A STUDY ON TECHNICAL ANALYSIS AS AN INDICATOR FOR INVESTMENT

DECISION-MAKING
SUMMER INTERNSHIP PROJECT REPORT SUBMITTED TO UTKAL
UNIVERSITY FOR THE PARTIAL FULFILLMENT OF THE
REQUIREMENTS OF MASTER OF FINANCE & CONTROL (MFC)
DEGREE
Submitted by:
SANTOSH KUMAR SAHOO
(SESSION !!"-#!$
U%de& t'e (uid)%*e +,:
External Supervisor: Faculty Supervisor:
M&- S)%(eet Mi.'&) M&- S)%/)y Kum)& 0)&id)
1&)%*' He)d F)*u2ty3 De4tt- O, Fi%)%*e
A4+22+ Si%d'++&i C)4it)2 I%5e.tme%t. Ltd- VIS6ASS
1'ub)%e.7)& 1&)%*'
VIVEKANANDA INSTITUTE OF SOCIAL 6ORK AND SOCIAL SCIENCES
1
ROLL NO-: #89:;U!"8!#9 REGD- NO-: #<=#;>!:
2
DECLARATION
I hereby declare that the project report entitled ?A STUDY ON TECHNICAL
ANALYSIS AS AN INDICATOR FOR INVESTMENT DECISION-MAKING@ is
submitted by me for partial fulfillment of the requirements of the degree of MASTER OF
FINANCE AND CONTROL, as a course curriculum under UTKAL UNIVERSITY, is an
authentic record of study carried out by me under professional guidance and supervision.
Due acknowledges and references have been made where ever necessary. his project
report is a result of my original work and e!cept some conceptual aspects, technical charts
and some images as prescribed, no portion of the said report has been copied or duplicated
nor has any project report similar to this one ever been submitted to any of the university or
any other organi"ation of this sort.
D)te:
02)*e:
#SANTOSH KUMAR SAHOO$
%
ACKNO6LEDGEMENT
I would like to e!press my gratitude to all those who gave me the possibility to
complete this thesis. I would like to thank my college authorities and my &.'.D. Mi..
Ku25ee% K)u& A%)%d first for providing me the opportunity to work with one of the most
prestigious organi"ation.
I e!press my hearty thanks to M&- S)%(eet Mi.'&), he (ranch &ead, )pollo
*indhoori +apital Investments ,td., (hubaneswar (ranch and M&.- S)mit) Mi.'&), my
company guide who gave and confirmed this permission and encouraged me to go ahead with
my thesis.
I am deeply indebted to my faculty guide M&- S)%/)y 0)&id), whose help,
stimulating suggestions and encouragements helped me in all the times of research and for
writing the thesis.
I also want to thank Mi.. S+%)2i 0)tt)%)iA and M&- L)2) Su.)%t R+y who always
stood beside me and encouraged me to complete my project work.
-y friends who have supported me in my research work, I want to thank them for all
their help, support, interest and valuable hints.
.specially, I would like to give my hearty thanks to my parents, their love and
blessings enabled me to complete this work.
D)te:
02)*e:
(SANTOSH KUMAR SAHOO$
/
0REFACE
he money which is earned is partly spent and the rest saved for meeting future
e!penses. Instead of keeping the savings idle, people like to use savings in order to get return
on it in the future. his is called Investment.
'ne needs to invest to0
earn return on his idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
)s per return is concerned *tock -arket is treated as the best place to earn higher
returns as compared to other means of investment. ) huge number of companies are listed
there to facilitate effective mobili"ation and utili"ation of savings.
In today1s world companies become known or considered big when they are listed on
reputed *tock .!changes namely 2*. #2I34$ 5 (*. #*.2*.6$ for India, D'78'2.*
for 9*), &)2:*.2: for &ong ;ong, 2I;;.I for 8apan, <* for <ussia, etc. 'nce the
company is listed everything a company does = doesn1t is reacted upon by the public and the
prices of the share of the respective company fluctuate. 2ow the company would always
want a true picture of the company to be represented by share price, they wouldn1t mind if its
overvalued but it hurts when the stocks get undervalued. (ut this uncertainty of the price
gives people a chance to make money both in long term 5 short term. ,ong term investment
is mainly based upon studying fundamentals of the company and its growth potential. (ut the
real piece of magic lies in making money by trading shares either Intraday or holding for a
short term. If one wants to make money in this way, he = she need to know the technical side
of the stock i.e. charts, trends etc.
It1s not hard to guess how fascinating it is and so it has been decided to unlock the
mystery as far as possible in these two months of time. his field is very difficult to be taught
in classroom perhaps beyond scope. 'ne has to see to believe, understand and implement it
and that was my main objective after all to find out the answers of following questions0
1. 7here will 2I34 go from here>
2. 7hich stock will rise today and which ones will fall>
%. *hould I hold it or square off my positions>
/. 7hy is hedging required = how is it done>
o find the answer of the above questions and many more it has been chosen to do
summer internship in the field of echnical )nalysis. &ope the project report will serve the
necessity of the needy students, investors and research scholars to find out strategic
implications of technical analysis at the time of taking investment decisions and will guide
them to unlock the market-sutra to sustain in the financial market.
?
?A STUDY ON TECHNICAL ANALYSIS AS AN INDICATOR FOR INVESTMENT
DECISION-MAKING@
CONTENTS
CHA0TERS 0ARTICULARS 0AGE NO-
1 INTRODUCTION AND RESEARCH METHODOLOGY #-=
1.1 Introduction
1.2 <esearch -ethodology
1.2.1 2eed for the study
1.2.2 'bjectives of the study
1.2.% *ources of Data
1.2./ <esearch Design
1.2.? *ampling -ethod
1.2.@ *ampling *i"e
1.2.A ,imitations of the study
1.1.B +hapter Clan
COM0ANY 0ROFILE :-9
2.1 )bout )pollo *indhoori
2.2 *ervices provided by the 'rgani"ation
2.% (usiness 2etwork
2./ (oard of Directors
2.? +ompany Information
2.@ +onclusion
8 TECHNICAL ANALYSIS "-=:
%.1 -eaning of echnical )nalysis
%.2 )ssumptions of echnical )nalysis
%.% echnical )nalysis and 3undamental )nalysis
%./ he +ritics of echnical )nalysis
%.? +oDe!istence of echnical )nalysis and 3undamental )nalysis
%.@ echnical ools
@
%.@.B *upport and <esistance
%.@.E Folume
%.@.1G <andomD7alk &ypothesis
%.@.11 echnical rends
%.@.12 rendD,engths
%.@.1% rendD,ine
%.@.1/ +hannels
%.@.1? echnical +harts
%.@.1?.1 +hart Croperties
%.@.1?.2 ypes of +harts
%.@.1?.% +hart Catterns
%.A echnical Indicators
%.A.1 -oving )verage +onvergence Divergence
%.A.2 <elative *trength Inde!
%.A.% *tochastic 'scillator
%.A./ he DowDheory
%.A.? he *hortDInterest <atio
%.A.@ he +onfidence Inde!
%.A.A *preads
%.A.B he )dvanceDDecline <atio
%.A.E he -arket (readth Inde!
%.A.1G he 'ddDlot <atio
%.A.11 Insider ransactions
%.A.12 -utual 3und )ctivity
%.A.1% he +reditD(alance heory
%.A.1/ Cerformance of ,inked -arkets
%.B *ummary
= A SAM0LE SURVEY =<-::
/.A 'bjectives of the *urvey
/.B *ample +omposition
/.E 'utcomes of the *urvey
/.1G 'pinion of the Investors
: FINDINGS AND SUGGESTIONS :<-:9
?.1 3indings
?.2 *uggestions
?.% +onclusion
A
1I1LIOGRA0HY
6E1LIOGRA0HY
A00ENDIB
CHAPTER 1
INTRODUCTION AND RESEARCH METHODOLOGY
#-# INTRODUCTION
-oney is honey for modern manHH In this modern and fast changing world where a
cutDthroat competition e!its it is treated as the essence of life. It has become the sole purpose
of every human activity. It is the sole target of every start. *tarting from the unsunshine lower
levels of deep blue Cacific to the upper layers of roposphere each and every component is
money oriented now a days. o fulfill such need of money and wealth, modern man uses
investment as a want satisfying and wealth ma!imi"ing tool.
aking investment decisions has become a part of our economic life. .verybody
makes such decisions in different conte!ts at different times. he appropriateness of such
decisions makes someone 7arren (uffet where as some become bankrupts. herefore, it is
very important to understand and know the right way to take sound investment decisions
which can be made in order to improve the chance of making profits through them.
)s investment is concerned, the stock market is treated as the most profitable and
efficient battle field. It gives a scope to earn e!tra ordinary income by taking high level of
risk where uncertainty e!ists always. *o it is not a game of a child to find the right time and
right choice to invest in. Investment decisionDmaking in such situation can best be viewed as
an integrated process to which security analysis makes its unique contribution. )nd, in the
process of security analysis, echnical )nalysis is treated as the Colestar which shows the
direction to proceed.
echnical )nalysis serves the investment decisionDmaker by pointing the direction
that is most likely to produce the desired results and to meet the e!pectations of the investors.
B
7hether echnical analysis will ever be classified as a science is doubtful, but research,
training and e!perience have developed it into a discipline, which means a structured,
consistent and orderly process without rigidity in either concepts or methods.
#- RESEARCH METHODOLOGY
#--# NEED FOR THE STUDY
7here the herds of bulls and beers are peeping to the stock market in an e!pectation
to grab the opportunity to take the advantage of volatility, a study on echnical )nalysis is
very much needed to cope with the momentDchange market fluctuations in the e!pected
direction to earn desired profits. his research study fulfills the needs of the speculators,
investors and students to acquire knowledge regarding various technical aspects of investing
the most liquid and hardDearned money not only in profitable stocks, but also at the right time
and at the right price. he thesis describes the various trends and chart patterns which are
very much helpful to find the timing of investment at different market situations.
his study contributes to the knowledge of *tock analysis through integration of the
review of literature and methodology developed for the understanding and resolution of
various related indicators and techniques regarding investment decisionDmaking in stock
market, and empirical work done there on.
he purpose of the summer project report is to allow the study within a coherent,
organi"ed and standardi"ed framework which is necessary to enhance understanding to grasp
knowledge and to clarify the subject matter. It is needed for the direction and procedure of the
study to bring it up to the required scope, coverage, rigor and also to enhance the quality of
research effort.
#-- O1CECTIVES OF THE STUDY
his project was started with an objective to know the basic tools, trends and chart
patterns of echnical )nalysis and their implications at the time of investment decisionD
making. &ow investors can gain more out of their investment by using the tools of echnical
)nalysis is the central objective of this research study. +ollecting information regarding
investors1 response and belief towards echnical )nalysis is also an additional objective that
forced to undertake such research study.
#--8 SOURCES OF DATA
E
his section of the project emphasi"es on the procedure used to accomplish the
project. 3or this purpose some data have been collected basically from two sources0
Crimary *ource
*econdary *ource
0&im)&y S+u&*e
he data collected from primary sources are rawDdata. hese are the data that are
collected firstDhand and have not had any previous meaningful interpretation. he primary
data will be collected through observation, questionnaire and through wellDtested personal
interviews with the investors at the door of number of broking houses.
