A STUDY ON TECHNICAL ANALYSIS AT MIDEAST INVESTMENTS PVT.LTD.

PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT FOR The Award of MASTERS IN BUSINESS ADMINISTRATION Submitted by RIZWAN AHMED KHAN
HT.NO: (03607153)

NIZAM INSTITUTE OF ENGEENERING & TECHNOLOGY DEPARTMENT OF BUSINESS MANAGEMENT DESHMUKHI,NALGONDA DIST.
(AFFILIATED TO OSMANIA UNIVERSITY) HYDERABAD.

(2007-2009)

A PROJECT REPORT ON

TECHNICAL ANALYSIS AT MIDEAST INVESTMENTS PVT.LTD.

BY RIZWAN AHMED KHAN ( Roll No: 036070153 ) NIZAM INSTITUTE OF BUSINESS MANAGEMENT

Project submitted in partial fulfillment for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

BY

Osmania University, Hyderabad-500007

2007-2009

DECLARATION

I here by declare that this project report TECHNICAL ANALYSIS from MIDEAST INVESTMENTS PVT. LTD is a bonafide work done by me under the guidance of prof. RIZWANA BANU at NIZAM INSTITUTE OF BUSINESS MANAGEMENT, ERRUMMANZIL, HYDERABAD and submitted to the management for the award of the degree of MBA for the year 2007-2009

This project has not been submitted else where for the award of any Degree (or) Diploma either in part or full in any University/Institution by me during my assignment at BAJAJ ALLIANZ, BEGUMPET, Hyderabad. The project report is the result of sincere effort put in by me, wherein I Endeavour to come up with the best possible result.

Place: Hyderabad Date: 15-3-2009

RIZWAN AHMED KHAN

DECLARATION

I here by declare that the project entitled TECHNICAL ANALYSIS from MIDEAST INVESTMENTS PVT. LTD. Submitted by me to the Nizam Institute of Engeenering & Technology Department of Business Management, Osmania University, Hyderabad is a bonafide work undertaken by me and it is not submitted to any other University or Institution for the award of any degree diploma/certificate or published any time before.

I further declare that it is my original project work as part of my academic course.

MOHAMMED HASSAN ALI HNO: 1-8-315/A, OPP.U.S.CONSULATE, BEGUMPET. SECUNDERABAD. Date Signature of the candidate

ABSTRACT

ACKNOWLEDGEMENT

I take this opportunity to thank Mr. GULAM QASIMUDDIN IRFAN (DIRECTOR-MIDEAST INVESTMENTS PVT. LTD) for their co-operation, efforts and guidance.

I thank the principal R.KONDAL REDDY of NIZAM INSTITUTE OF ENGINEERING & TECHNOLOGY DEPARTEMENT OF BUSINESS MANAGEMENT, for his encouragement in doing the project work.

Last but not the least I would thanks Mrs. Durdana Begum (Faculty) Finance for her guidance and suggestion and her kind help and motivation in completing the project.

I express my gratitude to my family and friends who have constantly supported and motivated me while preparing the project.

(MD HASSAN ALI)

CONTENTS Page No:

List of Tables List of Figures

i ii

CHAPTER-I INTRODUCTION 1.1 Need for the study 1.2 Objectives of the study 1.3 Research Methodology 1.4 Scope of the study 1.5 Limitations of the study CHAPTER-II LITERATURE REVIEW CHAPTER-III COMPANY PROFILE CHAPTER-IV DATA ANALYSIS CHAPTER-V FINDINGS CONCLUSIONS& SUGGETIONS BIBLIOGRAPHY

CHAPTER I
INTRODUCTION

NEED AND IMPORTANCE OF THE PROJECT

Analysis is the process of critically examine accounting information given in the financial statements. The financial analysis provide valuable in sight into a firms performance, financial position and future earnings. Their by themselves will not help a person to conclude whether the financial performance of the organization is good or not. The statement gives only the figures. Technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you a new set of tools or skills that will enable you to be a better trader or investor. These days strange movement of share prices at BSE and NSE are spreading fears among the small investors. Many of them want to understand why price of a share go up or down, against general expectation. They are trying to understand the complex charts and graphs showing upward and downward movements of the share prices. Technical analysis in the stock market has a great significance in the volatile market. Even market analysis bank on this instrument to predict where the stock market is heading for. But many times all analysis proved wrong and market sentiments become the real winner. So, it is not advisable to completely depend on the analysis. Investor should give all the factors equal importance.

