion Bibliography
Executive Summary Indias economy is highly developing. The development is taken place due to the growth in the financial system. This financial system provides the background to various investors regarding varied options to invest. Thus, development of the economy depends on how these investors invest for the well being in long run. I plotted my whole project into two parts: 1) Investor behavior with respect to COMMODITY market. 2) Fundamental and Technical analysis of COMMODITY sector. In the first part, I have tried to explain the perception of investor towards the COMMODITY market. Why they dont want to invest in share market? In the second part, I have tried to analyze the Indian COMMODITY industry. The Indian COMMODITY sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. COMMODITY market is expected to rise to 33.4 billion US$ till 2015. This report starts with a brief introduction of COMMODITY market along with Industry Overview. It further state that why COMMODITY sector is Analyzed and why India. In this report two COMMODITY Company HUL & Dabur India is analyzed there history their shareholding pattern along with their product is being discussed. The company Fundamental & Technical is shown in the report. An analysts evaluates the COMMODITYs based on different parameter like fundamentals of the company i.e earnings of the company, P/E dividend yield etc. And technical based on Chart of the company share price the chart i.e Moving Average Crossover Chart, MACD chart through which we come to know the future price whether it is going to come down or go up. The report also include the distinguish feature of COMMODITY as compared to other sector and a well defined conclusion. As consumer behavior and lifestyles changed, people no longer buy the way they used to. Simply increasing width' and depth' of coverage no longer seems to produce the magical results it once used to." -' Business Line, April 2003.
Company Profile Introduction Registration Number - NSE: INB 230939139, INF 230939139, BSE: INB 11072759, INF 11072759 Nirmal Bang Securities Private Limited Introduction Nirmal Bang Securities Pvt Ltd (Nirmal Bang) is amongst the top full-service broking firm established in the year 1989. It started as a small localised player and ultimately transformed into a diverse group in a span of 20 years. The company offers comprehensive range of products and services to meet the financial needs of its investors. It is solidly capitalized to meet the demands of retail clients and sufficiently caring to ensure that service is not compromised. History The Nirmal Bang group of companies were founded by Nirmal Bang, Dilip Bang and Kishore Bang. The group always believed in developing retail client network and had wide network of clients all over India. It started up the DP services and also added broking into commodities and insurance advisory services to diversify into allied activities. Thus Nirmal Bang became a corporate member of BSE with three membership rights. The company, besides broking is a depository participant with NSDL and CDSL. Bang Equity Broking Private Limited was formed in the year 1997. This company also became the corporate member of the BSE with three membership rights in the year 1999. The Group was thus the first in the history of the Bombay Stock Exchange to acquire six membership rights of the Exchange. Number of TERMINALS total 790 MAJOR CITIES Mumbai 250 Delhi 10 Kolkata 10 Chennai 5 Ahmedabad 10 OTHER CITIES & States Jaipur 25 Hosiarpur 35 Jodhpur 45 Pune 15 Others 385 MEMBERSHIP Cash Market : NSE, BSE Derivatives : NSE, BSE Commodities : NCDEX, MCX 5 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
REACH & ACCESS No. of Employees : 300 No. of Offices : 180 No. of Sub-brokers : 242 Terminals with Sub-brokers: 490 MANAGEMENT Directors D M Bang, K M Bang Chief Executive Officer S V Chalapathi M Chief Compliance Officer S Kamdar PRODUCTS & SERVICES Trading (Equity/Derivative/Commodity) IPOs Depository Services Arbitrage Margin Financing Sale of Mutual Funds Online Trading 89 Indias Leading Equity Broking Houses 2008 S V Chalapathi M - CEO the Multi Commodity Exchange of India Ltd (MCX), the National Commodity & Derivatives Exchange Ltd (NCDEX). Online Trading The company offers an online trading portal which is developed and maintained by Financial Technologies (India) Ltd. Depository Nirmal Bang is a depository participant of NSDL and CDS(I)L. It offers depository services through an online platform provided by Apex Softcell. IPO Nirmal Bang is also involved in the marketing of IPOs. It even offers information about forthcoming IPOs, open issues, new listing etc. Reach & Access Nirmal Bang has pan India presence with offices and branches spread across all major cities and states. Its wide spread network is further supported by franchisees and more than 200 sub brokers. As on Oct 2007, the company had 180 offices, 242 sub brokers and more than 300 employees. The company has tie ups with some of the leading IT solution providers for constant support and development of its technology set up. It has about 50 VSATs that enhance connectivity across several branches and terminals. Some of its technology partners include Financial Technologies, Apex Softcell and Reliable Software. 6 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
Performance During the first 10 months of CY07, Nirmal Bang reported growth across all its major businesses namely; equity and derivative reporting a growth of 200% and 75% and commodity reported a growth of 50% respectively. Number of terminals went upto 800 in 2007. Similarly number of offices and sub-brokers also underwent a substantial rise. The company added 15,000 domestic customer accounts in 2007 as compared to 3,000 in the previous year. The E-broking business also showed 100% growth and it added about 300 e-broking accounts. Future Plans Nirmal Bang plans to enhance its FII and institutional client base. The company is further planning to enhance its existing service portfolio by introducing investor advisory, portfolio management services and merchant
Mission: Nirmal Bangs mission statement is To Work Together With Integrity and Make Our Customer
Time Valued.
Vision of Nirmal Bang: Companys vision is crystal clear and mind frame very directed. To Create Valuable Relationships And Provide The Best Financial Services Most Professionally. NIRMAL BANG SERVICES: Equity Trading Platform (Online/Offline). Commodities Trading Platform (Online/Offline). Portfolio Management Service. Mutual Fund Advisory and Distribution. Insurance Distribution. Corporate finance and Merchant Banking services. Investment Advisory services. Registrar and Transfer agent services. Loans. Depository services. Currency Trading
ACHIEVEMENT OF NIRMAL BANG: Largest mobilizer of funds as per PRIME DATABASE First ISO - 9002 Certified Registrar in India A Category- I Merchant banker A Category- I Registrar to Public Issues Ranked as "The Most Admired Registrar by MARG Handled the largest- ever Public Issue - IDBI Strategic tie-up with Jardine Fleming India Securities Ltd Handled over 500 Public issues as Registrars Handling the Reliance Account which accounts for nearly 10 million account holders First Depository Participant from Andhra Pradesh SWOT ANALYSIS OF NIRMAL BANG Strengths: Professionally driven Nirmal Bang is a professionally driven organization having people with diverse professional backgrounds. The blend of experience, skill and dedication is shared with all clients. The group has more than 300 well-experienced and efficient staff to cater to the large clientele base. Approach The company focuses on adequate and thorough research on local and world-wide developments, balancing these with the astute discovery of intrinsic values, synergies and growth. Aim It aims at maximizing returns of its investors depending upon the investment motive. Commitment The Company is committed in providing service at par excellence Major Offerings Nirmal Bang currently offers the full stock brokerage services in line with the overall strategy of the group. Some of the major offerings include the following: Trading in Commodities & Derivatives Equity trading is offered to retail clients through multiple channels including online trading in the BSE and the NSE, for cash & derivatives segments. Live quotes, market commentary and major news are also offered through its website. This segment contributes a major portion of its revenue. Trading in Commodities The group company is a member of Indias premier commodity exchanges, namely,
Weaknesses: High Employee Turnover. 8 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
Opportunity: Growth rate of mutual fund industry is 40 to 50% during last year and it expected that this rate will be maintained in future also. Marketing at rural and semi-urban areas. Threats: Increasing number of local players. Past image of Mutual Fund. Major Competitors in market place KOTAK SECURITIES SHARE KHAN LTD. ICICI DIRECT INDIAINFOLINE SECURITY PRIVATE LTD. HDFC SECURITY INDIABULLS SECURITIES LIMITED, ETC. RELIGARE
Project Detail This study suggest that people are reluctant while investing in COMMODITY market due to lack of knowledge This is the project on the analyzing of commodities to invest the money to future for get higher return on investment. This project report is preferred to all investor who want to invest their money in commodities. But they should analysis the securities before to invest because the money has very much value in our life. I chose this project to do because I want to analysis the commodities for investor point of view so they can get good return in future, want to do fundamental and technical analysis of securities through the various theories, try to understand the movement and performance of COMMODITYs and also try to know the factors that affect the movement of COMMODITY prices in the Indian COMMODITY Markets. Through this project we were also able to understand, what are our Companys (Nirmal Bang Commodity Ltd) positive and strong points, on the basis of which we come to know what can be the basis of pitching to a potential client. We also gave suggestions to the company, what improvement can be done to our product.
Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the COMMODITY market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis. Team: This my solo project assign by project guide and whole staff of that branch. I did my analysis with relation manager. Duration: The time was very crucial factor in project report the training was for eight week. So I spent as much as time to learn from the internship and prepare this report to share my golden time with you. PROJECT- MY ROLE I did my project on the basis of topic given by the project guide in this project I contribute my best that I can do. I decide to choose some COMMODITY listed in NCDEX for fundamental and technical analysis. I approach my project guide and whole staff person to get knowledge. I sought out my queries with discussion with all staff members and my project guide. I note all important figures and facts about financial market and update my project report Step by step Achievements: The main achievement during the entire project was the knowledge about the financial market which was unseen for me. Successfully finishing project analysis by me and the compliment by project guide was best achievement for me in that entire project. Key Learning's: A proper interaction with staff members and project guide to gain knowledge is requiring for a good internship. I learn how to analysis the commodities for investing money. Challenges Faced: Busy schedule of project guide. I had to wait whole day to talk to him about project. There was no operational work in branch for me. Reasons for Success: Success story of this project is my dedication, passion, good relationship with all staff members and assistance of my project guide.
In this project I have tried to find out the behavior of investor towards COMMODITY market. When they want to save money to secure their future or want to earn from investment, they only go to bank, post offices, or insurance company. They never want to invest in shares. So, I have tried my best to answer these questions by detailed study of the nature of investor. I filled up questionnaire from the investor and after analyzing the entire questionnaire I reached to the following conclusion. 40 per cent people dont want to invest in share market because it is too risky but high return. 30 per cent people say no fixed return. 25 per cent people think its for big investor. 5 per cent people unaware about the market.
BEHAVIOUR OF INVESTOR TOWARDS COMMODITY MARKET