Se*+%d)&y S+u&*e
)ny data used that have been collected earlier for some other purposes are known as
*econdary Data. he secondary data has been collected such from various internet portals,
research articles, reference books and various .F. programmes related to the topic.
#--= RESEARCH DESIGN
he present research study will adopt Descriptive <esearch Design for properly
designing the research work. hrough this, the topic will be studied thoroughly and it will be
presented by giving necessary findings and conclusions.
#--: SAM0LING METHOD
he method adopted is +onvenient *ampling method because it was necessary to
cover all types of investors and at different places all over the city, even if by taking the help
of cell phone.
#--< SAM0LE SIDE
he total sample si"e was ?G and included small investors, speculators, businessmen,
research scholars and finance students. he interview was conducted inside the city of
(hubaneswar only.
#--9 LIMITATIONS OF THE STUDY
)lthough necessary precautions have taken, still this study suffers from the
following limitations0
he study consists of detailed theoretical e!planations.
1G
he time period allowed for the study was quite insufficient to cover and analyse all the
technical aspects and to compare it with the behavior of the stock market.
-ore importance has been given to the subject matter of echnical )nalysis only.
he wide range of chartDpatterns and trends may create confusion while going through
these.
he study may act as a magicDpedia for a layman having no basic knowledge regarding
securities market.
+onfidentiality of information was the biggest limitation that corporate people and
investors were not willing to share.
he primary limitation of the study is that, the survey is limited within the city of
(hubaneswar only.
#--" CHA0TER 0LAN
he study has been divided in to two parts such as the heoretical aspect and the
Cractical aspect. he first part contains a wide e!planation of the theories of echnical
analysis where as the second part is enriched with the response of the investors1 and their
beliefs with respect to echnical )nalysis. (y looking chapterDwise, +hapterD1 opens the door
to enter in to the subject. +hapterD2 gives information about the company under which the
summer internship has been made. +hapterD% gives a broad idea regarding echnical
)nalysis. It narrates about the tools available in echnical )nalysis and e!plains the various
indicators that signals investorDaction and guides to e!pect the future uncertain market
condition. +hapterD/ analyses the data that has been collected from primary sources reflecting
the role of technical charts and trends at the time of investment decisionDmaking. It gives an
idea regarding the applicability and popularity of echnical )nalysis in investorDworld. It
depicts the response of the investors. )nd, lastly the study comes to an end with chapterD?
that narrates the findings and suggestions e!tracted from this study with conclusion.

11
12
FIGURE NO- E -#
FIGURE TITLE -
COM0ANYLOGO
CHAPTER 2
COMPANY PROFILE
-# A1OUT A0OLLO SINDHOORI
)pollo *indhoori +apital Investments ,imited was a
professionally managed 3inancial *ervices organi"ation, belonging to )pollo &ospitals
:roup. (eing the group1s maiden foray into the financial services
sector, )pollo *indhoori successfully carried the strong linage of
service, as demonstrated by the flagship company of the group.
)pollo *indhoori is a leading player in broking space with nearly 1/ years of
e!perience. Incorporated in 1EE?, the +ompany became a part of )ditya (irla :roup in
-arch 2GGE, when the group acquired A@I of the +ompany through )ditya (irla 2uvo.
he )ditya (irla :roup is a household name in India, a 9* J2B billion conglomerate
that is in the league of the 3ortune ?GG companies. he )ditya (irla :roup has a strong
presence across various financial services verticals as a part of the )ditya (irla 3inancial
*ervices :roup #)(3*:$ that include life insurance, fund management, distribution 5
wealth management, security based lending, insurance broking and private equity.
he si! companies representing )(3*: are (irla *un ,ife Insurance +ompany, (irla
*un ,ife )sset -anagement +ompany, (irla *un ,ife Distribution +ompany, )ditya (irla
+apital )dvisors, (irla :lobal 3inance +ompany and (irla Insurance )dvisory 5 (roking
*ervices. he consolidated revenues from these companies crossed the 9* J 1 billion mark,
in 2GGADGB.
&eadquartered in +hennai, )*+I, is listed on 2ational *tock .!change of India
,imited K2*.L and he (ombay *tock .!change ,imited K(*.L. It is also registered as
Depository Carticipant with both 2*D, and +D*,.
- MANAGEMENT OF THE ORGANISATION
-r. Cankaj <a"dan
-r. ;anwar Fivek
-r. -anoj ;edia
-r. ;.<. *udhakar M.!ecutive Director
-r. *udhir <ao
1%
-r. :. Fijayaraghavan
-8 SERVICES 0ROVIDED 1Y THE ORGANISATION
)*+I, offers following services0
rading facility in .quity segment on and Derivative segment on 2*. 5 (*. through
a single screen.
rading facility in commodity segment, including bullion, oils, gaur seed etc. through
our subsidiary, )pollo *indhoori +ommodities rading ,imited
Depository Carticipant KDCL services of 2*D, and +D*, at major locations
'nline bidding for IC'
Distribution of -utual 3unds
-= 1USINESS NET6ORK
he +ompany has a strong distribution network of over 221 own and @BA franchisee
branches, a large customer base in e!cess of 1,A?,GGG and a scalable business model based on
a strong technology backbone and a wide product mi!. he +ompany boasts of immense
talent pool and vertical specialists which add to its positioning as a leading player in retail
broking space.
-: COM0ANY INFORMATION
+ompany 2ame0 )pollo *indhoori +apital Investments ,imited
Date of ,isting #2*.$0 GAD3ebD2GGB
3ace Falue0 1.GG
I*I20 I2.B@?+G1G22
Industry0 3I2)2+.
Issued +ap. 0 ??/GGGGG#shares$ as on 1/D)ugD2GGE
-arket +ap. 0 <s. 1EG.%G#+r$ as on 1/D)ugD2GGE
Impact +ost0 %.%B as on 8ulD2GGE
?2 week high=low price0 ?E.GG=E.2?
1/
-< CONCLUSION
)s the financial markets are going towards development with the pace of economic
growth, the postDrecession market e!pects a lot from the investors. In this regard it can be
seen that there is a huge scope for the companies providing financial services in coming days.
*o, the opportunity to gain more and create a brand equity is there and it is not too hard for a
market player like )pollo *indhoori to achieve such. ) mare sophistication and improvement
in services can pay much.
1?
CHAPTER 3
TECHNICAL ANALYSIS
8-# MEANING OF TECHNICAL ANALYSIS
Te*'%i*)2 )%)2y.i. is a security analysis technique that claims the ability to forecast
the future direction of prices through the study of past market data, primarily price and
volume. In its purest form, technical analysis considers only the actual price and volume
behavior of the market or instrument. echnical analysts, sometimes called NchartistsN, may
employ models and trading rules based on price and volume transformations, such as the
relative strength inde!, moving averages, regressions, interDmarket and intraDmarket price
correlations, cycles or, classically, through recognition of chart patterns.
echnical analysis stands in distinction to fundamental analysis. echnical analysis
NignoresN the actual nature of the company, market, currency or commodity and is based
solely on Nthe charts,N that is to say price and volume information, whereas fundamental
analysis does look at the actual facts of the company, market, currency or commodity. 3or
e!ample, any large brokerage, trading group, or financial institution will typically have both a
technical analysis and fundamental analysis team.
8ust as there are many investment styles on the fundamental side, there are also many
different types of technical traders. *ome rely on chart patternsO others use technical
indicators and oscillators, and most use some combination of the two. In any case, technical
analystsP e!clusive use of historical price and volume data is what separates them from their
fundamental counterparts. 9nlike fundamental analysts, technical analysts donPt care whether
a stock is undervalued D the only thing that matters is a securityPs past trading data and what
information this data can provide about where the security might move in the future.
8- ASSUM0TIONS OF TECHNICAL ANALYSIS
echnical )nalysis is based on certain assumptions. It does not matter whether the
assumptions are reflected in actual practice or not, investors take those in to consideration
while taking investment decisions and analy"ing technical indicators. hese basic
assumptions are0
1@
#- T'e M)&Aet Di.*+u%t. E5e&yt'i%(
) major criticism of technical analysis is that it only considers price movement,
ignoring the fundamental factors of the company. &owever, technical analysis assumes that,
at any given time, a stockPs price reflects everything that has or could affect the company D
including fundamental factors. echnical analysts believe that the companyPs fundamentals,
along with broader economic factors and market psychology, are all priced into the stock,
removing the need to actually consider these factors separately. his only leaves the analysis
of price movement, which technical theory views as a product of the supply and demand for a
particular stock in the market.
- 0&i*e M+5e. i% T&e%d.
In technical analysis, price movements are believed to follow trends. his means that
after a trend has been established, the future price movement is more likely to be in the same
direction as the trend than to be against it. -ost technical trading strategies are based on this
assumption.
8- Hi.t+&y Te%d. T+ Re4e)t It.e2,
)nother important idea in technical analysis is that history tends to repeat itself,
mainly in terms of price movement. he repetitive nature of price movements is attributed to
market psychologyO in other words, market participants tend to provide a consistent reaction
to similar market stimuli over time. echnical analysis uses chart patterns to analy"e market
movements and understand trends. )lthough many of these charts have been used for more
than 1GG years, they are still believed to be relevant because they illustrate patterns in price
movements that often repeat themselves.
=- N+t Cu.t ,+& St+*A.
echnical analysis can be used on any security with historical trading data. his
includes stocks, futures and commodities, fi!edDincome securities, fore!, etc. In this report,
wePll usually analy"e stocks in our e!amples, but keep in mind that these concepts can be
applied to any type of security. In fact, technical analysis is more frequently associated with
commodities and fore!, where the participants are predominantly traders.
1A
8-8 TECHNICAL ANALYSIS F FUNDAMENTAL ANALYSIS
echnical analysis and fundamental analysis are the two main schools of thought in
the financial markets. )s wePve mentioned, technical analysis looks at the price movement of
a security and uses this data to predict its future price movements. 3undamental analysis, on
the other hand, looks at economic factors, known as fundamentals. ,etPs get into the details of
how these two approaches differ, the criticisms against technical analysis and how technical
and fundamental analysis can be used together to analy"e securities.
T'e Di,,e&e%*e.
1. Charts vs. Financial Statements
)t the most basic level, a technical analyst approaches a security from the charts,
while a fundamental analyst starts with the financial statements. (y looking at the balance
sheet, cash flow statement and income statement, a fundamental analyst tries to determine a
companyPs value. In financial terms, an analyst attempts to measure a companyPs intrinsic
value. In this approach, investment decisions are fairly easy to make D if the price of a stock
trades below its intrinsic value, itPs a good investment. )lthough this is an oversimplification
#fundamental analysis goes beyond just the financial statements$.
echnical traders, on the other hand, believe there is no reason to analy"e a companyPs
fundamentals because these are all accounted for in the stockPs price. echnicians believe that
all the information they need about a stock can be found in its charts.
2. Time Horizon
3undamental analysis takes a relatively longDterm approach to analy"ing the market
compared to technical analysis. 7hile technical analysis can be used on a timeframe of
weeks, days or even minutes, fundamental analysis often looks at data over a number of
years.
he different timeframes that these two approaches use is a result of the nature of the
investing style to which they each adhere. It can take a long time for a companyPs value to be
reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not
reali"ed until the stockPs market price rises to its NcorrectN value. his type of investing is
called value investing and assumes that the shortDterm market is wrong, but that the price of a
1B
particular stock will correct itself over the long run. his Nlong runN can represent a
timeframe of as long as several years, in some cases.
