Technical Analysis involves the study of stock price

movement in the security mkt.

Technical Analysis is concerned with a critical study of
the daily or weekly price and volume data of the Index
comprising several shares
The objective of the technical analysis is to predict or
forecast the short, intermediate and long term price
movements.
It uses only the data generated from the market.
Such market generated data includes price, volume,
number of trades, 52-week high or low price, intra-
day spread, dealers buy-sell quote spread, number of
advances and declines, number of Stocks hitting the
new high and low, open interest, etc.
 Prices can
be
Changes in projected
supply and with charts
demand and other
cause technical
Supply and changes in tools
demand prices
determine
prices
 Market value of scrip is determined solely by
the interaction of supply and demand.
Supply and demand are governed by
numerous factors, both rational and
irrational.
Stock prices tend to move in trends, which
persists for an appreciable length of time.
Changes in trend are caused by shifts in
demand and supply.
Shifts in demand and supply can be detected
through chart analysis and some chart
patterns repeat themselves.
 Charles H Dow developed his theory in 1884 to explain the
movement of the indices of Dow Jones Averages.
The theory is based on certain hypothesis:
a) The first hypothesis is that no single individual or buyer can
influence the major trend of the market.
However, a single investor can affect the daily price movements by
buying or selling large qty of scrips.
a) The second hypothesis is that market discounts every thing.
Even natural calamities such as earthquake, plague or fire get
quickly discounted in the mkt
a) The third hypothesis is that the theory is not infallible.
(Fullproof Incapable of failure or error).
It is not a tool to beat the mkt but provides a way to understand
it better.

According to Dow theory the trend is divided into

1. Primary
2. Intermediate/Secondary
3. Short term/Minor
 The security price trend may be either
increasing or decreasing that may last for a
yr or two.
When the market exhibits the increasing
trend, it is called bull market and when it
exhibits a decreasing trend it is called bear
market.
 The bull market exhibits an increasing trend
shows three clear-cut peaks.
Each peak is higher than the previous peak.
The bottoms are also higher than the previous
bottoms
The phases leading to three peaks are :-
Revival of mkt confidence- Encourages more investors to buy
scrips as their expectations about the future are high.
Improvement in corporate profits- Increased corporate profits
results in further price rise.
Speculation Phase Price advances due to inflation and
speculations.
 The market exhibits falling trend.
The peaks are lower than the previous peaks.
The bottoms are also lower than the previous bottoms.
The three ph are:-
First ph - Fall starts with the loss of Hope. Chances of
prices moving back to prev high level appear to be low
resulting in the sale of shares
Second ph Co report lower profits and dividends leading
to selling pressure.
Final ph Characterised by distress sale of shares.
 The secondary trend or the intermediate trend moves
against the main trend and leads to correction.
The correction would be 33% to 66% of the earlier fall or
increase.
In a bull mkt, the sec trend can result in the fall of about 33-
66% of the earlier rise
In a bear mkt, the sec trend can result in the rise of 33-66% of
the earlier fall.
The intermediate trend corrects the overbought or
oversold positions and provides breathing space to the mkt.
Compared to the time taken for the primary trend,
secondary trend is swift and quicker.
 Minor trends or tertiary moves are called
random wriggles that occur in price
movements.
They are simply the daily price fluctuations.
Minor trend tries to correct the secondary
trend movement.
It is better for investors to conc on primary
or secondary trends rather than on minor
trends.
 A support and resistance level are integral part of Tech Analysis.
A support level exists at a price where considerable demand for
the stock is expected to prevent a further fall in the price level.
In the support level, the fall in the price may be halted for the
time being or it may result even in price reversal.
If the stock goes down to certain level and then rises there exists a
support level. If the price goes below the support level , it means
that the selling pressure has overcome the buying pressure and
the price may fall further.

