Technical Analysis

There are two times in a Mans life when He should not SPECULATE -When he can not afford it -And when he can afford - Mark Twain (1897)

Assumptions of Technical Analysis

The market discounts everything--- Price of security quoted represents all the hopes , inside

information, fear etc to all the participants of the Market. The market moves in Trends -----Once the trend is established it continues for a long time and then reverses at some point of time. Market movement is orderly and not random. History Keeps Repeating itself-----Human psychology does not change when it is a bull market every time the same psychology prevails in the market which drives the price upwards. Same psychology is repeated in other bull market. Market prices determined by the supply and demand forces which are based on both rational and irrational factors.

Technical Analysis Defined

The process of identifying a trend reversal at an early

stage to ride the trend until the weight of evidence suggests that the trend has reversed directions. Task 1- Ascertain the change in direction of trend Task 2 Monitor the trend on a continuous basis Task 3 Find out when the trend is going to reverse again.

Possible Tools for Analysis

Charting Records of past prices over the period of

time is plotted on the chart along with trading volume so that a particular pattern can be identified to garner profit. Technical Indicators The advance and decline ratio in the market can be an example. The available different Price Data O, C , L, H etc. Can be the movement of Open Interest in the market.

It may Be---- Sentiment Indicators Expectation of various

group of investors like FII , MFs, Corporate Insiders. Flow of Fund Indicators Indicate the potential for Various investor groups to influence the market Market structure indicators Monitor Price Trends and Cycles.

Support and Resistance

Support is where a falling can be expected to

halt due to concentration of demand. Resistance is where a rising price can be expected to halt temporarily due to concentration of supply.

Support & Resistance

Support and resistance lines

indicate likely ends of trends. Resistance results from the inability to surpass prior highs. Support results from the inability to break below to prior lows. What was support becomes resistance, and vice-versa.
Support

Breakout

Resistance

Dow Theory
This theory was first stated by Charles Dow in

a series of columns in the WSJ between 1900 and 1902. Dow (and later Hamilton and Rhea) believed that market trends forecast trends in the economy. A change in the trend of the DJIA must be confirmed by a trend change in the DJTA in order to generate a valid signal.

Assumptions in Dow Theory

The average Discounts everything- Any new

information arrives in the market the price of the stock automatically adjusts. The market is comprised of three trends.

Dow Theory Trends (1)

Primary Trend Called the tide by Dow, this is the trend that defines the long-term direction (up to several years). Others have called this a secular bull or bear market. Secondary Trend Called the waves by Dow, this is shorter-term departures from the primary trend (weeks to months) Day to day fluctuations Not significant in Dow Theory

Dow Theory Trends (2)

Dow Theory
Primary Trend has three phases Phase I it is made up of aggressive buying by

investors.(Economic Recovery and Long term Growth).Gloom and Doom and Disgust.Turn around Phase II - Increasing Corporate Earnings and improved economic conditions. Accumulation Phase. Phase III - More investors come as record corporate earnings reported and economy reaches peak .Buying frenzy by new entrants. Liquidation by First phase buyer as they foresee a down turn.

 The volume confirms the trend.

A trend remains intact until it gives a definite

reversal. Secondary trend is an important reversal lasting from a 3 weeks to 3 months Movement generally retraces from 33 to 66 %. Minor movements are intraday only.

Line Chart and Bar Charts

Line Chart are the most basic and simple with a line

joining the closing price of one period with the another. Bar charts gives more detail than regular line chart . Each period is represented by a bar . Bar not only shows price movements from one period to the next but it also shows price movements within the period itself.

The Bar Chart

Types of Charts: Bar Charts

This is a bar (open, high, low, close or OHLC) chart

of AMAT from early July to mid October 2001.

Candlestick Chart
Similar to Bar charts only colours are used to explain the

movements. Consist of a Body with a wick at the both end. The wick represents high or low Upper part of the body is opening price and lower part of the body is closing price or vice versa as the case may be . Colour of the body shows us the whether the price rose or fell during that period. If the close is higher than open the colour is green or blue and if the open is higher than close then the candle is red.

Candle Stick Charting

Drawing Bar (OHLC) Charts

Each bar is composed of 4

elements: Open High Low Close Note that the candlestick body is empty (white) on up days, and filled (some color) on down days Note: You should print the example charts (next two slides) to see them more clearly

High Close Open

High

Open Low Low

Close

Standard Bar Chart

Japanese Candlestick

Standard Bar Chart

Japanese Candlestick

Candle Stick Charting (Continued)

Green is an example of

a bullish pattern, the stock opened at (or near) its low and closed near its high Red is an example of a bearish pattern. The stock opened at (or near) its high and dropped substantially to close near its low

Candle Stick Charting (Continued)

Top example is called a

hammer and is a bullish pattern only if it occurs after the stock price has dropped for several days.

Theory is that pattern indicates a reversal

Bottom is an example

of a star, typically indicating a reversal and/or indecision.

Types of Charts: Japanese Candlesticks

This is a Japanese Candlestick (open, high, low,

close) chart of AMAT from early July to mid October 2001

Trend lines
Trend lines are lines that are drawn to identify

any ascending or descending rallies. These lines typically connects the peaks of rally and bottom of reversals. Penetration of a trend line means either a reversal or consolidation. The larger the number of peaks touch a trend line the better will be its significance. The length of a trend line indicates whether a penetration is significant.

Trend Lines
There are three basic

kinds of trends:

An Up trend where prices are generally increasing. A Down trend where prices are generally decreasing. A Trading Range.

Price Patterns
Technicians look for many patterns in the

historical time series of prices. These patterns are deputed to provide information regarding the size and timing of subsequent price moves.