Technical analysis essentially looks at the past performance and history it is reliant upon statistics and data to determine history, trends and patterns which indicate future market activity. Technical analysis ignores the markets feeling or value towards a currency, and bases decisions solely on statistical data. The history of the

value of currency pairs is a matter of statistical data and can be easily determined and understood. Supporters of technical analysis claim it is the only true way to understand where the market is heading, and predict the next crucial trend. Further to this there is the belief that without technical analysis it would be near impossible to understand or predict where the market is heading, and to act upon anything other than instinct. Investors use this form of analysis at the beginning point for their decision making. Investors use the Technical analysis in making decisions about whether to buy or sell stock. The only thing that matters is a securitys past trading data and what information this data can provide about where the security might move in the future. The significance of financial statements lies not in their preparation their analysis and interpretation. It involves a study of relationship among various financial factors and to judge their meaning and significance. Interpretation means explaining the meaning and significance of the data so simplified however both analysis and interpretation are interlinked and complementary to each other. Analysis is useless without interpretation without analysis interpretation is difficult or impossible. The most of the authors have used the term analysis to cover the meaning of both analysis and interpretation. The objective of analysis is to study the relationship between various items of financial statements by interpretation.

OBJECTIVES OF THE STUDY

The main objective of the study is to analyze and interpret the market conditions and the next crucial trend that will follow in the near future. More, specifically, the present study is under taken with the following objectives:
To make the analysis and interpret the trend of the companies which will

follow by seeing Moving Average Convergence/Divergence (MACD) line. To analyze and know when to buy and sell securities. To study the market prices and to understand the market data and volume. Technical analysis can be done for the short time period. To know the changes of the market by technical interpretation.

DATA AND METHODOLOGY

The study is mainly based on secondary data. Secondary data is taken from the annual reports of various companies and books and journals maintained by the companies. The MIDEAST INVESTMENTS is mainly engaged in trading of securities of small investors. The traders after seeing the market conditions and the trend which a security is expected to head after analyzing through technical analysis or fundamental analysis invest in the securities of the company. In this project we are going to see the expected market conditions through technical analysis by using Moving Average Convergence/Divergence (MACD) line.

LIMITATIONS OF THE STUDY

 It is a mute argument because technical analysis the same as fundamental analysis cannot predict what the share price is going to do.
We humans are the only ones the make the predictions and Technical

analysis is purely and simply a way of studying crowed behavior to ascertain what they may be thinking about the price of a stock and what the majority are predicting. So many states that they have the learnt the one great lesson The market is always right yet appear to fight it with last breath, or at least last dollar. A chart is the documentation of previous navigation and I would suggest that to go forward into unknown territory, a map be extremely useful even if it is old map. Chart gives us history not the future they certainly wont predict event.

CHAPTER II LITERATURE REVIEW

Technical Analysis: Introduction

The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.

Technical Analysis: The Basic Assumptions

What Does Technical Analysis Mean? 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 security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance. In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.

What Is Technical Analysis?

Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future. The field of technical analysis is based on three assumptions: 1. 2. 3. The market discounts everything. Price moves in trends. History tends to repeat itself.

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 a consistent 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. Not Just for Stocks

Technical analysis can be used on any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex, etc. In this tutorial, we'll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is more frequently associated with commodities and forex, where the participants are predominantly traders. Now that you understand the philosophy behind technical analysis, we'll get into explaining how it really works. One of the best ways to understand what technical analysis is (and is not) is to compare it to fundamental analysis. We'll do this in the next section.

Technical Analysis: The Use of Trend

One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed. Take a look at the chart: Figure 1 It isn't hard to see that the trend in Figure 1 is up. However, it's not always this easy to see a trend:

There are lots of ups and downs in this chart, but there isn't a clear indication of which direction this security is headed. Figure 2 A More Formal Definition Unfortunately, trends are not always easy to see. In other words, defining a trend goes well beyond the obvious. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.

Figure 3

Figure 3 is an example of an uptrend. Point 2 in the chart is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend each successive low must not fall below the previous lowest point or the trend is deemed a reversal. Types of Trend There are three types of trend: Up trends Downtrends Sideways/Horizontal Trends As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend. When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. If you want to get really technical, you might even say that a sideways trend is actually not a trend on its own, but a lack of a welldefined trend in either direction. In any case, the market can really only trend in these three ways: up, down or nowhere.

