INTRODUCTION

TECHNICAL ANALYSIS
Technical Analysis is important to form a view on the likely trend of the overall market, and it is helpful to have some idea of how to go about selecting individual stocks. Naturally, all investors would like their investments to appreciate rapidly in price, but stocks, which may satisfy this wish, tend to accompanied by a substantially greater amount of risk then many investors are normally willing to accept. However, it is important to understand that investors can be very conscious when it comes to stock ownership. Technical analysis is the use of numerical series generated by market activity, such as price and volume, to predict future price trends. The techniques applied to any market with a comprehensive price history. Primarily, but not exclusively, technical analysis is conducted by studying charts of past price movement. Many different methods and tools are used in technical analysis, but they all rely on the assumption that price patterns and trends exist in markets, and that they can be identified and exploited. Technical analysis or charting is considered to be as a supplement to Fundamental Analysis of securities. As an approach to investment analysis technical analysis is radically different from fundamental analysis. While the fundamental analysts believe that the market is 90% logical and 10% psychological, the technical analysis assumes that its 90% psychological and 10% logical. Technical analysis can be applied to any market with a comprehensive price history. The premises of technical analysis were derived from empirical observations of financial markets over hundreds of years. Perhaps the oldest branch of technical analysis is the use of candlestick techniques by Japanese traders at least as early as the 18th century, and still very popular today.

DOW THEORY ITS CORNERSTONE

New tools and theories have been produced and existing tools have been enhanced at a rapid rate in recent decades, with an increasing emphasis on computer-assisted techniques. Technical analysis is not concerned with why a price is moving but rather whether it is moving in a particular direction or in a particular chart pattern. Technical analysts believe that profits can be made by "trend following." In other words if a particular stock price is steadily rising (trending upward) then a technical analyst will look for opportunities to buy this stock. Until the technical analyst is convinced this uptrend has reversed or ended, all else equal, he will continue to own this security. Additionally, technical analysts look for various price patterns to form on a price chart and will take positions in anticipation of the expected move following that pattern. The various tools of technical analysis assist the technician in determining when trends have formed, ended, etc. and when particular patterns are unfolding. One of the forecasting tools very popular among practitioners is technical analysis. Technical analysis is the examination of past price movements in order to forecast future price movements. Technical analysis is open to interpretation. Many times two technicians will look at the same chart and paint two different scenarios or see different patterns. Both would be able to come up with logical support to justify their position. In addition, even if stock prices completely followed a random walk, people would be able to convince themselves that there are e patterns having a predictive value. It has become more and more popular, as it offered an unlimited set of tools and signals and seemed to be an interesting method of market analysis. It has been proven that stock prices most of the time approximately

follow a random walk pattern. Psychologists have described a number of ways in which people deal with randomness. Additionally, market participants may be subject to herd behavior. Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low, or close for a given security over a specific time frame. The time frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action. Economists have traditionally been skeptical of the value of technical analysis, affirming the theory of efficient markets that holds no strategy should allow investors and traders to make unusual returns except by taking excessive risk.

RESEARCH DESIGN AND METHODOLOGY

PROBLEM STATEMENT
The above study is undertaken to compare the selected technical analysis tools available for forecasting. The study tries to capture the contradicting views of different tools used in technical analysis. This study is aims to exploration of the topic TECHNICAL ANALYSIS. Investment in the stock market and the process Portfolio management encompassing many activities aimed at optimizing the investment of ones funds. Five Phases can be identified in this process: 1. Security analysis 2. Portfolio analysis 3. Portfolio selection 4. Portfolio revision 5. Portfolio evaluation Each phase is an integral part of the whole process and the success of portfolio management depends upon the efficiency in carrying out each of these phases. The very first step consists of examining the risk return characteristics of individual securities. Security analysis is such a crucial activity because every investor has to decide on the type, number and time timing of buying and selling of the shares. Today, the thousands of securities available for an investor, he has to decide on;

Which stock to invest? What type of security to buy? When to sell the securities? Where to Invest? How to Invest? Whether hold, sell or buy securities?

All these questions need to be answered before the investment can take place and also determining prospective benefits from the investment in a security. The risk associated with that investment.

