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Ilango TechAnalysis Explained

Blogsite: http://tradeinniftyonly.blogspot.com/
email: vanilango@gmail.com

Monday, January 25, 2010


http://tradeinniftyonly.blogspot.com/search/label/Technical%20Analysis

Nifty pauses again, nearing "oversold"..

Many readers have shown interest and writing to me wanting to learn Technical analysis. For very
new beginners, I want to say that it is like going to the market place to buy something or sell what
you have. But to get the best bargain, you need to understand the "demand & supply" for that
product. More the demand, the prices will be bid higher and more the supply(with less people to
buy)lesser will be the price. If you spend some time to figure this one out, you will be in a better
position to "buy low and sell higher."
In stock market too, the same logic works. But how do you go about finding this "demand &
supply"...Yes..by studying the prices bid in the recent past..how high it was bid., how low it
went..and where the last bid closed. I have covered the most minimum basics of Technical analysis
and they may be found under "Technical Analysis" in my label section.
Start with:
1. Trend Following
2. Trendlines
3. Moving Averages.
4. Macd (Moving average convergence & Divergence)
5. Stochastics.
6. Tech. Table- Part.1 and Part-2. And the Tech. File.

Spend your holiday time & week ends to go over these study materials and practice them during
market hours. The time spent and dedication shown will fetch you very satisfying results. After
studying and developing a disciplined approach to trading and investing, the most important lesson
you will realise is that " It is better to adopt a wait & watch approach (or sit tight in the direction of
the trend) when you do not understand choppy markets and act only when you are satisfied with a
compelling reason to employ your money".
Once you develop this "discriminating mind" to differentiate a trending market to a sideways market
of different time cycles(week, day, hour), your expectations of the market will be so balanced that
you will harvest like a seasoned farmer.
Just stay cool..Don't sweat it out. Simply try to understand the various forces at work. If you are
relaxed when you are trading, you will make money. Anxiety has no place in this business..Sort that
one out.
If you don't enjoy doing this, watch us play it and being a spectator, you will save all your money and
still get plenty of action.

The choice will be resolved by the world markets on wednesday morning.


First attempt to go above the "Hour High ema" was promptly sold into.The day low ema
needs to be conquered to arrest this fall.
This is a monthly scenario which has been discussed few months(Nov.09) earlier and its
still playing out..Watch out for those support levels."B" waves are "sucker waves" and
we are in the "b" of "B"..and that is a worst kind.

Posted by Ilango at 9:04 PM

Technical Analysis with Moving Averages - SMA & EMA.

Traders have seen the invention of hundreds of indicators. While some technical indicators are more
popular (macd, Stochastics) than others, few have proved to be as objective, reliable and useful as
the moving average (MA).
Moving averages help technical traders track the trends of stocks by smoothing out the day-to-day
price fluctuations, or noise.By identifying trends, moving averages allow traders to make those trends
work in their favor and increase the number of winning trades.
Every type of moving average is a mathematical result that is calculated by averaging a number of
past data points. Once determined, the resulting average is then plotted onto a chart in order to
allow traders to look at smoothed data rather than focusing on the day-to-day price fluctuations that
are inherent in all financial markets.
The simplest form of a moving average, appropriately known as a simple moving average (SMA),
is calculated by taking the arithmetic mean of a given set of values. For example, to calculate a basic
10-day moving average you would add up the closing prices from the past 10 days and then divide
the result by 10.
These curving lines are common on the charts of technical traders, but how they are used can vary
drastically. It is possible to add more than one moving average to any chart by adjusting the number
of time periods used in the calculation. These curving lines may seem distracting or confusing at first,
but you'll grow accustomed to them as time goes on.

The simple moving average is extremely popular among traders, but like all technical indicators, it
does have its critics. Many individuals argue that the usefulness of the SMA is limited because each
point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics
argue that the most recent data is more significant than the older data and should have a greater
influence on the final result. In response to this criticism, traders started to give more weight to
recent data, which has since led to the invention of various types of new averages, the most popular
of which is the -
Exponential moving average (EMA):
The exponential moving average is a type of moving average that gives more weight to recent prices
in an attempt to make it more responsive to new information. This type of moving average reacts
faster to recent price changes than a simple moving average. The 12- and 26-day EMAs are the most
popular short-term averages, and they are used to create indicators like the moving average
convergence divergence (MACD). In general, the 50- and 200-day EMAs are used as signals of long-
term trends. EMA responds more quickly to the changing prices. EMA has a higher value when
the price is rising, and falls faster than the SMA when the price is declining. This responsiveness is
the main reason why many traders prefer to use the EMA over the SMA. Below Tech.table will
vouch for the efficiency of EMA (Note the change in colours alerting instantly).
Moving averages are a totally customizable indicator, which means that the user can freely choose
whatever time frame they want when creating the average. The most common time periods used in
moving averages are 5,10, 20, 30, 50, 100 and 200 days. Alternatively, fibonacci believers use 3, 5,
8, 13, 21, 34, 55, 89, 144, 233 days. The shorter the time span used to create the average, the more
sensitive it will be to price changes. The longer the time span, the less sensitive, or more smoothed
out, the average will be. There is no "right" time frame to use when setting up your moving
averages. The best way to figure out which one works best for you is to experiment with a number of
different time periods until you find one that fits your strategy.
Primary functions of a moving average are to identify trends and reversals, measure the strength
of an stock's momentum and determine potential areas where an asset will find support or
resistance.
Identifying trends is one of the key functions of moving averages, which are used by most traders
who seek to "make the trend their friend". Moving averages are lagging indicators, which means
that they do not predict new trends, but confirm trends once they have been established. This "lag"
is somewhat mitigated by the arrival of EMA.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is
sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a
downtrend. Many traders will only consider holding a long position in a stock when the price is
trading above a moving average. This simple rule can help ensure that the trend works in the
traders' favor.
To measure momentum, pay close attention to the time periods used in creating the average, as
each time period can provide valuable insight into different types of momentum. In general, short-
term momentum can be gauged by looking at moving averages that focus on time periods of 20
days or less(5,10,20).
Looking at moving averages that are created with a period of 20 to 100 days (25,50,100) is
generally regarded as a good measure of medium-term momentum.
Finally, any moving average that uses 100 days or more (100,200) in the calculation can be used as
a measure of long-term momentum.
One of the best methods to determine the strength and direction of a stock's momentum is to
place three moving averages onto a chart and then pay close attention to how they stack up in
relation to one another. The three moving averages that are generally used have varying time frames
in an attempt to represent short-term, medium-term and long-term price movements. Strong upward
momentum is seen when shorter-term averages are located above longer-term averages and the two
averages are diverging. Conversely, when the shorter-term averages are located below the longer-
term averages, the momentum is in the downward direction.
Support:
Another common use of moving averages is in determining potential price supports. It does not
take much experience in dealing with moving averages to notice that the falling price of an asset will
often stop and reverse direction at the same level as an important average. Many traders will
anticipate a bounce off of major moving averages and will use other technical indicators as
confirmation of the expected move.
Resistance:
Once the price of a stock falls below an influential level of support, it is not uncommon to see the
average act as a strong barrier that prevents investors from pushing the price back above that
average. As you can see from the chart below, this resistance is often used by traders as a sign to
take profits or to close out any existing long positions.
Many short sellers will use these averages as entry points because the price often bounces off the
resistance and continues its move lower. If you are an investor who is holding a long position in a
stock that is trading below major moving averages, it may be in your best interest to watch these
levels closely because they can greatly affect the value of your investments.
Stop-Losses:
The support and resistance characteristics of moving averages make them a great tool for managing
risk. The ability of moving averages to identify strategic places to set stop-loss orders allows traders
to cut off losing positions before they can grow any larger. Using moving averages to set
stop-loss orders is key to any successful trading strategy.
Data Used in Calculation:
Most moving averages take the closing prices of a given asset and factor them into the calculation. It
is my experience that it would be important to note that this does not always need to be the case. It
is possible to calculate an "EMA"by using the close, high, low . When plotted on a chart or put in a
"Tech.Table", these impact your analysis as well as your trading results in a very big way.
Finding an Appropriate Time Period:
Because most MAs represent the average of all the applicable daily prices, it should be noted that the
time frame does not always need to be in days. Moving averages can also be calculated using
minutes, hours, weeks, months, quarters, years etc. Why would a day trader care about how a 50-
day moving average will affect the price over the upcoming weeks? On the other hand, a day trader
would want to pay attention to a 5-Hour or 35 Hour average/ Ema to get an idea of the trading
ranges. I have found the 5-hour High & Low Emas to be quite effective during intraday trading and 5
Day High & Low ema for positional trades.
Responsiveness to Price Action:
Traders who use moving averages in their trading will quickly admit that there is a battle between
trying to make a moving average responsive to changes in trend while not allowing it to be so
sensitive that it causes a trader to prematurely enter or exit a position.

