Technical Analysis

Introduction
Technical Analysis is a study of market generated data like prices and volumes to determine the future direction of price movements

Three principals of Technicals

Market action is repetitive. Everything is discounted and reflected in market prices. Prices move in trends and trends persist.

Differences
Technical Analysis
Predicts Short term price Movements. Focus on Internal Market data, like Price & volume.

Fundamental Analysis
Predicts Long-term price Movements. Focus on External data like Economy, industry & Firm.

Appeals to Shortterm investors.

Appeals to Long-Term Investors.

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CHARTS
Three Major types:
Line Chart Bar Chart

Candle Sticks

Line Chart
Line chart provides an uncluttered, easy to understand view of a securitys price. Line charts are displayed using a securitys closing prices.

LINE CHART

ARVIND MILLS

BAR CHARTS
In a bar chart, a vertical line that ranges from the periods lowest price to its highest price represents each time period.
It displays a securitys open, high , low and closing prices

BAR CHART

Japanese candle stick chart

A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled).
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Candle Sticks

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Japanese candle stick chart

Reliance
700 680 660 640 620 600 580 560 540 520 500

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6/ 1/

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6/ 29

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Trends

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Volume & Price

Volume is viewed as a measure of market strength or weakness. Chartists usually believe that volume and price go hand in hand.

Price n Volume

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Advance Decline Line

Referred as Breadth of the market. Measurement involves: Calculating the number of net advances/declines on a daily basis. Obtaining the breadth of the market by cumulating daily net advances/declines. Breadth of the market is usually compared with one or two market averages.
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Sentiments Indicators Put / Call Ratio

Defined as: No. of Puts Purchased

No. of Calls Purchased

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SUPPORT
Represents a concentration of demand

As the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

RESISTANCE

Represents a concentration of supply. Is the price level at which selling is thought to be strong enough to prevent the price from rising further.

Support = Resistance
Support can turn into resistance and visa versa.
Once the price breaks below a support level, the broken support level can turn into resistance. The other turn of the coin is resistance turning into support. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply.

FORMULAS
PIVOT = (HIGH+LOW+CLOSE)/3 SUPPORT = (PIVOT X 2)-HIGH RESISTANCE = (PIVOT X 2)-LOW e.g. ARVIND MILL=82+79+81/3 = 80.6 SUPPORT=80.6 X 2-82 = 79.20 RESISTANCE=80.6 X 2-79 = 82.20
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82.2 80.6 79.2

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Double Tops & Bottoms

Major reversal pattern that forms after an extended uptrend Pattern is made of two consecutive peaks that are roughly equal with a moderate trough in between

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Double Top (Reversal)

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Double Bottom (Reversal)

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Head & Shoulder Pattern

Forms after an uptrend and its completion marks a trend reversal. The patter contains three successive peaks middle peak (Head) being the highest Two outside peaks (Shoulders) being low and roughly equal The reaction lows of each peak can be connected to form support, or a neckline

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Head and Shoulders (Top)

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Head and Shoulders (Bottom)

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Cup with Handle

It is bullish continuation pattern that marks a consolidation period followed by a breakout The cup forms after an advance and looks like a bowl or a rounding bottom As the cup is completed a trading range develops on the right hand side and the handle is formed

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Cup with Handle

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MOVING AVERAGE
Moving averages can be effective tools to identify and confirm trend, identify support and resistance levels, and develop trading systems. The different types of moving averages are:
1. Simple Moving Average 2. Weighted Moving Average 3. Exponential Moving Average

Simple Moving Average

Used to generate a buy or a sell recommendation. Equal weights are applied to the prices for calculating the moving average. For example, a 20-day moving average is calculated by summing the closing price of the security over the last 20 days and dividing the result by 20.

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Simple Moving Average

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Exponential Moving Average

An exponential moving average gives more weight to recent prices and ever decreasing weight to older data.

5 Day EMA
Date Closing price (A) 45.375 45.5 45 43.625 43.375 44.575 -1.200 -0.480 44.095 Previous day EMA (B) (A)-(B)=C *0.4=(D) EMA+(D)

Mar22 Mar23 Mar24 Mar25 Mar28

Mar29
Mar30

43.125
43.125

44.095
43.707

-0.970
-0.582

-0.388
-0.233

43.707
43.474
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Moving Average Envelope

An envelope comprises two moving averages. Envelopes define the upper and lower boundaries of a security's normal trading range. A sell recommendation is generated when the securitys price reaches the upper band while a buy recommendation is generated when the price hits the lower band.
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Moving Average Envelope

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Price Oscillator
Displays the difference between two moving averages of a securitys price. Difference can be expressed in either points or percentages. Buy: if short-term moving avg rises above long-term moving avg. Sell: if short-term moving avg falls below long-term moving avg.
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Price Oscillator

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Volume Oscillator
Displays the difference between two moving averages of a securitys volume. Difference can be expressed in either points or percentages. Rising prices coupled with increased volume signifies increased upward participation (more buyers) and conversely falling prices coupled with increased volume (more sellers) signifies decreased upward participation.
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Volume Oscillator

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Stochastic Oscillator
Indicates where a securitys price closed relative to its price range (high and low) over a given time period. It has a value that ranges between 0 and 100 and is displayed as two lines. The main line is called "%K", or the fast stochastic. The second line, called "%D" or the slow stochastic, is a moving average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.
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Stochastic Oscillator

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Relative Strength Index (RSI)

Derived from the price of a security, with a value that ranges between 0 and 100. Is popular as an overbought/oversold indicator. Usually forms tops above 70 and bottoms below 30. Commonly used to look for divergence, an indication of an impending reversal in price.

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RSI

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Price ROC
Displays the difference between the current price and the price X - time periods ago ROC moves in tandem with the price Price changes can be anticipated by studying the previous cycles of the ROC and relating it to current market.

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Price ROC

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Elliot Wave Theory

Intreprets market actions in terms of recurrent price structures. Market cycles are composed of two major type of Wave:
Impulse Wave:Can be sub-divided into 5wave structure (1-2-3-4-5) Corrective Wave:Can be sub-divided into 5 wave structure (a-b-c)

These waves are Fractal in nature i.e market structure are built from similar patterns on a larger or smaller scales. Rules for Wave Count:
Wave 2 should not break the beginning of Wave 1 Wave 3 should not be the shortest wave among Wave 1,5 Rule for Alternation: Wave 2 and 4 should unfold in two different wave forms.
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Elliot Wave Theory

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Waves within waves

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Extended Wave Form

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Diagonal Triangle and Failure Fifth Pattern

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DOW Theory
Based on the philosophy that the market prices reflect every significant factor that affects supply and demand. The goal of the theory is to determine changes in the major trends or movements of the market.

Each market trend has three parts: The primary (major) trend or tide is a long term trend lasting from a year to several years The secondary trend (or mid-term trend) or wave lasts three weeks to three months and represents corrections of one third to two thirds of the previous movement - most often fifty percent of the movement. The minor trends (short-term trends) or insignificant ripples last less than three weeks and represent fluctuations in 56 the secondary trend.

DOW Theory

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Thank You
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