LITERATURE REVIEW
Cooter (1962) found that the stock prices move at random when studied at one week interval. The data for his study was week-end prices of forty five stocks from New York stock exchange. He tested randomness of share by means of a mean square successive difference test. He concluded that there was not one random walk model. He concluded that the share price trends could be predicted when studied at fourteen-week interval. But in total the stock prices followed a random walk at weekly intervals. Eugene F.Fama (1965) has answered the questions to what extend can the past history of a common stock price can be used to make meaningful predictions concerning the future prices of the stock? The theory of random walk on stock prices is studied with two hypotheses. They are i) Successive price changes are independent and ii) The price changes conform to some probability distribution. The data for this study consists of daily prices for each of the thirty stocks of the Dow Jones industrial average. This study concludes that there is strong and voluminous evidence in favor of random walk theory. Ramaswami.K (1996) assessed the relationship among book values, earnings, dividend and market price of share, impact of bonus issues, impact of security scam on equity return .to that end, the author used daily share price of 30 companies included in the construction of BSE sensitive index, daily data of BSESI and NYSE composite index, annual data on BV per share market price per share, EPS and DPS and data on bonus issue made ,during the period of study ,the researcher used correlation ,regression and frequency distribution for interpreting data. Sharma and Robert E. Kennedy (1977) tested the applicability of random walk hypothesis to the stock market in developing country namely India and compare this to that of stock markets in

developed countries namely USA, and England. For this purpose the price behavior of Bombay stock exchange is statistically examined both for randomness and independence .The test the random walk hypothesis. The test covers 132 monthly observations for each stock market index of common stock listed in Bombay exchange for eleven years from 1968-1973.The study indicates that price dependence while statistically significant, is comparably small in the developing countries. Based on the test, it is evident that the Bombay stock exchange stock obeys a random walk and is equivalent to developed countries stock exchange. Fernando Fernandez Rodriguez, Simon Sosvilla Rivero, Julian Andrada Felix (1999) assessed whether some simple forms of technical analysis can predict stock price movement in the Madrid stock exchange, covering thirty-one-year period from Jan 1966 Oct 1997.the results provide strong support for profitability of those technical trading rules. By making use of bootstrap techniques the author shows the returns obtained from these trading rules are not consistent with several null models frequently used in finance. C. L. Osler (2001) provides a microstructural explanation for the success of two familiar predictions from technical analysis: (1) trends tend to be reversed at predictable support and resistance levels, and (2) trends gain momentum once predictable support and resistance levels are crossed. The explanation is based on a close examination of stop-loss and take-profit orders at a large foreign exchange dealing bank. Take-profit orders tend to reflect price trends and stoploss Technical Analysis on Selected Stocks of Energy Sector orders tend to intensify trends. The requested execution rates of these orders are strongly clustered at round numbers, which are often used as support and resistance levels. Significantly, there are marked differences between the clustering patterns of stop-loss and take-profit orders, and between the patterns of stop-loss buy and stop-loss sell orders. These differences explain the success of the two predictions.

Gupta, (2003) examined the perceptions about the main sources of his worries concerning the stock market. A sample comprise of middle-class households spread over 21 sates/union territories. The study reveals that the foremost cause of worry for household investors is fraudulent company management and in the second place is too much volatility and in the third place is too much price manipulation. Ravindra and Wang (2006) examine the relationship of trading volume to stock indices in Asian markets. Stock market indices from six developing markets in Asia are analyzed over the 34 month period ending in October 2005. In the South Korean market, the causality extends from the stock indices to trading volume while the causality is the opposite in the Taiwanese market.

OBJECTIVES OF THE STUDY

This study is aimed at undertaking technical analysis of selected companies included in the CNX Nifty. I will also demonstrate how technical analysis can be of invaluable use for the investors in marketing their investment decisions. The following are the main objectives of this study. To analyze tools of technical analysis can be used in forecasting stock prices. To know the movements (upward or downward) of stock prices of selected company stocks through Technical analysis. To know how best we can utilize these analyses to meet the financial goals.

SCOPE OF THE STUDY

This study mainly focuses on investment decisions by predicting futures stock price movements through the use of Technical analysis. This study is based on five companies selected from those listed in National Stock Exchange and Bombay Stock Exchange, belonging to Automobiles. Following are the main scope of this study To help the investor in making decisions based on report Analysis of the shares of companies. Studying the stock price movement of the security market. Helps to identify trend reversals at an earlier stage to formulate the buying and selling strategy.