Short-term moving averages can be useful in identifying changing trends before a large move occurs,
but the downside is that this technique can also lead to being whipsawed in and out of a position
because these averages respond very quickly to changing prices. It is highly recommended to look at
other technical indicators such as Macd, Stochastics for confirmation of any move predicted by a
moving average.
Beware of the Lag:
Because moving averages are a lagging indicator, transaction signals will always occur after the price
has moved enough in one direction to cause the moving average to respond. EW STudy mitigates
this "Lag". This again emphasises the point that no method should be used isolatedly to have
consistent success in the markets. If you want to use only one method, then wait for the perfect set
up and do your trades, though if the trades are a few but the success will be high.
Crossovers:
A crossover is the most basic type of signal and is favored among many traders because it removes
all emotion. The most basic type of crossover is when the price of a stock moves from one side of a
moving average and closes on the other. Price crossovers are used by traders to identify shifts in
momentum and can be used as a basic entry or exit strategy. As you can see in the first chart,
a cross below a moving average can signal the beginning of a downtrend and would likely be used by
traders as a signal to close out any existing long positions. Conversely, a close above a moving
average from below may suggest the beginning of a new uptrend.
The second type of crossover occurs when a short-term average crosses through a long-term
average. This signal is used by traders to identify that momentum is shifting in one direction and that
a strong move is likely approaching. A buy signal is generated when the short-term average crosses
above the long-term average, while a sell signal is triggered by a short-term average crossing below
a long-term average.
Moving Average Envelope:
Another strategy that incorporates the use of moving averages is known as an envelope. This
strategy involves plotting two bands around a moving average, staggered by a specific percentage
rate. Traders will watch these bands to see if they act as strong areas of support or resistance.
MA has also been used in the development of other indicators such as -
Moving Average Convergence Divergence (MACD)
One of the most popular technical indicators, the moving average convergence divergence (MACD) is
used by traders to monitor the relationship between two moving averages. It is generally calculated
by subtracting a 26-day exponential moving average from a 12-day EMA. When the MACD has a
positive value, the short-term average is located above the long-term average. As mentioned
earlier, this stacking order of the averages is an indication of upward momentum. A negative value
occurs when the short-term average is below the long-term average - a sign that the current
momentum is in the downward direction. Many traders will also watch for a move above or below
the zero line because this signals the position where the two averages are equal (crossover strategy
applies here). A move above zero would be used as a buy sign, while a cross below zero can be used
as a sell signal.
Bollinger Band:
A Bollinger band technical indicator looks similar to the moving average envelope, but differs in how
the outer bands are created. The bands of this indicator are generally placed two standard deviations
away from a simple moving average. In general, a move toward the upper band can often suggest
that the asset is becoming overbought, while a move close to the lower band can suggest the asset is
becoming oversold. Since standard deviation is used as a statistical measure of volatility, this
indicator adjusts itself to market conditions. The tightening of the bands is often used by traders as
an early indication that overall volatility may be about to increase and that a trader may want to wait
for a sharp price move.
Speed Kills, so usage of moving averages which smooths out the noise & Choppiness is your best
bet to navigate your trading/ investments in this financial race field..Moving averages can be effective
tools to identify and confirm trend, identify support and resistance levels, and develop trading
systems. As with most tools of technical analysis, moving averages should not be used on their
own(But tell that to my critic who uses just moving average chart to make perfect entry points), but
in conjunction with other tools that complement them. Using moving averages to confirm other
indicators and analysis can greatly enhance technical analysis.
This, more or less, covers all Technical analysis that are sufficient to make consistent money in
the market - namely Trendlines, moving averages, Trend Analysis, macd, stochastics and the
Tech.Table.
And that is "Getting Rich Slowly".
Posted by Ilango at 10:41 AM
Sunday, January 17, 2010
Elliot's Impulse waves.(Part-4)

IMPULSE WAVES :- The Basics

Waves that move the market in the direction of its main trend either up or down are
called Impulse waves.

1. Impulsive waves are made up of 5 waves which themselves are made up of 5 waves. This is called
the fractal nature of waves. This fractal nature of waves can be carried down to the smallest time
frames. You may hear that we are in W5 of W5 of W5 of daily W5. Fractals within fractals within
fractals ... This is important to a trader when he/she is trying to catch the end of a move while
waiting for all patterns to be complete. Trading a reversal as it is completing its final wave into a
strong resistance or support, is a very high probability trade.

2. Within a 5 wave pattern, Waves 1, 3, & 5 are themselves impulsive.

Below is an illustration of impulsive waves that move the market in its trending direction.
3. Within this 5 wave impulsive pattern depicted above, Waves 2 and 4 are corrective. We will
cover corrective waves later. These corrective waves can be either simple or complex and one finds
the lower the timeframe, the more complex these corrections become. Simple corrections are 3
waves (ABC or Zig Zag) and complex corrections are combinations of 3 and 5 wave structures.

4. In a 5 wave impulsive pattern, one of the impulsive waves (W1, 3, or 5) will generally extend and
be longer than the other two. In the case of ES, Wave 3 is usually the extended wave. (Commodities,
it is often Wave 5).