3urthermore, the numbers that a fundamentalist analy"es are only released over long
periods of time. 3inancial statements are filed quarterly and changes in earnings per share
donPt emerge on a daily basis like price and volume information. )lso remember that
fundamentals are the actual characteristics of a business. 2ew management canPt implement
sweeping changes overnight and it takes time to create new products, marketing campaigns,
supply chains, etc. Cart of the reason that fundamental analysts use a longDterm timeframe,
therefore, is because the data they use to analy"e a stock is generated much more slowly than
the price and volume data used by technical analysts.
3. Trading ersus !nvesting
2ot only is technical analysis more short term in nature that fundamental analysis, but
the goals of a purchase #or sale$ of a stock are usually different for each approach. In general,
technical analysis is used for a trade, whereas fundamental analysis is used to make an
investment. Investors buy assets they believe can increase in value, while traders buy assets
they believe they can sell to somebody else at a greater price. he line between a trade and an
investment can be blurry, but it does characteri"e a difference between the two schools.
8-= THE CRITICS OF TECHNICAL ANALYSIS
*ome critics see technical analysis as a form of black magic. DonPt be surprised to see
them question the validity of the discipline to the point where they mock its supporters. In
fact, technical analysis has only recently begun to enjoy some mainstream credibility. 7hile
most analysts on 7all *treet focus on the fundamental side, just about any major brokerage
now employs technical analysts as well.
-uch of the criticism of technical analysis has its roots in academic theory D
specifically the efficient market hypothesis #.-&$. his theory says that the marketPs price is
always the correct one D any past trading information is already reflected in the price of the
stock and, therefore, any analysis to find undervalued securities is useless.
here are three versions of .-&. In the first, called weak form efficiency, all past
price information is already included in the current price. )ccording to weak form efficiency,
technical analysis canPt predict future movements because all past information has already
been accounted for and, therefore, analy"ing the stock1s past price movements will provide
no insight into its future movements. In the second, semiDstrong form efficiency, fundamental
analysis is also claimed to be of little use in finding investment opportunities. he third is
strong form efficiency, which states that all information in the market is accounted for in a
1E
stockPs price and neither technical nor fundamental can provide investors with an edge. he
vast majority of academics believe in at least the weak version of .-&, therefore, from their
point of view, if technical analysis works, market efficiency will be called into question.
8-: CO-EBISTENCE OF TECHNICAL ANALYSIS FFUNDAMENTAL ANALYSIS
)lthough technical analysis and fundamental analysis are seen by many as polar
opposites D the oil and water of investing D many market participants have e!perienced great
success by combining the two. 3or e!ample, some fundamental analysts use technical
analysis techniques to figure out the best time to enter into an undervalued security.
'ftentimes, this situation occurs when the security is severely oversold. (y timing entry into
a security, the gains on the investment can be greatly improved.
)lternatively, some technical traders might look at fundamentals to add strength to a
technical signal. 3or e!ample, if a sell signal is given through technical patterns and
indicators, a technical trader might look to reaffirm his or her decision by looking at some
key fundamental data. 'ftentimes, having both the fundamentals and technical1s on your side
can provide the bestDcase scenario for a trade.
7hile mi!ing some of the components of technical and fundamental analysis is not
well received by the most devoted groups in each school, there are certainly benefits to at
least understanding both schools of thought.
8-< TECHNICAL TOOLS
In echnical )nalysis, there are a lot of tools and strategies that enable us to draw
necessary conclusions at the time of taking important decisions. *ome of the most applicable
and appreciated tools are discussed below0
8-<-# SU00ORT AND REGISTANCE
) .u44+&t 2e5e2 is a price level where the price tends to find support as it is going
down. his means the price is more likely to NbounceN off this level rather than break through
it. &owever, once the price has passed this level, by an amount e!ceeding some noise, it is
likely to continue dropping until it finds another support level.
) &e.i.t)%*e 2e5e2 is the opposite of a support level. It is where the price tends to find
resistance as it is going up. his means the price is more likely to NbounceN off this level
rather than break through it. &owever, once the price has passed this level, by an amount
2G
e!ceeding some noise, it is likely that it will continue rising until it finds another resistance
level.
21
'nce you understand the concept of a trend, the ne!t major concept is that of support
and resistance. 4ouPll often hear technical analysts talk about the ongoing battle between the
bulls and the bears, or the struggle between buyers #demand$ and sellers #supply$. his is
revealed by the prices a security seldom moves above #resistance$ or below #support$.
FIGURE NO-: 8-#
FIGURE TITLE: SU00ORT AND RESISTANCE
SOURCE: 777-met).t+*A-*+m
)s it can be seen in this 3igure, support is the price level through which a stock or
market seldom falls #illustrated by the blue arrows$. <esistance, on the other hand, is the price
level that a stock or market seldom surpasses #illustrated by the red arrows$.
6'y d+e. it ')44e%G
hese support and resistance levels are seen as important in terms of market
psychology and supply and demand. *upport and resistance levels are the levels at which a
lot of traders are willing to buy the stock #in the case of a support$ or sell it #in the case of
resistance$. 7hen these trend lines are broken, the supply and demand and the psychology
behind the stockPs movements is thought to have shifted, in which case new levels of support
and resistance will likely be established.
T'e Im4+&t)%*e +, Su44+&t )%d Re.i.t)%*e
*upport 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. 3or e!ample, if a trader
identifies an important level of resistance that has been tested several times but never broken,
he or she may decide to take profits as the security moves toward this point because it is
unlikely that it will move past this level.
22
*upport and resistance levels both test and confirm trends and need to be monitored
by anyone who uses technical analysis. )s 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. 3or e!ample, if prices moved above the resistance level of an up trending channel,
the trend have accelerated and not reversed. his means that the price appreciation is
e!pected to be faster than it was in the channel.
(eing aware of these important support and resistance points should affect the way
that you trade a stock. raders 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 rule0 do not
place orders directly at the support or resistance level. his is because in many cases, the
price never actually reaches the whole number, but flirts with it instead. *o if youPre bullish
on a stock 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. 'n the other
hand, if you are placing stops or short selling, set up your trade price at or below the level of
support.
R+u%d Numbe&. )%d Su44+&t )%d Re.i.t)%*e
'ne type of universal support and resistance that tends to be seen across a large
number of securities is round numbers. <ound numbers like 1G, 2G, %?, ?G, 1GG and 1,GGG
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.
(uyers will often purchase large amounts of stock once the price starts to fall toward a
major round number such as I2< ?G, which makes it more difficult for shares to fall below
the level. 'n the other hand, sellers start to sell off a stock 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.
R+2e Re5e&.)2
'nce 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. )s the price moves past a level of support or resistance, it
2%
is thought that supply and demand has shifted, causing the breached level to reverse its role.
3or a true reversal to occur, however, it is important that the price make a strong move
through either the support or resistance.
FIGURE NO-: 8-
FIGURE TITLE: ROLE REVERSAL
SOURCE: 777-t&e%di%(#8-*+m
3or e!ample, as you can see in above, the dotted line is shown as a level of resistance
that has prevented the price from heading higher on two previous occasions #Coints 1 and 2$.
&owever, once the resistance is broken, it becomes a level of support #shown by Coints % and
/$ by propping up the price and preventing it from heading lower again.
-any traders who begin using technical analysis find this concept hard to believe and
donPt reali"e that this phenomenon occurs rather frequently, even with some of the most wellD
known companies.
In almost every case, a stock will have both a level of support and a level of resistance
and will trade in this range as it bounces between these levels. his is most often seen when a
stock is trading in a generally sideways manner as the price moves through successive peaks
and troughs, testing resistance and support.
8-<- VOLUME
Folume is simply the number of shares or contracts that trade over a given period of
time, usually a day. &igher volume means the security has been more active. o determine the
movement of the volume #up or down$, chartists look at the volume bars that can usually be
found at the bottom of any chart. Folume bars illustrate how many shares have traded per
period and show trends in the same way that prices do.
2/
FIGURE NO-: 8-8
FIGURE TITLE: VOLUME OF SHARES
SOURCE: 777-met).t+*A-*+m
6'y V+2ume i. im4+&t)%t>
Folume is an important aspect of technical analysis because it is used to confirm
trends and chart patterns. )ny price movement up or down with relatively high volume is
seen as a stronger, more relevant move than a similar move with weak volume. herefore, if
you are looking at a large price movement, you should also e!amine the volume to see
whether it tells the same story.
*ay, for e!ample, that a stock jumps ?I in one trading day after being in a long
downtrend. Is this a sign of a trend reversal> his is where volume helps traders. If volume is
high during the day relative to the average daily volume, it is a sign that the reversal is
probably for real. 'n the other hand, if the volume is below average, there may not be enough
conviction to support a true trend reversal.
Folume should move with the trend. If prices are moving in an upward trend, volume
should increase #and vice versa$. If the previous relationship between volume and price
movements starts to deteriorate, it is usually a sign of weakness in the trend. 3or e!ample, if
the stock 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.
2?
7hen volume tells a different story, it is a case of divergence, which refers to a
contradiction between two different indicators. he simplest e!ample of divergence is a clear
upward trend on declining volume.
V+2ume )%d C')&t 0)tte&%.
he other use of volume is to confirm chart patterns. Catterns such as head and
shoulders, triangles, flags and other price patterns can be confirmed with volume. In most
chart patterns, there are several pivotal points that are vital to what the chart is able to convey
to chartists. (asically, 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.
V+2ume 0&e*ede. 0&i*e
)nother important idea in technical analysis is that price is preceded by volume.
Folume 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.
8-<-8 RANDOM 6ALK HY0OTHESIS
he &)%d+m 7)2A 'y4+t'e.i. is a financial theory stating that stock market prices evolve
according to a random walk and thus the prices of the stock market cannot be predicted. It has
been described as PjibingP with the efficient market hypothesis. .conomists have historically
accepted the random walk hypothesis. hey have run several tests and continue to believe
that stock prices are completely random because of the efficiency of the market.
8-9-= TECHNICAL 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. It is important to be able to understand and identify trends so
that you can trade with rather than against them. wo important sayings in technical analysis
are Nthe trend is your friendN and NdonPt buck the trend,N illustrating how important trend
analysis is for technical traders.
here are three types of trends as0
U4-T&e%d
)s the names imply, when each successive peak and trough is higher, itPs referred to
as an upward trend.
2@
D+7%t&e%d
It describes the price movement of a financial asset when the overall direction is
downward. ) formal downtrend occurs when each successive peak and trough is lower than
the ones found earlier in the trend.
FIGURE NO-: 8-=
FIGURE TITLE: DO6NTREND OF SHARE 0RICE
SOURCE: 777-i%5e.t+4edi)-*+m
Downtrend is the opposite of uptrend. -any traders seek to avoid
downtrends because they can drastically affect the value of any investment. ) downtrend can
last for minutes, days, weeks, months or even years so identifying a downtrend early is very
important. 'nce a downtrend has been established #series of lower peaks$ a trader should be
very cautious about entering into any new long positions.
Side7)y.>H+&iH+%t)2 T&e%d.
