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TECHNICAL ANALYSIS

TECHNICAL ANALYSIS
Alternative approach to predicting stock price behavior The technician does not consider value in the sense in which the fundamentalist uses it. The technician believes the forces of supply and demand are reflected in patterns of price and volume of trading. By examination of these patterns, he predicts whether prices are moving higher or lower, and even by how much. In the narrowest sense, the technician believes that price fluctuation reflect logical and emotional forces. He further believes that price movements, whatever their cause, once in force persist for some period of time and can be detected.

IMPORTANCE OF VOLUME

Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume, the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.

IMPORTANCE OF VOLUME CONTD

IMPORTANCE OF VOLUME CONTD


Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story.

IMPORTANCE OF VOLUME CONTD


Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal.

IMPORTANCE OF VOLUME CONTD


Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end.

VOLUME AND CHART PATTERNS


The other use of volume is to confirm chart patterns In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened

VOLUME PRECEDES PRICE

Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end

DOW THEORY
Charles H. Dow formulated a hypothesis that the stock market does not perform on a random basis but is influenced by three distinct cyclical trends that guide its general direction. By following these trends, he said, the general market direction can be predicted. Dow classified these cycles as primary, secondary and minor trends. The primary trend is the long-range cycle that carries the entire market up or down.

DOW THEORY C

ONTD.

The basic proposition in the Dow Theory is relatively simple. A bull market is in process when successive highs are reached after secondary corrections and when secondary upswings advance beyond previous secondary downswings The theory also requires that the secondary downswing corrections will be of shorter duration than the secondary upswings. The reverse of these propositions would be true of a bear market

DOW THEORY CONTD.

The classical Dow Theory utilizes both the industrial average and the transportation average in determining the market position. When both averages are moving in the same direction, valid indicators of a continuing bull or bear market are implied.

PRIMARY TREND
The security price trend may be either increasing , it is called Bull Market.

TREND LINES

TREND
Trend is the direction of movement-it can be increasing trend(Bullish), decreasing trend (Bearish) and flat trend. It represents the emotions ,sentiments of the players in the market.

TREND REVERSAL
The raise or fall in the share price cannot go on for ever The share price movement may reverse its direction Before the change of direction certain pattern in price movement emerges Change in the direction of the trend is shown by violation of the trend line. If the scrip price cuts the trend line from above it signals the possibility of the fall in price

PRIMARY TREND
Security price behavior shows an increasing or decreasing trend In the BULLISH market

Each peak is higher than the previous peak Each bottom is higher than the previous bottom

In the BEARISH market

Each peak is lower than the previous peak Each bottom is lower than the previous bottom

SECONDARY TREND
Also known as intermediate trend Moves against the main trend and leads to correction This corrects the over bought and over sold position This takes less time than the primary trend and generally a lot quicker

MINOR TREND
Relate to day to day price fluctuations It tries to correct the secondary trend movement Considered to be of less significance to a chartist than primary and secondary trend These three concepts of primary ,secondary and minor trends form the basic foundation of Technical Analysis

SUPPORT LEVEL AND RESISTANCE LEVEL


Support level exists at a price where there is a reversal of the demand supply position Resistance level exists at a price where there is a reversal of demand supply position This signifies that the share price cannot rise beyond the resistance level At the resistance level price , there will be more of supply than demand and hence a reversal in trend will take place

GROUND RULES OF TECHNICAL ANALYSIS


Rule 1: Market action discounts everything The market price of the shares of a Company is the culmination of all the factors affecting the fortunes of the business of that company Players in the market act upon any change in the fundamental factors of a security by buying or selling the shares Any news that is awaited or has been received or any new information about the company is reflected in the market price. This is by means of a demand / supply shift If demand rises, the price goes up; if supply rises, prices fall

GROUND RULES OF TECHNICAL ANALYSIS Contd.


Rule 1: Market action discounts everything(contd.) Technical analysts believe that whatever changes occur in the fundamentals of a company, they are discounted in the market. By the time one tries to analyse what causes prices to change rumours of war, merger news, etc. the prices would have already changed. Further, trying to forecast a price by analysing the fundamental factors is too unwieldy, as there are just too many factors to be analysed

GROUND RULES OF TECHNICAL ANALYSIS CONTD


Rule 2: Prices move in trends and trends persist Technical analysts believe that prices continue to move in a certain direction unless some event occurs to change its direction .Thus, technical analysts believe that prices do not move in a random manner. It has to be noted that the supply and demand balance sets the trend in motion. This trend does not change, unless the balance in the demand / supply undergoes a change. This is aptly put in the maxim The trend is your friend

GROUND RULES OF TECHNICAL ANALYSIS CONTD


Rule 3:History repeats itself Technical analysts believe that markets repeat themselves. This belief is based on the fact that, it is people who drive prices and market is the reflection of the actions of the participants Investors and traders tend to react in a similar way every time an event occurs. These reactions become transactions in the market place, which tend to repeat.

