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Technical Analysis in the Indian Capital Market …A Survey

Sanjay Sehgal* & Meenakshi Gupta**

The Indian economy has been going through a phase
of economic transition since 1991.The Indian capital The survey aims at providing
market has received special attention under the policy insights about the way technical
traders operate in the financial
of liberalisation. Reforms in the security market, market and the trading
particularly, the establishment and empowerment of strategies that they adopt. The
Securities and Exchange Board of India (SEBI), survey covered institutional and
individual technical traders
abolition of Controller of Capital Issues of India (CCI), with a long and active trading
market determined allocation of resources, screen record for the Indian market.
It is observed that the sample
based nationwide trading, market determined interest
respondents tend to use
rate structures, entry of Foreign Institutional Investors technical analysis along with
(FII) and Non Resident Indians’ (NRI) investments, fundamental analysis for
security selection. They fit the
Mutual fund entry in the private sector, technical tools mainly on the
dematerialisation and electronic transfer of securities, equity segment of the market
rolling settlement, sophisticated risk management and and relatively prefer their use
during the market upturns. They
derivatives trading have greatly improved the further feel that volume
regulatory framework and efficiency of trading and indicators provide independent
information compared to price
settlement in the Indian capital market. The Indian
indicators. They seem to be
market is now comparable to many developed markets using the classical technical
in terms of a number of quantitative and qualitative tools more frequently while
sophisticated technical trading
parameters. systems as well as time series
econometric tools were
The Indian stock market consists of 23 stock exchanges relatively less important to
including two exchanges set up in the reforms era i.e. them. They believe that the
National Stock Exchange of India (NSE) and Over choice of tools is not related to
company characteristics such
The Counter Exchange of India (OTCEI). NSE was as size, relative distress and
inaugurated in 1994 with objectives to provide a leverage.
nationwide trading facility, to meet international

*Professor in Finance, Department of Financial Studies,University of Delhi, South Campus.

e-mail: alkas@vsnl.com
**Lecturer in Commerce, Sri Aurobindo College, University of Delhi.
e-mail: mg_abc@rediffmail.com

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Technical Analysis in the Indian Capital Market …A survey 92

securities market standards, to shorten settlement cycles and to impart fairness,

efficiency, and transparency to the securities trading. OTCEI was set up in 1992 to
promote trading in an entirely new set of companies sponsored by the members of
the OTCEI. It allows listing of small and medium sized companies (with an issued
capital of Rs.3 million to Rs.250 million). An Interconnected Stock Exchange (ISE)
has also been created by 14 regional stock exchanges, to provide cost effective trading
linkage to all the members of the participating exchanges, with the objective of widening
the market for the securities listed on these exchanges. ISE aims to address the
needs of small companies and retail investors with the guiding principle of optimising
the existing infrastructure and harnessing the potential of regional markets so as to
transform these into a liquid and vibrant market through the use of state-of-the-art
technology and networking.
At present all the 23 stock exchanges in the country offer a screen based trading
system. The trading system is connected using the VSAT (Vary Small Aperture
Terminals) technology from over 357 cities. It has grown exponentially with an all
India market capitalisation of Rs.13187,953 million, 9413 listed companies, 9368
members 20 millions of investors, and a turnover of 122.9% at the end of March 2004
(Indian Securities Market Review, 2004). The market has witnessed fundamental
institutional changes resulting in drastic reduction in transaction costs and significant
improvement in efficiency, transparency and safety.
At the end of 2003, Standard and Poor (S&P) ranked the Indian stock market 25th in
terms of market capitalisation, 16th in terms of total value traded in stock exchanges
and sixth in terms of turnover ratio (S&P Emerging Stock Market Fact Book, 2004).
Except for the USA, India has the highest number of securities listed on stock
exchanges. With this expanding size, there is a need for comprehensive analysis of
the Indian securities market.
The mature markets of the world have been heavily researched in the last few decades.
However, similar research activity for emerging markets like India is very limited.
The research gap is even more pronounced on the short end of the market that
involves understanding investor behaviour in terms of framing short-term investment
strategies with the help of a technical trading system. Hence, there is a need to
perform a survey of the market practitioners before proceeding to empirically evaluate
the technical indicators. The survey aims at determining the attitude of the analysts
towards technical analysis and the success they attribute to it. It will also highlight the
technical indicators they are using in different market phases and their preferences
for using them. The study is organised into six sections, including the present one.
The next section gives an overview of technical analysis. It is followed by a review of

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literature, the data and methodology and the survey findings. The summary and
conclusions are given in the final section.
An Overview of Technical Analysis
There have been two main approaches to analyse the securities market - the
fundamental approach and the technical approach. According to the fundamental
approach, each security has an intrinsic value and the market forces would ensure
that the share price converges to that value in the long run. The technical approach
states that past share prices and volumes tend to follow a pattern and they can be
used to predict future price movements. Forces of demand and supply in general
determine the share price. The fundamentalists, however, think that demand and supply
are a function of rational factors, while technicians attribute it to psychological factors.
The technical approach to investment is essentially a reflection of the idea that prices
move in trends, which are determined by the changing attitudes of the investors towards
a variety of economic, monetary, political and psychological forces. The technical
approach is based on the theory that the price is a reflection of mass psychology (the
crowd) in action. It attempts to forecast future price movements on the assumption
that crowd psychology moves between panic, fear, and pessimism, on one hand, and
confidence, excessive optimism and greed on the other. But the possible existence of
an efficient market1 poses a major challenge to the ability of technical analysts to
select shares, which will outperform the market. If technical analysts can produce
excess returns they must have identified information not reflected in security prices.
If such information is identifiable, market prices do not reflect all available information
and hence the market is not efficient.
The tools of technical analysis can be divided into two main groups, namely classical
technical analysis and modern technical analysis. Classical technical analysis is based
on chart patterns and the analyst tries to identify price patterns. Their goal is to profit
from trading when patterns occur. Some of the important Chart Patterns are Head
and Shoulders, Support and Resistance, Gap Analysis, Trend lines, Triangles,
Rectangles, Double Top and Double Bottom. Other classical tools are Elliot Wave
Principle, Fibonacci Ratios and Candlesticks Chart Patterns.