5%
25%
40%
RISKY NO FIXED RETURN MARKET FOR BIG INVESTOR UNAWARE ABOUT THE MARKET
30%
INTRODUCTION The methods used to analyze securities and make investment decisions fall into two very broad categories 1. Fundamental analysis 2. Technical analysis.
FUNDAMENTAL ANALYSIS Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a COMMODITY, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. 1. Top-down approach: In this approach, an analyst investigates both international and national economic indicators, such as GDP growth rates, energy prices, inflation and interest rates.
The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition in a sector in order to identify the best business in the sector. 2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses, irrespective of their industry/region.
OBJECTIVE OF FUNDAMENTAL ANALYSIS To conduct a company commodity valuation and predict its probable price evolution. To make a projection on its business performance. To calculate its credit risk. Fundamental analysis is a three step examination:1. Economic analysis 2. Industrial analysis 3. Company analysis 1. POLITICO-ECONOMIC ANALYSIS: No industry or company can exist in isolation. It may have splendid managers and a tremendous product. However, its sales and its costs are affected by factors, some of which are beyond its control the world economy, price inflation, taxes and a host of others. It is important, therefore, to have an appreciation of the politico-economic factors that affect an industry and a company. The political equation A stable political environment is necessary for steady, balanced growth. If a country is ruled by a stable government which takes decisions for the long-term development of the country, industry and companies will prosper.
Foreign Exchange Reserves A country needs foreign exchange reserves to meet its commitments, pay for its imports and service foreign debts. Foreign Exchange Risk This is a real risk and one must be cognizant of the effect of a revaluation or devaluation of the currency either in the home country or in the country the company deals in. Restrictive Practices 13 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
Restrictive practices or cartels imposed by countries can affect companies and industries. Foreign Debt and the Balance of Trade Foreign debt, especially if it is very large, can be a tremendous burden on an economy. India pays around $ 5 billion a year in principal repayments and interest payments. Inflation Inflation has an enormous effect in the economy. Within the country it erodes purchasing power. As a consequence, demand falls. If the rate of inflation in the country from which a company imports is high then the cost of production in that country will automatically go up.
The Threat of Nationalization The threat of nationalization is a real threat in many countries the fear that a company may become nationalized. Interest Rates A low interest rate stimulates investment and industry. Conversely, high interest rates result in higher cost of production and lower consumption. Taxation The level of taxation in a country has a direct effect on the economy. If tax rates are low, people have more disposable income. Government Policy Government policy has a direct impact on the economy. A government that is perceived to be proindustry will attract investment. Analysis of Economy of India YEA R INFLATIO N RATE GD P UNEMPLOYMEN T CR R
PLR 11.0011.50 % 12.5512.50 14
2006 2007
4.20% 5.30%
8.4 9.2
8.90% 7.80%
5% 6%
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2008
6.40%
8.5
7.20%
9%
2009 2010
10.9% 11.75
N.A
N.A
5%
% 13.2514.00 % 11.0012.00 %
Analysis: In 2006, G.D.P was 8.4% and it has increased in 2007. Thats why R.B.I has also increased C.R.R by 9% in 2008. C.R.R is lagging indicator which is used after economy has changed. Similarly, when G.D.P has come down to 8.5% in 2008, C.R.R has been reduced to 5% in 2009. Reduction in cash reserve ratio in 2009 shows that it is a lagging indicator as it has been used only after economy has taken change. Similarly prime lending rates are lagging indicators. In the data given above, it is clear that changes in PLR also have been brought only after changes in economic growth. While with the growth of economy unemployment has also been reduced. Such kinds of indicators are called co-incidental indicators. Co-incidental indicators are those which tend to move in the same direction in which economy moves.
2. INDUSTRY ANALYSIS: It refers to an evaluation of the relative strengths and weakness of industries.
OBJECTIVE: To assess the prospects of various industries
This section is divided into various parts: Sensitivity to the Business Cycle Industry Life Cycle Analysis Study of the Structure and Characteristics of an Industry SWOT analysis SPOT analysis Profit Potential of Industries: Porter Model Issue Priority Matrix Tows Matrix Societal Level Strategy of Major Players COMPANY ANALYSIS: 15 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
At the final stage of fundamental analysis, the investor analyzes the company. This analysis has two parts: How has the company performed vis--vis other similar companies and How has the company performed in comparison to earlier years. It is imperative that one completes the politico economic analysis and the industry analysis before a company is analyzed because the company's performance at a period of time is to an extent a reflection of the economy, the political situation and the industry. What does one look at when analyzing a company? The different issues regarding a company that should be examined are:
THE MANAGEMENT: The single most important factor one should consider when investing in a company and one often never considered is its management. In India management can be broadly divided in two types: Family Management Professional Management THE COMPANY: An aspect not necessarily examined during an analysis of fundamentals is the company. A company may have made losses consecutively for two years or more and one may not wish to touch its shares - yet it may be a good company and worth purchasing into. There are several factors one should look at.
1. How a company is perceived by its competitors? One of the key factors to ascertain is how a company is perceived by its competitors. It is held in high regard. Its management may be known for its maturity, vision, competence and aggressiveness. The investor must ascertain the reason and then determine whether the reason will continue into the foreseeable future. 2. Whether the company is the market leader in its products or in its segment Another aspect that should be ascertained is whether the company is the market leader in its products or in its segment. When you invest in market leaders, the risk is less. The Shares of market leaders do not fall as quickly as those of other companies. There is a
magic to their name that would make individuals prefer to buy their products as opposed to others.
3. Company Policies 16 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
The policy a company follows is also important. What are its plans for growth? What is its vision? Every company has a life. If it is allowed to live a normal life it will grow up to a point and then begin to level out and eventually die. It is at the point of leveling out that it must be given new life. This can give it renewed vigor and a new lease of life. 4. Labour Relations Labour relations are extremely important. A company that has motivated, industrious work force has high productivity and practically no disruption of work. On the other hand, a company that has bad industrial relations will lose several hundred man-days as a consequence of strikes and go slows. 5. Where the company is located and where its factories are? One must also consider where the companies Plants and Factories are located.. THE ANNUAL REPORT: The primary and most important source of information about a company is its Annual Report. By law, this is prepared every year and distributed to the shareholders. Annual Reports are usually very well presented. A tremendous amount of data is given about the performance of a company over a period of time. The Annual Report is broken down into the following specific parts: A) The Director's Report, B) The Auditor's Report, C) The Financial Statements, and D) The Schedules and Notes to the Accounts. A. The Directors Report The Directors Report is a report submitted by the directors of a company to its shareholders, advising them of the performance of the company under their stewardship. 1. It enunciates the opinion of the directors on the state of the economy and the political situation vis-vis the company.
2. Explains the performance and the financial results of the company in the period under review. This is an extremely important part. The results and operations of the various separate divisions are usually detailed and investors can determine the reasons for their good or bad performance.
3. The Directors Report details the company's plans for modernization, expansion and diversification. Without these, a company will remain static and eventually decline. 4. Discusses the profit earned in the period under review and the dividend recommended by the directors. This paragraph should normally be read with some skepticism, as the directors will always argue that the performance was satisfactory. If adverse economic conditions are usually at fault. 5. Elaborates on the directors' views of the company's prospects in the future. 6. Discusses plans for new acquisition and investments. An investor must intelligently evaluate the issues raised in a Directors Report. Industry conditions and the management's knowledge of the business must be considered. B. The Auditor's Report The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors. Auditors are required to report whether the financial statements presented do, in fact, present a true and fair view of the state of the company. Investors must remember that the auditors are their representatives and that they are required by law to point out if the financial statements are not true and fair.