It describes the hori"ontal price movement that occurs when the forces of supply and
demand are nearly equal. ) sideways trend is often regarded as a period of consolidation
before the price continues in the direction of the previous move.
) sideways price trend is also commonly known as a Nhori"ontal trendN. *ideways trend
is generally a result of the price traveling between strong levels of support and resistance. It is
not uncommon to see a hori"ontal trend dominate the price action of a specific asset for a
prolonged period before starting a move higher or lower. (rief consolidation is often needed
during large price runs, as it is nearly impossible for such large price moves to sustain
themselves over the longer term.
2A
8-<-: TREND LENGTHS
)long with these three trend directions, there are three trend classifications. ) trend of
any direction can be classified as a longDterm trend, intermediate trend or a short term trend.
In terms of the stock market, a major trend is generally categori"ed as one lasting longer than
a year. )n intermediate trend is considered to last between one and three months and a nearD
term trend is anything less than a month. ) longDterm 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. he
shortDterm trends are components of both major and intermediate trends. ake a look a 3igure
/ to get a sense of how these three trend lengths might look.
FIGURE NO-:8-:
FIGURE TITLE: TRENDLENGTHS
SOURCE: 777-met).t+*A-*+m
7hen analy"ing trends, it is important that the chart is constructed to best reflect the type
of trend being analy"ed. o help identify longDterm trends, weekly charts or daily charts
spanning a fiveDyear period are used by chartists to get a better idea of the longDterm trend.
Daily data charts are best used when analy"ing both intermediate and shortDterm trends. It is
also important to remember that the longer the trend, the more important it isO for e!ample, a
oneDmonth trend is not as significant as a fiveDyear trend.
2B
8-<-< TRENDLINE
) trendline is a simple charting technique that adds a line to a chart to represent the trend
in the market or a stock. Drawing a trendline is as simple as drawing a straight line that
follows a general trend. hese lines are used to clearly show the trend and are also used in the
identification of trend reversals.
)s it can be seen in the figure, an upward trendline is drawn at the lows of an upward
trend. his line represents the support the stock has every time it moves from a high to a low.
2otice how the price is propped up by this support. his type of trendline helps traders to
anticipate the point at which a stockPs price will begin moving upwards again. *imilarly, a
downward trendline is drawn at the highs of the downward trend. his line represents the
resistance level that a stock faces every time the price moves from a low to a high.
FIGURE NO-: 8-<
FIGURE TITLE: TRENDLINE
SOURCE: 777-met).t+*A-*+m
8-<-9 CHANNELS
) channel, or channel lines, is the addition of two parallel trendlines that act as strong
areas of support and resistance. he upper trendline connects a series of highs, while the
lower trendline connects a series of lows. ) channel can slope upward, downward or
sideways but, regardless of the direction, the interpretation remains the same. raders will
e!pect 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 e!pect a sharp move in the
direction of the break. )long with clearly displaying the trend, channels are mainly used to
illustrate important areas of support and resistance.
2E
FIGURE NO-: 8-9
FIGURE TITLE: CHANNEL
SOURCE: 777-met).t+*A-*+m
3igure illustrates a descending channel on a stock chartO the upper trendline has been
placed on the highs and the lower trendline is on the lows. he price has bounced off of these
lines several times, and has remained rangeDbound for several months. )s long as the price
does not fall below the lower line or move beyond the upper resistance, the rangeDbound
downtrend is e!pected to continue.
8-<-" TECHNICAL CHARTS
In technical analysis, charts are similar to the charts that you see in any business
setting. ) chart is simply a graphical representation of a series of prices over a set time frame.
3or e!ample, a chart may show a stockPs price movement over a oneDyear period, where each
point on the graph represents the closing price for each day the stock is traded0
FIGURE NO-: 8-"
FIGURE TITLE: A SAM0LE CHART
SOURCE: 777-.t+*A*')&t.-*+m
%G
he above figure provides an e!ample of a basic chart. It is a representation of the
price movements of a stock over a 1.? year period. he bottom of the graph, running
hori"ontally #!Da!is$, is the date or time scale. 'n the right hand side, running vertically #yD
a!is$, the price of the security is shown. (y looking at the graph we see that in 'ctober 2GG/
#Coint 1$, the price of this stock was around I2< 2/?, whereas in 8une 2GG? #Coint 2$, the
stockPs price is around I2< 2@?. his tells us that the stock has risen between 'ctober 2GG/
and 8une 2GG?.
8-<-"-# CHART 0RO0ERTIES
here are several things that you should be aware of when looking at a chart, as these
factors can affect the information that is provided. hey include the time scale, the price scale
and the price point properties used.
1. The Time Scale
he time scale refers to the range of dates at the bottom of the chart, which can vary
from decades to seconds. he most frequently used time scales are intraday, daily, weekly,
monthly, quarterly and annually. he shorter the time frame, the more detailed the chart. .ach
data point can represent the closing price of the period or show the open, the high, the low
and the close depending on the chart used.
Intraday charts plot price movement within the period of one day. his means that the
time scale could be as short as five minutes or could cover the whole trading day from the
opening bell to the closing bell.
Daily charts are comprised of a series of price movements in which each price point
on the chart is a full day1s trading condensed into one point. )gain, each point on the graph
can be simply the closing price or can entail the open, high, low and close for the stock over
the day. hese data points are spread out over weekly, monthly and even yearly time scales to
monitor both shortDterm and intermediate trends in price movement.
7eekly, monthly, quarterly and yearly charts are used to analy"e longer term trends in
the movement of a stockPs price. .ach data point in these graphs will be a condensed version
of what happened over the specified period. *o for a weekly chart, each data point will be a
representation of the price movement of the week. 3or e!ample, if you are looking at a chart
of weekly data spread over a fiveDyear period and each data point is the closing price for the
week, the price that is plotted will be the closing price on the last trading day of the week,
which is usually a 3riday.
%1
2. The "rice Scale and "rice "oint "ro#erties
he price scale is on the rightDhand side of the chart. It shows a stockPs current price
and compares it to past data points. his may seem like a simple concept in that the price
scale goes from lower prices to higher prices as you move along the scale from the bottom to
the top. he problem, however, is in the structure of the scale itself. ) scale can either be
constructed in a linear #arithmetic$ or logarithmic way, and both of these options are available
on most charting services.
If a price scale is constructed using a linear scale, the space between each price point
#1G, 2G, %G, /G$ is separated by an equal amount. ) price move from 1G to 2G on a linear scale
is the same distance on the chart as a move from /G to ?G. In other words, the price scale
measures moves in absolute terms and does not show the effects of percent change.
FIGURE NO-: 8-;
FIGURE TITLE: 0RICE SCALE
SOURCE: 777-met).t+*A-*+m
If a price scale is in logarithmic terms, then the distance between points will be equal
in terms of percent change. ) price change from 1G to 2G is a 1GGI increase in the price
while a move from /G to ?G is only a 2?I change, even though they are represented by the
same distance on a linear scale. 'n a logarithmic scale, the distance of the 1GGI price change
from 1G to 2G will not be the same as the 2?I change from /G to ?G. In this case, the move
from 1G to 2G is represented by a larger space one the chart, while the move from /G to ?G, is
represented by a smaller space because, percentageDwise, it indicates a smaller move. In
3igure 2, the logarithmic price scale on the right leaves the same amount of space between 1G
and 2G as it does between 2G and /G because these both represent 1GGI increases.
%2
8-<-"- TY0ES OF CHARTS
here are four main types of charts that are used by investors and traders depending
on the information that they are seeking and their individual skill levels. he chart types are0
the line chart, the bar chart, the candlestick chart and the point and figure chart.
#- Li%e C')&t
he most basic of the four charts is the line chart because it represents only the
closing prices over a set period of time. he line is formed by connecting the closing prices
over the time frame. ,ine charts do not provide visual information of the trading range for the
individual points such as the high, low and opening prices. &owever, the closing price is
often considered to be the most important price in stock data compared to the high and low
for the day and this is why it is the only value used in line charts.
FIGURE NO-: 8-#!
FIGURE TITLE: LINE CHART
SOURCE: 777-met).t+*A-*+m
- 1)& C')&t.
'ne of the basic tools of technical analysis is the 1)& C')&t, where the open, close,
high, and low prices of stocks or other financial instruments are embedded in bars which are
plotted as a series of prices over a specific time period. (ar charts allow traders to see
patterns more easily. In other words, each bar is actually just a set of / prices for a given day,
or some other time period, that is connected by a bar in a specific wayQhence, it is often
referred to as a 4&i*e b)&.
%%
FIGURE NO-: 8-##
FIGURE TITLE: 0RICE 1AR
SOURCE: 777-t'i.m)tte&-*+m
) price bar shows the +4e%i%( 4&i*e of the financial instrument, which is the price at
the beginning of the time period, as a left hori"ontal line, and the *2+.i%( 4&i*e, which is the
last price for the period, as a right hori"ontal line. hese hori"ontal lines are also called ti*A
m)&A.. he 'i(' 4&i*e is represented by the top of the bar and the 2+7 4&i*e is depicted by
the bottom of the bar.
he bar chart e!pands on the line chart by adding several more key pieces of
information to each data point. he chart is made up of a series of vertical lines that represent
each data point. his vertical line represents the high and low for the trading period, along
with the closing price. he close and open are represented on the vertical line by a hori"ontal
dash. he opening price on a bar chart is illustrated by the dash that is located on the left side
of the vertical bar. +onversely, the close is represented by the dash on the right. :enerally, if
the left dash #open$ is lower than the right dash #close$ then the bar will be shaded black,
representing an up period for the stock, which means it has gained value. ) bar that is colored
red signals that the stock has gone down in value over that period. 7hen this is the case, the
dash on the right #close$ is lower than the dash on the left #open$.
3ollowing is a bar chart that represents the details0
%/
FIGURE NO-: 8-#
FIGURE TITLE: 1AR CHART
SOURCE: 777-met).t+*A-*+m
8- C)%d2e.ti*A C')&t.
)nother type of chart used in technical analysis is the candlestick chart, so called
because the main component of the chart representing prices looks like a candlestick, with a
thick body, called the &e)2 b+dy, and usually a line e!tending above and below it, called the
u44e& .')d+7 and 2+7e& .')d+7, respectively. he top of the upper shadow represents the
high price, while the bottom of the lower shadow represents the low price. Catterns are
formed both by the real body and the shadows. +andlestick patterns are most useful over
short periods of time, and mostly have significance at the top of an uptrend or the bottom of a
downtrend, when the patterns most often signify a reversal of the trend.
FIGURE NO-: 8-#8
FIGURE TITLE: CANDLE-STICK 1AR 0ARTS
SOURCE: 777-7iAi4edi)-*+m
%?
7hile the candlestick chart shows basically the same information as the bar chart,
certain patterns are more apparent in the candlestick chart. he candlestick chart emphasi"es
opening and closing prices. he top and bottom of the real body represents the opening and
closing prices. 7hether the top represents the opening or closing price depends on the color
of the real bodyQif it is 7'ite, then the top represents the closeO b2)*A, or some other dark
color, indicates that the top was the opening price. he length of the real body shows the
difference between the opening and closing prices. 'bviously, white real bodies indicate
bullishness, while black real bodies indicate bearishness, and their pattern is easily observable
in a candlestick chart.
he candlestick chart is similar to a bar chart, but it differs in the way that it is
visually constructed. *imilar to the bar chart, the candlestick also has a thin vertical line
showing the periodPs trading range. he difference comes in the formation of a wide bar on
the vertical line, which illustrates the difference between the open and close. here are two
color constructs for days up and one for days that the price falls. 7hen the price of the stock
is up and closes above the opening trade, the candlestick will usually be white or clear. If the
stock has traded down for the period, then the candlestick will usually be red or black,
depending on the site. If the stockPs price has closed above the previous day1s close but below
the dayPs open, the candlestick will be black or filled with the color that is used to indicate an
up day.