Trend Lengths

Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. Take a look a Figure 4 to get a sense of how these three trend lengths might look. Figure 4 When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend. Trendlines

A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals.

As you can see in Figure 5, an upward trendline is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trendline helps traders to anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.

Figure 5

Channels

A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance. The upper trendline connects a series of highs, while the lower trendline connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.

Figure 6 Figure 6 illustrates a descending channel on a stock chart; the upper trendline has been placed on the highs and the lower trendline is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue. The Importance of Trend

It is important to be able to understand and identify trends so that you can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders.

Technical Analysis: Support and Resistance

Once you understand the concept of a trend, the next major concept is that of support and resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).

Figure 1 As you can see in Figure 1, support is the price level through which a stock or market seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the red arrows). Why does it happen?

These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trendlines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance will likely be established. Round Numbers and Support and Resistance One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions. Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as $50, which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major psychological points as well.

Role Reversal

Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance.

Figure 2 For example, as you can see in Figure 2, the dotted line is shown as a level of resistance that has prevented the price from heading higher on two previous occasions (Points 1 and 2). However, once the resistance is broken, it becomes a level of support (shown by Points 3 and 4) by propping up the price and preventing it from heading lower again. Many traders who begin using technical analysis find this concept hard to believe and don't realize that this phenomenon occurs rather frequently, even with some of the most well-known companies. For example, as you can see in Figure 3, this phenomenon is evident on the Wal-Mart Stores Inc. (WMT) chart between 2003 and 2006. Notice how the role of the $51 level changes from a strong level of support to a level of resistance.

Figure 3 In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels. This is most often seen when a stock is trading in a generally sideways manner as the price moves through successive peaks and troughs, testing resistance and support. The Importance of Support and Resistance Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level.

Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share

remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance levels of an upward trending channel, the trend has accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel. Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support.

Technical Analysis: The Importance of Volume

To this point, we've only discussed the price of a security. While price is the primary item of concern in technical analysis, volume is also extremely important. What is 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. Why Volume is Important? 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.

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. 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. When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume. Volume and Chart Patterns The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume, a process which we'll describe in more detail later in this tutorial. 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. Now that we have a better understanding of some of the important factors of technical analysis, we can move on to charts, which help to identify trading opportunities in prices movements.

Technical Analysis: What Is A Chart?

In technical analysis, charts are similar to the charts that you see in any business setting. A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock's price movement over a oneyear period, where each point on the graph represents the closing price for each day the stock is traded:

Figure 1 Figure 1 provides an example of a basic chart. It is a representation of the price movements of a stock over a 1.5 year period. The bottom of the graph, running horizontally (x-

axis), is the date or time scale. On the right hand side, running vertically (y-axis), the price of the security is shown. By looking at the graph we see that in October 2004 (Point 1), the price of this stock was around $245, whereas in June 2005 (Point 2), the stock's price is around $265. This tells us that the stock has risen between October 2004 and June 2005. Chart Properties There are several things that you should be aware of when looking at a chart, as these factors can affect the information that is provided. They include the time scale, the price scale and the price point properties used. The Time Scale The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually. The shorter the time frame, the more detailed the chart. Each data point can represent the closing price of the period or show the open, the high, the low and the close depending on the chart used. Intraday charts plot price movement within the period of one day. This means that the time scale could be as short as five minutes or could cover the whole trading day from the opening bell to the closing bell. Daily charts are comprised of a series of price movements in which each price point on the chart is a full days trading condensed into one point. Again, each

point on the graph can be simply the closing price or can entail the open, high, low and close for the stock over the day. These data points are spread out over weekly, monthly and even yearly time scales to monitor both short-term and intermediate trends in price movement. Weekly, monthly, quarterly and yearly charts are used to analyze longer term trends in the movement of a stock's price. Each data point in these graphs will be a condensed version of what happened over the specified period. So for a weekly chart, each data point will be a representation of the price movement of the week. For example, if you are looking at a chart of weekly data spread over a five-year period and each data point is the closing price for the week, the price that is plotted will be the closing price on the last trading day of the week, which is usually a Friday. The Price Scale and Price Point Properties The price scale is on the right-hand side of the chart. It shows a stock's current price and compares it to past data points. This may seem like a simple concept in that the price scale goes from lower prices to higher prices as you move along the scale from the bottom to the top. The problem, however, is in the structure of the scale itself. A scale can either be constructed in a linear (arithmetic) or logarithmic way, and both of these options are available on most charting services. If a price scale is constructed using a linear scale, the space between each price point (10, 20, 30, 40) is separated by an equal amount. A price move from 10 to 20 on a linear scale is the same distance on the chart as a move from 40 to 50. In other words, the price scale measures moves in absolute terms and does not show the effects of percent change.