Efficient market theory is based on the notion that nobody can outperform the market because any price
at any given moment incorporates all available information.
A trend is a condition where prices are rising or falling, on balance, and where there is a definite up or
down direction to a price move. Successively higher highs and higher reaction lows define an up trend.
Successively lower lows and lower reaction highs define a downtrend. An up trend is also called as bull phase
and a downtrend is called a bear phase.

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Modern technical analysis is based on 3 major groups of indicators that help in

identifying trends and their turning points. They can be trend following indicators
which work best when market is in a trend2, oscillators which work best when the
market is in trading range, and miscellaneous indicators such as aggregate market
analysis tools, psychological indicators, trading systems, etc. Trend Following Indicators
can be divided into 3 groups i.e. Moving Average (MA), Directional System and
Trend Following Volume indicators. Oscillators are used to analyse overbought/oversold
conditions, divergences and crossovers. An oscillator becomes overbought when it
reaches a high level associated with tops in the past. It means too high, ready to turn
down. An oscillator becomes oversold when it reaches a low level associated with
bottoms in the past. It means too low, ready to turn up. Horizontal reference lines on
the charts mark these levels. Divergences occur when the oscillator and the price
action diverge amongst themselves. Crossovers involve the use of two different moving
averages that comprise of a slow moving average and a fast moving average. When
the fast average crosses above the slower moving average, then, a buy signal is
generated. However, when the faster moving average crosses below the slower moving
average, then, a sell signal is generated. Some of the important oscillators are
Commodity Channel Index (CCI), Relative Strength Index (RSI), Stochastic, Rate of
Change (ROC), and William %R. A miscellaneous group includes all other indicators
used by practitioners for the aggregate market as well as individual security analysis.
Review of Literature
The technical analysis (TA) approach to capital market evaluation has received little
attention and acceptance as compared to fundamental analysis (FA). But in recent
years the popularity of technical school of thought is increasing among academicians
and practitioners. A brief review of literature is given below for studies abroad and
studies for the Indian market.
Studies Abroad
Alexander (1961) examined the profitability of using a mechanical filter rule for stock
trading. His study indicated substantial profits from filters. Cootner and James Jr
(1962) tested the Moving Average technique. They believed that this technique
averages out random fluctuations and thus changes in the direction of basic trends
can be isolated. Fama and Blume (1966) conducted a study of the thirty Dow Jones
Industrial Stocks using 24 different filters, ranging in size from 0.5 percent to 50
percent for the time period from 1957 to Sept 1962. The conclusion of their test was
that filter rules were not profitable when the effect of interim dividends and brokerage
commissions are considered. Levy (1967) tested the Relative Strength technique.
This technique selected those stocks that were performing the best, relative to their

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average price of the previous 26 weeks. According to Levy, the relative strength
portfolios had higher returns than B-H strategy, but also the risks were higher. James
Jr (1968) extended the moving average tests to include averaging by exponential
smoothing. To test the significance of his findings, the difference Di, between the
moving average return and the buy and hold return was calculated for each sample
security. The results show that none of the rules or various smoothing coefficients
was more successful than the B-H strategy unless the data is unadjusted for dividends.
Neftci and Policano (1984) used the moving average and slope method to analyse the
future market. The results suggest that by characterising the actual behaviour of the
market participants, improved price predictions can be obtained in future markets.
Dawson (1985) tested whether investors could have outperformed the market by
using actual share recommendation based solely upon technical analysis made by a
specific investment advisory firm. Share recommended by technical analysis
outperformed the market but after adjusting for trading commissions, market trends
and risk, the recommended share did not outperform the market. Brock, Lakonishok
and Le Baron (1992) tested the two simplest and most popular trading rules- Moving
Average and Trading Range Break (Resistance and support level) – by utilising the
Dow Jones Index from 1897 to 1986. The results provide strong support for technical
strategies. Consistently, buy (sell) signals generate returns which are higher (lower)
than normal returns.
Blume, Easley and O’Hara (1994) investigated the informational role of volume and
its applicability for technical analysis. In their model, technical analysis is valuable
because current market statistics may be sufficient to reveal some information, but
not all. The uncertainty in the economy is not resolved in one period and sequences of
market statistics can provide information that is not impounded in a single market
price. Unique to their model is the feature that volume captures the important information
contained in the quality of traders’ information signal.
Batten and Ellis (1996) analysed the technical trading performance and weak form
efficiency of the Australian All Ordinary Index (AAOI). The trading systems employed
were able to generate a return greater than B-H strategy without considering
transaction costs. Sullivan, Timmermann, and White (1999) used bootstrap methodology
to evaluate simple technical trading rules while quantifying. the data snooping bias
and fully adjusting for its effect in the context of the full universe from which the
trading rules were drawn. Evaluation is based on mean returns and on the Sharpe
ratio, which adjusts for total risk. The best technical trading rules for the mean returns
from the full universe are from the short-term price movements (5 day moving average,
2 day on-balance-volume). The best trading rule by the Sharpe ratio criterion is also