It can be illustrated as0
FIGURE NO-: 8-#=
FIGURE TITLE: CANDLE-STICK CHART
SOURCE: 777-met).t+*A-*+m
%@
=- 0+i%t-)%d-Fi(u&e C')&t.:
0+i%t-)%d-,i(u&e *')&t. list only significant price information as columns of 6Ps and
'Ps without regard to time, so that trends, resistance and support levels are more apparent.
)lthough time is depicted on the hori"ontal a!is, the units of time are determined by when
the trend changes.
here are several ways of constructing pointDandDfigure charts, but all are based on
b+I .iHe, which is the minimum price differential necessary before a price is recorded as an 6
or an '. +olumns of 6Ps show an uptrend, and 'Ps show a downtrend. :enerally, closing
price differentials are used. here is no high, low, opening, or closing prices recorded, since
only the change in price greater than the bo! si"e is recorded as an 6 if the price differential
is up or as an ' if it is down. .ach consecutive 6 is recorded in the same column above the
previous 6 until the price reverses by more than the bo! si"e, then a new column is started by
recording an ' in a bo! below and to the right of the highest 6 in the previous column. 'Ps
are added downward with each price decrease greater than the bo! si"e until the downtrend
reverses to an uptrend, starting a new column where the 1
st
6 is placed in the bo! above and
to the right of the last ' in the previous column.
he construction of pointDandDfigure charts simplifies the drawing of trend lines, and
support and resistance levels, which is why pointDandDfigure charts are ideal for detecting
trends, and determining support and resistance levels.
3ollowing is the pointDandDfigure chart of Intel +orporation. In this chart, the 6Ps are green
and the 'Ps are red, which increases their contrast, making patterns more apparent.
FIGURE NO-: 8-#:
FIGURE TITLE: 0OINT AND FIGURE CHART
S+u&*e: 777-t&)de.t)ti+%-*+m
%A
his seems to be the most common type of pointDandDfigure chart, but there are
several variations that differ significantly from the above description.
+harts are one of the most fundamental aspects of technical analysis. It is important
that one should clearly understand what is being shown on a chart and the information that it
provides.
8-<-"-8 CHART 0ATTERNS
) chart pattern is a distinct formation on a stock chart that creates a trading signal, or
a sign of future price movements. +hartists use these patterns to identify current trends and
trend reversals and to trigger buy and sell signals.
he theory behind chart patterns is based on the third assumption that is history
repeats itself. he idea is that certain patterns are seen many times, and that these patterns
signal a certain high probability move in a stock. (ased on the historic trend of a chart pattern
setting up a certain price movement, chartists look for these patterns to identify trading
opportunities.
7hile there are general ideas and components to every chart pattern, there is no chart
pattern that will tell you with 1GGI certainty where a security is headed. his creates some
leeway and debate as to what a good pattern looks like, and is a major reason why charting is
often seen as more of an art than a science.
here are two types of patterns within this area of technical analysis, reversal and
continuation. ) reversal pattern signals that a prior trend will reverse upon completion of the
pattern. ) continuation pattern, on the other hand, signals that a trend will continue once the
pattern is complete. hese patterns can be found over charts of any timeframe. In this section,
we will review some of the more popular chart patterns.
#- He)d )%d S'+u2de&.
his is one of the most popular and reliable chart patterns in technical analysis. &ead
and shoulders is a reversal chart pattern that when formed, signals that the security is likely to
move against the previous trend. )s you can see in 3igure, there are two versions of the head
and shoulders chart pattern. &ead and shoulders top #shown on the left$ is a chart pattern that
is formed at the high of an upward movement and signals that the upward trend is about to
end. &ead and shoulders bottom, also known as inverse head and shoulders #shown on the
right$ is the lesser known of the two, but is used to signal a reversal in a downtrend.
%B
FIGURE NO-: 8-#<
FIGURE TITLE: HEAD AND SHOULDER CHART 0ATTERN
SOURCE: 777-met).t+*A-*+m
3igure0 &ead and shoulders top is shown on the left. &ead and shoulders bottom, or inverse
head and shoulders, is on the right.
(oth of these head and shoulders patterns are similar in that there are four main parts0
two shoulders, a head and a neckline. )lso, each individual head and shoulder is comprised of
a high and a low. 3or e!ample, in the head and shoulders top image shown on the left side in
3igure 1, the left shoulder is made up of a high followed by a low. In this pattern, the neckline
is a level of support or resistance. It can be remember that an upward trend is a period of
successive rising highs and rising lows. he head and shoulders chart pattern, therefore,
illustrates a weakening in a trend by showing the deterioration in the successive movements
of the highs and lows.
- Cu4 )%d H)%d2e
) cup and handle chart is a bullish continuation pattern in which the upward trend has
paused but will continue in an upward direction once the pattern is confirmed.
FIGURE NO-: 8-#9
FIGURE TITLE: CU0 AND HANDLE CHART 0ATTERN
SOURCE: 777-met).t+*A-*+m
%E
)s it can be seen in the above figure, the price pattern forms what looks like a cup,
which is preceded by an upward trend. he handle follows the cup formation and is formed
by a generally downward=sideways movement in the securityPs price. 'nce the price
movement pushes above the resistance lines formed in the handle, the upward trend can
continue. here is a wide ranging time frame for this type of pattern, with the span ranging
from several months to more than a year.
8- D+ub2e T+4. )%d 1+tt+m.
his chart pattern is another wellDknown pattern that signals a trend reversal D it is
considered to be one of the most reliable and is commonly used. hese patterns are formed
after a sustained trend and signal to chartists that the trend is about to reverse. he pattern is
created when a price movement tests support or resistance levels twice and is unable to break
through. his pattern is often used to signal intermediate and longDterm trend reversals.
FIGURE NO-: 8-#"
FIGURE TITLE: DOU1LE TO0S AND 1OTTOMS CHART 0ATTERN
SOURCE: 777-met).t+*A-*+m
In the case of the double top pattern in 3igure %.1A, the price movement has twice
tried to move above a certain price level. )fter two unsuccessful attempts at pushing the price
higher, the trend reverses and the price heads lower. In the case of a double bottom #shown on
the right$, the price movement has tried to go lower twice, but has found support each time.
)fter the second bounce off of the support, the security enters a new trend and heads upward.
=- T&i)%(2e.
/G
riangles are some of the most wellDknown chart patterns used in technical analysis.
he three types of triangles, which vary in construct and implication, are the symmetrical
triangle, ascending and descending triangle. hese chart patterns are considered to last
anywhere from a couple of weeks to several months.
FIGURE NO-: 8-#;
FIGURE TITLE: TRIANGLES CHART 0ATTERN
SOURCE: 777-met).t+*A-*+m
he symmetrical triangle in 3igure / is a pattern in which two trendline converge
toward each other. his pattern is neutral in that a breakout to the upside or downside is a
confirmation of a trend in that direction. In an ascending triangle, the upper trendline is flat,
while the bottom trendline is upward sloping. his is generally thought of as a bullish pattern
in which chartists look for an upside breakout. In a descending triangle, the lower trendline is
flat and the upper trendline is descending. his is generally seen as a bearish pattern where
chartists look for a downside breakout.
:- F2)( )%d 0e%%)%t
/1
hese two shortDterm chart patterns are continuation patterns that are formed when
there is a sharp movement followed by a generally sideways price movement. his pattern is
then completed upon another sharp price movement in the same direction as the move that
started the trend. he patterns are generally thought to last from one to three weeks.
FIGURE NO-: 8-!
FIGURE TITLE: FLAG AND 0ENNANT CHART 0ATTERN
SOURCE: 777-met).t+*A-*+m
)s you can see, there is little difference between a pennant and a flag. he main
difference between these price movements can be seen in the middle section of the chart
pattern. In a pennant, the middle section is characteri"ed by converging trendline, much like
what is seen in a symmetrical triangle. he middle section on the flag pattern, on the other
hand, shows a channel pattern, with no convergence between the trendline. In both cases, the
trend is e!pected to continue when the price moves above the upper trendline.
<- 6ed(e
he wedge chart pattern can be either a continuation or reversal pattern. It is similar to
a symmetrical triangle e!cept that the wedge pattern slants in an upward or downward
direction, while the symmetrical triangle generally shows a sideways movement. he other
difference is that wedges tend to form over longer periods, usually between three and si!
months.
FIGURE NO-: 8-#
/2
FIGURE TITLE: 6EDGE CHART 0ATTERN
SOURCE: 777-met).t+*A-*+m
he fact that wedges are classified as both continuation and reversal patterns can
make reading signals confusing. &owever, at the most basic level, a falling wedge is bullish
and a rising wedge is bearish. In the above figure, we have a falling wedge in which two
trend lines are converging in a downward direction. If the price was to rise above the upper
trendline, it would form a continuation pattern, while a move below the lower trendline
would signal a reversal pattern.
9- G)4.
) gap is witnessed very recently when the trade was halted due to upper free"e R
2GI. ) gap in a chart is an empty space between a trading period and the following trading
period. his occurs when there is a large difference in prices between two sequential trading
periods. 3or e!ample, if the trading range in one period is between I2< 2? and I2< %G and
the ne!t trading period opens at I2< /G, there will be a large gap on the chart between these
two periods. :ap price movements can be found on bar charts and candlestick charts but will
not be found on point and figure or basic line charts. :aps generally show that something of
significance has happened in the security, such as a betterDthanDe!pected earnings
announcement.
here are three main types of gaps, breakaway, runaway #measuring$ and e!haustion.
) breakaway gap forms at the start of a trend, a runaway gap forms during the middle of a
trend and an e!haustion gap forms near the end of a trend.
8-9 TECHNICAL INDICATORS
/%
I%di*)t+&. are calculations based on the price and the volume of a security that
measure such things as money flow, trends, volatility and momentum. Indicators are used as a
secondary measure to the actual price movements and add additional information to the
analysis of securities. Indicators are used in two main ways0 to confirm price movement and
the quality of chart patterns, and to form buy and sell signals.
here are two main types of indicators0 leading and lagging. ) leading indicator
precedes price movements, giving them a predictive quality, while a lagging indicator is a
confirmation tool because it follows price movement. ) leading indicator is thought to be the
strongest during periods of sideways or nonDtrending trading ranges, while the lagging
indicators are still useful during trending periods.
here are also two types of indicator constructions0 those that fall in a bounded range
and those that do not. he ones that are bound within a range are called oscillators D these are
the most common type of indicators. 'scillator indicators have a range, for e!ample between
"ero and 1GG, and signal periods where the security is overbought #near 1GG$ or oversold
#near "ero$. 2onDbounded indicators still form buy and sell signals along with displaying
strength or weakness, but they vary in the way they do this.
he two main ways that indicators are used to form buy and sell signals in technical
analysis is through crossovers and divergence. +rossovers are the most popular and are
reflected when either the price moves through the moving average, or when two different
moving averages cross over each other. he second way indicators are used is through
divergence, which happens when the direction of the price trend and the direction of the
indicator trend are moving in the opposite direction. his signals to indicator users that the
direction of the price trend is weakening.