The stocks so selected are as follows. Bajaj Auto limited Hero Honda Motors limited MarutiUdyog limited TVS Motors Company limited Tata Motors limited

Techniques of data analysis: Technical tools used for the study are: Chart patterns Line charts Japanese candlestick chart Indicators of the study Exponential Moving average (EMA) Rate of change Indicator (ROC)

Moving average, convergence and Relative strength index (RSI) divergence.(MACD) On-Balance Volume Money flow Index (MFI) Bollinger band width Aroon Up and Down Oscillators TRIX Williams percent rate (W%R)

RESEARCH DESIGN
Research design is a plan of action to be carried out in connection with a research project. The research design use in this study is explanatory and descriptive research. It involves the collection of data from both the primary and secondary sources. The data so collected was subjected to analysis by using the necessary tools that are relevant and idealistic.

RESEARCH METHODOLOGY
For the study, 5 companies were selected from CNX Nifty. There are following steps in methodology: Use of technical tools i.e. Simple moving Average, Exponential Moving Average, Relative Strength Index and Moving Average Convergence and Divergence. Identification of patterns and trends in the stock price movements. Preparation of stock chart, Line chart, Bar chart and candle stick chart showing the price and volume of the stocks over the period of time and Interpret charts. Source of Data Primary data were collected through direct interactions with the clients of Religare. Other data used in this study are publicly available data collected from secondary source. The major source of the data is the website of NSE India. Text books and Business journals and periodicals and newspapers are also to collect some data and information.

LIMITATIONS OF THE STUDY

The analysis is focused on five companies. The study is only for academic purpose Study restricted to a smaller sample size because of lack of time and resources. The recommendations made may not be a perfect prediction of the future as technical analysis is not an absolutely accurate practice.

THEORETICAL BACKGROUND
OVERVIEW OF TECHNICAL ANALYSIS
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume, Technical analysts do not attempt to measure a securitys intrinsic value, but instead use charts to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance. Technical Analysis has become increasingly popular over the past several years, as more and more people believe that the historical performance of a stock is a strong indication of future performance. People using fundamental analysis have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical analysts belief that securities move according to very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, Price levels are predictable. Investors successfully trade securities using only their knowledge of the securitys chart, without even understanding what the company does. Although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.

DOW THEORY
The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis today. Charles Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market. The behavior patterns that he observed apply to markets throughout the world. Markets fluctuate in more than one time frame at the same time The first is the daily variation due to local causes and the balance of buying and selling at that particular time (Ripple). The secondary movement covers a period ranging from days to weeks, averaging probably between six to eight weeks (Wave). The third move is the great swing covering anything from months to years, averaging between 6 to 48 months. (Tide). Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.

Primary Phases of Movements

Secondary movements normally retrace from one-third to two thirds of the primary trend since the previous secondary movement. Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements. Primary Movements have Three Phases 1. Bull markets o Bull markets commence with reviving confidence as business conditions improve. o Prices rise as the market responds to improved earnings Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual result.

2. Bear markets o Bear markets start with abandonment of the hopes and expectations that sustained inflated prices. o Prices decline in response to disappointing earnings. o Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value. 3. Ranging Markets o A secondary reaction may take the form of a line, which may endure for several weeks. o Price fluctuates within a narrow range of about five percent. o Breakouts from a range can occur in either direction. o Advances above the upper limit of the line signal accumulation and higher prices; o Declines below the lower limit indicate distribution and lower prices; o Volume is used to confirm price breakouts. Bull Trends A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline.

Successive higher highs and higher lows

The start of an uptrend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak): Start = higher Low + break above previous High. The end is signaled by a lower high (peak), followed by a decline below the previous low (trough): End = lower High + break below previous Low.

Bear Trends: A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend. Each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the preceding decline. Successive lower highs and lower lows

Large Corrections: A large correction occurs when price falls below the previous low (during a bull trend) or where price rises above the previous high (in a bear trend).

A bull trend starts when price rallies above the previous high, A bull trend ends when price declines below the previous low, A bear trend starts at the end of a bull trend (and vice versa).