5. Truncation: Sometimes when the market is weak, we see a different reaction from Wave 5.
We see a failed W5. A hint that W5 might fail is a 5 wave pattern that is completing below the level
of W3. When we see a W5 failure (truncation), we can expect a deeper than normal correction.
6.An ending diagonal is a special type of wave that occurs in the 5th wave position when the
preceding 3rd wave has gone "too far too fast". Ending diagonals can also be seen, sometimes, in
the c wave of an "ABC". In all cases they are found at the termination of larger patterns suggesting
exhaustion of the trend. Ending diagonals take a wedge shape with a sub waves of 3-3-3-3-3. A
rising diaganl is bearish followed by a sharp decline and a falling diagonal id followed by an upward
thrust. EW study helped to identify the "ending diagonal" possibility when Nifty made its low @ 2539
in Mar.09. Wave Personality: First waves are part of basing formations and "sell on rise" continues,
though breadth and volumes tend to rise with prices retrecing the previous decline in shorter time.
Second waves retraces much of the first wave convincing the bears that the downtrend is still on and
the sell on rise has yielded good results and is followed with declining volumes. Third waves are
strong and broad and the trend is unmistakable. They generative highest volumes and tend to be
extended with many gaps in them. Fourth waves are predictable in both depth and form because of
alternation as well as their tendency to terminate near the 4th of the previous time cycle and also a
small break of the trendline.Lagging stocks build their tops. Fifth waves can be explosive and quite
sharp if third wave has extended as it did in 2007-2008. And if 3rd wave was quite powerful, 5th can
be an ending diagonal as it happened during the decline in year 2008-2009(A wave down).
The following is a summary of points that help to project price targets based on wave
relationships:
The best approach is "Whatever Elliott rule will not allow, you can deduce that whatever remains is
the proper perspective, no matter how improbable it may seem".
Wave Principle trains the trader/ investor to discern what the market is likely to do next before it
does it. Wave principle limits the possibilities and then orders the relative probabilities of possible
future market paths.
When you have conquered the essential task of applying a method expertly, you have done little
more than gather the tools for the job. When you act on that method, you encounter the real work:
Battling your own emotions. Thus it makes it clear that "Analysis" and "Making money" are two
different skills and there is no way to understand that battle off the field....Only speculating in the
real markets can prepare you for "Speculation in Markets". And you must do it yourself. Choose the
wave principle..It will start you thinking properly and that is a first step on the path to trading
successfully.
Get Rich Slowly.

Posted by Ilango at 9:42 AM

Sunday, January 10, 2010


Elliot wave "Principle" , "Rules & Guidelines".(Part-3)

What is the Elliott Wave Principle?


In its simplest form, it is that most market trends unfold in 5 waves in the direction of the trend, and
in 3 waves in the direction counter to the main trend. Simple! 5's and 3's.
The 5 wave patterns are impulsive waves that cause the market to trend.
The 3 wave patterns are corrective, and can be thought of as the market taking a breath so it
can continue the trend. EW believes that these patterns are caused by group psychology and the
interplay of fear and greed.
A complete Elliott Wave pattern has 8 waves: 5 during the “impulse” phase and 3 during the
“corrective” phase.
EW is a fractal concept, so look closely at Wave (1) and Wave (2). The entire 8-wave structure
that comprises the first and second wave is exactly the same as the complete 8-wave structure that
completes the whole chart, which itself might be a larger Wave 1 and Wave 2 of a higher time frame.
It is important to understand that Elliott Wave is fractal.

In an impulse (an uptrend, for simplicity), Waves 1, 3, and 5 will ’subdivide’ into their own smaller 5-
wave affairs. Waves 2 and 4, which move against the larger trend, have a 3-wave structure.

EW principle is fractal, meaning a complete five-wave impulse up might just simply be part of
Wave 1 or Wave 3 (or Wave 5) of a larger complete wave structure, which itself might be part of an
even larger wave structure.This is how to understand Elliott Wave Fractal ‘waves within waves.’
Here are the ‘ideal’ correction types:
It may take few sessions to elaborate on these corrections which make up 85% of market moves.
Efficient trading requires mastering of these. We will take it up later.

Rules:-

Keep these three "Hard rules" (Unbreakable) always in mind while assessing/ counting/ labeling
the price moves to help you arrive at a correct count which can result in a unbelievable forecast &
stupendous trades.

- An impulsive wave always subdivides into five waves (1-2-3-4-5).


- Wave 1 usually subdivides into an impulse or seldom into a leading diagonal.
- Wave 2 subidivides into a zigzag, flat or combination.
- Wave 2 never moves beyond the start of wave 1 (Rule-1).
- Wave 3 always moves beyond the end of wave 1 and is never the shortest (Rule-2).
- Wave 5 subidivides into an impulse or an ending diagonal.
- Wave 4 subidivides into a zigzag, flat, triangle or combination.
- Wave 4 never moves into the territory of wave 1 (Rule-3).
Below is an illustration of these rules.

Guidelines:-
These are flexible rules but quite useful in identifying/ recognising a wave and its likely type or
pattern.

- Wave 1, 3 or 5 is usually extended, while wave 1 is the least commonly extended wave.
- If wave 3 is extended, it’s common for sub wave 3 of 3 to extend as well (the same applies for
wave 1 and 5).
- Subwave 3 of 3 almost always has the steepest slope within the parent impulse.
- Wave 5 often ends when hitting a line drawn from the end of wave 1 or 3 that is parallel to a line
drawn between the ends of waves 2 and 4.
- Wave 5 normally ends beyond the end of wave 3, if not it’s called a truncation.
- If wave 2 was a sharp correction, wave 4 will almost always be a sideways correction and vice versa
(Alternation).
- Wave 2 is usually a zigzag or zigzag combination.
- Wave 4 is ususally a flat, triangle or combination thereof.
- Wave 4 usually ends within the price territory of the fourth wave of wave 3.
- Wave 4 usually breaks the trendline .
The most difficult part of Elliott Wave analysis is correctly labeling and counting the waves. A correct
count can lead the analyst to amazing accuracy in forecasting the market.
Applying what is learnt:
Learning can go on for eternity but practice must start immediately to develop the "Intuitive
capability" to understand and apply this knowledge for profitable trades.
EW knowledge helped us to close the shorts @ 4960 and create longs too.

A move past the "i" wave of the 1st wave and a faster retracement gave another entry point.
Expanded flat of 2nd wave hinted at underlying bullishness and thus a shallow 2nd wave to hold on
for the 3rd wave.
The 5-sub waves of 3rd wave alerted us to book profits at 5300+.
Shallow 2nd wave revealed an "alternation" in 4th wave to be steeper to play "Selling".
An "abc" correction helped us to initiate a long near the lows.
1st wave is 4944 - 5197 = 253; 3rd wave is 5161 - 5310 = 149.
3rd wave cannot be shortest(Rule-2) and hence the 5th can not be more than 148.
So if 5235 is the end of 4th, then 5th can not move past 5383. If it does, then the count is wrong
and we should revisit the same. If 4th continues further down, it should not enter the 1st wave
territory of 5197(Rule-3), and 5th measurement should start from that new low between 5200-
5235.
An alternative scenario suggests of an ending diagonal possibility in the daily time frame. In such
a case, the hourly should sub divide into "ABC" as shown below.
Use Elliott Wave however you see fit and however it works for you - just like any of the hundreds of
technical indicators out there.
Read the previous posts Part-1 and Part-2 here.
Get 10 Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever from
Elliott wave International by registering as a member (Free).
We will discuss the impulse waves in detail including the ending diagonal in the next week. Until then
keep counting the waves and money.
Get rich slowly.
Posted by Ilango at 5:17 AM

Saturday, January 2, 2010


Introduction to Elliot & his Wave Theory.(part-2)

More and exhaustive studies have been made on Elliot wave theory by many experts to follow the
markets and the studies are available in the links under Elliot wave Tutorials in this blog. With
complex counting of waves and numerous rules and squabble among EW analysts about the correct
labelling has scared away many from this simple tool.
My sincere attempt is to illustrate here the way I self taught myself with the wave theory and the
utility of it when combined with other methods in understanding market moves. The book that
inspired me the most to follow EW is "Elliott wave Explained" by Robert beckman.
To me, EW is simply a spontaneous counting of "Fives and threes" and its combination to put the
market moves in a predictable order.

