Fundamental
analysis is finding out
the intrinsic value of the share
Technical analyst studies the price
movements in the market
Price-volume and supply-demand for
overall market and individual stock
The technical analyst tries to study
the trend in the market by
considering the historical share prices
The
price fluctuations reflects logical
and emotional forces
The technician must
Identify the trend
Recognise when one trend comes to an
end and prices start in opposite direction.
He
seldom rely upon a single
indicator, as no one indicator is
sufficient for prediction
Price
All
is determined by supply and demand
information is reflected in prices of
share
Market
Past
always moves in a trend
prices predict the future
Based
on the doctrine given by Charles
H. Dow in 1884.
A J Nelson, formalised the Dow theory
for economic forecasting
The Analysts used charts of individual
stocks and moving averages in the
early 1920s.
Generally used techniques:
Market indicators, volume indicators and
other market indicators
He identified three
distinct cyclical trends
that guide the general
direction.
Primary trend: long range
cycle that carries the
entire market up or down
Secondary trend:
corrects the deviations in
the primary trend
Minor trend: day to day
Charles Dow known as the Godfather of TA
fluctuations
bull market is when the current up
swing is more than the previous up
swing and
When the current downward
movement is bellow the previous then
the market is bearish
Price
Primary trend
Secondary Corrections
Time
Primary and Secondary Trend
Minor trend
support level exists at a price where
considerable demand for that stock is
expected to prevent further fall in the price
level.
In support level demand for the particular
scrip is expected.
The negative swing in the price may be
halted.
The price of the stocks will never move
bellow that. For the time being it may result
even in price reversal.
The
supply of scrip would be greater than
the demand and further rise in price is
prevented.
The selling pressure is greater and the
increase in price is halted for the time being.
When the stock prices touches certain level
and then drops, this is called resistance level
When the stock prices reaches down to a
certain level and then rises there exists a
support.
PRICE
Support Level
DAYS
PRICE
Res
ist
DAYS
anc
e Le
vel
Breakout
Support
Resistance
If
the scrip price reverses the
support level and moves downward,
it means that the selling pressure
has overcome the potential buying
pressure signaling the possibility of a
further fall in the value of the scrip.
It is violation of the support level and
bearish market.
If
the scrip penetrates the previous
top and moves above, it is the
violation of resistance level. At this
point buying pressure would be more
than the selling pressure.
If the scrip was to move above the
double top or triple top formation, it
indicates bullish market.
It
It
need not form on the tops or bottoms
can also formed in gaps (time when
the scrip does not change hands)
If the prices are in the upward move
and the high of any day is lower than
the next days low , the gap is said to
have occurred.
If the price closes in a price and opens
in another price then this indicates the
stock has not traded but changes price.
Indicators
are used to find out the direction of
the market.
Indicators are normally price and volume of
share trade
Those are price indicators and volume
indicators
Advances and declines, New Highs and New
lows and The most active list are the price
indicators
Volume of trade, Short sales and Odd Lot
trading are volume indicators.
Price
Indicators
Advances and
declines
New Highs and
New lows
The most active list
Volume
Indicators
Volume of trade
Short sales
Odd Lot trading
Mathematical
Indicators
Moving Averages
Exponential
Moving Averages
Oscillators:
Relative Strength
Index
Rate of Change
Advances and declines are also referred to
as the breadth of the market. It is the
difference between the number of shares
moving up and number of shares moving
down. The net difference is added to the
previous day and plotted in a graph. A
comparison with the index will show the
future market direction. If there is a
divergence the change in market is predicted.
Day
Advan
ce
Declines
Net
Breadt
h
NSE
Nifty
Monday
1486
774
712
712
5876.89
Tuesday
1310
966
344
1056
5883.33
Wednesda
y
898
1225
-327
729
5646.46
Thursday
1108
1091
17
746
5810.17
Friday
931
1279
-348
398
5623.08
It is used as a supplementary to the breadth
High low differential index is prepared
Number of new highs lead to a rising market
The number of BSE stocks making new highs
minus new lows is averaged for a five-day
period.
A moving average smooth out erratic daily
fluctuations and exposes the trend. Such highlow index would normally move with the
market. Divergence is a clue for future
movement.
The
major newspapers and financial
magazines publishes most active list of
stock.