CHARTS
The basic tool of a technician is the price chart. Charts can be made for different time horizons depending on the use the technician wants to put it to, ranging from a day to a week to a month Accordingly, charts can be daily, weekly or monthly depending on the time horizon for which we need to apply the various technical analysis tools

PRICE BAR CHART


A Bar is formed by joining the highest price and the lowest price of a particular sale by a vertical line. The closing price of the day is marked by a horizontal mark on this vertical line

LINE CHARTS
These charts are made up of closing prices. Line Charts have time on the X-axis and price on its Y-axis

TOOLS OF TECHNICAL ANALYSIS

Moving Average An average is the sum of prices of a share over some weekly periods divided by the number of weeks. This point is market on the latest date for which a price bar has been plotted. This process is repeated for the previous dates. The points thus obtained are connected together to give the Moving Average line

HOW TO CALCULATE MOVING AVERAGE


Week
1 2 3 4 5

Closing Price
22 25 26 24 28.5

Total of Price for five weeks

5-week average=total/5

125.5

25.1

6
7 8 9 10 11

29
28 26.5 27.5 25 23.5

132.5
135.5 136 139.5 136 130.5

26.5
27.1 27.2 27.9 27.2 26.1

WHAT DO THE MOVING AVERAGES DEPICT


Moving Averages smoothen out the apparent erratic movement of share prices and highlight the underlying trend In an Exponential Moving Average, more weight is given on the most recent data and less weight is given to the older data

EXPONENTIAL MOVING AVERAGE CHART

MACD
MACD stands for Moving Average Convergence /Divergence MACD is a useful indicator for spotting major changes in trend MACD is a trend following momentum indicator used to signal trend changes and to indicate trend direction Signals are generated by crossovers and divergence from price

MACD CONTD

The MACD method, developed by Gerald Appel, is a trending indicator, telling us whether a stock is in an uptrend or a downtrend. The direction of the long-term trend is the first assessment you should make of any market. If it is trending up, you want to be long (buying). If it is trending down, you want be short (selling) The simplest version of this indicator is composed of two lines: the MACD line, which is the difference between two exponential moving averages (EMAs) and a signal line, which is an EMA of the MACD line itself. The signal or trigger line is plotted on top of the MACD to show buy/sell opportunities. Gerald Appel's MACD method uses a 26-day and 12-day EMA, based on the daily close, and a 9-day EMA for the signal line

MACD CHART

TOOLS OF TECHNICAL ANALYSIS CONTD...


Rate-of-Change (Momentum)

It indicates the rate of change of the price as compared to the price a certain period back ROC depicts the speed of upward or downward movements of the price ahead of the price movement ROC is a price momentum or velocity indicator. A rising ROC indicates a bullish increasing momentum A falling ROC indicates a bearish decreasing momentum ROC should always be used in conjunction with reversal signals on the price chart. ROC is a momentum indicator that measures velocity and also leads the price action

CALCULATION OF RATE-OF-CHANGE
WEEK
1 2 3 4 5 6 7 8 9 10

Closing Price
49 50 52 54 55 56 56 55 54 48

Price Seven weeks ago

Ratio of the two prices

ROC=Ratio less 1

49 50 52 54

1.14 1.1 1.04 0.89

0.14 0.1 0.04 -0.11

ROC CHART

RSI
Relative Strength index(RSI) The RSI is a momentum indicator, or oscillator, that measures the relative internal strength of a market (not against another market or index). As with all oscillators, RSI can provide early warning signals but should be used in conjunction with other indicators. Divergences are the most important signal provided by RSI The Relative Strength Index (RSI) can provide an early warning of an opportunity to buy or sell

RSI CONTD
Relative Strength index This index emphasizes market moves before they occur. When the price of a stock advances, the closing price is higher than the closing price of the previous day. When the price of the stock declines, the closing price is lower than the closing price of the previous day. However, the rise or fall of a market is not smooth. During the rising phase, the price falls several times, while during the falling phase, the price rises several times.

Relative Strength index Contd Relative Strength Index tells us whether the net difference between the closing prices is increasing or decreasing. During the rising phase of the market, the prices move up fast, and the differences between the recent close and the previous close are large. When the market reaches the top, these differences reduce. When the market declines, the different again become large

Relative Strength index Contd. RSI = 100 [100/ (1+RS)] Where RSI = Average of 14 weeks up closing prices Average of 14 weeks down closing prices This is powerful indicator and pinpoints buying and selling opportunities ahead of the market. It ranges in value from 0 to 100. Values above 70 are considered to denote overbought conditions, and values below 30 are considered to denote oversold conditions. If the RSI has crossed the 30 lines from below to above and is rising, a buying opportunity is indicated. If it has crossed the 70 lines from above to below indicates a selling opportunity

RSI CHART

TOOLS OF TECHNICAL ANALYSIS CONTD...


oscillator The values of the 10-week moving average are subtracted from the values of the 2-week moving average. These differences are plotted on a horizontal zero line

TOOLS OF TECHNICAL ANALYSIS CONTD...


What help does an Oscillator give? An Oscillator is an excellent indicator of overbought / oversold conditions. Values above the zero line indicate that buying is in progress, while values below the zero line indicate that selling is in progress. When the Oscillator moves from negative to positive, it shows a possible buying opportunity. When the Oscillator moves down from the positive towards the negative, it indicates that selling may be considered

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