C. Financial Statements The published financial statements of a company in an Annual Report consist of its Balance Sheet as at the end of the accounting period detailing the financing condition of the company at that date, and the Profit and Loss Account or Income Statement summarizing the activities of the company for the accounting period. BALANCE SHEET The Balance Sheet details the financial position of a company on a particular date; of the company's assets (that which the company owns), and liabilities (that which the company owes), grouped logically under specific heads. It must however, be noted that the Balance Sheet details the financial position on a particular day and that the position can be materially different on the next day or the day after. PROFIT AND LOSS ACCOUNT The Profit and Loss account summarizes the activities of a company during an accounting period which may be a month, a quarter, six months, a year or longer, and the result achieved by the company. It details the income earned by the company, its cost and the resulting profit or loss. It is, in effect, the performance appraisal not only of the company but also of its management- its competence, foresight and ability to lead. 18 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
RATIOS: Ratios express mathematically the relationship between performance figures and/orAssets and Liabilities in a form that can be easily understood and interpreted.
No single ratio tells the complete story Ratios can be broken down into four broad categories: (A)Profit and Loss Ratios These show the relationship between two items or groups of items in a profit and loss account or income statement. The more common of these ratios are: 1. Sales to cost of goods sold. 2. Selling expenses to sales. 3. Net profit to sales and 4. Gross profit to sales. (B) Balance Sheet Ratios These deal with the relationship in the balance sheet such as: 1. Shareholders equity to borrowed funds. 2. Current assets to current liabilities. 3. Liabilities to net worth. 4. Debt to assets and 5. Liabilities to assets. (C) Balance Sheet and Profit and Loss Account Ratios. These relate an item on the balance sheet to another in the profit and loss account such as: 1. Earnings to shareholder's funds. 2. Net income to assets employed. 3. Sales to COMMODITY. 4. Sales to debtors and 5. Cost of goods sold to creditors.
(D) Financial Statements and Market Ratios These are normally known as market ratios and are arrived at by relative financial figures to market prices: 1. Market value to earnings and 2. Book value to market value. (a) Market value (b) Earnings (c) Profitability 19 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
(d) Liquidity (e) Leverage (f) Debt Service Capacity (g) Asset Management/Efficiency
The major ratios that are considered: (i) Market value (ii) Price- earnings ratio (iii) Market-to-book ratio (iv) Earnings (v) Earning per share (vi) Dividend per share (vii) Dividend payout ratio (viii) Leverage ratios (ix) Return on investments/total assets CASH FLOW: A statement of sources and uses begins with the profit for the year to which are added the increases in liability accounts (sources) and from which are reduced the increases in asset accounts (uses). The net result shows whether there has been an excess or deficit of funds and how this was financed. Investors must examine a company's cash flow as it reveals exactly where the money came from how it was utilized. Investors must be concerned if a company is financing either its inventories or paying dividends from borrowings without real growth as that shows deterioration. Technical analysis Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements. Technical analysis mainly seeks to predict the short term price travels. It is important criteria for selecting the company to invest. It also provides the base for decision-making in investment. The one of the most frequently used yardstick to check & analyze underlying price progress. For that matter a verity of tools was consider. This Technical analysis is helpful to general investor in many ways. It provides important & vital information regarding the current price position of the company. Technical analysis involves the use of various methods for charting, calculating & interpreting graph & chart to assess the performances & status of the price. It is the tool of financial analysis, which not only studies but also reflecting the numerical & graphical relationship between the important financial factors. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating back to the late 19th century. It uses charts and computer programs to study the COMMODITYs trading volume and price movements in the hope of identifying a trend. In fact the decision made on the basis of technical analysis is done only after inferring a trend and judging the future movement of the COMMODITY on the basis of the trend. Technical Analysis assumes that the market is efficient and the price has already taken into consideration the other factors related to the company and the industry. It is because of this assumption that many think technical analysis is a tool, which is effective for short-term investing. 20 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
History of Technical Analysis: Technical Analysis as a tool of investment for the average investor thrived in the late nineteenth century when Charles Dow, then editor of the Wall Street Journal, proposed the Dow theory. He recognized that the movement is caused by the action/reaction of the people dealing in COMMODITYs rather than the news in itself. Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a COMMODITY is undervalued the only thing that matters is a security's past trading data and what information this data can provide about where the Security might move in the future. Basic premises of technical analysis: 1. Market prices are determined by the interaction of supply & demand forces. 2. Supply & demand are influenced by variety of supply & demand affiliated factors both rational & irrational. 3. These include fundamental factors as well as psychological factors. 4. Barring minor deviations COMMODITY prices tend to move in fairly persistent trends. 5. Shifts in demand & supply bring about change in trends. 6. This shift s can be detected with the help of charts of manual & computerized action, because of the persistence of trends & patterns analysis of past market data can be used to predict future prices behaviors. Drawbacks / limitations of technical analysis: 1. Technical analysis does not able to explain the rezones behind the employment or selection of specific tool of Technical analysis. 2. The technical analysis failed to signal an uptrend or downtrend in time. 3. The technical analysis must be a self defeating proposition. As more & more people use, employ it the value of such analysis trends to reduce.
Why we use TECHNICAL ANALYSIS? 1) Technical analysis provides information on the best entry and exit points for a trade. 2) On a chart, the trader can see where momentum is rising, a trend is forming, a price is dipping or other events are developing that show the best entry point and time for the most profitable trade. With the constant movement of various currencies against each other in the Forex market, most traders will focus on using technical indicators to find and place their trades.
IS TECHNICAL ANALYSIS DIFFICULT? 1) Technical analysis is not difficult, but it requires studying different types of charts such as the hourly or daily charts, knowing which technical indicators to use and how to use them. 2) Computers and the Internet have made this process much easier. Most brokers provide basic charts and technical indicators for free or at a very low cost. 3) One way to avoid getting frustrated by all the lines, colors, and graphics is to focus on using only a few indicators that will provide you with the information needed. Try not to clutter your chart with too much information. Fundamental vs. Technical Analysis Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. The future can be found in the past If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a COMMODITY's future earnings that the average investor cannot disprove. Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome. The devout technician might define this process as the fact that history repeats itself while others would suffice to say that we should learn from the past. Usually the following tools & instruments are used to do the technical analysis: Price Fields Technical analysis is based almost entirely on the analysis of price and volume. The fields which define a security's price and volume are explained below. Open - This is the price of the first trade for the period (e.g., the first trade of the day). When analyzing daily data, the Open is especially important as it is the consensus price after all interested parties were able to "sleep on it." High - This is the highest price that the security traded during the period. It is the point at which there were more sellers than buyers (i.e., there are always sellers willing to sell at higher prices, but the High represents the highest price buyers were willing to pay). Low - This is the lowest price that the security traded during the period. It is the point at which there were more buyers than sellers (i.e., there are always buyers willing to buy at lower prices, but the Low represents the lowest price sellers were willing to accept). Close - This is the last price that the security traded during the period. Due to its availability, the Close is the most often used price for analysis. The relationship between the Open (the first price) and the Close (the last price) are considered significant by most technicians. This relationship is emphasized in candlestick charts. 22 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
Volume - This is the number of shares (or contracts) that were traded during the period. The relationship between prices and volume (e.g., increasing prices accompanied with increasing volume) is important. Open Interest - This is the total number of outstanding contracts (i.e., those that have not been exercised, closed, or expired) of a future or option. Open interest is often used as an indicator. Bid - This is the price a market maker is willing to pay for a security (i.e., the price you will receive if you sell). Ask - This is the price a market maker is willing to accept (i.e., the price you will pay to buy the security).
Price Styles Price in a chart can be displayed in four styles: 1. Bar Chart. 2. 3. Line Chart. Candlestick Chart.
4. Point and Figure Charts