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based on relatively short sample using 2 to 20 days of price information. In the full
universe the best performing trading rule earned a mean annualised return of 17.17
percent resulting from 6310 trades.
Mamaysky and Wang (2000) proposed a systematic and automatic approach to
technical pattern recognition using non-parametric kernel regression, and applied this
method to a large number of US stocks. They found that over a 31-year sample
period, several technical indicators do provide incremental information and may have
some practical value.
Studies of the Indian Capital Market
Sehgal and Garhyan (2002) evaluate whether share recommendations based on
technical analysis provide abnormal returns in the Indian capital market. Several return
measures have been employed including those adjusted for market trend, risk and
transaction costs. The study involves 21645 recommendations for 21 companies using
13 technical indicators. The mean return was found statistically significant for the
total period. But the gains disappear in the case of market-adjusted measures. The
returns were found significant for the risk-adjusted measures and also after the
adjustment for transaction costs. Mitra (2002) examined the applicability of moving
average based techniques and filter rule technique for investments on trading in Indian
stock market. The study found that profit is high in moving average crossover with
periods of 2 and 10 days. All low value filters give profits; however, the profitability
becomes negative with high value filters. The filter of 1 percent of stock price was
found suitable for all the series and the use of filter method was found less risky.
These studies attempt to obtain unusual profits by using technical tools. Several tools
have shown the ability to provide a higher return than that of buy and hold policy. But
after adjusting for trading commissions or transaction costs, the results are not so
encouraging for a developed market; however, Indian evidence on technical trading
system seems to be more supportive. The disparity in empirical findings for developed
markets and the Indian market may probably reflect differences in the levels of
efficiency of these markets.
Data and Methodology
The survey aims at determining the attitude of the analysts towards technical analysis
and the success they attribute to it. It will also highlight the technical indicators they
are using in different market phases and their preferences for using them. The sample
consists of 25 respondents. The respondents are investment analysts, mutual fund
managers, brokers and active technical traders. It is a representative set of active
investors, as in our study, we are looking for a specialised sample involving respondents

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Technical Analysis in the Indian Capital Market …A survey 97
with a long experience in the stock market and a reasonable length of time spent on
technical trading. The average experience of respondents in the stock market is 9
years and in technical analysis 7 years, as shown in figure 1. The questionnaire was
distributed personally by hand or through e-mail to 50 individuals. Of those approached,
fifty percent returned it after filling in the necessary details.
A standard questionnaire (see Appendix) was framed which contained mostly closed

Figure 1
ended questions. However, some open-ended questions were also incorporated
wherever it was necessary to obtain a detailed view of the respondents with regard
to a given issue. The aim was to accumulate views and opinions of the respondents in
order to gain deeper insight into the working of the stock market, in general, and the
economic feasibility of technical trading systems, in particular. The questionnaire was
sent to three experts for validation check and their suggestions were duly taken into
account before furnishing it to the respondents. The questionnaire was framed in
three parts. Part one consisted of the personal profile of the respondents. Part two
dealt with questions regarding the use of technical analysis tools on different securities
and part three laid emphasis on the market index used, and also if the analysts made
any distinction regarding different sectors of the industry and different company
characteristics. A set of fourteen questions were asked in part two and only six in
part three. We used convenient but judgemental sampling as the desired persons
were selected on the basis of personal contacts.
Survey Findings
Technical analysis – Individual Securities
All the respondents have faith in technical analysis and agree that it helps in generating
better returns. Almost two thirds of the respondents are using fundamental analysis
along with technical analysis as shown in Figure 2. It is probable that they are using
FA for selection of securities based on their intrinsic value and TA for market timing

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Figure 2

All twenty-five respondents are using one or more technical software packages at
one time to analyse the securities. Their cumulative responses are given below in
Table1. It is evident that metastock is the most popular software package among the
analysts. It provides a variety of tools for decision-making purposes. But almost all of
them are using one or the other software along with metastock.

List of Software Used
Software No. of users
Advanced Get 4
Money 2
Metastock 23
Aspen Graphics 2
Omega 5
Elwave 5
Wave Analyser 3

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All the respondents are using technical indicators in all the three phases i.e. Bull,
Bear and Normal (also known as trading range). The Bull Phase is symbolised by a
prolonged rise in the prices of shares sustained by the buying pressure of investors.
The Bear Phase is symbolised by a prolonged period of falling prices, dominated by
selling pressure in the market place.The Normal Phase is a period where prices
move sideways or in a lateral direction or where a series of highs peak in the same
area and a series of lows bottom around the same levels. It appears from the survey
that technical indicators are being used more extensively in the Bull Phase as shown
in Figure 3.

Figure 3
In the Bull Phase about 88% are using technical tools extensively and 12% are using
them moderately. In the Bear Phase, 64% are using them extensively, 32% moderately
and only 4% are using them less extensively. In the Normal Phase, about 56% are
using them extensively, 32% moderately, and only 12% are using them less extensively.
Investors suffer losses in the Bear Phase so their focus shifts more to understanding
and analysing corporate fundamentals. As short selling is not allowed they cannot use
technical tools in the Bear Phase except for the stocks on which stock futures are
available. In the Normal Phase, the market is in trading range and profit opportunities
are less lucrative and it is always advisable to use oscillators. The less extensive use
of TA in the Normal Phase is also implied by the limited use of oscillators by the

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respondents, which we observe in a later question.

All the respondents are using technical tools on shares. 50% of them are using their
tools on shares and financial derivatives (FD), and only 16% are using them on shares,
FD, forex and bonds. Thus it seems that TA is predominantly used for the equity
sector of financial markets, while in other sectors, its use is limited.
Sixty percent of the respondents feel that the settlement system does not influence
the technical recommendations while the remaining forty percent feel otherwise, as
shown in Figure 4.