Ralph Nelson Elliot observed after years of analysis that the market movement was quite orderly
and followed a pattern of waves. It is a theory that reflects the law governing the form of the
natural path of all human activities. This Nature's law, though predictable to the dedicated, still
leaves much mystery to many.
The comparison with tide, wave and ripple has been used since the earliest days of Dow Theory.

What is a wave..?? There are no parameters to define what is a wave and hence it is left to the
imagination of the follower. The example of the waves of the ocean illustrates this quite well..
1. A small wave starts initially.

2. And then it recedes for a while and gathers more strength.


3.On its next advance, the wave becomes stronger than the earlier one.

4.With a further consolidation, the final wave explodes with full strength.
What is a wave..?? There are no parameters to define what is a wave and hence it is left to
the imagination of the follower. Years of my observations have helped me to arrive at a basic tool to
identify a wave which is "Trendline". When a trendline is combined with the study of Technical
indicator such as macd (How to combine EW with macd, you are well guided to put these price
movements in an orderly fashion as defined by Elliot wave theory that prices move in 5 waves
followed by a 3 wave correction. And this process continues..on and on.
The Elliot theory: Market moves in waves, each of which is interrelated to one another in time and
price. A movement in a particular direction can be represented by "5" distinct waves of which three
in the direction(called impulse wave-1,3,5) and two against the direction(called Corrective wave-2,4).

One such five-wave would become the first wave of the higher degree. Eg: 5 waves in hour would
become one single wave in the Day.
Each corrective wave will subdivide into 3 waves of a lesser degree. And this process continues with
variations in actual market place as per the Traders/Investors psychology & their resultant behaviour
which moves the markets.

How to apply..? You simply start labeling them in fives and threes as you deem fit using, if
necessary, other "Overbought & Oversold" indicators and other methods. There are some basic rules
to be followed to help you in counting them correctly which will be discussed next week.

Here is a small illustration to count them and their immense utility in assessing the likely direction
of the market which helps in proper entry and exit and above all to "sit tight" with the trades.

1. At the reversal point, the first wave is formed with a swift retracement of the last fall. The
illustration here is of the onset of the bull run started in March 2009.(In the 5-minute or 30 minute
chart, the faster retracement could have been spotted at 2630 after a positive divergences and highly
oversold nature).
As the first set of "5"s is complete, it becomes the 1st or "A" wave (As the upmove from mar.09 low
is construed as corrective)of a larger degree/ time cycle.
i.e- from hourly 5 waves, they become the 1st wave of the daily as shown below:
Also note that the last fall from 2798 to 2556 got retraced in shorter time to 2836, confirming a trend
reversal.
Always book out at the count of 5, at least partially and re-enter at the count of "abc"-the corrective
part. In most bullish cases, the correction ends at the 4th wave of the previous lower cycle. Never
miss the "Third wave entry"-one of the most rewarding phase.There are many traders who
simply wait for the 3rd wave set ups in various time cycles to make their safer & rich trades. Note in
the hourly chart below the irregular correction in the second wave(marked in red) wherein the "b"
moved above the "1st" wave suggesting of "Bullish undercurrent" that market is quite impatient to
forge ahead.
Here below, you will note the completion of three sets of "fives" connected by two sets of "threes" to
form one big "First or A"(Pink) wave to be followed by a correction which ended near the 4th wave of
the previous cycle. Now Imagine, what the 3rd wave of this larger time scale can have in store for it
after experiencing a small 3rd wave upmove earlier within the "three sets of Fives". We'll see soon.

The more noisy or countless sub-waves are enclosed within the daily waves in a neat fashion.Note
also how the "first break of the trendline often gives away the end of a 4th wave and the onset of a
powerful 5th wave" This is not a rule but a guideline worth remembering.
Yes..in the daily 3rd wave, the markets gave a Black Swan..a total upward freeze. This happens often
to individual scrips.Note also, subsequent to the completion of the 5-waves in daily which make up
the 1st or "A" wave of the weekly, a larger correction sets in. A break of the redrawn trendline
confirms the "a" wave(first of the three waves of a correction) of that correction.

Once a larger correction in the form of an "abc" (We label the corrections as "abc" to avoid a
confusion of labeling both upmoves and downmoves using numbers) is complete, the next big 3rd
wave or "C" wave(as it is still considered to be corrective)start to unfold.
The most important factor in labeling the moves is to help identify the direction, its magnitude
depending on its time cycle to stay in the direction for the correct amount of time. One should not,
for eg.,enter into an hourly 3rd wave and sit tight for days.The hourly direction lasts for "Hours"
only.
Remember there are waves within waves and various "Counts" are in force at any given time for
different time cycles. EW works well for the larger time scale and requires high agility & proper stop
loss & money management to play the shorter version.
My EW learning has come mostly from the shorter version as you will see most of the wave forms in
a shorter version since one life time is not enough to see them in larger time scale which can run into
centuries.
In the next week, we will learn some basic rules that govern this wave movements.
Have patience..Elliot took 10 years to arrive at his theory.
Get rich slowly.
Posted by Ilango at 8:25 AM

Monday, December 28, 2009


An Invitation to enter the world of Elliott waves.(Part-1)

Success in the stock market is measured in terms of money earned. Luck is how the envious describe
hard work and the successful use of skilled judgement.
Stock market offers no absolutes that it will do what it wants to do, when it wants to do
it.
You need a guide to help define probabilities and the knowledge to weigh them, followed by the
confidence to act on your own judgement and not be thrown off-balance by the arrival of the
improbable.
The most rewarding aspect of the wave principle is that when only one option is offered, the
probability of success is extraordinarily high. Markets are efficient but 90% driven by emotions and
these emotions are reflected by the Nature's Law called "Elliott waves" named after Ralph.N.Elliott
who discovered it and effectively applied to US markets on a larger time frame.
Most important intellectual quality for successful investment is the ability to keep an open mind. The
biggest mistakes are made by those who do not know what they do not know. Genius is nothing but
a great aptitude for patience.
The precise order of wave formation can often seem obscure, riddled with random noise, leaving you
totally confused as to the position of the market within the framework of the overriding elliott trends.
The forecasting error is not due to Elliott's wave principle but to our misuse of it. Markets and Elliott
wave principle are like the Delphic Oracle; neither are ever right or wrong, they just are.
Be realistic - that is the best way to make money from the wave principle. When in doubt, Stay out.
Even a slight acquaintance with the wave principle will reinforce your performance.
Markets are technically strongest after a sharp decline and technically at their weakest after a sharp
upmove and EW suggests to sell into the strength and buy into the weakness quite contrary to the
crowd behaviour.
Before you'd have been petrified by the falling markets. Now you can place them in context - a
mere corrective wave, possibly time to buy in with both hands.
Before you were tempted to get wildly enthusiastic about bull markets getting yourself right at the
top of the market every time. Now you see that the prices are rising in the fifth wave and you sell
the market when there is euphoria all around.
Market's movement is a psychological phenomenon. The stock market is a creation of man and
therefore reflects human idiosyncrasy. Wave principle represents this rhythm of man's response to
external stimuli which shows itself in price fluctuation.

I feel no opportunity should be lost to help you understand this extremely valuable and potentially
highly profitable investment tool. I want you to think, live and breathe Elliott and his wave principle.