Figure 2 If a price scale is in logarithmic terms, then the distance between points will be equal in terms of percent change. A price change from 10 to 20 is a 100% increase in the price while a move from 40 to 50 is only a 25% change, even though they are represented by the same distance on a linear scale. On a logarithmic scale, the distance of the 100% price change from 10 to 20 will not be the same as the 25% change from 40 to 50. In this case, the move from 10 to 20 is represented by a larger space one the chart, while the move from 40 to 50, is represented by a smaller space because, percentage-wise, it indicates a smaller move. In Figure 2, the logarithmic price scale on the right leaves the same amount of space between 10 and 20 as it does between 20 and 40 because these both represent 100% increases.

Technical Analysis: Chart Types

There are four main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types are: the line chart, the bar chart, the candlestick chart and the point and figure chart. In the following sections, we will focus on the S&P 500 Index during the period of January 2006 through May 2006. Notice how the data used to create the charts is the same, but the way the data is plotted and shown in the charts is different. 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.

Bar Charts The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on

the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open).

Candlestick Charts The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. A major problem with the candlestick color configuration, however, is that different sites use different standards; therefore, it is important to understand the candlestick configuration used at the chart site you are working with. There are two color constructs for days up and one for days that the price falls. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black,

depending on the site. If the stock's price has closed above the previous days close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day.

Point and Figure Charts The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the stock, which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis.

When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. On most charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock. The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new

trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signaling a trend change.

Technical Analysis: Chart Patterns

A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. In the first section, we talked about the three assumptions of technical analysis, the third of which was that in technical analysis, history repeats itself. The theory behind chart patters is based on this assumption. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern setting up a certain price movement, chartists look for these patterns to identify trading opportunities. While there are general ideas and components to every chart pattern, there is no chart pattern that will tell you with 100% certainty where a security is headed. This creates some leeway and debate as to what a good pattern looks like, and is a major reason why charting is often seen as more of an art than a science. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns can be found over

charts of any timeframe. In this section, we will review some of the more popular chart patterns.

Head and Shoulders This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As you can see in Figure 1, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.

Figure 1: Head and shoulders top is shown on the left. Head and shoulders bottom, or inverse head and shoulders, is on the right.

Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side in Figure 1, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows. Cup and Handle A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.

The price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can

continue. There is a wide ranging time frame for this type of pattern, with the span ranging from several months to more than a year.

Double Tops and Bottoms This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals.

Figure 3: A double top pattern is shown on the left, while a double bottom pattern is shown on the right.

In the case of the double top pattern in Figure 3, the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward. Triangles Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.

The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trendline is flat, while the bottom trendline is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trendline is flat and the upper trendline is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout. Flag and Pennant

These two short-term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks.

There is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trendlines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trendlines. In both cases, the trend is expected to continue when the price moves above the upper trendline. Wedge The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over longer periods, usually between three and six months. The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. In Figure 6, we have a falling wedge in

which two trendlines are converging in a downward direction. If the price was to rise above the upper trendline, it would form a continuation pattern, while a move below the lower trendline would signal a reversal pattern. Gaps A gap in a chart is an empty space between a trading period and the following trading period. This occurs when there is a large difference in prices between two sequential trading periods. For example, if the trading range in one period is between $25 and $30 and the next trading period opens at $40, there will be a large gap on the chart between these two periods. Gap price movements can be found on bar charts and candlestick charts but will not be found on point and figure or basic line charts. Gaps generally show that something of significance has happened in the security, such as a better-than-expected earnings announcement. There are three main types of gaps, breakaway, runaway (measuring) and exhaustion. A breakaway gap forms at the start of a trend, a runaway gap forms during the middle of a trend and an exhaustion gap forms near the end of a trend. Triple Tops and Bottoms Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.

Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon.