Figure 4

The reason they provide against the relationship between settlement system and
technical recommendations is that TA is based on past trends and hence it has nothing
to do with settlement period. Also, as TA is based on demand and supply of the
instrument, factors like end of settlement /long trading weekends prompt liquidation
of positions by short term traders. As active stocks are on rolling settlement system,
the impact of the weekly settlement system is not there. In the rolling settlement
system, the pressure is not on a particular day as against the weekly settlement
system where pressure was on a particular day (settlement day). In an earlier study
by Sehgal and Garhyan (2002), the average holding period was found to be 5.4 days,
which was approximately equal to the length of the weekly settlement period. The
rolling settlement system may not affect the holding period as investors can settle
their accounts on a continuous basis.
About 36% of respondents say that circuit breakers and circuit filters affect the
return and 64% of them say it does not affect the return, as circuit breakers are

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Technical Analysis in the Indian Capital Market …A survey 101

relevant for intraday or index securities as shown in Figure 5.

Figure 5
The respondents are trading in BSE SENSEX and NIFTY securities and filters are
not applicable on them and circuit breakers are applied to the index as a whole, which
are applicable infrequently i.e., only in the event of a major market breakout. About
40% of the respondents are using both arithmetic and log scale3 and 28% are using
only log scale and 32% are using only arithmetic scale as given in figure 6. Use of
arithmetic scale means the linear scale but sometimes when values on one axis grow
at an exceptional rate, use of log scale is preferred.

Figure 6

Logarithmic scaling is the type of price scale where equal percentage moves are measured equally. For
example, a move from 10 to 20, representing a gain of 100 percent, will be 5 times as long on the
logarithmic price scale as a move from 50 to 60, a gain of 20 percent. In arithmetic scale both these price
moves would be equal on the price scale.

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The respondents made no distinction in using the tools in different market phases.They
are using all the tools in all the phases. The only distinction they made is their preferences
for tools as given in the Table 2 below.
Table 2

Tools used with high preference in all 3 phases

1 Trend lines
2 Gap Analysis
3 Japanese Candlesticks
4 Fibonacci numbers
5 Moving average
Tools used with medium preference in all 3 phases
1 Elliot Waves
3 Open Interest
Tools used with low preference in all the 3 phases
1 Directional indicator
2 Bollinger Band
3 MACD-Histogram

Preference is shown towards classical indicators and then towards the trend following
indicators. Despite so much of emphasis on modern technical indicators in academics,
such as directional system, stochastic, momentum, William %R, elder-ray etc. the
technicians seem to prefer classical tools of technical analysis. This could be owing
to the fact that technicians do not have enough faith in modern technical analysis.
The second reason may be that they have already evaluated the economic profitability
of modern indicators vis-à-vis classical indicators and have found the later to be more
useful. But, if it is owing to the first reason, then modern technical tools need to be
evaluated. Unlike so much of emphasis in theory about the Triple Screen Trading

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System, respondents are not using them. However, some of them are using channel-
trading systems like Commodity Channel Index (CCI) and Bollinger Band systems.
80% of the respondents are using both price and volume indicators but only 4% of the
respondents are using only volume indicators and 16% are using only price indicators
as shown in Figure 7.

Figure 7
From the responses, it is clear that although the respondents are using both the volume
indicators and price indicators, the latter is preferred to the former as shown in Figure 8.

Figure 8

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Technical Analysis in the Indian Capital Market …A survey 104

68% of the respondents exhibit no preference for volume indicators over price indi-
cators and 56% believe that volume indicators do not lead price indicators. 60% of
the respondents are of the opinion that volume indicators and price indicators give
different signals and 72% of them say that volume indicators do not confirm (give
similar results) price indicators. It seems that price and volume indicators are not
related. They give independent information to investors. There seems to be no lead-
lag relationship between them.
Only 8% of the respondents are using time series models, such as, ARIMA (Auto
Regressive Integrated Moving Average) and VAR (Vector Auto Regression) along
with technical analysis as given in Figure 9.

Figure 9

Econometricians regularly use and recommend time series models like ARIMA and
VAR for forecasting financial time series like stock prices, interest rates and forex
movements. Practitioners tend to rely on technical trading tools for forecasting, as
the time series models cannot explain the returns generated by these tools (Brock,
Lakoniskok, and LeBaron,1992). It may be possible that they are not using time series
models at all or have abandoned their use after trying them for a considerable time.
The probable likelihood is that the first reason is more valid. A comparative evaluation
should be done of the economic feasibility of technical trading systems and time
series models. This will hopefully fill the gap between theory and practice.
Table 3 below shows the shares on which the respondents strongly feel that technical
analysis works. The holding period of the shares varies from 3 to 15 days. Of these,
16 shares are from the BSE Sensex as on Dec 2003 and all of them are Nifty stocks.

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Table 3
Name of the Shares that Technicians are Using

S.no. Name S.no. Name

1 ACC 11 M&M
3 Grasim 13 ONGC
4 HCL Tech 14 Reliance
5 Hindalco 15 Satyam Computers
6 HLL 16 State Bank
7 HPCL 17 Zee Telefilms
8 Infosys 18 Tata power
10 Hughes 20 TISCO

Table 4 gives various financial parameters such as size (market capitalisation which
is measured as market price times the number of shares outstanding), trading volume,
Market Price to Book Equity Ratio (P/B), Price Earning Ratio (P/E), and Debt Eq-
uity Ratio (D/E) for these twenty shares. These parameters are calculated as on the
31st of December 2003 because the survey has been conducted during this time
period. The ratios are calculated by dividing each value of the recommended com-
pany with the average value of the BSE500 Index. To get an idea of how high or low
these ratios are for a given company, these ratios are converted into indices.