I have put up a Elliott wave Tutorial Link in the blog. Go through them which are quite simple and
lucid to understand. Spend your valuable time on them and allow it to take you through the whole
teaching....and do not struggle to understand. If necessary go over again. From next week, we will
start discussing various application of the Wave principles to our trading strategies.
Posted by Ilango at 6:44 AM

Sunday, December 27, 2009


Leading Technical Indicator - the Stochastics

Technical analysis is practiced in two main categories namely chart patterns and indicators.
Indicators are calculations based on the price of a stock/ Index and indicates trends, volatility and
momentum. Indicators are often compared to "pulse, pressure check" of a patient by the doctor to
assess the extent of the illness. Indicators help you assess the market for its momentum, direction,
etc.
Indicators are used as a tool to gain further insight into the supply and demand of securities.
Indicators are used to confirm price movement and the probability that the given move will continue.
Along with using indicators as secondary confirmation tools, they can also be used as a basis
for trading as they can form buy-and-sell signals.
Indicators are of two main types - leading and lagging - both differing in what they show users.
Leading Indicators are those created to precede the price movements of a security giving
predictive qualities. Two of the most well-known leading indicators are the Relative Strength Index
(RSI) and the Stochastics Oscillator. I have often identified the reversal with the additional help
from Stochastics.

Lagging indicator is one that follows price movements and has less predictive qualities. The most
well-known lagging indicator is the MACD. The usefulness of this indicator tends to be lower during
non-trending periods.
A leading indicator is thought to be the strongest during periods of sideways trading ranges, while
the lagging indicators are regarded as highly useful during trending periods and produce fewer buy-
and-sell signals which allow the trader to capture more of the trend instead of being forced out of
their position.
The stochastic oscillator is calculated as a percentage of a security's closing price to its price
range over a given time period. For eg: If a 5 day range of an index is 100 points and the index has
closed to day 80 points up from that 5 day low, the stochastic will be 80, near overbought. Similarly if
the index closes quite close to the 5 day lows, a mere 20 point away from it, the stochastic is 20,
near oversold. The oscillator's sensitivity to market movements can be reduced by adjusting the time
period or by taking a moving average of the result. In an upward trend the price should be closing
near the highs of the trading range and in a downward trend the price should be closing near the
lows of the trading range. When this occurs it signals continued momentum and strength in the
direction of the prevailing trend.
This leading indicator will create many buy and sell signals that make it better for choppy non-
trending(Sideways) markets instead of trending markets where it is better to have less entry and exit
points.

The stochastic oscillator is plotted within a range of 0 and 100 and signals overbought conditions
above 80 and oversold conditions below 20. The stochastic oscillator contains two lines. The first line
is the %K which is essentially the raw measure used to formulate the idea of momentum behind
the oscillator. The second line is the %D which is simply a moving average of the %K. The %D
line is considered to be the more important of the two lines as it produces better signals.
There are two main ways this indicator is used to form buy and sell signals are through crossovers
and divergence.
Crossovers occur when Stochastic moves up from below 20 or 30 to generate a buy signal or moves
down from above 70 or 80 to create a sell set up. It signals that the trend in the indicator is shifting
and that this trend shift will lead to a certain movement in the price of the underlying security.
Divergence occurs when the direction of the price trend and the direction of the indicator trend are
moving in the opposite direction. This signals that the direction of the price trend may be weakening
as the underlying momentum is changing.
There are two types of divergence - positive and negative. Positive divergence occurs when the
indicator is trending upward while the security is trending downward. This bullish signal suggests that
the underlying momentum is starting to reverse and that traders may soon start to see the result of
the change in the price of the security. Negative divergence gives a bearish signal as the underlying
momentum is weakening during an uptrend.
When it is combined with EW, the effectiveness increases as during 3rd waves, it tends to remain in
the "Overbought" or "Oversold" for longer than usual. During such a 3rd wave, the lagging
indicator,Macd, works well.
We, now, have trendlines & Channels, Pivots with supports & Resistances, leading(Stochastics) and
lagging(Macd) indicators combination in a Trading system that forms the basis of our
"Tech.Table". Note that we are not obsessed by any indicator or any method but each one
contributing its worth as in a "Cohesive TEAM" that can lead you into any challenging trading day.
What is the one most important team member missing.? The strategist who can peek into the
opponents (Market's) next move. We will cover next the Strategist, Elliott wave.
Posted by Ilango at 6:56 AM

Wednesday, December 23, 2009


Nifty Technical Analysis Explained - 2.

• 5-D & 14-D: These are "Stochastics" indicators found in 8th&9th columns(H, I). A
more detailed write up will be followed later. This indicator oscillates between 0 to 100 and
helps in identifying "Overbought and Oversold" situations. It is generally observed as the
prices of stock increase, the closing prices tend to be nearer to the upper end of the price
range. As prices fall, the closing prices tend to be nearer to the lower end of the price range.
This price range is selected for 5 days and 14 days and the positioning of the close price on
any given day in this range is denoted as 5-D and 14-D. This confirms a rising, falling trend as
well as Overbought and Oversold status. The colour changes to green when in uptrend and
red when in downtrend.

• Columns L shows the high point of 5 period range, Column M shows the Low point of 5
period range, Column N shows the high point of 14 period and Column O shows the low
point of 14 period. Here too, the colour changes as the index maintains or makes new highs or
makes new lows. Also of importance is these columns give you the ready break down or
Break out points of 5 period or 14 period which keep changing as the days pass by.
• PIVOT, Support & Resistances: These are shown in Column P,Q,R,S,T,U. and
the same are copied and pasted in the Weekly Pivot table as well as the Daily Pivot table in
the same sheet for easy viewing. The importance of Pivots & other S1,s2(supports) and
R1,R2(Resistances) may be read here.
• Weekly Pivot & Averages: These are collected from the same sheet as mentioned
above as well as from Data.W (Colum V to Z). Use the close by averages, and other numbers
for weekly trading strategy.

• Daily Pivot & Averages: These are collected from the same sheet as mentioned
above as well as from Data.D (Colum AH to AL for simple averages and column AN to Ar for
emas). Use the close by averages, and other numbers for weekly trading strategy. Whenever
the emas are above the simple averages, the near term strength is seen and the colour of the
ema turns green and whenever the emas move below the simple averages, the colour of emas
turn red. You can see all the emas have turned red as the near term strength is quite weak.
And that is also an area bounces/ relief rally takes place. It is said "Market is weak when it is
at its high and strong when it is at its lows" as advised by Robert Beckman of Elliott wave and
hence EW encourages the trader to "Buy into the weakness and Sell into the Strength".

For the chart reading, I will cover it tomorrow.


Posted by Ilango at 7:42 AM

Tuesday, December 22, 2009


Nifty Tech.Analysis File explained-1.

• Pivot Sheet: As you key in the high, Low, High of any stock or Index, this table
calculates the "Pivot" point, three supports & three Resistances. This could be used for trading
purposes. For more on this, read "Pivot, Supports & Resistances".