Indicators that are used in technical analysis provide an e!tremely useful source of
additional information. hese indicators help identify momentum, trends, volatility and
various other aspects in a security to aid in the technical analysis of trends. It is important to
note that while some traders use a single indicator solely for buy and sell signals, they are
best used in conjunction with price movement, chart patterns and other indicators.
8-9-# MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD$:
//
he moving average convergence divergence #-)+D$ is one of the most well known
and used indicators in technical analysis. his indicator is comprised of two e!ponential
moving averages, which help to measure momentum in the security. he -)+D is simply
the difference between these two moving averages plotted against a centerline. he centerline
is the point at which the two moving averages are equal. )long with the -)+D and the
centerline, an e!ponential moving average of the -)+D itself is plotted on the chart. he
idea behind this momentum indicator is to measure shortDterm momentum compared to
longer term momentum to help signal the current direction of momentum.
MACDJ .'+&te& te&m m+5i%( )5e&)(e E 2+%(e& te&m m+5i%( )5e&)(e
7hen the -)+D is positive, it signals that the shorter term moving average is above
the longer term moving average and suggests upward momentum. he opposite holds true
when the -)+D is negative D this signals that the shorter term is below the longer and
suggest downward momentum. 7hen the -)+D line crosses over the centerline, it signals a
crossing in the moving averages. he most common moving average values used in the
calculation are the 2@Dday and 12Dday e!ponential moving averages. he signal line is
commonly created by using a nineDday e!ponential moving average of the -)+D values.
hese values can be adjusted to meet the needs of the technician and the security. 3or more
volatile securities, shorter term averages are used while less volatile securities should have
longer averages.
)nother aspect to the -)+D indicator that is often found on charts is the -)+D
histogram. he histogram is plotted on the centerline and represented by bars. .ach bar is the
difference between the -)+D and the signal line or, in most cases, the nineDday e!ponential
moving average. he higher the bars are in either direction, the more momentum behind the
direction in which the bars point.
)s you can see in below figure, one of the most common buy signals is generated
when the -)+D crosses above the signal line #blue dotted line$, while sell signals often
occur when the -)+D crosses below the signal.
/?
FIGURE NO-: 8-
FIGURE TITLE: MOVING AVERAGE CONVERGENCE DIVERGENCE
SOURCE: 777-met).t+*A-*+m
8-9- RELATIVE STRENGTH INDEB (RSI$0
It is another one of the most used and wellDknown momentum indicators in technical
analysis. <*I helps to signal overbought and oversold conditions in a security. he indicator
is plotted in a range between "ero and 1GG. ) reading above AG is used to suggest that a
security is overbought, while a reading below %G is used to suggest that it is oversold. his
indicator helps traders to identify whether a security1s price has been unreasonably pushed to
current levels and whether a reversal may be on the way.
FIGURE NO-: 8-8
FIGURE TITLE: RELATIVE STRENGTH INDEB
SOURCE: 777-met).t+*A-*+m
/@
he standard calculation for <*I uses 1/ trading days as the basis, which can be
adjusted to meet the needs of the user. If the trading period is adjusted to use fewer days, the
<*I will be more volatile and will be used for shorter term trades.
8-9-8 STOCHASTIC OSCILLATOR
he stochastic oscillator is one of the most recogni"ed momentum indicators used in
technical analysis. he idea behind this indicator is that in an uptrend, the price should be
closing near the highs of the trading range, signaling upward momentum in the security. In
downtrends, the price should be closing near the lows of the trading range, signaling
downward momentum.
he stochastic oscillator is plotted within a range of "ero and 1GG and signals
overbought conditions above BG and oversold conditions below 2G. he stochastic oscillator
contains two lines. he first line is the I;, which is essentially the raw measure used to
formulate the idea of momentum behind the oscillator. he second line is the ID, which is
simply a moving average of the I;. he ID line is considered to be the more important of
the two lines as it is seen to produce better signals. he stochastic oscillator generally uses the
past 1/ trading periods in its calculation but can be adjusted to meet the needs of the user.
FIGURE NO-: 8-=
FIGURE TITLE: STOCHASTIC OSCILLATOR
SOURCE: 777-met).t+*A-*+m
/A
8-9-= THE DO6 THEORY
he Dow heory is a major corner stone of technical analysis. It is one of the oldest
and best known methods used to determine the major trend of stock prices. It tells about the
future prospects regarding a particular stock. It indicates the direction of the price of the share
by looking in to which an investor can think for investment on that particular stock.
Se5e% 1).i* 0&i%*i42e. +, D+7K. T'e+&y0
E5e&yt'i%( i. di.*+u%ted by the price )verages, specifically, the DowD8ones Industrial
)verage and the DowD8ones ransportation )verage. *ince the )verages reflect all
information, e!perience, knowledge, opinions, and activities of all stock market investors,
everything that could possibly affect the demand for or supply of stocks is discounted by the
)verages.
T'e&e )&e t'&ee t&e%d. in stock prices. 1$ he "rimar$ Tide is the major longDterm trend.
(ut no trend moves in a straight line for long, and 2$ Secondar$ %eactions are the
intermediateDterm corrections that interrupt and move in an opposite direction against the
Crimary ide. %$ %i##les are the very minor dayDtoDday fluctuations that are of concern only
to shortDterm traders and not at all to Dow heorists.
%. Crimary ides going up, also known as &ull 'arkets, typically unfold in t'&ee u4 m+5e.
in stock prices. he first move up is the result of farDsighted investors accumulating stocks at
a time when business is slow but anticipated to improve. he second move up is a result of
investors buying stocks in reaction to improved fundamental business conditions and
increasing corporate earnings. he third and final up move occurs when the general public
finally notices that all the financial news is good. During the final up move, speculation runs
rampant.
/. Crimary ides going down, also known as &ear 'arkets, typically unfold in t'&ee d+7%
m+5e. in stock prices. he first move down occurs when farDsighted investors sell based on
their e!perienced judgement that high valuations and booming corporate earnings are
unsustainable. he second move down reflects panic as a now fearful public dumps at any
price the same stock they just recently bought at much higher prices. he final move down
results from distress selling and the need to raise cash.
?. T'e t7+ )5e&)(e. mu.t *+%,i&m e)*' +t'e&. o signal a Crimary ide (ull -arket major
trend, both averages must rise above their respective highs of previous upward *econdary
<eactions. o signal a Crimary ide (ear -arket major trend, both the DowD8ones Industrial
/B
)verage and the DowD8ones ransportation )verage must drop below their respective lows of
previous *econdary <eactions. ) move to a new high or low by just one average alone is not
meaningful. )lso, it is not uncommon for one average to signal a change in trend before the
other. he Dow heory does not stipulate any time limit on trend confirmation by both
averages.
@. O%2y e%d-+,-d)y3 *2+.i%( 4&i*e. on the averages are considered. Crice movements during
the day are ignored.
A. he Crimary ide remains in effect until a Dow heory reversal has been signaled by b+t'
averages.
It can act as an yardstick to choose the growing stocks and investing in those in
anticipation of future profits.
8-9-: THE SHORT INTEREST RATIO THEORY
he *hort Interest <atio is derived by dividing the reported short interest or the
number of shares sold short, by the average volume foe about %G days. 7hen short sales
increase relative to total volume, the indicator rises. ) ratio above 1?GI is considered bullish,
and a ratio below 1GGI is considered bearish.
he logic behind this ratio is that speculators and other investors sell stocks at high
price in anticipation of buying them back at lower prices. hus, increasing short selling is
viewed as a sign of general market weakness, and short covering #as evidenced by decreasing
short positions$ as a sign of strength. )n e!isting large short interest is considered a sign of
strength, since the cover #buying$ is yet to comeO whereas an established slight short interest
is considered a sign of weakness #more shortDsells are to come$.
8-9-< THE CONFIDENCE INDEB
It is the ratio of a group of lowerDgrade bonds to a group of higherDgrade bonds.
)ccording to the theory underlying this inde!, when the ratio is high, investors1 confidence is
likewise high, as reflected by their purchase of relatively more of the lowerDgrade securities.
7hen they buy relatively more of the higherDgrade securities, this is taken as an indication
that confidence is low, and is reflected in a low ratio.
8-9-9 S0READS
,arge spread between yields indicate low confidence and are bearishO the market
appears to require a large compensation for business, financial and inflation risks. *mall
spreads indicate high confidence and are bullish. In short, the larger the spreads, the lower the
ratio and the less the confidence. he smaller the spreads, the greater the ratio, indicating
greater confidence.
/E
8-9-" THE ADVANCE-DECLINE RATIO
he inde!Drelating advance to decline is called the )dvanceDDecline <atio. 7hen
advances persistently out number declines, the ratio increases. ) bullish condition is said to
e!ist, and viceDversa. hus, an )dvanceDDecline <atio tries to capture the market1s
underlying strength by taking in to account the number of advancing and declining issues.
8-9-; THE MARKET 1READTH INDEB
he -arket (readth Inde! is a variant of the )dvanceDDecline <atio. o compute it,
we take the net difference between the number of stocks rising and the number of stocks
falling, added #or subtracted$ to the previous. 3or e!ample, if in a given week @GG shares
advanced, 2GG shares declined, and 2GG were unchanged, the breadth would be 2 i.e., #@GGD
2GG$=2GG. he figure of each week is added to previous week1s figure. hese data are then
plotted to establish the pattern of movement of advance and decline.
he purpose of the -arket (readth Inde! is to indicate whether a confirmation of
some inde! has occurred. If both the stock inde! and the market breadth inde! increase, the
market is bullishO when the stock inde! increase but the breadth inde! does not, the market is
bearish.
8-9-#! THE ODD-LOT RATIO
'ddDlot transactions are measured by oddDlot changes in inde!. 'ddDlots are stock
transactions of less than, say, 1GG shares. he 'ddDlot ratio is sometimes referred to as a
yardstick of uniformed sentiment or an inde! of contrary opinion, because the oddDlot theory
assumes that small buyers or sellers are not very bright especially at tops and bottoms when
they need to be the brightest. he 'ddDlot ratio theory assumes that the oddDlot short sellers
are even more likely to be wrong than oddDlotters in general. his indicator relates oddDlot
sales to purchases.
8-9-## INSIDER TRANSACTIONS
he hypothesis that insider activity may be indicative of future stock prices has
received some support in academic literature. *ince insiders have the best picture of how the
firm is faring, some believers of technical analysis feel that these inside transactions offer a
clue, to future earnings, dividend and stock price performance. If the insiders are selling
heavily, it is considered a bearish indicator and vice versa. *tockholders do not like to hear
that the president of a company is selling large blocks of stock of the company. )lthough the
?G
president1s reason for selling the stock may not be related to the future growth of the
company, it is still considered bearish as investors figure the president, as an insider, must
know something bad about the company that they, as outsiders, do not know.
8-9-# MUTUAL FUND ACTIVITY
-utual 3unds represent one of the most potent institutional forces in the market, and
they are a source of abundant data that are readily available. he cash position of the funds
and their net subscriptions are followed closely by technicians.