These are big capitalisation companies with an average daily high trading volume and
low Debt-Equity ratio (D/E), low Price to Book Value (P/B) and low Price to Earn-
ings ratio (P/E). It means that investors are doing value investing in big size compa-
nies with low risk. Probably they are ignoring strong profit opportunities that may
arise from choosing value bargains in the small and mid capitalisation sector of the

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Table 4
Financial Parameters for the Selected Companies

Co. Name Size Trdg.Vol. P/B P/E D/E

ACC 0.08 0.03 0.22 0.20 0.66
BPCL 0.13 0.22 0.24 0.12 0.31
Grasim 0.83 0.94 0.66 0.18 0.32
HCL Tech 5.05 1.37 1.29 0.51 0.00
Hindalco 0.11 0.06 0.54 0.18 0.18
HLL 0.13 0.38 0.51 0.27 0.00
HPCL 0.08 0.02 0.34 0.33 0.09
Infosys 0.51 0.07 0.92 0.57 0.00
ITC 0.05 0.22 0.47 0.13 0.01
Hughes 7.08 4.01 0.73 0.28 0.00
M&M 1.45 2.31 0.83 0.42 0.34
OBC 1.85 3.34 0.63 0.20 0.25
ONGC 46.57 3.80 0.86 0.26 0.01
Reliance 33.29 28.25 0.82 0.38 0.33
Satyam Comp 4.86 37.72 1.48 0.71 0.00
State Bank 13.18 18.86 0.46 0.18 0.35
Zee Telefilms 2.82 6.82 0.48 1.37 0.05
Tata power 2.18 3.10 0.42 0.24 0.25
TELCO 5.18 11.44 1.49 0.53 0.26
TISCO 5.39 22.72 1.31 0.24 0.41
Average 6.54 7.28 0.74 0.36 0.19

It is interesting to note that when we find out the returns of the top 30 and bottom 30
shares of the BSE500 index on the basis of company characteristics such as size, P/
B and P/E separately, an alarming difference in returns is seen. We restricted our
empirical evaluation to a subset of recommended indicators. The selected indicators
are inbuilt in metastock (a popular technical software) and hence easy to compute
and analyse. The list of the technical indicators used is given in Table 5.

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Technical Analysis in the Indian Capital Market …A survey 107
Table 5
List of technical indicators used
Indicator Used Symbol
Moving average MA
Directional Indicator DI
MA Convergence Divergence MACD
Stochastic STOCH
Relative Strength Index RSI
Bollinger Band BB
Commodity Channel Index CCI
Negative Volume Index NVI

The returns for the year 2003 for these technical indicators and for simple Buy and
Hold (SBH) strategy are shown in Table 6. The annual % return on individual stocks
for an indicator is calculated as:
Σ [(Pt-Pt-1)/Pt-1]*100, ………(5.1)
where N is number of trades.
Pt =Price at the end of each trade
Pt-1=Price at the beginning of each trade
The annual return on the top 30 and bottom 30 portfolios are then computed by taking
a simple average of the returns on individual stocks belonging to the concerned groups.
Table 6
Profits (in %) for the Year 2003
Indicator Small Size Big Size Low P/B High P/B Low P/E High P/E
MA 245.98 50.60 188.63 6.12 157.13 39.93
DI 261.37 63.63 159.93 2.56 170.11 30.36
MACD 217.08 28.60 177.43 13.31 150.07 53.68
STOCH 348.71 98.57 215.31 17.55 226.71 56.75
RSI 47.26 21.53 17.61 4.68 42.28 0.44
BB 20.64 5.10 22.08 12.36 26.68 12.77
CCI 209.50 18.64 43.94 16.05 78.64 11.42
NVI 61.19 8.07 45.94 -6.05 17.64 9.48
SBH 333.97 84.42 220.42 20.77 300.50 69.71

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Technical Analysis in the Indian Capital Market …A survey 108
The returns on small stocks were almost 5 times higher than that of big stocks. The
higher return on small stocks may be due to higher risk exposure because of operating
financial and liquidity risk. But, still the difference in returns may not be justified by
the risk alone and ignoring this difference might be a mistake. Similarly, for low P/B
shares, the returns were 10 times higher than that of high P/B shares and for low P/
E shares, the returns were 4 times higher than that of high P/E shares. However, the
magic wanes out when we compare the returns provided by different technical
indicators with those on a SBH strategy as shown in Table 6. The SBH strategy
seems to outperform almost all technical indicators for all the portfolios.

Market, Sectoral and Company characteristics related patterns.

In this section, we attempt to find out how technical analysts perform aggregate
market analysis, and select technical indicators for specific industrial sectors and
companies with different characteristics. Almost all of them are using more than one
index as a barometer of the market. Fifteen out of twenty-five respondents are using
BSE500 and twelve respondents are using BSE Sensex. Nine of them are using
NSE, 10 of them S&P CNX Nifty and only two are using BSE100 and none of them
is using BSE200. Respondents’ cumulative responses are given below in Table 7.

Table 7
Indices Used by the Respondents

BSE100 2
BSE200 0
BSE500 15
S&PCNX Nifty 10

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Technical Analysis in the Indian Capital Market …A survey 109

As Sensex and Nifty are price sensitive indices and BSE500 is supposed to be a
surrogate for aggregate economic wealth, they are using a combination of these two
as a market barometer. 92% of the respondents are using the same set of tools to test
the market index as well as securities and only 8% are using a different set of tools as
given in Figure 10.

Figure 10.
The respondents use New High-New Low (NH-NL) and advance decline (A/D)
indicators for forecasting the direction of the market. However, since an index itself
is a basket of securities, the respondents prefer using the same set of technical tools,
which they apply for individual stocks, for evaluating the market.