The number of stocks hardly represents
1% of the total issues but account for
around 15% of total volume.
The most active list moves ahead of the
market
The movement of the active list helps in
predicting the market
Volume
of Trade expands as along with the
bull market and narrows down in a bear
market.
The volume will fall with rise in price and vice
versa
Large rise in price or large fall in price leads
to increase in volume
If the volume decline for five consecutive
days, then it will continue for another four
days and the same is true in increasing
volume.
Short
selling refers to selling shares
that re not owned. (Short interest)
Bears are short sellers who sell in the
hope that they will buy the same in
future with a low price
Increase in short selling increases the
future demand and market will become
bullish
These indicators cannot be considered
in isolation.
Monthly
short sales are compared with
the average daily volume of the
preceding month. The ratio between
these two indicates how many days of
trading it would take to use up the total
short interest.
When it is less 1, the market is weak or
weakening. Between 1 to 1.5
considered as neutral. More than 1.5 or
2 indicates bullish and highly favorable.
Small
investors often do not buy more than
100 shares and such buyers and sellers are
termed as odd-lotters.
Ratio of odd lot purchases to odd lot sales is
the odd lot index. (>1 more buying)
If the odd lot volume is increasing shows a
bullish market and reverse for bearish
If odd lotters dominates the market the
market is considered as technically weak.
Simple
Moving Averages
Exponential
Moving Average
Oscillators:
Relative Strength Index
Rate of Change Indicators
Moving Average Convergence and
Divergence
To
smoothen the data moving average
technique is used. (Long Term and Short
Term)
Moving average of 5 days means on the
6th day while calculating average the 1 st
price is ignored and the 6th price is added
and the process continues.
It specifies the trend and predicts the
future movement of the stock
Ten or thirty days moving average is used
for short term forecasting
Day
Price
Average
1-Sep-09
2-Sep-09
3-Sep-09
4-Sep-09
123.25
120.75
119.9
120.25
7-Sep-09
8-Sep-09
121.6
121.6
9-Sep-09
122.7
10-Sep-09
120.9
121.3
120.3
120.583333
3
121.15
121.966666
7
121.733333
3
Individual
stock price average is
compared with market index moving
average. Both are plotted in a graph and
trend is compared
If the stock price is below the market
index then bearish and reverse for bullish
If the stock price penetrates the index
from above then sell signal.
If it pushes up from bellow then buy
signal
The
closing price and the moving
average of the stock prices are
compared
Both the line move along each other
Their intersection indicates a shift in
the move
Downward penetration indicates a
fall and upward indicates a rise in
the prices
When
LT and ST moving averages
intersects with each other, a buy or sell
signal is indicated.
ST moving average intersects the LT
curve and falls below, it is bearish
When the prices are rising the ST
intersects from blow giving a buy
signal
When LT is above the ST expect that
the prices will rise in near future.
Days
Prices
Price
Buy Signal
ST
LT
Day
Price
Sell Signal
LT
ST
Day
EMA = (Current Closing price Previous EMA)
x Factor + Previous EMA
2
Factor n+
Where n = number
for which the
= of days
1
average is to be calculated.
If we are calculating 5 day EMA then the
correct EMA will be from 6th day onwards.
It is prepared with the price trend then
the intersection points are decision
points.
Data sheet
Relative
Rate
Strength Index
of Change Indicators
Moving
Average Convergence and
Divergence
It
indicates the scrip momentum, shows
the share price movement across a
reference across a reference point from
one extreme to another.
The momentum indicates;
Overbought and oversold conditions
Signals possible trend reversal
Rise or decline in the momentum
Developed by Wells Wilder. An oscillator used
to identify the inherent technical strength
and weakness of a particular scrip or market.
10
RSI = 100 1+
0
Average RS
Gain Per
RS = day
Average Loss Per
If
Day
the RSI crosses seventy there may
be downturn and it is time to sell. If RSI
falls below thirty time to buy the
scrip.
It is
The
normally prepared for 14 days basis
RSI of the 14 days interval are
plotted in graph
If RSI is above the Overbought /Over sold
zone time to take action
This kind of situation occurs due to large
buying or large selling
The term oversold speaks that the
market has declined to a new low
The overbought speaks that the market
has touched the new highs
Data sheet
Rate
of change between the current price
and the price n number of days in the
past.