HOW TECHNICAL ANALYSIS IS DONE

Technical analysis done by identifying the trend from past movements and then using it as a tool to predict future price movements of the stock with the use of the tools of technical analysis

ASSUMPTIONS OF TECHNICAL ANALYSIS

1. The Market Discounts Everything A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This 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. 2. Price Moves in Trends In technical analysis, price movements are believed to follow trends. This 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. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide aconsistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves

CHART PATTERN
1 Candlestick charting: Candlestick charts have been around for hundreds of years. They are often referred to as Japanese candles because the Japanese would use them to analyze the price of rice contracts. Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low. The difference is the use of color to show if the stock went up or down over the day.

The chart below is an example of a candlestick chart for AT&T (T). Green bars indicate the stock price rose, red indicates a decline:

Figure: Candlestick charting Investors seem to have a "love/hate" relationship with candlestick charts. People either love them and use them frequently or they are completely turned off by them. There are several patterns to look for with candlestick charts - here are a few of the popular ones and what they mean.

This is a bullish pattern - the stock opened at (or near) its low and closed near its high

The opposite of the pattern above, this is a bearish pattern. It indicates that the stock opened at (or near) its high and dropped substantially to close near its low.

Known as "the hammer", this is a bullish pattern only if it occurs after the stock price has dropped for several days. A small body along with a large range identifies a hammer. This pattern indicates that a reversal in the downtrend is in the works.

Known as a "star. For the most part, stars typically indicate a reversal and or indecision. There is a possibility that after seeing a star there will be a reversal or change in the current trend.

2 Line Chart: The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, 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: Line Chart 3 Support and resistance: Support and resistance are price levels at which movement should stop and reverse direction. Think of support/resistance (S/R) as levels that act as a floor or a ceiling to future price movements. Support - A price level below the current market price, at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower.

Resistance - A price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher. One of two things can happen when a stock price approaches a support/resistance level. On the one hand, it can act as a reversal point: in other words, when a stock price drops to a support level, it will go back up. On the other hand, S/R levels may reverse roles once they are penetrated. For example - When the market price falls below a support level, that former support level will then become a resistance level when the market later trades back up to that level.

Figure: Support and resistance This chart shows an excellent example of support and resistance levels for General Electric (GE). Notice that once the stock price penetrated below the support level in December, it became the resistance level. You also need to understand that S/R levels vary in strength, leading to certain price levels being designated as major or minor S/R levels. For example -- A five-year high on a bar chart would be a much more significant and useful resistance level than a one-month resistance level.

4 Cup and Handle: This is a pattern on a bar chart that can be as short as seven weeks and as long as 65 weeks. The cup is in the shape of a "U". The handle has a slight downward drift. The right-hand side of the pattern has low trading volume. As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for anywhere from four days to four weeks, then it will take off. This pattern looks like a pot with a handle. It is one of the easier patterns to detect; and investors have made a lot of money using it.

Figure: Cup and Handle 5 Head and Shoulders: This is a chart formation resembling an "M" in which a stock's price: o Rises to a peak and then declines, then o Rises above the former peak and again declines, and then o Rises again but not to the second peak and again declines. The first and third peaks are shoulders, and the second peak forms the head. This pattern is considered a very bearish indicator.

Figure: Head and Shoulders 6 Double Bottom: This pattern resembles a "W" and occurs when a stock price drops to a similar price level twice within a few weeks or months. You should buy when the price passes the highest point in the handle. In a perfect double bottom, the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors. The middle point of the "W" should not go into new high ground. This is a very bullish indicator.

Figure: Double Bottoms The belief is that, after two drops in the stock price, the jittery investors will be out and the longterm investors will still be holding on.

7 Double Tops: Double tops point out a weakness of the uptrend and warn for a change of trend generally a selling crazy starts when this formation is indicates.

Figure: Double Tops 8 Falling wedges: Falling wedges are opposite of the rising wedges and pull back reactions during the up trends. Sellers continue to believe the securities in their hand do not want to sell so, volume decreases significantly. When the upper line is broken, generally a rally starts. So this formation is a chance to buy security available prices in an uptrend.

Figure: Falling wedges

9 Symmetrical Triangles: All triangles formations are consolidation formations. In symmetrical triangle direction of the trend is not known. It is only can be identified after one of the line broken. Prices go up if upper line broken. And go down if lower line broken. Volume is very important for triangle formations. Volume should decrease during the formations.

Figure: Symmetrical Triangles 10 Descending triangles: It is a signal for down trend. Price target can be found approximately by drawing a parallel line to descending line.