Table 8 gives the list of industries, which the respondents prefer to use. The companies
recommended by respondents as shown in Table 3, also fall within these recommended
sectors. They are trading in both old economy and new economy shares.

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Technical Analysis in the Indian Capital Market …A survey 110

Table 8
Preferred Industrial Sectors
S.No. Industry
1 Banking
2 Capital Goods
3 Cement
4 Entertainment
6 IT
7 Power
8 Refineries
9 Steel
10 Telecom

Respondents use all indicators for all categories of stocks. No distinction is made in
using different tools for different categories of stocks based on company
characteristics. This could be owing to the fact that investors are applying TA on
specific sets of stocks (as shown in Table 3) i.e., stocks of big companies with high
trading volume, low leverage and valuation ratios. Hence, they are not able to evaluate
the sensitivity of technical indicators across the stocks exhibiting a different set of
company characteristics.
To study the effect of company characteristics on returns of stocks, we classified the
BSE500 stocks into 3 equal groups on the basis of size i.e.S1 (small), S2 (medium) and
S3 (big). We further classified the same stocks into 3 equal groups on the basis of
their P/B ratios i.e. V1 (low), V2 (medium) and V3 (high). We formed double sorted
equally weighted portfolios based on size and value groupings i.e. S1V1, S2V1, S3V1,
S1V2, S2V2, S3V2, S1V3, S2V3, and S3V3, where S1V1 is a portfolio of small stocks
with low valuation ratios and S 3V3 is a portfolio of big stocks with high valuation
ratios. The equally weighted portfolios are more desirable as their parameters are
loaded with less measurement errors (Lakonishok, Shleifer, Vishny 1994). We estimate
the returns provided by each of these portfolios using 8 different technical indicators
for the calendar years 2002 and 2003 as shown in Tables 9 and 10 respectively. The
trading system in India has changed w.e.f. July 2001 where in the badla system was
abolished. Hence, evaluation for the previous period may not be useful owing to
comparison problems. Returns shown in Tables 9 and 10 are net of transaction costs

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Technical Analysis in the Indian Capital Market …A survey 111

i.e., the commission charged by security brokers and other sales agents on buying
and selling the securities. Daily price data (using arithmetic scale) is used for calculating
the portfolio returns. The unadjusted returns (shown in Panel A) on portfolios are
calculated in two steps. First, the annual % return on individual stocks is calculated
using the equation 5.1 and in the second step, annual portfolio returns are estimated
by taking a simple average of security returns.

Table 9
Profit (in %) for the year 2002 for different size and value portfolios
Panel A
Unadjusted Returns
S1V1 72.91 117.56 62.20 135.07 45.14 9.73 39.70 57.66 174.75
S2V1 98.62 142.05 65.88 110.30 34.24 -1.39 53.72 28.16 135.13
S3V1 70.23 125.84 47.45 66.50 24.93 8.27 19.58 26.51 124.69
S1V2 52.25 82.39 35.25 56.13 11.06 7.01 12.22 11.72 154.45
S2V2 16.12 39.29 14.63 32.44 16.63 9.54 14.52 6.55 84.49
S3V2 32.64 52.54 6.48 19.67 -3.65 -3.80 4.87 -2.63 61.64
S1V3 19.11 20.36 17.53 24.08 3.38 5.58 27.06 0.77 78.63
S2V3 -13.65 1.22 0.49 9.42 2.76 6.67 -7.84 0.34 29.49
S3V3 -7.43 -4.69 -5.17 -6.47 -1.15 -0.68 -3.47 -1.75 5.51

Panel B
Market adjusted returns


S1V1 55.59 100.24 44.88 117.75 27.82 -7.59 22.38 40.34 157.43
S2V1 81.30 124.73 48.56 92.98 16.92 -18.71 36.40 10.84 117.81
S3V1 52.91 108.52 30.13 49.18 7.61 -9.05 2.26 9.19 107.37
S1V2 34.93 65.07 17.93 38.81 -6.26 -10.31 -5.10 -5.60 137.13
S2V2 -1.20 21.97 -2.69 15.12 -0.69 -7.78 -2.80 -10.77 67.17
S3V2 15.32 35.22 -10.84 2.35 -20.97 -21.12 -12.45 -19.95 44.32
S1V3 1.79 3.04 0.21 6.76 -13.94 -11.74 9.74 -16.55 61.31
S2V3 -30.97 -16.10 -16.83 -7.90 -14.56 -10.65 -25.16 -16.98 12.17
S3V3 -24.75 -22.01 -22.49 -23.79 -18.47 -18.00 -20.79 -19.07 -11.81

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Technical Analysis in the Indian Capital Market …A survey 112

Table 10
Profit (in %) for the year 2003 for different size and value portfolios
Panel A
Unadjusted Returns
S1V1 222.22 249.54 203.39 278.96 31.35 16.63 56.90 47.74 302.70
S2V1 144.97 147.63 135.44 184.50 34.74 14.05 61.56 1.05 248.16
S3V1 148.55 127.85 131.72 213.01 69.13 19.79 70.87 2.85 296.48
S1V2 104.99 156.58 112.10 167.19 28.36 18.92 47.22 17.21 225.40
S2V2 146.11 136.74 103.87 190.91 34.67 15.48 52.16 17.09 215.35
S3V2 163.30 137.77 91.00 198.90 45.16 17.09 57.38 19.38 279.11
S1V3 91.41 95.00 67.63 139.37 66.25 26.98 94.90 12.91 182.52
S2V3 78.97 96.16 62.88 124.84 17.84 12.56 40.69 15.20 150.72
S3V3 18.88 39.74 26.85 53.24 13.51 5.23 8.93 5.23 52.42