1) Bar Charts :
The highs and lows of a foreign currency are plotted in a diagram and the points are joined with vertical lines (bars). A small horizontal tick to the left denotes the opening level while a small horizontal tick to the right represents the closing price of each interval.
2) Line Chart. It gives the detailed information about every aspect. The exchange rates for each time period are plotted in a diagram and the points are joined. Prices on the y-axis, time on the x-axis. The line chart chooses for example the closing price of consecutive time periods, but can also work with daily, official fixings.
The relatively easy handling of line charts is a great advantage. Line charts 24 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
do not show price movements within a time period. This can be a problem because important information for exchange rate analysis can be lost. This problem was remedied with the development of bar charts that represent a more sophisticated form of line chart. 3) Candlestick Chart. A candlestick is black if the closing price is lower than the opening price. A candlestick is white if the closing price is higher than the opening price.
In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation.
Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day barchart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices, they don't involve any calculations. Because candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices. 25 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
The interpretation of candlestick charts is based primarily on patterns. The most popular patterns are explained below. Bullish Patterns 1) Long white (empty) line. This is a bullish line. It occurs when prices open near the low and close significantly higher near the period's high.
2) Hammer. This is a bullish line if it occurs after a significant downtrend. If the line occurs after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real body (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low is significantly lower than the open, high, and lose). The body can be empty or filled-in.
3) Piercing line. This is a bullish pattern and the opposite of a dark cloud cover. The first line is a long black line and the second line is a long white line. The second line opens lower than the first line's low, but it closes more than halfway above the first line's real body.
4) Bullish engulfing lines. This pattern is strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is engulfed by a large bullish (empty) line.
5) Morning star. This is a bullish pattern signifying a potential bottom. The "star" indicates a possible reversal and the bullish (empty) line confirms this. The star can be empty or filled-in.
6) Bullish doji star. A "star" indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the morning star, above) before trading a doji star. The first line can be empty or filled in.
Bearish Patterns 1) Long black (filled-in) line. This is a bearish line. It occurs when prices open near the high and close significantly lower near the period's low.
2) Hanging Man. These lines are bearish if they occur after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low was significantly lower than the open, high, and close). The bodies can be empty or filled-in.
3) Dark cloud cover. This is a bearish pattern. The pattern is more significant if the second line's body is below the center of the previous line's body (as illustrated).
4) Bearish engulfing lines. This pattern is strongly bearish if it occurs after a significant uptrend (i.e., it acts as a reversal pattern). It occurs when a small bullish (empty) line is engulfed by a large bearish (filled-in) line.
5) Evening star. This is a bearish pattern signifying a potential top. The "star" indicates a possible reversal and the bearish (filled-in) line confirms this. The star can be empty or filledin.
5) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.
6) Shooting star. This pattern suggests a minor reversal when it appears after a rally. The star's body must appear near the low price and the line should have a long upper shadow.
Reversal Patterns 1) Long-legged doji. This line often signifies a turning point. It occurs when the open and close are the same, and the range between the high and low is relatively large.
2) Dragon-fly doji. This line also signifies a turning point. It occurs when the open and close are the same, and the low is significantly lower than the open, high, and closing prices.
3) Gravestone doji. This line also signifies a turning point. It occurs when the open, close, and low are the same, and the high is significantly higher than the open, low, and closing prices.
4) Star. Stars indicate reversals. A star is a line with a small real body that occurs after a line with a much larger real body, where the real bodies do not overlap. The shadows may overlap.
5) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.
Neutral Patterns 1) Spinning tops. These are neutral lines. They occur when the distance between the high and low, and the distance between the open and close, are relatively small.
2) Doji. This line implies indecision. The security opened and closed at the same price. These lines can appear in several different patterns. Double doji lines (two adjacent doji lines) imply that a forceful move will follow a breakout from the current indecision.
3) Harami ("pregnant" in English). This pattern indicates a decrease in momentum. It occurs when a line with a small body falls within the area of a larger body. In this example, a bullish (empty) line with a long body is followed by a weak bearish (filledin) line. This implies a decrease in the bullish momentum.
4) Harami cross. This pattern also indicates a decrease in momentum. The pattern is similar to a harami, except the second line is a doji (signifying indecision).
Example
4 ) Point And Figure Charts The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the COMMODITY, which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis.
When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the COMMODITY: the higher the COMMODITY's price the more each box represents. On most charts where the price is between $20 and $100, a box represents $1, or 1 point for the COMMODITY. The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signalling a trend change. TRENDS IN TECHNICAL ANALYSIS The Use of Trends One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed. Take a look at the chart below:
Isnt it hard to see that the trend is up? However, it's not always this easy to see a trend:
There are lots of ups and downs in this chart, but there isn't a clear indication of which direction this security is headed. A More Formal Definition Unfortunately, trends are not always easy to see. In other words, defining a trend goes well beyond the obvious. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather
in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.
It is an example of an uptrend. Point 2 in the chart is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend each successive low must not fall below the previous lowest point or the trend is deemed a reversal. Types of Trend There are three types of trend: 1. Uptrend 2. Downtrend 3. Sideways/Horizontal Trends As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend. When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. If you want to get 38 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
really technical, you might even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. In any case, the market can really only trend in these three ways: up, down or nowhere.
Trend Lengths Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the COMMODITY market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. Take a look a Figure 4 to get a sense of how these three trend lengths might look.
When analyzing trends, it is important that the chart is constructed to bestreflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend. Trend Lines
A trend line is a simple charting technique that adds a line to a chart to represent the trend in the market or a COMMODITY. Drawing a trend line is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals. An upward trend line is drawn at the lows of an upward trend. This line represents the support the COMMODITY has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trend line helps traders to anticipate the point at which a COMMODITY's price will begin moving upwards again. Similarly, a downward trend line is drawn at the highs of the downward trend. This line represents the resistance level that a COMMODITY faces every time the price moves from a low to a high.
Channels A channel, or channel lines, is the addition of two parallel trend lines that act as strong areas of support and resistance. The upper trend line connects a series of highs, while the lower trend line connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.
A descending channel on a COMMODITY chart; the upper trend line has been placed on the highs and the lower trend line is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue.
The Importance of Trend It is important to be able to understand and identify trends so that you can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders IMPORTANCE OF VOLUME:What Is Volume? Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume, the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any
chart. Volume bars illustrate how many shares have traded per period and show trends in the same way
that prices do.
Why Volume Is Important? Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume.Say, for example, that a COMMODITY jumps 5% in one trading day after being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal. Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the COMMODITY is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end. When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume.
Volume and Chart Patterns 42 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume, a process which we'll describe in more detail later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened. Volume Precedes Price Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end. Now that we have a better understanding of some of the important factors of technical analysis, we can move on to charts, which help to identify trading opportunities in prices movements.
SUPPORT AND RESISTANCE Once you understand the concept of a trend, the next major concept is that of support and resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).
Support is the price level through which a COMMODITY or market seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price level that a COMMODITY or market seldom surpasses (illustrated by the Red Arrows).\ These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the COMMODITY (in the case of a support) or sell it (in the case of resistance). When these trend lines are broken, the supply and demand and the psychology behind the COMMODITY's movements is thought to have shifted, in which case new levels of support and resistance likely be established. Round Numbers and Support and Resistance:One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions. Buyers will often purchase large amounts of COMMODITY once the price starts to fall toward a major round number such as $50, which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a COMMODITY as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major psychological points as well.
Role Reversal Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance.
For example, as you can see, the dotted line is shown as a level of resistance that has prevented the price from heading higher on two previous occasions (Points 1 and 2). However, once the resistance is broken, it becomes a level of support (shown by Points 3 and 4) by propping up the price and preventing it from heading lower again. Many traders who begin using technical analysis find this concept hard to believe and don't realize that this phenomenon occurs rather frequently, even with some of the most well-known companies. For example, this phenomenon is evident on the Wal-Mart Stores Inc. (WMT) chart between 2003 and 2006. Notice how the role of the $51 level changes from a strong level of support to a level of resistance.
In almost every case, a COMMODITY will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels.
The Importance Of Support And Resistance Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal.
For example, If prices moved above the resistance levels of an upward trending channel, the trend have accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel. Being aware of these important support and resistance points should affect the way that you trade a COMMODITY. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a COMMODITY that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support.