• Blog Data Sheet: This is the most important sheet in the file and it collects vital data
automatically as you update the "Data.W(eek), Data.D(ay) and Data.H(our)" sheets.It has
Date, High, Low & Close in the first four columns. If the high clears the previous two day's
high, the colour changes in the cell. Similarly if the low breaks previous two day's lows, the
colour changes telling us the change in the swing highs and swing lows.Generally a two day
swing clearing is an indication of a change in direction. But there are also false breakout/
breakdown in this, hence I have taken 5-day high & Low breaking as one of the factors for
"Conservative Trade" initiation.
• 5.Ema:This is placed in the 5th column(E) and it is the most important short term
average. Unlike a simple moving average which averages the last 5 days prices equally, ema
gives more weightage to the most recent prices by a mathematical calculation and thus it is a
good indicator of short term strength or weakness of the market. The colour of the cell
& the font changes to "Red" the moment the close price closes below this critical ema
indicating the onset of weakness. And it changes to green if the close price closes above it
indicating strength. As long as the weekly close was above this ema, the daily falls were
bought into. Since the 18th Dec "weekly sell Signal" as per this ema, the first day resulted in a
sell(21.12.09). Now the highly oversold daily as well as Hourly with positive divergences will
attempt a reversal. For the week, the first week after the sell signal is the "fight back" week if
there is any strength left in the earlier uptrend. A continued close below the week ema on
24.12.09 will more or less confirm a larger time scale reversal in trend. Similarly when the day
close is closing below the 5day ema, a sell signal is generated and use this signal to sell in the
hourly time frame everytime there is an intraday rally towards either hour ema or Hour high
ema. Always give more weightage to the higher time cycle and play the lower time cycle till a
"overbought or Oversold" situation arises in the higher time cycle when one should approach
with caution but continue in the same direction.

• High ema:This is placed in the 10th column(J) and it is the 5 day ema of the highs made
on the previous 5 days giving more weightage to the most recent highs. Thus, as the Close
price stays above this the upward momentum is intact and the market is expected to make
continued up moves and new highs.The moment the close price closes below this, the colour
changes to yellow and font to red signaling the onset of a correction. Sell on rises come
into play and market will attempt during this period to move higher than this "High ema"
during intraday but only a close above this will bring back a lasting momentum. Similarly the
moment the close price closes above this the colour changes to green and font to green
signaling the resumption of the upward momentum. Buy on dips come into play and
market will attempt during this period to move lower than this "High ema" during intraday
which generally is bought into but only a close below this will bring in a correction.

• Low ema: This is placed in the 11th column(K) and it is the 5 day ema of the lows made
on the previous 5 days giving more weightage to the most recent lows. Thus, as the Close
price stays above this the uptrend is intact and any fall till this low ema may be construed as
only a correction.The moment the close price closes below this the cell & font colour changes
to red signalling the onset of a downtrend. Sell on rises come into play and market will
attempt during this period to move higher than this "low ema" during intraday but only a close
above this will bring back a "Neutral mode". Similarly the moment the close price closes above
this the cell colour changes to blue and font to blue signalling the "likely end of a downtrend".
Buy on dips for trading may come into play and market will attempt during this period to move
lower than this "low ema" during intraday but only a close below this will continue the
downtrend.
• D.Macd & S.Macd: These two are placed in 6th & 7th Columns (F, G) and they are
the values of fast macd(5,10,9) and Slow macd(12,26,9). As this numbers are ascending, it is
in uptrend and as the numbers are declining, it is in downtrend and the colour changes to Red
during downmoves and to Green in upmoves. For more on this MACD, please read an
exhaustive write up here.

More on the "File & Chart Reading" tomorrow.


Posted by Ilango at 6:34 AM

Saturday, December 19, 2009


Trend following - the most basic of all.

The direction of the stock/index price movement is called a TREND. Prices either be rising or
falling or moving narrowly(flat). "Trend is your friend"-the often repeated phrase carries its weight
in gold. Pay heed to this phrase all the time to become an unbeaten market player.

The most basic Trend analysis:


Uptrend: Prices are rising and making higher tops and higher bottoms.
Downtrend: Prices are making lower bottoms and lower tops.
Sideways or Flat trend: Prices are moving in a narrow range with choppiness.
The terms bull market and bear market describe upward and downward market trends, respectively.

Prices do not rise or fall in a straight line but gets interrupted with counter moves in the opposite
direction. These counter moves can be of zigzag or flat or some kind of triangles giving rise to minor
tops & bottoms against the main trend.
For eg: If the trend is up, prices after a significant upmove will pause and make minor lower bottoms
& lower tops- called corrections/ counter trend rally. Once this correction is over, the main trend will
assert itself by taking the prices to new highs.

A top: is nothing but a price level from which the stock reverses direction to move downwards.
A bottom: is that level from where the scrip reverses the downmove and starts to rise.
A TREND: is the position of these tops and bottoms that determines the trend at any given point
of time.
At any given point of time an investor or a trader has three options - to buy, sell or stay away from
the market. If the trend is rising, he would do well to buy. If the trend is falling, he should be selling,
and if the trend is flat, it is best to stay away unless you are capable of handling micro movements.
Most of a trader's losses arise from trading in a flat market . Patience plays a vital part when market
moves in a sideways, choppy mode.
Trend following for Medium to Long term Investing:

This weekly chart shows the benefit of trend following for the maximum gains requiring highest
amount of discipline and patience.
A falling market cannot keep falling and at one point of time it is vulnerable to change. This change
in the direction of the trend is called a trend reversal. Once reversed, the new trend will make
higher tops & higher bottoms until exhaustion sets in and it starts to make lower top and lower
bottom.
Technical Analysis is this process, whereby one can spot trend reversal at an early stage and can
ride the trend till the weight of evidence proves that it has reversed directions.
Trend following for short term Trading(Hour):
Short term traders will do well to follow closely these minor price tops & bottoms and plan their
trades. Many traders mix up the time cycle while following the trend and end up holding a losing
position. For eg: One goes long spotting a trend change in the hourly time frame but hold on to it in
spite of a continuation of the downtrend in the daily time scale. Every trading position has an "Expiry
date" to it. If the anticipated price does not unfold within a set of time frame, exit thereby protecting
the capital.
Trend following for short term Trading(Day):
This simple concept of observing tops and bottoms posted by the stock can help the investor/ trader
in riding the trend and spotting trend reversal.The short term trader must keep the daily trend as the
main factor but use the hourly trend for entry & exit.
I label all the critical pivot points in numbers(tops & bottoms) which help me tremendously to follow
the market as numbers stay on in my mind longer and number is what I see on the trading screen.
Price: One of the first rules of trend following is that price is the main concern. Traders may use
other indicators showing where price may go next or what it should be but as a general rule these
should be disregarded. A trader need only be worried about what the market is doing, not what the
market might do. The current price and only the price tells you what the market is doing.

Money Management: Another decisive factor of trend following is not the timing of the trade or
the indicator, but rather the decision of how much to trade over the course of the trend.

Risk Control: Cut losses is the rule. This means that during periods of higher market volatility, the
trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The
main objective is to preserve capital until more positive price trends reappear.

Though this concept appears very simple, it is probably the most important concept that can be quite
profitably employed in trading the market. In using this concept, one may use either a bar/candle
chart or the close price chart. Find the time cycle that best suits your time and nature and follow that
trend to find your treasure.
Get rich slowly.
Posted by Ilango at 12:31 PM

Tuesday, December 15, 2009


Sharing my TA File

At 8.55AM: For PreMarket view, read the EOD analysis..First session may hold
5080-5120-5130 and then fall down to 5070-5060-5050.
**********************************************************************
*****
I am wishing to share the file that I use for TA study with all my
readers.
It combines the Tech Table & Pivot points as well as a simple study of macd(fast-5,10,9 & Slow
12,26,9), stochastics(fast-5.D & Slow-14.D), candle analysis which are sufficient to take trading
decisions.
Also it has three time cycles: Week, Day & Hour.
Give weightage to the higher time cycle & trade until the lower cycle nears OB or OS & start to
develop divergence.
1.Charts are set for 400 weeks, 400 days & 400 hours. Every week or a month, adjust the data
manually . For eg: If you need to add 40 days/hours, copy only from 43rd row "b,c,d,e-columns cells"
and copy up to the last day/hour & more 50 cells & paste them on the 3rd row. Now clear the
formulas in the last 40 rows.(Do not delete in the "Data" sheets anything).
Once you try to implement it, it just takes a minute of your week end time.
2. When ever the price exceeds your chart frame, click on the axis side and key in the price range in
the minimum & maximum slots.
3. These charts are not special but very clear & crisp but it helps to experiment on the effects of a
price change in the next hour, day or week by keying in the new imaginary rate.
4. You can use this file for your stocks as well as for other index too.