Panel B
Market adjusted returns


S1V1 122.5 149.37 103.22 178.79 -68.82 -83.54 -43.27 -52.43 202.53
S2V1 44.80 47.46 35.27 84.33 -65.43 -86.12 -38.61 -99.12 147.99
S3V1 48.38 27.68 31.55 112.84 -31.04 -80.38 -29.30 -97.32 196.31
S1V2 4.82 56.41 11.93 67.02 -71.81 -81.25 -52.95 -82.96 125.23
S2V2 45.94 36.57 3.70 90.74 -65.50 -84.69 -48.01 -83.08 115.18
S3V2 63.13 37.60 -9.17 98.73 -55.01 -83.08 -42.79 -80.79 178.94
S1V3 -8.76 -5.17 -32.54 39.20 -33.92 -73.19 -5.27 -87.26 82.35
S2V3 -21.21 -4.01 -37.29 24.67 -82.33 -87.61 -59.48 -84.97 50.55
S3V3 -81.29 -60.43 -73.32 -46.93 -86.66 -94.94 -91.24 -94.94 -47.75

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Technical Analysis in the Indian Capital Market …A survey 113
If we check the status of recommended companies given in Table 3, the majority of
the companies fall in S3V2 and S3V3. Even for the highly risk averse investor who
wishes to concentrate on big and liquid stocks, there were better trading options
available in S3V1 compared to the experts’ recommendations. For those investors
who are willing to take some incremental risk owing to a shift in portfolio towards low
and medium capitalisation stocks, the returns from value investing are even higher for
most of the technical indicators. Hence, one can conclude from this that investors are
ignoring strong return opportunities by not being cognizant of the impact of company
characteristics on trading profits. However, as in Table 6, the empirical success of
value based technical investing becomes questionable, once one compares the returns
on technical analysis with SBH strategy. The superior performance of SBH strategy
probably suggests that technical analysis is more of a myth than a reality.
The empirical result suggests that TA being transaction extensive does not pay off
after adjusting for transaction costs owing to frequent buying and selling of securities.
Further, the period of evaluation witnessed a bull trend4 for the Indian market, making
the sample share price series non-stationary over time. It is quite possible that technical
indicators under evaluation are not appropriate for handling trending series. We
recommend a more comprehensive evaluation for technical indicators that explicitly
adjust for trending data vis-à-vis the SBH strategy. Further the empirical test should
be conducted over a complete market cycle rather than for a given phase (up trend in
our case).
Tables 9 and 10(Panel B) are showing the results on double sorted portfolios net of
market effects i.e. the return on a given portfolio minus the market return. The market
return is defined as (Vt-Vt-1/Vt-1)*100 where Vt-1 and Vt are the values of BSE500
index at the beginning and end of calendar year. For estimating market adjusted
%return, we should have preferably subtracted % return on the market factor from
%return on each trade for a given sample stock before computing the annual stock
returns and equally weighted portfolio returns. However, given the number of sample
stock5, and the number of trades for each stock, and number of technical indicators,
the computation would have been very heavy. Hence, adjusted returns have been
approximated by subtracting the % annual return on market index from portfolio
return. More reliable results can be obtained by empirically evaluating the technical
trading system for different sets of stocks over a complete market cycle. Hence, our
results can, at best, be described as suggestive. However, the survey findings throw
light on the trading strategies of technical traders as well as the trading styles adopted

Due to unavailability of data for some of the companies, a total of 373 and 422 companies out of a total
of 500 could be selected for finding out the return for the year 2002 and 2003 respectively.

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Technical Analysis in the Indian Capital Market …A survey 114

by them. Hence, they provide a platform for empirical researchers who wish to evaluate
the economic feasibility of alternative technical indicators in the Indian environment
using a representative study period.
Summary and Concluding Remarks
The survey covered institutional and individual respondents who have a long record
of trading in the stock market and in the use of the technical trading system for
securities’ analysis. The sample respondents believed that technical analysis could
generate superior profits. They tend to apply these tools predominantly to the equity
(and to some extent financial derivatives) segment of the market. A majority of them
use TA along with the FA. Further, they tend to use technical analysis more frequently
in the Bull Phase of the market. Surprisingly, the respondents revealed a greater
preference for classical technical indicators, such as, trend analysis, gap analysis,
candlestick charts, Fibonacci numbers and ratios, and simple moving average, while
more sophisticated tools of TA seem to take a backseat.
The respondents, further, felt that volume indicators provide independent information
compared to price indicators and suggested that both of them played an important
role in security selection. They were also not using time series econometric tools for
TA. They employed, generally, the same tools for individual stocks as well as for
market analysis.
The stock recommendations provided by technical traders were related to big
companies with high trading volume and medium P/B ratios. An empirical evaluation
of size-value portfolios formed from the BSE500 index revealed that better returns
could have been generated by investing in big and liquid companies with lower P/B
ratios. For technical traders who will be willing to take extra risk, there are even
stronger value bargains available in the small and mid capitalisation categories using
selected technical indicators. However, the SBH strategy seemed to outperform all
technical indicators for all categories of stocks, thus casting a shadow on the applicability
of TA. However, more conclusive results can be obtained by performing such an
evaluation over a complete market cycle.
The survey findings shall be extremely relevant for technical traders who are
continuously on the look out for investment strategies that beat the market. They shall
also be useful for financial software developers who wish to know what they should
emphasise in the technical toolbox. They are also relevant for empirical researchers
who intend to test the applicability of technical tools. Finally, it has implications for
market regulators and the investing community in general, as it shall help, in a better
way, the understanding of investor behaviour, in the short run, for the Indian market.