Summary of charts
MOVING AVERAGES:Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favor. Types of Moving Averages: There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential.
1.
Simple Moving Average (SMA) This is the most common method used to calculate the moving average of prices. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of 47 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10. As you can see in Figure 1, a trader is able to make the average less responsive to changing prices by increasing the number of periods used in the calculation. Increasing the number of time periods in the calculation is one of the best ways to gauge the strength of the long-term trend and the likelihood that it will reverse.
Many individuals argue that the usefulness of this type of average is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence. The critics argue that the most recent data is more important and, therefore, it should also have a higher weighting. This type of criticism has been one of the main factors leading to the invention of other forms of moving averages. 2. Linear Weighted Average This moving average indicator is the least common out of the three and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five-day linear weighted average, today's closing price is multiplied by five; yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers. 48 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
3. Exponential Moving Average (EMA) This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. Having an understanding of the calculation is not generally required for most traders because most charting packages do the calculation for you. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. This responsiveness is one of the key factors of why this is the moving average of choice among many technical traders. A 15-period EMA raises and falls faster than a 15-period SMA. This slight difference doesnt seem like much, but it is an important factor to be aware of since it can affect returns.
Major Uses of Moving Averages Moving averages are used to identify current trends and trend reversals as well as to set up support and resistance levels. Moving averages can be used to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average. When a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend.
Another method of determining momentum is to look at the order of a pair of moving averages. When a short-term average is above a longer-term average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend.
Moving average trend reversals are formed in two main ways: when the price moves through a moving average and when it moves through moving average crossovers. The first common signal is when the price moves through an important moving average. For example, when the price of a security that was in an uptrend falls below a 50-period moving average, it is a sign that the uptrend may be reversing.
The other signal of a trend reversal is when one moving average crosses through another. For example, if the 15-day moving average crosses above the 50-day moving average, it is a positive sign that the price will start to increase.
If the periods used in the calculation are relatively short, for example 15 and 35, this could signal a short-term trend reversal. On the other hand, when two averages with relatively long time frames cross over (50 and 200, for example), this is used to suggest a long-term shift in trend. Another major way moving averages are used is to identify support and resistance levels. It is not uncommon to see a COMMODITY that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200day moving average in a downward direction, it is a signal that the uptrend is reversing.
Moving averages are a powerful tool for analyzing the trend in a security. They provide useful support and resistance points and are very easy to use. The most common time frames that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month And 10 day average of two weeks. Moving averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend. So far we have been focused on price movement, through charts and averages. In the next section, we'll look at some other techniques used to confirm price movement and patterns.
Technical Indicators ACCUMULATION/DISTRIBUTION Overview The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move. Interpretation The Accumulation/Distribution is really a variation of the more popular On Balance Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices. When the Accumulation/Distribution moves up, it shows that the security is being accumulated, as most of the volume is associated with upward price movement. When the indicator moves down, it shows that 53 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
the security is being distributed, as most of the volume is associated with downward price movement. Divergences between the Accumulation/Distribution and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse.
BOLLINGER BANDS Overview Bollinger Bands are similar to moving average envelopes. The difference between Bollinger Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods. Bollinger Bands were created by John Bollinger. Interpretation Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an indicator. These comments refer to bands displayed on prices. As with moving average envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands narrow to contain prices.
Following are characteristics of Bollinger Bands: Sharp price changes tend to occur after the bands tighten, as volatility lessens. When prices move outside the bands, a continuation of the current trend is implied. Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets. COMMODITY CHANNEL INDEX:Overview The Commodity Channel Index ("CCI") measures the variation of a security's price from its statistical mean. High values show that prices are unusually high compared to average prices whereas 54 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
low values indicate that prices are unusually low. Contrary to its name, the CCI can be used effectively on any type of security, not just commodities. Interpretation There are two basic methods of interpreting the CCI: looking for divergences and as an overbought/oversold indicator. A divergence occurs when the security's prices are making new highs while the CCI is failing to surpass its previous highs. This classic divergence is usually followed by a correction in the security's price.
The CCI typically oscillates between 100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).
ENVELOPES (TRADING BANDS) Overview An envelope is comprised of two moving averages. One moving average is shifted upward and the second moving average is shifted downward. Interpretation Envelopes define the upper and lower boundaries of a security's normal trading range. A sell signal is generated when the security reaches the upper band whereas a buy signal is generated at the lower band. The optimum percentage shift depends on the volatility of the security--the more volatile, the larger the percentage. The logic behind envelopes is that overzealous buyers and sellers push the price to the extremes (i.e., the upper and lower bands), at which point the prices often stabilize by moving to more realistic levels. This is similar to the interpretation of Bollinger Bands.
MACD Overview The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. (Appel specifies exponential moving averages as percentages. Thus, he refers to these three moving averages as 7.5%, 15%, and 20% respectively.) Interpretation The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: crossovers, overbought/oversold conditions, and divergences. Crossovers 55 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero.
Overbought/Oversold Conditions The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions exist vary from security to security. Divergences A indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels. MOMENTUM Overview The Momentum indicator measures the amount that a security's price has changed over a given time span. Interpretation The interpretation of the Momentum indicator is identical to the interpretation of the Price ROC. Both indicators display the rate-of-change of a security's price. However, the Price ROC indicator displays the rate-of-change as a percentage whereas the Momentum indicator displays the rate-of-change as a ratio.
ON BALANCE VOLUME Overview On Balance Volume ("OBV") is a momentum indicator that relates volume to price change. On Balance Volume was developed by Joe Granville Interpretation On Balance Volume is a running total of volume. It shows if volume is flowing into or out of a security. When the security closes higher than the previous close, all of the day's volume is considered upvolume. When the security closes lower than the previous close, all of the day's volume is considered down-volume. PRICE OSCILLATOR Overview The Price Oscillator displays the difference between two moving averages of a securitys price. The difference between the moving averages can be expressed in either points or percentages. The Price 56 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
Oscillator is almost identical to the MACD, except that the Price Oscillator can use any two userspecified moving averages. (The MACD always uses 12- and 26-day moving averages, and always expresses the difference in points.) Interpretation Moving average analysis typically generates buy signals when a short-term moving average (or the securitys price) rises above a longer-term moving average. Conversely, sell signals are generated when a shorter-term moving average (or the securitys price) falls below a longer-term moving average. The Price Oscillator illustrates the cyclical and often profitable signals generated by these one- or twomoving-average systems. VOLUME Overview Volume is simply the number of shares (or contracts) traded during a specified time frame (e.g., hour, day, week, month, etc). The analysis of volume is a basic yet very important element of technical analysis. Volume provides clues as to the intensity of a given price move. Interpretation Low volume levels are characteristic of the indecisive expectations that typically occur during consolidation periods (i.e., periods where prices move sideways in a trading range). Low volume also often occurs during the indecisive period during market bottoms. High volume levels are characteristic of market tops when there is a strong consensus that prices will move higher. High volume levels are also very common at the beginning of new trends (i.e., when prices break out of a trading range). Just before market bottoms, volume will often increase due to panic-driven selling. Volume can help determine the health of an existing trend. A healthy up-trend should have higher volume on the upward legs of the trend, and lower volume on the downward (corrective) legs. A healthy downtrend usually has higher volume on the downward legs of the trend and lower volume on the upward (corrective) legs VOLUME OSCILLATOR Overview The Volume Oscillator displays the difference between two moving averages of a security's volume. The difference between the moving averages can be expressed in either points or percentages. Interpretation We can use the difference between two moving averages of volume to determine if the overall volume trend is increasing or decreasing. When the Volume Oscillator rises above zero, it signifies that the shorter-term volume moving average has risen above the longerterm volume moving average, and thus, that the short-term volume trend is higher (i.e., more volume) than the longer-term volume trend. There are many ways to interpret changes in volume trends. One common belief is that rising prices coupled with increased volume, and falling prices coupled with decreased volume, is bullish. Conversely, if volume increases when prices fall, and volume decreases when prices rise, the market is showing signs of underlying weakness. The theory behind this is straight forward. Rising prices coupled with increased volume signifies increased upside participation (more buyers) that should lead to a continued move. Conversely, falling prices coupled with increased volume (more sellers) signifies decreased upside participation. ABOUT THE COMMODITY MARKET 57 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
INTRODUCTION The vast geographical extent of India and her huge population is aptly complemented by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Commodity Market can be subdivided into the following two categories: Wholesale Market Retail Market 5
The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons: The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers. The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt. In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand are owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles both agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to 6
draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is. COMMODITY A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. 7
Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. COMMODITY MARKET Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.
STRUCTURE OF COMMODITY MARKET Ministry of Consumer Affairs FMC (Forwards Market Commission) Commodity Exchange National Exchange Regional Exchange NCDEX MCX NMCE NBOT 20 other regional exchanges Transporters/ support agencies Consumers (Retail/Institutio-nal) Traders (speculators)arbi-trageurs/client) Hedger (Exporters / Millers Industry) Quality Certification Agencies Commodities Ecosystem MCX Producers (Farmers/Co-operatives/Institutional) Clearing Bank Warehouses 9
DIFFERENT TYPES OF COMMODITIES TRADED World-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following: Aluminium, Copper, Lead, Nickel, METAL Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc Gold, Gold HNI, Gold M, i-gold, BULLION Silver, Silver HNI, Silver M Cotton L Staple, Cotton M Staple, FIBER Cotton S Staple, Cotton Yarn, Kapas ENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude Oil Cardamom, Jeera, Pepper, Red Chilli Arecanut, Cashew Kernel, Coffee (Robusta), Rubber Chana, Masur, Yellow Peas HDPE, Polypropylene(PP), PVC Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds Maize Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S30
SPICES PLANTATIONS PULSES PETROCHEMICALS OIL & OIL SEEDS
CEREALS OTHERS
Commodity Futures Trading in India INTRODUCTION Derivatives as a tool for managing risk first originated in the Commodities markets. They were then found useful as a hedging tool in financial markets as well. The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features, which are very peculiar to commodity derivative markets. In the case of financial 62 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really
exist as far as financial underlyings are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed. BENEFITS TO INDUSTRY FROM FUTURES TRADING Hedging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informed lending. Hedged positions of producers and processors would reduce the risk of default faced by banks. * Lending for agricultural sector would go up with greater transparency in pricing and storage. Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households. Provide trading limit finance to Traders in commodities Exchanges. BENEFITS TO EXCHANGE MEMBER Access to a huge potential market much greater than the securities and cash market in commodities. Robust, scalable, state-of-art technology deployment. Member can trade in multiple commodities from a single point, on real time basis. 17
Traders would be trained to be Rural Advisors and Commodity Specialists and through them multiple rural needs would be met, like bank credit, information dissemination, etc. WHY COMMODITY FUTURES? One answer that is heard in the financial sector is "we need commodity futures markets so that we will have volumes, brokerage fees, and something to trade''. We have to look at futures market in a bigger perspective -- what is the role for commodity futures in India's economy? In India agriculture has traditionally been an area with heavy government intervention. Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they have import-export restrictions and a host of other interventions. Many economists think that we could have major benefits from liberalization of the agricultural sector. In this case, the question arises about who will maintain the buffer stock, how will we smoothen the price fluctuations, how will farmers not be vulnerable that tomorrow the price will crash when the crop comes out, how will farmers get signals that in the future there will be a great need for wheat or rice. In all these aspects the futures market has a very big role to play. If we think there will be a shortage of wheat tomorrow, the futures prices will go up today, and it will carry signals back to the farmer making sowing decisions today. In this fashion, a system of futures markets will improve cropping patterns. Next, if I am growing wheat and am worried that by the time the harvest comes out prices will go down, then I can sell my wheat on the futures 18
market. I can sell my wheat at a price, which is fixed today, which eliminates my risk from price fluctuations. These days, agriculture requires investments -- farmers spend money on fertilizers, high yielding varieties, etc. They are worried when making these investments that by the time the crop comes out prices might have dropped, resulting in losses. Thus a farmer would like to lock in his future price and not be exposed to fluctuations in prices. The third is the role about storage. Today we have the Food Corporation of India, which is doing a huge job of storage, and it is a system, which -- in my opinion -- does not work. Futures market will produce their own kind of smoothing between the present and the future. If the future price is high and the present price is low, an arbitrager will buy today and sell in the future. The converse is also true, thus if the future price is low the arbitrageur will buy in the futures market. These activities produce their own "optimal" buffer stocks, smooth prices. They also work very effectively when there is trade in agricultural commodities; arbitrageurs on the futures market will use imports and exports to smooth Indian prices using foreign spot markets. In totality, commodity futures markets are a part and parcel of a program for agricultural liberalization. Many agriculture economists understand the need of liberalization in the sector. Futures markets are an instrument for achieving that liberalization. WHAT MAKES COMMODITY TRADING ATTRACTIVE? A good low-risk portfolio diversifier A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate. Less volatile, compared with, equities and bonds. Investors can leverage their investments and multiply potential earnings. Better risk-adjusted returns. A good hedge against any downturn in equities or bonds as there is Little correlation with equity and bond markets. High co-relation with changes in inflation. No securities transaction tax levied.
The NCDEX System Every market transaction consists of three components i.e. trading, clearing and settlement. A brief overview of how transactions happen on the NCDEXs market. TRADING The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. Order matching is 66 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
essential on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to finds a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required. NCDEX trades commodity futures contracts having one month, two month and three month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading 21
day. New contracts will be introduced on the trading day following the expiry of the near month contract. CLEARING National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX. The settlement guarantee fund is maintained and managed by NCDEX. Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. At NCDEX, after the trading hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view the factors such as available capacity of the vault/warehouse, commodities already deposited and dematerialized and offered for delivery etc. Matching done by this process is binding on the clearing members. After completion of the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/loss as determined on the basis of final settlement price. SETTLEMENT Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the NCDEX, daily MTM settlement and the final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/crediting the clearing accounts of CMs with the respective clearing bank. 22
All positions of a CM, brought forward, created during the day or closed out during the day, are market to market at the daily settlement price or the final settlement price at the close of trading hours on a day. On the date of expiry, the final settlement price is the spot price on the expiry day. The responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his clients trades. A professional clearing member is responsible for settling all the participants trades, which he has confirmed to the exchange. On the expiry date of a futures contract, members submit delivery information through delivery request window on the trader workstations provided by NCDEX for all open positions for a commodity for all constituents individually. NCDEX on receipt of such information matches the information and arrives at delivery position for a member for a commodity. The seller intending to make delivery takes the commodities to the designated warehouse. These commodities have to be assayed by the exchange specified assayer. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications, the warehouse accepts them. Warehouse then ensures that the receipts get updated in the depository system giving a credit in the depositors electronic account. The seller the gives the invoice to his clearing member, who would courier the same to the buyers clearing member. On an appointed date, the buyer goes to the warehouse and takes physical possession of the commodities. 23
Gold Introduction Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of golds total accumulated holdings relate to store of value considerations. Holdings in this category include the central bank reserves, private investments, and high-caratage jewellery bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of golds total accumulated holdings can be considered a commodity, the jewellery bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in afterinflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a currency without a country. It is an internationally recognized asset that is not dependent upon any governments promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counterparty risk. History Gold, the first metal used by humans, remains one of the most valued metals since prehistoric times. Egyptian hieroglyphs dating 2600 BCE describe gold as something king Tushratta of the Mitanni claimed was as "common as dust" in Egypt. Egypt and Nubia had the resources to make them major gold-producing areas for much of history. Gold is also mentioned several times in the Old Testament. Gold has been considered for ages as one of the most precious metals, and its value has been used as the standard for many currencies in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties. Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term carat or karat is used to indicate the amount of gold present, with 24 carats being pure gold and lower ratings proportionally less. The purity of a gold bar can also be expressed as a decimal figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995 and 0.999. The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in 1919, provides a twice-daily benchmark figure to the industry Current scenario Domestic Market India is the largest consumer of Gold in the world accounting for nearly 25% of the total gold consumption in the world. Most of Indias gold consumption is in the form of jewellery and as investment demand. Indian gold demand is supported by cultural and religious traditions which are not directly linked to global economic trends as a result of which demand remains steady even during high prices. International Market 70 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
Gold demand in 2010 reached a 10 year high of 3,812.2 tonnes. Demand was up 9% year-on-year, and marginally above the previous peak of 2008 despite a 40% increase in the annual average price level between 2008 and 2010. In value terms, total annual gold demand surged 38% to a record of US$150 billion. China is currently the largest producer of Gold in the world having overtaken US in the last couple of years. Asian consumers led demand with the revival of the Indian market and strong momentum in Chinese gold demand, which together constituted 51% of total jewellery and investment demand during the year 2010 Future prospectus The steadily rising prices of Gold reinforces the inherent value of gold jewellery, an intrinsic part of its desirability and also as a means of investment. The growth in investment demand has sparked numerous innovations in gold investment, ranging from online bullion sales to gold ETFs Recent research has uncovered a number of new practical uses for gold, including its function as a catalyst in fuel cells, as well as chemical processing and pollution control. The potential to use nanoparticles of gold in advanced electronics, glazing coatings, and cancer treatments offers promising new areas of scientific research.
Factor influencing price