Figure: Descending triangles 11 Ascending Triangles: It is a signal for uptrend. By drawing a parallel line to descending line, price target can be calculated approximately.

Figure: Ascending triangle

INDICATORS OF THE STUDY

Exponential Moving Average (EMA) Are calculated by applying a percentage of todays closing price to yesterdays moving average value. Use an exponential moving average to place more weight on recent prices. This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. Having an understanding of the calculation is not generally required for most traders because most charting packages do the calculation for you. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. This responsiveness is one of the key factors of why this is the moving average of choice among many technical traders. As you can see in Figure 2, a 15-period EMA raises and falls faster than a 15-period SMA. This slight difference doesnt seem like much, but it is an important factor to be aware of since it can affect returns.

Figure: Exponential Moving Averages (EMA)

Moving Average Convergence Divergence (MACD) Common, the MACD is a trend following, momentum indicator that shows the relationship between two moving averages of prices. To Calculate the MACD subtract the 26-day EMA from a 12-day EMA. A 9-day dotted EMA of the MACD called the signal line is then plotted on top of the MACD. There are 3 common methods to interpret the MACD: Crossover When the MACD falls below the signal line it is a signal to sell. Vice versa when the MACD rises above the signal line. Divergence When the security diverges from the MACD it signals the end of the current trend. Overbought/Oversold When the MACD rises dramatically (shorter moving average pulling away from longer term moving average) it is a signal the security is overbought and will soon return to normal levels. Other less common moving averages include triangular, variable, and weighted moving average. All of them being slight deviations from the++ ones above and are used to detect different characteristics such as volatility, and weighting different time spans. One of the easiest indicators to understand, the moving average, shows the average value of a securitys price over a period of time. To find the 50-day moving average, you would add up the closing prices (but not always explain later) from the past 50 days and divide them by 50. Because prices are constantly changing, the moving average will move as well. It should also be noted that moving averages are most as well. It should also be noted that moving averages are most often used then compared or used in conjunction with other indicators such as moving average convergence divergence (MACD) and exponential moving (E M A).

The most commonly used moving averages are 20, 30, 50,100 and 200 days. Each moving average provides a different interpretation on what the stock will do-there is not one right time frame. The longer the time spans, the less sensitive the moving average will be to daily price changes. Moving averages are used to emphasize the direction of a trend and smooth out price and volume fluctuations that can confuse interpretation. Here is a visual example using stock price

Figure: Moving Average Convergence Divergences (MACD)

Notice that back, in September the stock price dropped well below its 50-day average (the green line) there has been a steady downward trend since then and no really strong divergence until the end of December when it rose above its 50-days average and continued to rise for several weeks. Typically, when a stock price moves below its moving average it is a bad sign because the stock is moving on a negative trend. The opposite is true for stock that exceed their moving average-in this case, hold on for the ride. BOLLINGER BANDS WIDTH Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. The indicator consists of three bands designed to encompass the majority of a security's price action. The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle band is a measure of the intermediate-term trend, usually a simple moving average that serves as the base for the upper and lower bands. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average. The default parameters, 20 periods and two standard deviations, may be adjusted to suit your purposes:

Middle Bollinger Band = 20-period simple moving average Upper Bollinger Band = Middle Bollinger Band + 2 * 20-period standard deviation Lower Bollinger Band = Middle Bollinger Band - 2 * 20-period standard deviation Standard deviation is a statistical unit of measure that provides a good assessment of a price plot's volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of the bands.

Figure: Bollinger Bands Width The center band is the 20-day simple moving average. The upper band is the 20-day simple moving average plus 2 standard deviations. The lower band is the 20-day simple moving average less 2 standard deviations. On-Balance Volume The on-balance volume (OBV) indicator is well-known technical indicators that reflect movements in volume. It is also one of the simplest volume indicators to compute and understand. Joe Granville introduced the On Balance Volume (OBV) indicator in his 1963 book,

Granville's New Key to Stock Market Profits. This was one of the first and most popular indicators to measure positive and negative volume flow. The concept behind the indicator: volume precedes price. OBV is a simple indicator that adds a period's volume when the close is up and subtracts the period's volume when the close is down. A cumulative total of the volume additions and subtractions form the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation. Calculation As stated above, OBV is calculated by adding the day's volume to a running cumulative total when the security's price closes up, and subtracts the volume when it closes down. For example, if today the closing price is greater than yesterday's closing price, then the new

OBV = Yesterday's OBV + Today's Volume

If today the closing price is less than yesterday's closing price, then the new

OBV = Yesterday's OBV - Today's Volume

If today the closing price is equal to yesterday's closing price, then the new

OBV = Yesterday's OBV

Use The idea behind the OBV indicator is that changes in the OBV will precede price changes. A rising volume can indicate the presence of smart money flowing into a security. Then once the public follows suit, the security's price will likewise rise.