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Please mark an asterisk (*) against the option you wish to select. For example,
to select Yes, mark as follows:

Yes: * No:


1) Name:
2) Investor Category Individual: Institutional:
3) Your experience in the stock market (in years):
4) Your experience in Technical Analysis (in years):


1) Do you believe Technical Analysis helps in generating better returns?

Yes: No:
2) Do you use Fundamental Analysis along with Technical Analysis?
Yes: No:
3) Name the technical Software(s) used (if any):
4) How extensively you are using Technical Analysis in different stock market
phases? (Please rank on a 5 point scale. 1 for Not using and 5 for Extensive

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Technical Analysis in the Indian Capital Market …A survey 118
Bull Phase: Bear Phase: Normal Phase:
5) Please select the relevant category/categories in which you mostly use technical
(a)Shares: (b) Bonds:
(c)Financial Derivatives: (d) Forex:
6) Do you think that the holding period of technical recommendations is influenced by the
nature of settlement systems (such as Rolling Settlement, Weekly Settlement, etc.) on the
stock exchanges?
Yes: No:
If yes, please specify, the reasons:

7)Do you believe that returns on the shares using technical tools get affected by
circuit breakers and circuit filters?
Yes: No:
8)What scale do you use in your charts?
Arithmetic scale: Logarithmic Scale: Both:
9) Please mark asterisk (*) against the technical tool/indicator you normally use during different
market phases. Also indicate the extent of your preference for these indicators on a 5-point scale.
(1 for no preference, 5 for the highest preference). Also specify the windows (number of days) used
for different technical indicators e.g. 12-day moving average, a 7- day momentum etc.
Bull Period Bear Period Trading Range Used
Mark* Prefer- Mark* Prefer- Mark* Prefer- (no. of
((If ence ((If ence ((If ence days)
used) (1-5) used) (1-5) used) (1-5)
1.Trend lines

2.Gap Analysis

3.Japanese candlesticks

4.Elliot Wave

5.Fibonacci numbers

6.Moving Average

7. Moving Average
convergence divergence

9.Directional System (ADX)

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Technical Analysis in the Indian Capital Market …A survey 119

10. Momentum

11. Rate of Change (ROC)

12. William %R

13. Stochasic

14.Relative Strength Index


15.On Balance Volum

16. Accumulation-

17. Open Interest

18.Commodity Channel
Index (CCI)

19. Force Index

20. Elder Ray

21. Signals from the


22. Insider Trading

23. Odd-Lot Activity

Any other (Please specify)


10) Select the trading systems, if any, used by you.

(a) Triple Screen Trading System:

(b) Parabolic Trading System:
(c) Channel Trading Systems:
(d) Any Other:

If Triple Screen Trading System is used, please specify the technical indicators preferred in the-
First Screen:
Second Screen:
11) Are you using price indicators, volume indicators or both?
Price Indicators: Volume Indicators: Both:

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Technical Analysis in the Indian Capital Market …A survey 120
12) Indicate your opinion for the following statements relating to the use of volume and price
(i) Volume indicators are preferred over price indicators.
Yes: No:
(ii) Volume indicators lead price indicators.
Yes: No:
(iii) Volume indicators and price indicators are related (consistently give similar signals).
Yes: No:
(iv) Price indicators are confirmed by volume indicators.
Yes: No:

13) Do you also use time series models with technical analysis (such as ARIMA, ARCH, GARCH
processes etc.)?
Yes: No:

14) Name the stocks on which you regularly fit the technical tools with high success rate in the recent
past and also provide their average holding period in days.

Stock Holding period Stock Holding period

i. vi.

ii. vii.

iii. viii.

iv. ix.

v. x.


1) Put an asterisk (*) against the index that you use as a barometer of stock market?

BSE500 S&P CNX Nifty NSE

Any other (Specify)

2) Do you use the same set of technical tools for analysis of individual stock as well as market index?
Yes: No:
3) Do you use the following tools/indicators for market index?
(a) New High New Low (NH-NL):
(b) Advance Decline Ratio:
(c) Trader’s Index (TRIN):
(d) Any Other:

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Technical Analysis in the Indian Capital Market …A survey 121
Technical Analysis in Indian Capital Market …A survey

4) Mark an asterisk (*) against the industrial sectors in which you are actively using technical tools.
IT Telecom

Entertainment Pharmaceutical

Banking FMCG

Cement Steel

Refineries Fertilizers

Power Food Products

Capital Goods Other industries

5) Do you use a different set of technical indicators for the analysis of the following categories
of stocks? Indicate by marking an asterisk in the respective column.

Ye s No

A. Small stocks and big stocks

B. High P/E ratio and Low P/E ratio

C. High BE/ME and Low BE/ME

D. High Dividend yield and Low Dividend yield

E. High Leverage and Low Leverage

F. Old economy and New economy shares

G. Index and Non Index stocks

H. High turnover and Low turnover stock

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Technical Analysis in the Indian Capital Market …A survey 122

6)Please specify the preferred tools/ indicators for the stock categories for which the answer in the
previous question is in the affirmative.

Company Characteristics Name of the tool/indicator used

A. Big stocks

Small stocks

B. High P/E stocks

Low P/E stocks

C. High BE/ME stocks

Low BE/ME stocks

D. High Dividend stocks

Low Dividend stocks

E. High Leverage stocks

Low Leverage stocks

F. Old economy shares

New Economy shares

G. Index stocks

Non Index stocks

H. High turnover stocks

Low turnover stocks

Thank you very much for your precious time.

Decision, Vol. 32, No.1, January - June, 2005