Example : If stk price hovers around Rs 150 for some weeks and then it
may rise and reach Rs 210. At this pt, the price halts and then falls back.
The scrip keeps on falling back to around its original price of Rs 150 and
halts. Then it moves upwards. In this case Rs 150 becomes the support
level. At this pt, the scrip is cheap and investors buy it. Demand makes
the price move upwards.
The price of Rs 210 becomes Resistance level, and selling pressure results
in a price decline.
 At the resistance level, the supply of scrip is greater
than the demand and further rise in price is prevented.
Selling pressure is greater and the increase in price is
halted for the time being.
When the stock touches a certain level and then drops,
it is called as resistance level. If the price moves above
the resistance level it means that the buying pressure
has overcome the selling pressure and the price may
rise further.
 It is a technical analysis indicator used to
determine the overall trend of the market
over different time frames.
The pivot point itself is simply the average of
the high, low and closing prices from the
previous trading day.
On the subsequent day, trading above the
pivot point is thought to indicate ongoing
bullish sentiment, while trading below the
pivot point indicates bearish sentiment.
 A pivot point and the associated support and
resistance levels are often turning points for
the direction of price movement in a market.
In an up-trending market, the pivot point and
the resistance levels may represent a
resistance level in price above which the
uptrend is no longer sustainable and a
reversal may occur.
In a declining market, a pivot point and the
support levels may represent a low price
level of stability or a resistance to further
decline
 Gaps are those points or price levels where the scrip
has not changed hands. They are formed in rising or
falling price level.
If the prices are moving upwards and the high of any
day is lower than the next days low, a gap is said to
have occurred.
Similarly, if the prices are falling, a gap is formed if
the low price on a day is higher than the high price of
next day.
Example:
If high price of a Co on 01 Mar is Rs 200 and on 02
Mar , the low price is Rs 225, a gap occurs on the
bar chart. This indicates the stk has not been
traded btw the levels of Rs 200 and Rs 225.
Likewise, in a falling price, suppose low price on
Monday is Rs 150 and the high price on Tuesday is
Rs 130, it indicates that there is no transaction
btw the level of Rs 150 and Rs 130.
 Point
and Line
Figure Chart
Chart
Candlest
ick Bar
Chart Chart

Charts are valuable and easiest tool in Tech Analysis.

Uses:-
Helps to spot current trends for buying and selling.
Indicate the probable future action of the mkt by
projection.
Show historical movements
Indicate key areas of support and resistance.
e
EXHIBIT 12-4 EXHIBIT 12-5 Candlestick Chart:
Construction of a Companhia Vale do Rio Doce, 1
Candlestick Chart January 15 June 2009 (prices in U.S.
dollars)
 It is time to sell the scrip

It is time to pick up the scrip

If the RSI has crossed the 30 lines from below to above and
is rising, a buying opportunity is indicated. If it has crossed
the 70 lines from above to below indicates a selling
opportunity.
Basis Fundamental Analysis:
Purpose It seeks to forecast stock prices
on the basis of economic, industry
and company statistics. However,
the most important variables
considered in deciding stk
prices are earnings and dividends.
Long-term & It seeks to predict long-term
Short-term values of securities. Generally, the
Price fundamentalist is a conservative
Movement: who invests his funds for a long
term. Long-term investors buy a
high dividend paying stock and
hold it for many years through
market fluctuations.
Value of Estimates the intrinsic value of
Share shares and purchases them when
their market price is less than the
intrinsic value and sells the shares
when the market value of shares is
more than the intrinsic value and
earns profit. Thus, he works on
long-term basis.
Technical Analysis:
It mainly focuses on internal market data.
The technical analysis determines the short-
term price movements of the securities. The
technician is a trader who buys and sells
securities for short-term profits. He does not
believe in buying and holding of securities.
He gives importance to total returns, i.e.,
the realized price less the price paid, plus
dividend received.
There is no real value to any stock. stock
prices depend on demand and supply forces
which in turn are governed by rational and
irrational factors.
Basis Fundamental Analysis: Technical Analysis:

Finding the In fundamental analysis, there is
trend no scope for finding out the past
trend of share and also the
fluctuations in the price trend.
Technicial analysis is based on the fact that
the past trend will be repeated again and
the current movements can be used for
studying the future trend. In other words, in
respect of all securities there are cycles and
trends which will occur again and again.

Assumptions There are no assumptions in Technical analysis works on the basis of

fundamental analysis. various assumptions which have been
outlined earlier.

Usefulness It helps identify undervalued or It is useful in timing a buy or sell order

overvalued shares.

Decision The fundamental analysis carefully The view of the market is the most
Making studies the financial statements, important factor in determining stock prices
demand forecasts, quality of
management, earnings and
growth. Then they judge the
prices of securities. Thus, the
fundamental analysts are making
decisions based on their own
(subjective) opinions.