-utual 3unds keep cash to take advantage of favourable market opportunities and=or
to provide or redemption of shares by holders. It is convenient to e!press mutualDfund cash as
a percentage of net assets on a daily, monthly or annual basis. In theory, a low cash ratio
would indicate a reasonably fully invested position, with the implication that not much
reserve buying power remains in the hands of funds as a group. ,ow ratios #on the order of ?
to ? and S percent$ are frequently equated with market heights. )t marketDbuttoms, the cash
ratio would be high to reflect heavy redemptions, among other things. *uch a buildDup of the
cash ratio at market lows is an indication of potential purchasing power that can be injected in
to the market to propel it upward.
)nother -utual 3und indicator that is quite closely is net subscriptions #subscriptions
to new shares, less redemptions of e!isting shares$. ,ike the 'ddDlot statistics, this indicator
measures public sentiment and the outlook for the stock market. he trend to more or less
buying moves in random with the ToddDlot purchase to sell ratio.U he sells redemption
differential narrows considerably prior to market analysis. In effect market advances are
preceded by a relative shift towards redemption. *hifts towards relative buying #sells of new
shares$ tend to precede market declines.
8-9-#8 THE CREDIT-1ALANCE THEORY
ypically, investors receive credit balances in their accounts at their brokerage houses
when they sell stock. )t this point the investor has two choices0 he can either have the credit
balance forwarded to him or leave the credit balance in the account. &owever, these balances
frequently earn no interest. hus, the only reason for maintaining the credit balance in the
account would be for purposes of reinvestment of these funds in the very near future.
*ome feel that a buildDup in these cash balances represent large reserve of potential
buying power. In effect, investors are leaving the credit balances in their brokerage firm
accounts because they anticipate a drop in prices, thus a buying opportunity. +onversely, a
?1
drop in credit balance suggests that prices will go up. (ecause, an increase in prices was
e!pected, investors have already used up their credit balances. &owever, echnicians feel that
investors in general, as their actions get reflected in credit balances are usually wrongO that is,
the investors are buying stocks when they should be selling them and selling stocks when
they should be buying. )s such, the credit balance theory is a contrary opinion theory.
In other words, technicians suggests that wise investor will buy stocks as credit
balances are rising and sell stocks as credit balances are dropping. In short technicians say the
wise investor should do the opposite of what the credit balances are doing.
8-9-#= 0ERFORMANCE OF LINKED MARKETS
3or an investor, the performances of the markets play a vital role to estimate the
future performance of the market in which it trades in. If relative markets show a positive
performance it can be anticipated that the market will go positively. If it shows a downward
trend, it can be anticipated that the market will take a down turn. :enerally, for Indian
investors the 2)*D)V, D'7W'2.* and *ingapore have a much relation to guard their
decisions to anticipate the future market tendency.
8-" SUMMARY
echnical analysis is a method of evaluating securities by analy"ing the statistics
generated by market activity. It is based on three assumptions0 1$ the market discounts
everything, 2$ price moves in trends and %$ history tends to repeat itself.
X echnicians believe that all the information they need about a stock can be found in its
charts.
X echnical traders take a shortDterm approach to analy"ing the market.
X +riticism of technical analysis stems from the efficient market hypothesis, which states
that the market price is always the correct one, making any historical analysis useless.
X 'ne of the most important concepts in technical analysis is that of a trend, which the
general direction that a security is headed is. here are three types of trends0 9ptrends,
downtrends and sideways=hori"ontal trends.
X ) trendline is a simple charting technique that adds a line to a chart to represent the trend
in the market or a stock.
X ) channel, or channel lines, is the addition of two parallel trendlines that act as strong
areas of support and resistance.
X *upport is the price level through which a stock or market seldom falls. <esistance is the
price level that a stock or market seldom surpasses.
?2
X Folume is the number of shares or contracts that trade over a given period of time,
usually a day. he higher the volume, the more active the security.
X ) chart is a graphical representation of a series of prices over a set time frame.
X he time scale refers to the range of dates at the bottom of the chart, which can vary
from decades to seconds. he most frequently used time scales are intraday, daily,
weekly, monthly, quarterly and annually.
X he price scale is on the rightDhand side of the chart. It shows a stockPs current price and
compares it to past data points. It can be either linear or logarithmic.
X here are four main types of charts used by investors and traders0 line charts, bar charts,
candlestick charts and point and figure charts.
X ) chart pattern is a distinct formation on a stock chart that creates a trading signal, or a
sign of future price movements. here are two types0 reversal and continuation.
X ) head and shoulders pattern is reversal pattern that signals a security is likely to move
against its previous trend.
X ) cup and handle pattern is a bullish continuation pattern in which the upward trend has
paused but will continue in an upward direction once the pattern is confirmed.
X Double tops and double bottoms are formed after a sustained trend and signal to chartists
that the trend is about to reverse. he pattern is created when a price movement tests
support or resistance levels twice and is unable to break through.
X ) triangle is a technical analysis pattern created by drawing trendlines along a price
range that gets narrower over time because of lower tops and higher bottoms. Fariations
of a triangle include ascending and descending triangles.
X 3lags and pennants are shortDterm continuation patterns that are formed when there is a
sharp price movement followed by a sideways price movement.
X he wedge chart pattern can be either a continuation or reversal pattern. It is similar to a
symmetrical triangle e!cept that the wedge pattern slants in an upward or downward
direction.
X ) gap in a chart is an empty space between a trading period and the following trading
period. his occurs when there is a large difference in prices between two sequential
trading periods.
X ) moving average is the average price of a security over a set amount of time. here are
three types0 simple, linear and e!ponential.
X -oving averages help technical traders smooth out some of the noise that is found in
dayDtoDday price movements, giving traders a clearer view of the price trend.
?%
X Indicators are calculations based on the price and the volume of a security that measure
such things as money flow, trends, volatility and momentum. here are two types0
leading and lagging.
X he accumulation=distribution line is a volume indicator that attempts to measure the
ratio of buying to selling of a security.
X he moving average convergence divergence #-)+D$ is comprised of two e!ponential
moving averages, which help to measure a securityPs momentum.
X he relative strength inde! #<*I$ helps to signal overbought and oversold conditions in a
security.
X he stochastic oscillator compares a securityPs closing price to its price range over a
given time period.
?/
CHAPTER-4
A SAMPLE SURVEY
=-# O1CECTIVES OF THE SURVEY
he survey has been carried out in order to find out0
7hether people invest in stock market>
&ow much returns one e!pects by investing in stock market>
7hether investors believe in echnical )nalysis and=or 3undamental )nalysis>
Do people use echnical Indicators at the time of investment decisionDmaking>
Do echnical )nalysis better than 3undamental )nalysis as an indicator>
=- SAM0LE COM0OSITION
In all %/ persons were interviewed. / out of them revealed that they don1t have any
interest in securities market. herefore, those respondents were not considered for answering
the questionnaire. he remaining %G thereby formed the sample si"e of this survey.
1. A(e C+m4+.iti+%
!-8! 8!-=! =!-<! M+&e t')% <!
1@ 12 2 G
??
2. O**u4)ti+%
Se2,-
Em42+yed S)2)&ied Stude%t
G+5t-
Em42+yee Reti&ed Ot'e&.
@ 1? A G 1 1
8- I%*+me Le5e2 (0e& M+%t'$
Le.. T')%
R.- :3!!!
R.- :3!!! t+
R.- #!3!!!
R.- #!3!!! t+
R.- :3!!!
R.- :3!!! t+
R.- :!3!!!
R.-:!3!!! )%d
Ab+5e
B 1/ % / 1
?@
=-8 OUTCOMES OF THE SURVEY
3ollowing are the outcomes that have been revealed from the survey0
#- 0EO0LE 6HO INVEST IN STOCK MARKET
)s a part of this study it was found that out of %G people 22 people invest in stock
market where as the rest B has no believe on the stock market.
I%5e.t D+ %+t I%5e.t
22 B
- RETURN EB0ECTED 0ER ANNUM
'ut of 22 people that invest in stock market, most of the investors i.e., E in number
e!pect a return of 2GD?G percent per annum, where as B investor e!pect a return of more than
?GI p.a. / investors like 1GD2G percent return per annum and there is a single person who is
satisfied with an e!pected return of less than 1GI p.a.
Le.. T')%
#!L
#!L -
!L
!L-
:!L
M+&e T')%
:!L
1 / E B
?A
8- STOCKS IN 6HICH INVESTORS 0REFER TO INVEST IN
'ut of 22 investors, 1/ investors used to invest in midcap stocks, @ in blueDchips and
not a single investor in penny shares. It indicates that most of the investors have a strong
believe on midcap stocks.
12ue
C'i4
Mid
C)4
0e%%y
S')&e. A22
@ 1/ G 2
=- INVESTORS TRADING INTRADAY
'ut of 22 investors, 1% investors practice intraday where as E don1t want to take much
risk by doing intraday trading.
0&)*ti*e D+%Kt 0&)*ti*e
E 1%
?B
:- ANALYSIS INVESTORS 1ELIEVE U0EN
It was revealed that a major portion of the investors believe in both echnical
)nalysis as well as in 3undament )nalysis as 1/ investors believe on both.
Fu%d)me%t)2
A%)2y.i.
Te*'%i*)2
A%)2y.i. 1+t' N+%e
/ 2 1/ 2
<- INVESTORS 1ELIEVE ON DO6-THEORY
)n average number of investors believe on the DowDheory i.e., 12 where as 1G do
not.
U.e D+%Kt U.e
?E
1G 12
9- TY0E OF CHART USED 1Y INVESTORS
he +andleDstick chart is very popular by investors while analy"ing the market
condition as @ out of 22 investors rely on that. he major thing is that @ investors believe on
all the four types of charts where as 2 investor never use any of the charts to analy"e.
Li%e C')&t 1)& C')&t
C)%d2e Sti*A
C')&t
0+i%t F Fi(u&e
C')&t A22 N+%
? 1 @ 2 @ 2
"- INVESTORS TRADE IN DERIVATIVES
<elatively more than the average investors used to invest in derivative instruments as
1/ love to invest in derivatives out of 22.
@G
T&)de D+%Kt T&)de
1/ B
;- TY0E OF DERIVATIVE INVESTORS INVEST IN
'ut of 1/ investor those invest in derivatives, most of the investors like to invest in
Inde! options as compared to other derivative instruments. he statistics shows that, out of 1/
investors trading in derivatives, ? invest in Inde! 'ptions, % in *tock 'ptions, one in *tock
3utures and one in Inde! 3utures. / investors invest in all the four types of derivatives.
I%deI Futu&e. I%deI O4ti+%. St+*A Futu&e. St+*A O4ti+%. A22
1 ? 1 % /
#!- IS TECHNICAL ANALYSIS AN INDICATOR FOR INVESTMENT
DECISION-MAKING G
3rom the study, it was found that out of %G people 1E treat the echnical )nalysis as
an indicator for investment decision making but E people did not agree on that. *ome 2
people were unable to decide whether echnical )nalysis is an indicator or not.
I% F)5+u& A()i%.t C)%Kt S)y
1E E 2
@1
)s most of the people have the opinion that echnical )nalysis indicates the market behavior,
it can be accepted that echnical )nalysis is an indicator for investment decision making.