Head and Shoulders

This formation is
H&S Top
Head

characterized by two small peaks on either side of a larger peak. This is a reversal pattern, meaning that it signifies a change in the trend. The left shows the penultimate rally and the right shows the start of bear market.

Left Shoulder

Right Shoulder

Neckline

H&S Bottom
Neckline

Left Shoulder

Right Shoulder

Head

Head & Shoulders Example

Sell Signal

Minimum Target Price Based on measurement rule

Charting Patterns
Cup and Handle Pattern on bar chart as short as 7 weeks or as long as 65 weeks Cup in the shape of a U; Handle has a slight downward drift Right hand side of pattern has low trading volume As the stock comes up to test old highs, the stock will incur selling pressure by the people who bought at or near the old high Selling pressure will take the stock price sideways for 4 days to 4 weeks, then it takes off

Cup and Handle Approach.

Double Bottom and Double Top

Occurs when a stock price drops to a similar price

level twice within a few weeks or months The double-bottom pattern resembles a W Buy when the price passes the highest point in the handle. In a perfect double bottom, the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors The middle point of the W should not go into new high ground. This is a very bullish indicator

Double Bottom

What is Moving Average

Moving averages are one of the

most popular and easy to use tools available to the technical analyst.
They smooth a data series and

make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays

Popular types of Moving Average

Simple Moving Average (SMA) Exponential Moving Average (EMA)

10 Data SMA

SMA (Simple Moving Average)

Example

Use 5 data to calculate

10+11+12+13+14 = 60 SMA = 60/5 = 12 Then next data (6th data) coming) 11+12+13+14+15 = 65 SMA =65/5 =13

Interpretation through moving average

When moving average rises above the price line a

reversal in the bullish trend is signalled. A price line and moving average cross over has to be examined cautiously when the price line and moving average moves in opposite direction. A moving average acts as a resistance and support line also. If the moving average is flat a crossover by the price line will be a fairly reliable indicator for trend reversal. The moving average covering a longer time shows a longer time trend and hence crossover signifies important move.

Exponential Moving Average (EMA)

It will react quicker to recent price changes

than a simple moving average

Reduce the lag in simple moving averages

by applying more weight to recent prices relative to older prices

MACD
Moving Average Convergence Divergence It is a momentum indicator shows the variation in the

moving average. It compares a short term moving average (50days) with a long term moving average (200 day) . If the short term moving average is constantly higher than LTMA it gives a bullish signal. If the short term moving average is constantly lower than LTMA it gives a bearish signal. This measures short term momentum and signals the direction of Momentum.Used as an indicator of trend reversal.

Technical Indicators
Technical Indicators are as follows Leading Indicators it precedes

movements.so used for prediction. They provide early signaling for entry and exit. It can help determining trends like overbought or oversold position. Some of the popular indicators are Relative Strength Index and Stochastic Oscillator

price

RSI
It is a momentum indicator.Momentum measures the

rate of change of prices. It helps signaling overbought and oversold position. RSI is plotted in a range of 0-100. A reading above 70 suggests overbought and a reading below 30 suggests oversold position. So any unreasonable push given to a current stock can be found out.

Stochastic Oscillator
Most recognized momentum indicator.

It is a price velocity technique.

As the price of the stocks continues to rise

the closing price comes nearer to the upper end of the price range and vice versa. It is also plotted within a range of 0-100 . It signals overbought when above 80 And oversold when less than 20.

Crossover and Divergence

Cross over occurs when either the price

moves through the moving average or two different moving average cross over each other. Divergence when the direction of the price trend and the indicator trend are moving in the opposite direction. It means the direction of the price trend is weakening.

Divergance

Confidence Index
It shows how investors are optimistic about the

market. It is the ratio between the high grade bond yield to low grade bond yields. When the bond investors gain more confidence in the economy they shift their investment from a high grade bonds to low grade bonds. This will increase the price of LG bonds which will lower their yields and increase the confidence index

Diffusion index and AD Ratio.

Diffusion index is calculated to see the rate at which

number of stocks price increased over a period of time. It shows the breadth of the market. Advance decline ratio means number of shares increased in a particular day compared to the number of shares decreases on the same day. The net advances are cumulated and plotted on a graph to measure with market line. If market line moves upward and AD ratio moves down ward it shows a bearish signal and vice versa

Fundamental and Technicals

Charts Vs. Financial Statements

Time Horizon
Trading Vs. Investing

Short Interest Ratio

The short interest means the number of

shares are sold short but not yet bought back. SIR = Total no. of shares sold short/Avg.daily trading volume High ratio means more short in market so it should give sell signal. But technical analyst feels that there will be short covering to close out in future and then price will move upwards.

Put call ratio

Put call ratio = Number of put purchased/

Number of calls purchased. If ratio is .70 it means only seven puts are purchased for every 10 calls are purchased. A rise in put call ratio means pessimism in the market. So a decline in PCR it shows optimism in the market.

Trin Statistics
Trin = (Volume declining / No of decline)/

(Volume rising/ no of advances) If it is more than 1 it gives a bearish signal If it is less than 1 it gives a bullish signal.

Open Interest
Open interest refers to the number of outstanding

option contracts in the exchange market or in a particular class or series. Open Interest is an important indicator that can help one in ascertaining the flow of funds.
If the open interest rises with rise in price it is a

bullish indication. If open interest rises and prices fall it is a bearish indication. If open interest falls and prices rise it is a sign of short covering by bears. If open interest falls and prices also fall it is a sign of profit booking by bulls or liquidation of positions.

Thank You.
I believe the future is only the past again entered through another gate.
-Sir Arthur Wing Pinero (1893)