Rise in Investor demand. Robust Jewelry off take. Geo-political concerns US dollar movement against other currencies Indian rupee movement against the US dollar Central Banks diversifying into bullion Fall in Supply Central Bank Sales Slowing and Massive De-Hedging Gold Mine Production
Gold future Gold Futures contract started trading on NCDEX platform from 2004 onwards has witnessed considerable volatility. Using futures platform importers & domestic buyers can minimize their price risk. Wide range of Market participants ensure good price discovery. With ever increasing import demand, importers can insure themselves against price risk. Disparity between import prices provide good arbitrage opportunities to the various market participants. ture What makes gold special? Timeless and Very Timely Investment Gold is an effective diversifier Gold is the ideal gift Gold is highly liquid
Gold responds when you need it most
Market Characteristics The gold market is highly liquid. Gold held by central banks, other major institutions, and retail jewellery is reinvested in market. Due to large stock of gold, against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Effective portfolio diversifier: This phrase summarizes the usefulness of gold in terms of Modern Portfolio Theory, a strategy used by many investment managers today. Using this approach, gold can be used as a portfolio diversifier to improve investment performance. Effective diversification during stress periods: Traditional method of portfolio diversification often fails when they are most needed, that is during financial stress (instability). On these occasions, the correlations and volatilities of return for most asset class (including traditional diversifiers, such as bond and alternative assets) increase, thus reducing the intended cushioning effect of the diversified portfolio.
Demand and supply China produced 276 metric tons of gold last year, equal to about 9.7 million ounces, said London precious metals consultancy GFMS Ltd. That's up 12% from the year-ago and represented just over onetenth of the world's supply. The ranking pushes South Africa into second place, the first time the gold giant has lost its top ranking since 1905. South Africa, whose late 19th century gold rush led to the founding of mining heavyweight Anglo American Plc and is home to global producers Gold Fields Ltd and AngloGold Ashanti Ltd, saw its production decline 8% to 272 metric tons. India is world largest gold consumer with an annual demand of 800 tonnes. Indian Gold Jewellery Market Plain 22 carat jewellery is the core of consumption especially in the rural areas, where gold is so important in judging a family's status at a marriage. A basic marriage set for a bride is two earrings, one nose pin, one ring, one necklace and two bangles, all in 22 carat gold and weighing up to 200 grams (6.2 oz). 72 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
Studded (i.e. gem-set) 18 carat jewellery is increasingly popular in the cities and is estimated to have used 31 tonnes (1 million oz) in 2001. Medallions, charms and small gift items account for up to half of what is loosely called jewellery. These items are popular as gifts at weddings and other family events. Gold thread, known as Jari used in high quality saris worn at weddings and special occasions requires somewhere in the region of 20 tonnes (0.6 m oz) annually. The market is highly fragmented with an estimated 100,000 workshops supplying over 300,000 retailers, mostly family-owned, single shop operations. The industry is beginning to be modernised with large factories, installing the latest equipment, in centres such as Mumbai, Ahmadabad and Bangalore. Hallmarking does not exist in India and under-caratage is commonplace. The Bureau of Indian Standards has introduced a voluntary scheme which, although not yet widely used, is becoming more popular. The minimum legal caratage is 9 carat. The number of retail jewellery outlets has increased greatly since the abolition of gold control, as has the number of Indians possessing gold jewellery.
MCX Contract Specifications of Gold: GOLD Name of Commodity Ticker Symbol Trading System Trading Period Trading Session Gold GLDPURMUMK MCX Trading System Monday to Saturday Monday to Friday: 10:00a.m. to 11:30 p.m. Saturday: 10:00a.m. to 2:00 p.m. 1 kg Rs. Per 10 g, ex-Ahmedabad (inclusive of all taxes and levies relating to import and custom duty, but excluding sales tax/VAT, any other additional tax or surcharge on sales tax, local taxes and octroi) 10 kg Re. 1 per 10 g (minimum price movement) 3% 4% In case of initial volatility, a special margin at such percentage (as deemed fit), will be imposed immediately on both buy and sell side in respect of all outstanding positions, which will remain in force for next 2 days, after which the special margin will be relaxed. For individual client: 2 MT For members collectively for all clients: 6 MT or 15%of the market position, whichever is high 1 kg 25% of the value of the open position during the delivery period At designated clearing house facilities of Group 4 Securitas at these centers and at additional delivery centers at Chennai, New Delhi and Hyderabad. Compulsory 74 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
TRADING Trading Unit Price Quote
Maximum order size Tick Size Daily price limit Initial Margin Special Margin
Maximum Allowable
DELIVERY Delivery unit Delivery period margin Delivery center(s)
Delivery Logic
SETTLEMENT PERIOD Tender Period Delivery Period Pay-in of commodities (delivery by seller member) 1st to 6th day of the contract expiry month. 1st to 6th day of the contract expiry month. On any tender days by 6.00 p.m. except Saturdays, Sundays and Trading Holidays. Marking of delivery will be done on the tender days based on the intentions received from the sellers after the trading hours. On expiry all the open positions shall be marked for delivery. Delivery pay-in will be on E + 1 basis. By 11.00 a.m. on Tender day +1 basis By 05.00 p.m. on Tender day +1 basis.
Pay-in of funds Pay-out of funds and commodities (delivery to Bibliography www.mcxindia.com www.indiamba.com www.commodityindia.com www.business.mapsofindia.com www.bseindia.com www.ncdex.com www.sebi.gov.in, SEBI Bulletin www.indiaexpress.com www.nmce.com www.nbotind.org www.gold.org
Month January February March April May June
Year 2011 2011 2011 2011 2011 2011
Commodity Gold Gold Gold Gold Gold Gold
Volume (Rs In Lakhs) 1397078 2353946 1781503 52410 122315 254560
SWOT ANALYSIS
Strengths 1. Low operational cost. 2. Presence of established distribution network in urban as well as rural areas. 3. Presence of well known brands.
Weakness 1. Low exports level. 2. Me-too products which legally mimic the labels of established brands narrow down the scope of COMMODITY products in rural & semi-urban market. Research Methodology
Opportunities 1. Untapped rural market. 2. Rising income level of consumers. 3. Large domestic market- 1 billion population. 4. Export potential. 5. High consumer good spending.
Threats 1. Removal of import restrictions resulting in replacing of domestic brands. 2. Slowdown in rural demand. 3. Tax & regulatory structure.