Like other indicators, the OBV indicator will take a direction. A rising (bullish) OBV line indicates that the volume is heavier on up days. If the price is likewise rising, then the OBV can serve as a confirmation of the price uptrend. In such a case, the rising price is the result of an increased demand for the security, which is a requirement of a healthy uptrend. However, if prices are moving higher while the volume line is dropping, a negative divergence is present. This divergence suggests that the uptrend is not healthy and should be taken as a warning signal that the trend will not persist. The numerical value of OBV is not important, but rather the direction of the line. A user should concentrate on the OBV trend and its relationship with the security's price.

Figure: On-Balance Volumes This chart shows how the OBV line can be used as confirmation of a price trend. The peak in September was followed by lower price movements that corresponded with volume spikes, thus implying that the downtrend was going to continue.

Aroon Oscillators The Aroon indicator is a relatively new technical indicator that was created in 1995. The Aroon is a trending indicator used to measure whether a security is in an uptrend or downtrend and the magnitude of that trend. The indicator is also used to predict when a new trend is beginning. The indicator is comprised of two lines, an "Aroon up" line (blue line) and an "Aroon down" line (red dotted line). The Aroon up line measures the amount of time it has been since the highest price during the time period. The Aroon down line, on the other hand, measures the amount of time since the lowest price during the time period. The number of periods that are used in the calculation is dependent on the time frame that the user wants to analyze.

Figure: Aroon Up And Down Oscillator An expansion of the Aroon is the Aroon oscillator, which simply plots the difference between the Aroon up and down lines by subtracting the two lines. This line is then plotted between a range of -100 and 100. The centerline at zero in the oscillator is considered to be a major signal line determining the trend. The higher the value of the oscillator from the centerline point, the more upward strength there is in the security; the lower the oscillator's value is from the centerline, the more downward pressure. A trend reversal is signaled when the oscillator crosses through the centerline. For example, when the oscillator goes from positive to negative, a downward trend is

confirmed. Divergence is also used in the oscillator to predict trend reversals. A reversal warning is formed when the oscillator and the price trend are moving in an opposite direction. The Aroon lines and Aroon oscillators are fairly simple concepts to understand but yield powerful information about trends. This is another great indicator to add to any technical trader's arsenal. Money Flow Index The Money Flow Index (MFI) is a momentum indicator that is similar to the Relative Strength Index (RSI) in both interpretation and calculation. However, MFI is a more rigid indicator in that it is volume-weighted, and is therefore a good measure of the strength of money flowing in and out of a security. It compares "positive money flow" to "negative money flow" to create an indicator that can be compared to price in order to identify the strength or weakness of a trend. Like the RSI, the MFI is measured on a 0 - 100 scale and is often calculated using a 14 day period. The "flow" of money is the product of price and volume and shows the demand for a security and a certain price. The money flow is not the same as the Money Flow Index but rather is a component of calculating it. So when calculating the money flow, we first need to find the average price for a period. Since we are often looking at a 14-day period, we will calculate the typical price for a day and use that to create a 14-day average. Typical Price = (Day high + Day low + Day close) / 3 Money Flow = (Typical Price) X Volume

The MFI compares the ratio of "positive" money flow and "negative" money flow. If typical price today is greater than yesterday, it is considered positive money. For a 14-day average, the sum of all positive money for those 14 days is the positive money flow. The MFI is based on the ratio of positive/negative money flow (Money Ratio). Money Ratio = positive money flow / Negative money flow Finally, the MFI can be calculated using this ratio: Money Flow Index- 100-(100 / (1 + money ratio)) The fewer number of days used to calculate the MFI, the more volatile it will be. The MFI can be interpreted much like the RSI in that it can signal divergences and overbought/oversold conditions. Positive and negative divergences between the stock and the MFI can be used as buy and sell signals respectively, for they often indicate the imminent reversal of a trend. If the stock price is falling, but positive money flow tends to be greater than negative money flow, then there is more volume associated with daily price rises than with the price drops. This suggests a weak downtrend that threatens to reverse as money flowing into the security is "stronger" than money flowing out of it. As with the RSI, the MFI can be used to determine if there is too much or too little volume associated with a security. A stock is considered "overbought" if the MFI indicator reaches 80 and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and below suggests a stock is "oversold".