This is no magic file but it helps if you are consistent. I am always available to assist you in using this
file, in case you have difficulties.

Send me a test mail ( vanilango@gmail.com ), I will send them to


you.
Posted by Ilango at 7:07 AM

Saturday, December 12, 2009


Trendlines - The most simple & effective Technical tool.

Technical analysis is a study of past prices of an index/ Stock or Commodity with the assistance of
certain mathematically derived tools to forecast the future price movements. However, the simplest &
most effective tool devoid of mathematical applications which identifies and confirms a trend is called
a trendline (Channels) .
Stocks move up on persistent demand(buying) or down because of relentless supply (selling) or
sideways because of a close tussle between buyers & sellers. A trendline in most occasions says it all.
If you observe lane discipline and travel by the sign boards, you reach your destination safe & sound.
Trendlines help you reap the richest haul from the markets in a similar safe way.
A trend line is a straight line that connects two or more price points and then extends into the future
to act as a line of support or resistance. The upward sloping trendline may be called a demand line
as stocks bounce of that line due to a rise in demand and similarly the downward sloping trendline
may be called a supply line as every time the stocks reaches that line supply comes in & prices fall.
In a sideways market, the unresolved "supply & demand" gets into a tussle for supremacy which gets
resolved when either demand or supply overpowers the other. As long as the larger trendline is
intact, each sideways move will get resolved in favour of the main trend.
Uptrend Line(Demand line)
An uptrend line has a positive slope and is formed by connecting two or more low points. The
second low must be higher than the first for the line to have a positive slope. Uptrend lines act as
support and indicate that net-demand (demand less supply) is increasing even as the price rises. As
long as prices remain above the trend line, the uptrend is considered solid and intact. A break below
the uptrend line indicates that net-demand has weakened and a change in trend could be imminent.
Downtrend Line (Supply Line)
A downtrend line has a negative slope and is formed by connecting two or more high points.
The second high must be lower than the first for the line to have a negative slope. Downtrend lines
act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price
declines. As long as prices remain below the downtrend line, the downtrend is solid and intact. A
break above the downtrend line indicates that net-supply is decreasing and that a change of trend
could be imminent.

Semi-log Chart for Higher cycles(Week/Month)

High points and low points appear to line up better for trend lines when prices are displayed using a
semi-log scale. This is especially true when long-term trend lines are being drawn or when there is a
large change in price. Most charting programs allow users to set the scale as arithmetic or semi-
log. A semi-log scale displays incremental values in percentage terms as they move up the y-axis.
A move from Rs10 to Rs20 is a 100% gain, and would appear to be a much larger than a move from
Rs100 to Rs110, which is only a 10% gain. The rate of ascent appears smoother on the semi-log
scale. On the semi-log scale, the trend line fits all the way up.The semi-log scale reflects the
percentage gain evenly, and the uptrend line was never broken till jan.08. Long term investors will
do well to use this semi-log charts to maximise their gains by increasing their holding period.
Smart investors will exit at the channel peak when the sentiment reading is of "Euphoria" with
highest PE.
Arithmetic Chart for lower cycles(Day/Hour)
An arithmetic scale displays incremental values (5,10,15,20,25,30) evenly as they move up the y-
axis. A Rs10 movement in price will look the same from Rs10 to Rs20 or from Rs100 to Rs110. On
the arithmetic scale, three different trend lines were required to keep pace with the advance.
It takes two or more points to draw a trend line. The more points used to draw the trend line, the
more validity attached to the support or resistance level represented by the trend line. The general
rule in technical analysis is that it takes two points to draw a trend line and the third point confirms
the validity.
The magic of trendlines unfold into channels when parallel lines are drawn and these channels give
you often the "targets" to book out as well as "fresh entry point" as illustrated in the chart of
"UNITECH".

As the steepness of a trend line increases, the validity of the support or resistance level decreases.
The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support
or resistance level.

Combining timecycles:

As illustrated from the chart of "SAIL"- Daily & Hourly, a trendline breakdown in the lower time
cycle(Hour) may be construed as a mere correction as long as the higher timecycle prices are
trending up within the channel. When the price breaks down in the hour which also coincides with
the likely breakdown in the daily, a critical reversal point is spotted early on and a trade could be
initiated with a high potential profit with limited risk.
In EW study, trendlines play a very important role in identifying a wave(as Elliott never defined
what is a wave?), the end of corrections, type of corrections, target setting coupled with fibonacci
relationships and most important of all is the early warning signal of the end of the 4th wave with a
small(false) break down in the trendline, thereby initiating the swift 5th wave trade which then
completes the trend.

Trend lines can offer great insight to trading coupled with horizontal support and resistance
levels or peak-and-trough analysis.
Trendlines are easy to apply and the trader need to be persistent as well as consistent and balanced
in his approach. Highly traded stocks has highly tradeable channels. As trendlines follow only the
prices, not the often distracting technical oscillators, many traders swear by it and base their trading
strategies with only trendlines.

The simplest of all technical analysis, Trendlines, which effectively captures the demand & supply -
the very basic of stock price behaviour, if exploited in a balanced way with tremendous amount of
patience & conviction, can bring the riches beyond a trader's/ investor's imagination..Believe in it.
Get Rich Slowly.
Posted by Ilango at 7:18 AM

Saturday, December 5, 2009


Technical Analysis with Macd

Moving Average Convergence and Divergence (MACD)

Introduction

Macd is one of the simplest and most reliable indicators available. Macd uses moving averages,
which are lagging indicators but turn them into a momentum oscillator by subtracting the longer
moving average from the shorter moving average. The subtracted value when plotted forms a line
that oscillates above and below zero, without any upper or lower limits. Using shorter moving
averages(5 & 10) will produce a quicker, more responsive indicator(fast macd), while using longer
moving averages(12 & 26) will produce a slower indicator(Slow macd), less prone to whipsaws.

Macd measures the difference between two Exponential Moving Averages (EMAs). A positive Macd
indicates that the 5 or 12-day EMA is trading above the 10 or 26-day EMA. A negative Macd
indicates that the 5 or 12-day EMA is trading below the 10 or 26-day EMA. If Macd is negative and
declining further, then the negative gap between the faster moving average (blue) and the slower
moving average (pink) is expanding. Downward momentum is accelerating, indicating a bearish
period of trading. Macd centerline crossovers occur when the faster moving average crosses the
slower moving average.

In Jan.2008, Macd turned down ahead of both moving averages, and formed a negative divergence
ahead of the price peak(6274).

In Oct.2008, Macd began to strengthen and make higher Lows while both moving averages
continued to make lower Lows(2259).

Finally, Macd formed a positive divergence in Mar.2009 while both moving averages recorded new
Lows.