Every project is started with the objective of getting results either positive or negative. And each and every project reaches to the stage of completion through the way of some research either with the help of primary data or secondary 76 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
data. And getting of any project and getting genuine results from that depends on the research method used by researcher. Research is a common parlance refers to a search for knowledge. According to REDMEN Research is a systematized effort to gain knowledge.
TYPE OF RESEARCH STUDY The research has been based on secondary data analysis. The study has been exploratory as it aims at examining the secondary data for analyzing the previous researches that have been done in the area of technical and fundamental analysis of COMMODITYs. The knowledge thus gained from this preliminary study forms the basis for the further detailed Descriptive research. In the exploratory study, the various technical indicators that are important for analyzing COMMODITY were actually identified and important ones short listed.
OBJECTIVES OF THE STUDY Primary Objective: 1.) To do technical and fundamental analysis of chosen securities Sub-Objectives: 1.) To study the various theories of technical analysis and fundamental analysis for various COMMODITYs that chosen. 2.) To understand the movement and performance of COMMODITYs to take decision to invest. 3.) To understanding and analyzing the factors that affect the movement of COMMODITY prices in the Indian COMMODITY Markets
SAMPLE DESIGN Data collection methods include the various methods used by the researcher in his project. The application of method for collecting the data mainly depends upon the type of project researcher is going to undertake. 77 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
In case the survey project questionnaire is the best tool for collecting data. But in case of projects other than surveys like this project all the data is collected already prepared or published in the form of annual reports. SAMPLE SIZE The sample size for the number of company is taken as 2 for Fundamental and Technical analysis. Fundamental and Technical analysis of COMMODITYs as is very exhaustive and requires detailed study
SOURCES OF DATA Data can be classified into two part:Primary source Through conversation with the Relationship, Head and the staff of the branch of NIRMAL BANG COMMODITY BROKING Ltd. Secondary source - Annual Reports of selected COMMODITYs - Financial Statements - Internet Steps for Analysis Selection - It involves selection of information relevant to the purpose of analysis. Classification It involves methodological classification of the data. Interpretation It includes drawing of inferences and conclusion.
PROCEDURE 1. Acquaint with the Principles and postulates of analyzing. 2. Determining the extent of analysis so that the sphere of working may be decided. 3. Re-arranging the data. 78 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT
4. Reducing data to a standardized form. 5. Establishing relationship with the help of tools of analyzing. 6 Interpreting information in a simple and understandable form. 7. Drawing the conclusion.
LIMITATIONS OF STUDY The scope of study was limited due to some constraints given below:1. Analysis is only a means not an end. The analysis has been done on the basis of my own interpretations and up to my best knowledge but every analyst have his or her own interpretations and suggestions. 2. It does not take into consideration the time taken for the completion of the jobs. 3. The non-monetary factors are not taken into consideration for the analysis 4. No personal contacts with stakeholders of companies also a limitation for analyzing the project. 5. Error due to some oversight or misinterpretation.
Conclusion The COMMODITY sector has traditionally grown at a very fast rate and has generally outperformed the rest of the industry. Over the last one year, however the rate of growth has slowed down and the sector has recorded sales growth of just five per cent in the last four quarters. The outlook in the short term does not appear to be very positive for the sector. Rural demand is on the decline and the Centre for Monitoring Indian Economy (CMIE) has already downscaled its projection for agriculture growth in the current fiscal. Poor monsoon in some states, too, is unlikely to help matters. Moreover, the general slowdown in the economy is also likely to have an adverse impact on disposable income and purchasing power as a whole. The growth of imports constitutes another problem area and while so far imports in this sector have been confined to the premium segment, COMMODITY companies estimate they have already cornered a four to six per cent market share. The high burden of local taxes is another reason attributed for the slowdown in the industry
At the same time, the long term outlook for revenue growth is positive. Give the large market and the requirement for continuous repurchase of these products, COMMODITY companies should continue to do well in the long run. Moreover, most of the companies are concentrating on cost reduction and supply chain management. This should yield positive results for them
Bibliography 1. www.COMMODITYmarketers.com 2. www.financialexpress.com/news/fast-moving-changes-in-COMMODITY 3. www.economictimes.indiatimes.com/News/News-By-IndustryCons-Products/articlelist 4. www.moneycontrol.com/india/news/news/COMMODITY-cos-expect-prices-to-come-down 5. http://COMMODITY-marketing.blogspot.com/2007/11/porters-five-forces-model.html 6. http://www.google.co.in/search?hl=en&q=porter+model+of+COMMODITY&btnG=Google+S earch&meta= 7. http://www.euromonitor.com/Corporate_Social_Responsibility_%28and_the_COMMODITY_ Market_Response%29 8. http://www.hul.coulditbeu.in/U_pages/U_CSR_initiatives.aspx 9. http://www.itcportal.com/ 10. www.bseindia.com 11. www.nseindia.com 12. Www.googleyahoo.co.in 13. www.daburindia.com

Nurshid Final Sip Project

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ON INVESTOR BEHAVIOUR WITH RESPECT TO COMMODITY MARKET & FUNDAMENTAL AND TECHNICAL ANALYSIS OF COMMODITY SECTOR NIRMAL BANG

MISS. Neeru Kumari (Industry Mentor)

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TABLE OF CONTENTS Sr. No. Particulars Pg. No.

Issue Priority Matrix

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Weaknesses: High Employee Turnover. 8 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT

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BEHAVIOUR OF INVESTOR TOWARDS COMMODITY MARKET

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PLR 11.0011.50 % 12.5512.50 14

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OBJECTIVE: To assess the prospects of various industries

3. Company Policies 16 INSTITUTE OF PRODUCTIVITY AND MANAGEMENT

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4. Point and Figure Charts

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that prices do.

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SPICES PLANTATIONS PULSES PETROCHEMICALS OIL & OIL SEEDS

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Factor influencing price

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Gold responds when you need it most

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