Figure: Money Flow Index Rate of change indicators (ROC) It is a very popular oscillator which measures the rate of change of the current price as compared to the price a certain number of days or weeks back. The ROC has to be used along with price chart. The buying and selling signals indicated by the ROC should also be confirmed by the price chart.

Figure: Rate of change

Relative strength index (RSI) There are a few different tools that can be used to interpret the strength of a stock. One of these is the Relative Strength Index (RSI), which is a comparison between the days that a stock finishes up and the days it finishes down. This indicator is a big tool in momentum trading. The RSI is a reasonably simple model that anyone can use. It is calculated using the following formula. RSI = 100 - [100/(1 + RS)] RS = (Avg. of n-day up closes)/(Avg. of n-day down closes) n = days (most analysts use 9 - 15 day RSI) The RSI ranges from 0 to 100. At around the 70 levels, a stock is considered overbought and you should consider selling. In a bull market some believe that 80 is a better level to indicate an overbought stock since stocks often trade at higher valuations during bull markets. Likewise, if the RSI approaches 30, a stock is considered oversold and you should consider buying. Again, make the adjustment to 20 in a bear market. The smaller the number of days used, the more volatile the RSI is and the more often it will hit extremes. A longer term RSI is more rolling, fluctuating a lot less. Different sectors and industries have varying threshold levels when it comes to the RSI. Stocks in some industries will go as high as 75-80 before dropping back, while others have a tough time breaking past 70. A good rule is to watch the RSI over the long term (one year or more) to determine at what level the historical RSI has traded and how the stock reacted when it reached those levels.

The RSI is a great indicator that can help you make some serious money. Be aware that big surges and drops in stocks will dramatically affect the RSI, resulting in false buy or sell signals. Most investors agree that the RSI is most effective in "backing up" or increasing confidence before making an investment decision - don't invest simply based on the RSI numbers.

Figure: Relative Strength Index (RSI) Above, we have an RSI chart for AT&T. The RSI is the green line, and its scale is the numbers on the right hand side that go from 0 to 100. Notice the RSI was approaching the 60-70 level in December and January, and then the stock (blue line) sold off. Also, notice that when the RSI dropped to 25 around October the stock climbed up nearly 30% in just a couple of weeks. Using the moving averages, trend lines divergence, support and resistance lines along with the RSI chart can be very useful. Rising bottoms on the RSI chart can produce the same positive trend results as they would on the stock chart. Should the general trend of the stock price tangent from the RSI, it might spark a warning that the stock is either over- or under bought.

Momentum The momentum is certainly the easiest one to compute. The momentum is the difference between today's price and the one of n days before. With: Pttoday's price. Pt-n the price at the date t-n The momentum is: MOt= Pt- Pt-n TRIX (Triple exponential) "Trix (or TRIX) is a technical analysis oscillator developed in the 1980s by Jack Huston, editor of Technical Analysis of Stocks and Commodities magazine. It shows the slope (i.e. derivative) of a triple-smoothed exponential moving average. The name Trix is from "triple exponential Trix is calculated with a given N-day period as follows: o Smooth prices (often closing prices) using an N-day exponential moving average o Smooth a third time, using a further N-day EMA o Calculate the percentage difference between today's and yesterday's value in that final smoothed series Like any moving average, the triple EMA is just a smoothing of price data and therefore is trendfollowing. A rising or falling line is an uptrend or downtrend and Trix shows the slope of that line, so it's positive for a steady uptrend, negative for a downtrend, and a crossing through zero is a trend-change, i.e. a peak or trough in the underlying average. The triple-smoothed EMA is very different from a plain EMA. In a plain EMA the latest few days dominate and the EMA follows recent prices quite closely; however, applying it three times

results in weightings spread much more broadly, and the weights for the latest few days are in fact smaller than those of days further past. The following graph shows the weightings for an N=10 triple EMA (most recent days at the left). Graph shows the weightings for an N=10 triple EMA (most recent days at the left).