It helps in finding out the overbought or
oversold level
ROC graph is prepared to find out the
overbought and oversold limit (oscillators)
RoC
=
Current price
-1
Price n period
ago
Overbought
Oversold
Data sheet
Easiest tools in technical analysis.
Spot the current trend for buying and
selling
Indicates the probable future action
Shows the past historic movement
Indicates the important areas of support
and resistance level.
James Dines said, Charts are like fire or
electricity. They are brilliant tools if
intelligently controlled and handled but
dangerous to a novice.
The
PF charts are of one dimensional
and there is no indication of time or
volume. The price changes in relation to
previous prices are shown.
The change of price direction can be
interpreted.
The charts are drawn in the ruled paper.
Only whole numbers are considered
The price rise is shown as a X and O
for a price fall.
Sell signal
Buy signal
Simplest
and most commonly used
tool
To draw a bar a dot is entered to
indicate the highest level and another
dot is for the lowest level in a day.
Both the pints are joined to form a bar
and a small nub is drawn at the top
and bottom of the bars to indicate the
opening and closing price.
Each bar is
composed of 4
elements:
Open
High
Low
Close
Note that the
candlestick body
is empty (white)
on up days, and
filled (some
color) on down
days
High
High
Close
Open
Open
Close
Low
Standard
Bar Chart
Low
Japanese
Candlestick
Standard
Bar Chart
Japanese
Candlestick
Date
16Aug10
17Aug10
18Aug10
19Aug10
20Aug10
23Aug10
24Aug10
25Aug10
26Aug10
27Aug10
30Aug10
31Aug10
Open
Price
86
84.5
85.55
85.4
84.8
84.5
85
83.45
83
81.4
81
80.55
High
Price
86.4
88
86.75
86.4
85
85.65
85.2
84.05
83.15
81.9
82.65
80.9
Low
Price
83.2
84.5
83.9
84.65
84.1
84.35
83.4
82.4
81.4
80.05
80.5
78.55
Close
Price
83.45
85.4
84.95
84.95
84.25
84.6
83.55
82.6
81.6
80.2
80.85
79.8
Chart
Patterns: used as a supplement
to other information and confirmation.
V formation: The V patterns occurs
mostly in popular stocks where the
market interest changes quickly from
hope to fear and vice-versa.
Tops and Bottoms: Buy at bottom and
sell at top
Double top and bottom: End of a
trend
Head
and Shoulders: Easy to
identify and the signal generated by
this is considered reliable. Three
rallies resembling the left shoulder, a
head and a right shoulder. A neckline
is drawn connecting the lows of the
tops. When the stock price cuts the
neckline from above, it signals the
bear market.
This formation is
characterized by
two small peaks
on either side of
a larger peak.
This is a reversal
pattern, meaning
that it signifies a
change in the
trend.
H&S Top
Head
Right Shoulder
Left Shoulder
Neckline
H&S Bottom
Neckline
Left Shoulder
Right Shoulder
Head
Triangles are
continuation
formations.
Three flavors:
Ascending
Symmetrical
Ascending: Demand
is high, bullish
Descending: Bearish
trend
Symmetrical:
Temporary halt and
original trend to
come soon
Symmetrical
Descending
Nov to Mar
Trading range
Descending
triangles
Double bottom
Gap, should get
filled
Fundamental analysis studies the stock based on
the companys performance and other macro
economic conditions. But TA mainly focuses on the
historical prices of the stock and volume of trading.
FA Find the long term value of the share but the TA
forecasts the prices on a short term basis.
FA opines that stock prices depends on the
underlying factor, but TA focuses on price and
volume
Fundamental analysis is time consuming but
Technical Analysis is not.
Larry Williams, regarded as one of the great
technicians, entered a trading competition and
returned over 20,000% in a year trading TECHNICAL
picks
Daughter, actress Michelle Williams returns 10,000%
in same competition using her fathers strategies
Develop
a strategy unique to your
personality and comfort levels
Tweak your strategy until it works
the best that it can
Test it using virtual (paper) trading
DO NOT STRAY FROM THE SYSTEM!
Remember that 1% every day leads
to about 290% a year! A little goes a
long way!