:-= O0INION OF THE INVESTORS
During the survey, different investors have shared different views regarding
investment. he discussions and question answer sessions with them revealed lots of practical
trading and investing strategies that can help one to take appropriate investment decisions at
the right time and at the right way. *ome of the most discussed and suggested tips of
investment and dayDtrading are as follows0
#- C'e*A buyi%( 5+2ume.
(efore buying check out the buying and selling quantity #volumes$. If buying volume started
increasing then the stock may go up and if selling volumes start increasing the stock price
may come down.
2. C'e*A de&i5)ti5e .t)tu.
If possible try to check out the derivative of the stock which you want to trade.
If derivative of that particular stock is going up with increasing buying volumes then you can
immediately grab #buy$ that share=stock. -ost of the time it is seen that, if the derivative
price goes up, then its share price also goes up.
%. 6)it ,+& t'e t)&(et 4&i*e t+ buy
3or e!ample, if buy is given at 1?G.? then don1t buy below this price, only buy at 1?G.? price
or slightly higher than price. (ecause the given buy price may be the resistance price, if it
@2
breaks then share price goes up or else may not go up above ?G.?. *o plan to buy at given
targeted price, don1t buy below target price.
=- St&i*t2y m)i%t)i% St+4 L+..
*trictly maintain the given stop losses. his will help you to minimi"e your further losses.
*uppose for moment the share you bought falls drastically down, then you may end up with
huge loss. *o always maintain given stop loss. T*top ,oss will reduce your lossU.
?. D+7% 7)it ,+& 'u(e 4&+,it i% .i%(2e .')&e>t&)de
If you are getting some profit and if you notice that is not further moving up #it1s called
consolidation$ then you can sell your share=stock and come out of that trade. In this manner,
you can earn small profit instead of loss then you can do another trade and again earn small
profit. ,ikewise if you keep earning couple of small profits in a single day then all your
small profits will add up to huge profit amount in a single day. T:et satisfied in small profit
and do multiple tradesU.
@. D+%Kt O5e&t&)de
3irst and very important is not to 'vertrade D 2ever put all your money=savings in share
market. -ost of the brokers provide margin amount but it is up to you how to make use of
this margin amount. -ost of the traders make use of this margin amount for over trading
which is risky.
A. 6)it3 6)t*' )%d T&)de
Do not jump in market early. 7ait, watch and trade. +onfirm the market direction and make
sure and confirm all your strategies like resistance and support levels and then plan to trade.
B. Study ti4. *)&e,u22y
Do not react to tips given by anyone D 3irst observe that stock, check the volume, where they
are increasing or decreasing and then decide your trade. Do not buy or sell blindly based on
share tips. -ost of the share tips do not work if market direction changes.
E. A27)y. (+ 7it' M)&Aet t&e%d
Don1t short sell, if the market is going up and don1t buy if the market is falling down. rade
with market direction and don1t go against market direction.
1G. T&y t+ mi%imiHe y+u& L+.. )%d i%*&e).e 4&+,it
:et ready to accept loss if you do wrong trade D +ome out of your trade if you have entered in
wrong time by accepting loss instead of waiting for trade to reverse and finally it is coming
down from top means it is cooling, if you see more buyer than seller then you can hold your
@%
position. 4ou must know which share has what momentum, means if the share price is <s.12G
then you can e!pect upside from <s.1 to ? and not <s.?G to 1GG. If the scrip is going up, it
will go in ladder fashion, it will go up and it will come down bit and it will again continue its
upward journey.
12. 6)it ,+& +44+&tu%ity
If you are not sure about market movement then watch and wait for opportunity don1t trade
forcefully. *ome times market move in range bound means market move upDdown in very
small range at that time it becomes very difficult to judge the market direction and do
intraday trading. Its always better to wait instead of losing money.
1%. D+%Mt eI4e*t t++ mu*'
Don1t e!pect too much D (e happy in whatever profit you get, don1t try to grab too much
from market. (e realistic, and don1t e!pect too much. It can be remembered that while doing
day trading, you should square off your positions with appropriate profit instead of waiting
for big profit.
1/. Ad5i*e ,+& 'i(' &etu&%.
,ack of ;nowledge is very risky and very dangerous, so don1t do trading or investing without
having proper knowledge. <ead books, refer websites and get prepared before you plan for
share market trading or investing.
@/
CHAPTER-5
FINDINGS AND SUGGESTIONS
:-# FINDINGS:
3rom this study one can able to e!tract out the fundamental aspects of echnical )nalysis as
well as its applicability. *ome of the major findings of the study are mentioned below0
1$ 9nlike 3undamental )nalysis, echnical )nalysis is also very much important to play
in the stock market.
2$ 3undamental )nalysis tells about Tright choiceU where as echnical )nalysis tells
about the Tright timeU to enter or e!it from the market.
%$ echnical )nalysis assumes that history tends to repeat itself, but it is not wise to
believe that the same trend will occure ne!t.
/$ *upport and <esistance levels are the levels at which a lot of traders are willing to buy
the stock or sell it. *o, an investor has to keep its eyes and ears open at this point of
time.
?$ )mong the various types of charts the +andleD*tick +hart is the most effective and
acceptable tool to evaluate the performance of a stock and forecast the future.
@$ 7hen an investor looks in to the numerous types of chart patterns, it creates a lot of
confusion and e!pectations in the minds of the investors.
A$ he -oving )verage +onvergence Divergence #-)+D$ is the most well known and
used indicator in echnical )nalysis as it is based on real facts of past performance.
B$ In trading, volumes have equal importance along with price to confirm the
formulation of a trend or a technical pattern. 7ith the help of volumes we can easily
determine whether the demand side is greater or supply side is greater for stocks at
any given point of time.
E$ In (hubaneswar, most of the investors are riskDaverse in nature. Ceople hesitate to
invest in derivatives by taking much risk.
1G$ -ost of the investors are not aware of the sophisticated and well designed tools of
technical analysis. hey invest without going through the technical analysis.
11$ hough echnical )nalysis plays a lion1s role to decide investment pattern as
3undamental )nalysis, it cannot be treated as a substitute to 3undamental )nalysis.
@?
:- SUGGESTIONS:
(y going through the subject matter, analysis, opinion of the respondents and the findings,
the following points can be suggested for the purpose of further reference and
implementation0
1$ echnical analysis is a game of charts and figures. *o, at the time of taking any
decision regarding investment, 3undamental )nalysis and other factors should also be
taken in to consideration along with echnical )nalysis.
2$ Instead of looking in to all chart patterns, it is good to follow a single chart pattern
and to draw timely conclusion by interpreting that.
%$ -arket never tells anything of its ownH It1s the investor who has to look in to the
market and catch up the indicator to forecast and e!pect the market trend.
/$ -ost of the investors assume that by using charts and patterns, they can earn much by
purchasing in low and selling at high prices. (ut, it is not so easy as they think. *o,
such believes should be rooted out from mind before looking towards market.
?$ )s we have a globalised market, along with the domestic market the performance of
the overseas markets should also be considered and the help of modern financial
instruments should be taken to reduce risk and ma!imi"e the probability of gaining
more.
@$ )nd, as per )pollo *indhoori +apital Investments ,td. Is concerned, there is an ample
scope to e!pand and increase its revenue in this postDrecessionDrecovering market. *o,
the organisation has to look in to its serviceDprovidingDskills and problems to attract
more customers in the market. )lthough it has a good brand name, still it has to go for
optimum advertisement and well skilled human resources.
:-8 CONCLUSION:
) large number of new investors think that there is easy and quick money in investing
and day trading. hey think that they can buy at bottoms and sell at tops very easily. hey
thing that since they can analyse the chart patterns and use technical analysis very well, they
can trade consistently with EGI accuracy. hey think that they can invest small amount and
trade for large amounts to earn big profits by utili"ing multiple e!posure on their margin
amount and fail to understand the real market behavior. hey fail to understand that investing
is not like T:'Y..*'CU game. &ere, only disciplined investors well equipped with
sophisticated technical tools having presence of mind can sustain and make the indices
favourable for them irrespective of market trends whether bull or bear. he only thing that
matters in investment is T<ight ime and <ight +hoiceU which can be tamed through proper
analysis and understanding of the whole game as the 2*. has rightly narratedY.
S(CH)*%+
S*'*,H)*%+
!-.ST)*%
1I1LIOGRA0HY:
@@
1. (hat, *udhindra0 Security Analysis And Portfolio Management, .!cel (ooks, 3irst
.dition, 2GGB
2. *ingh, Creeti0 Investment Management, &imalaya Cublishing &ouse, 1/
th
.dition,
2GG@
%. +handra, Crasanna0 Investment Analysis And Portfolio Management, ata -cgraw
&ill Cub. +o. ,td.
/. 3ischer, Donald .. and 8ordan, <onald .0 Security Analysis And Portfolio
Management, Cearson, Crentice &ill, 1@
th
.dition, 2GG@
6E1LIOGRA0HY:
o complete this study the following Internet portals have helped a lot0
1. www.moneybhai.com
2. www.moneycontrol.com
%. www.trending12%.com
/. www.investopedia.com
?. www.sharevyapaar.com
@. www.nseindia.com
A. www.myiris.com
B. www.wikipedia.com
E. www.metastock.com
1G. www.findarticles.com
11. www.tradestation.com
12. www.stockcharts.com
1%. www.traderslog.com
1/. www.learningmarkets.com
1?. www.thismatter.com
@A
A00ENDIB:
NUESTIONNAIRE FOR THE SURVEY
1. 2ame of the <espondent0ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ
2. +ontact 2umber0ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ *e!0 -ale=3emale
%. )ge0 a$2GD%G4rs b$%GD/G4rs
c$/GD@G4rs d$@G4rs 5 )bove
/. 'ccupation0
a$*elfDemployed b$*alaried c$*tudent
d$:ovt. .mployee e$<etired f$'thers
?. Income ,evel0
a$,ess than <s.?GGG b$<s.?GGGD<s.1GGGG
c$<s.1GGGGD<s.2?GGG d$<s.2?GGGD<s.?GGGG
e$<s.?GGGG 5 )bove
@. Do you invest in stock market> #4es=2o$
A. If yes, how much money you have invested>
<s.ZZZZZZZZZZZZZZZZZZZZ
B. &ow much return you e!pect from your investment>
<s.ZZZZZZZZZZZZZZZZZZZZ
E. &ow many years you have e!perienced in stock market> ZZZZZZZ
1G. 7hich stocks you prefer to invest in>
a$(lue +hip b$-idcap c$Cenny *hares
11. Do you practice *hortDselling or Intraday> #4es=2o$
12. 7hich analysis you believe upon>
a$3undamental b$echnical
c$(oth d$2one
1%. If you believe on echnical )nalysisO
@B
a$ Do you use Dow heory> #4es=2o$
b$ 7hich type of chart you prefer for analysis>
i$ ,ine +hart ii$(ar +hart
iii$+andle *tick +hart iv$Coint 53igure +hart
1%. Do you trade in Derivatives> #4es=2o$
If yesO in which section>
a$*tock 3utures b$*tock 'ptions
c$Inde! 3utures d$Inde! 'ptions
1/. Do you think echnical )nalysis is better than 3undamental )nalysis> #4es=2o$
1?. Do you treat echnical )nalysis as a compass to forecast and foresee the right direction of
the stock market> #4es=2o$
*ignature of the <espondent
Date0
@E