Figure: TRIX (Triple exponential) Triple exponential moving average weightings, N=10 (percentage versus days ago) Note that the distribution's mode will lie with pN-2's weight, i.e. in the graph above p8 carries the highest weighting. An N of 1 is invalid. The easiest way to calculate the triple EMA based on successive values is just to apply the EMA three times, creating single-, then double-, then triple-smoothed series. The triple EMA can also be expressed directly in terms of the prices as below, with p0 today's close, p1 yesterday's, etc, and with (as for a plain EMA).

The coefficients are the triangle numbers, n (n+1)/2. In theory, the sum is infinite, using all past data, but as f is less than 1 the powers fn become smaller as the series progresses, and they decrease faster than the coefficients increase, so beyond a certain point the terms are negligible. Williams %R Developed by Larry Williams, Williams % R is a momentum indicator that works much like the Stochastic Oscillator. It is especially popular for measuring overbought and oversold levels. The scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. William %R, sometimes referred to as %R, shows the relationship of the close relative to the high-low range over a set period of time. The nearer the close is to the top of the range, the nearer to zero (higher) the indicator will be. The nearer the close is to the bottom of the range, the nearer to -100 (lower) the indicator will be. If the close equals the high of the high-low range, then the indicator will show 0 (the highest reading). If the close equals the low of the high-low range, then the result will be -100 (the lowest reading). Calculation %R = [(highest high over? periods - close) / (highest high over? periods - lowest low over? periods)] * -100 Typically, Williams % R is calculated using 14 periods and can be used on intraday, daily, weekly or monthly data. The time frame and number of periods will likely vary according to desired sensitivity and the characteristics of the individual security.

Use It is important to remember that overbought does not necessarily imply time to sell and oversold does not necessarily imply time to buy. A security can be in a downtrend, become oversold and remain oversold as the price continues to trend lower. Once a security becomes overbought or oversold, traders should wait for a signal that a price reversal has occurred. One method might be to wait for Williams %R to cross above or below -50 for confirmation. Price reversal confirmation can also be accomplished by using other indicators or aspects of technical analysis in conjunction with Williams %R. One method of using Williams %R might be to identify the underlying trend and then look for trading opportunities in the direction of the trend. In an uptrend, traders may look to oversold readings to establish long positions. In a downtrend, traders may look to overbought readings to establish short positions.

Figure: Williams % R

The chart of Weyerhaeuser with a 14-day and 28-day Williams % R illustrates some key points:
o

14-day %R appears quite choppy and prone to false signals. 28-day %R smoothed the data series and the signals became less frequent and more reliable.

When the 28-day %R moved to overbought or oversold levels, it typically remained there for an extended period and the stock continued its trend.

Some good entry signals were given with the 28-day %R by waiting for a move above or below -50 for confirmation.

EVALUATION OF TECHNICAL ANALYSIS:

Technical analysis appears to be a highly controversial approach to security analysis. It has its ardent votaries: it has its severe critics. The advocates of technical analysis offer the following interrelated arguments in support of their position: Under the influence of crowed psychology, trend persists for quite some time. Tools of technical analysis that help in identifying these trends early are helpful aids in investment decision making. Shift in demand and supply are gradual rather than instantaneous. Technical analysis helps in detecting these shifts rather early and hence provides clues to future price movement. Fundamental information about a company is absorbed and assimilated by the market over a period. Hence, the price movement tends to continue in more or less the same direction until the information is assimilated in the stock price.

 Charts provide what has happened in the past and hence give a sense of volatility that can be expected from the stock. Future, the information on trading volume which is ordinarily provide at the bottom of a bar chart gives a fair idea of the extent of the public interest in the stock The detractors of technical analysis believe that the technical analysis is a useless exercise. Their arguments run as follows: Most technical analyst are not able to offer convincing explanation employed by them Empirical evidence in support of the random-walk hypothesis casts its shadow over the usefulness of technical analysis. By the time an uptrend or down may have been signaled by technical analysis, it already have taken place. Ultimately, technical analysis must be a self-defeating proposition as more and more people employ the value of such analysis tends to decline. for the tools