Foundations of Technical

Analysis
“ Since all human actions obey laws, as
fixed as those of geometry, psychology
should be studied in geometrical form,
and with mathematical objectivity”

Spinoza
 Foundations of Technical
Analysis
Three premises on which Technical Analysis
builds up

• Market action discounts everything

• Prices move in trends

• History repeats itself

 Foundations of Technical
Analysis
Definition of Technical Analysis

“ Technical Analysis is the organized and systematic

study of a pictorial representation (chart) of the past
price actions of a particular item with a view to
ascertaining its expected future behavior”.
 Foundations of Technical
Analysis
DO CHARTS TELL ANYTHING / EVERYTHING
 Foundations of Technical
Analysis
Basic tenets of the Dow Theory

1) Averages discount everything

2) Market has three (3) trends
3) Markets go through three (3) phases
4) Averages must confirm each other
5) Volume must confirm the trend
6) A trend is in effect until it gives definite signals of
reversal
 Foundations of Technical
Analysis
Technical Analysis addresses the simple question

“WHEN TO DO WHAT ?
Foundations of Technical
Analysis
“ Investors must keep in mind that there is
a difference between a good company and
a good stock”
 Foundations of Technical
Analysis
Types of charts
1) Bar chart

2) Line or Close chart

3) Japanese Candlestick chart

 Foundations of Technical
Analysis
EXAMPLE OF A BAR CHART
 Foundations of Technical
Analysis
Charting techniques
•Arithmetic scale

•Log scale
 Foundations of Technical
Analysis
Concept of SUPPORT: Level at which
demand is expected to be stronger then
supply.

Concept of RESISTANCE: Level at

which supply is expected to be stronger
then demand.
 Foundations of Technical
Analysis
Functions of SUPPORT:
1. Level around which one can initiate long
positions
2. Used for putting stop loss orders.
3. Levels around one which can look to square short
side trades
4. Violation of important support levels indicate
possibility of further decline in the stock price.
 Foundations of Technical
Analysis
Functions of RESISTANCE:
1. Level around which one can initiate short
positions
2. Used for putting stop loss orders.
3. Levels around one which can look to square long
side trades
4. Violation of important resistance levels indicate
possibility of further advance in the stock price.
 Foundations of Technical
Analysis
Uptrend:

Higher tops and higher bottoms represent an uptrend

Down trend:

Falling tops and falling bottoms represent a downtrend

 Foundations of Technical
Analysis
Trend-lines: lines on the chart which represent
a particular trend and also signal reversals in
such trends.

A trend line is formed by joining a series of tops (if the

trend is down) or bottoms (if the trend is up) and
suggests that the ongoing trend is in force as long as
the line is not violated.s
 Foundations of Technical
Analysis
Example of Trend Lines