MACD Bullish Signals


1.Positive Divergence
2.Bullish Moving Average Crossover
3.Bullish Centerline Crossover

Positive Divergence
A Positive Divergence occurs when Macd begins to advance and the security is still in a downtrend
and makes a lower reaction low. Macd can either form as a series of higher Lows or a second Low
that is higher than the previous Low. Positive Divergences are probably the least common of the
three signals, but are usually the most reliable, and lead to the biggest moves.
Bullish Moving Average Crossover
A Bullish Moving Average Crossover occurs when Macd moves above its 9-day EMA, or trigger
line(red). Bullish Moving Average Crossovers are probably the most common signals. If not used in
conjunction with other technical analysis tools, these crossovers can lead to some false signals.
Bullish Centerline Crossover
A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive
territory. This is a clear indication that momentum has changed from negative to positive, or from
bearish to bullish. After a Positive Divergence and Bullish moving average Crossover, the Bullish
Centerline Crossover can act as a confirmation signal.

MACD Bearish Signals


MACD generates bearish signals from three main sources. These signals are mirror reflections of the
bullish signals:
1.Negative Divergence
2.Bearish Moving Average Crossover
3.Bearish Centerline Crossover

Negative Divergence
A Negative Divergence forms when the security advances or moves sideways, and the Macd declines.
The Negative Divergence in Macd can take the form of either a lower High or a straight decline.
Negative Divergences are probably the least common of the three signals, but are usually the most
reliable, and can warn of an impending peak.
Nifty showed a Negative Divergence when Macd formed a lower High in Jan.2008(& in Oct.09), and it
formed a higher High at the same time. This was a rather blatant Negative Divergence, and signaled
that momentum was slowing and Nifty fell strongly.
Bearish Moving Average Crossover
The most common signal, a Bearish Moving Average Crossover occurs when Macd declines below its
9-day EMA. As such, moving average crossovers should be confirmed with other signals to avoid
some false readings.
Bearish Centerline Crossover
A Bearish Centerline Crossover occurs when Macd moves below zero and into negative territory. This
is a clear indication that momentum has changed from positive to negative, or from bullish to
bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as
a moving average crossover or negative divergence. Once Macd crosses into negative territory,
momentum, at least for the short term, has turned bearish.
The significance of the centerline crossover will depend on the previous movements of Macd as well.
If Macd is positive for many weeks, begins to trend down, and then crosses into negative territory, it
would be bearish. However, if Macd has been negative for a few months, breaks above zero, and
then back below, it might be a correction. In order to judge the significance of a centerline crossover,
traditional technical analysis can be applied to see if there has been a change in trend, higher High or
lower Low.
MACD Benefits
One of the primary benefits of Macd is that it incorporates aspects of both momentum and trend in
one indicator. As a trend-following indicator, it will not be wrong for very long. The use of
moving averages ensures that the indicator will eventually follow the movements of the underlying
security. By using Exponential Moving Averages (EMAs), as opposed to Simple Moving Averages
(SMAs), some of the lag has been taken out.
As a momentum indicator, Macd has the ability to foreshadow moves in the underlying security.
Macd divergences can be key factors in predicting a trend change. A Negative Divergence signals that
bullish momentum is waning, and there could be a potential change in trend from bullish to bearish.
This can serve as an alert for traders to take some profits in long positions, or for aggressive traders
to consider initiating a short position.
Since Macd's introduction, there have been hundreds of new indicators introduced to technical
analysis. While many indicators have come and gone, the Macd has stood the test of time. The
concept behind its use is straightforward, and its construction is simple, yet it remains one of
the most reliable indicators around. The effectiveness of the Macd will vary for different
securities and markets. The lengths of the moving averages can be adapted for a better fit to a
particular security or market. As with all indicators , Macd is not infallible and should be used in
conjunction with other technical analysis tools.

MACD Drawbacks
One of the beneficial aspects of the Macd is also one of its drawbacks. Moving averages, be they
simple, exponential or weighted, are lagging indicators. Even though Macd represents the
difference between two moving averages, there can still be some lag in the indicator itself. This is
more likely to be the case with weekly charts than daily charts. One solution to this problem is the
use of the Macd-Histogram.

READ more on Macd @ Stockcharts.com

Combining EW with Macd:(Read the related post)


Since the last post on Oct.09, you can see the price declining sharply after a "5 wave structure" and a
negative divergence in Macd.
For Investors: Investors who have a huge portfolio can use the weekly macd chart to spot the
Negative divergences to "Part Book" once and during the Bearish Cross over a second "Part booking"
and a last one at Bearish centreline crossover. Similarly Start buying in parts when Positive
divergences start to develop and add more to it with Bullish cross over & Bullish centreline crossover.
For Traders: Use it in combination with other Technical tools such as Stochastics and with a basic
EW knowledge to make entry & exits. When you combine your studies of various time frames such as
Week, Day & Hour, you have potentially a system which will follow the prices to a good accuracy.
Needless to emphasise here, there are no foolproof systems in stock markets but only more
efficient ones in relative term. Your experience, your discriminating ability to stay off the market
when the picture is muddy & unclear with choppy moves, your patience to wait for good set ups/
opportunities, your intuitive risk taking ability when the euphoria & Fear are at their peaks will
set you on a path to riches.
Get rich slowly.
Posted by Ilango at 8:21 PM

Saturday, October 24, 2009


How to combine EW with macd

RENU asked about reading EW with macd:


Illustrated here with "IOC" & "Nifty" chart:-
(I have chosen IOC as it is not manipulated, nevertheless widely traded in its sector)
1. When the down trend is nearing its "oversold" &" public apathy" & "Panic" situation, you will notice
a +ve div in the down move's 4th & 5th wave down OR in "b" & "c" down OR in "c4" & "c5", there by
identifying the start of the 1 st wave.
2. First wave generally gets exhausted with the macd moving into +ve area and this can be fine
tuned with the help of hour charts. In underperformers, macd may find it difficult to get into positive
territory but moves closer to "0".
3. In the Second wave, macd moves back into negative once again. In outperformers, macd may
stay above "0" but moves down closer to "0".
4. Third wave upmove takes macd strongly up to the extreme upsides. Then. in outperformers the
macd may move down with prices continuing to move up and as the macd moves up again, prices
move much higher. This is where the "novice" investors/ traders read the direction of the macd with
prices quite literally and miss a huge upmove..Exhaustion in this uptrend can be gauged from the
"gaps", "volume" as well as following the 3rd wave subdivisions in the "hourly charts".
5. Fourth wave moves become triangles to carry out time correction if the third wave was very steep
and swift Or an alternation to the second wave(if 2nd is flat, then the 4th is zigzag and vice versa).
In underperformers, the macd moves into negative while in outperformers it stays above "0" but
comes well off its high reading to set itself for a negative divergence base.
6. Fifth wave or the "froth" or the "speculative move" will bring in mostly the retailers with a herd
kind of move to new highs while the macd making a lower high thereby developing a negative
divergence. In a strongly trending markets, the 5th wave gets extended with series of negative
divergences frustrating the bears and confounding the bulls and the falls happen with a sudden
reversal when complacency sets into bulls.
7. During the reversal, the first wave down takes the macd into negative territory and the second
wave up into positive and the cycle repeats itself in the opposite direction.
Sounds simple..But as you watch the prices move on your monitor, you generally tend to forget all
your lessons. Best EW practioners have "military discipline" in them..those who mean business ...be it
in any phase/ aspect of life.
When a trading competition was held in the USA for EW practitioners, most of the toppers had
military background which gave them the edge over others in carrying out the commands without
questioning.
All the EW followers will admit that the most difficult part of EW practice is "to believe in what one
sees" . Correct labeling of the charts once the moves are over for posterity is easy . Needless to say
here that "you are right only when you make money" and that is "act when you should without
questioning".
Posted by Ilango at 12:12 PM