Rounding Bottom A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years. A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, make it a difficult pattern to trade. We have finished our look at some of the more popular chart patterns. You should now be able to recognize each chart pattern as well the signal it can form for

chartists. We will now move on to other technical techniques and examine how they are used by technical traders to gauge price movements.

Technical Analysis: Moving Averages

Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favor. Types of Moving Averages There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential. Simple Moving Average (SMA) This is the most common method used to calculate the moving average of prices. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then

divided by 10. A trader is able to make the average less responsive to changing prices by increasing the number of periods used in the calculation. Increasing the number of time periods in the calculation is one of the best ways to gauge the strength of the long-term trend and the likelihood that it will reverse. Many individuals argue that the usefulness of this type of average is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence. The critics argue that the most recent data is more important and, therefore, it should also have a higher weighting. This type of criticism has been one of the main factors leading to the invention of other forms of moving averages. Linear Weighted Average This moving average indicator is the least common out of the three and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five-day linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers. Major Uses of Moving Averages Moving averages are used to identify current trends and trend reversals as well as to set up support and resistance levels.

Moving averages can be used to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average. when a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend.

Another method of determining momentum is to look at the order of a pair of moving averages. When a short-term average is above a longer-term average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend. Moving average trend reversals are formed in two main ways: when the price moves through a moving average and when it moves through moving average crossovers. The first common signal is when the price moves through an important moving average. For example, when the price of a security that was in an uptrend falls below a 50-period moving average, like in Figure, it is a sign that the uptrend may be reversing. Another major way moving averages are used is to identify support and resistance levels. It is not uncommon to see a stock that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move

through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing. Moving averages are a powerful tool for analyzing the trend in a security. They provide useful support and resistance points and are very easy to use. The most common time frames that are used when creating moving averages are the 200day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month and 10-day average of two weeks. Moving averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend. So far we have been focused on price movement, through charts and averages. In the next section, we'll look at some other techniques used to confirm price movement and patterns.

Technical Analysis: Indicators and Oscillators

Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities. Indicators are used in two main ways: to

confirm price movement and the quality of chart patterns, and to form buy and sell signals. There are two main types of indicators: leading and lagging. A leading indicator precedes price movements, giving them a predictive quality, while a lagging indicator is a confirmation tool because it follows price movement. A leading indicator is thought to be the strongest during periods of sideways or non-trending trading ranges, while the lagging indicators are still useful during trending periods. There are also two types of indicator constructions: those that fall in a bounded range and those that do not. The ones that are bound within a range are called oscillators - these are the most common type of indicators. Oscillator indicators have a range, for example between zero and 100, and signal periods where the security is overbought (near 100) or oversold (near zero). Non-bounded indicators still form buy and sell signals along with displaying strength or weakness, but they vary in the way they do this. The two main ways that indicators are used to form buy and sell signals in technical analysis is through crossovers and divergence. Crossovers are the most popular and are reflected when either the price moves through the moving average, or when two different moving averages cross over each other. The second way indicators are used is through divergence, which happens when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. This signals to indicator users that the direction of the price trend is weakening. Indicators that are used in technical analysis provide an extremely useful source of

additional information. These indicators help identify momentum, trends, volatility and various other aspects in a security to aid in the technical analysis of trends. It is important to note that while some traders use a single indicator solely for buy and sell signals, they are best used in conjunction with price movement, chart patterns and other indicators. Accumulation/Distribution Line The accumulation/distribution line is one of the more popular volume indicators that measures money flows in a security. This indicator attempts to measure the ratio of buying to selling by comparing the price movement of a period to the volume of that period. Calculated: Acc/Dist = ((Close - Low) - (High - Close)) / (High - Low) * Period's Volume This is a non-bounded indicator that simply keeps a running sum over the period of the security. Traders look for trends in this indicator to gain insight on the amount of purchasing compared to selling of a security. If a security has an accumulation/distribution line that is trending upward, it is a sign that there is more buying than selling. Average Directional Index The average directional index (ADX) is a trend indicator that is used to measure the strength of a current trend. The indicator is seldom used to identify the direction of the current trend, but can identify the momentum behind trends. The ADX is a combination of two price movement measures: the positive

directional indicator (+DI) and the negative directional indicator (-DI). The ADX measures the strength of a trend but not the direction. The +DI measures the strength of the upward trend while the -DI measures the strength of the downward trend. These two measures are also plotted along with the ADX line. Measured on a scale between zero and 100, readings below 20 signal a weak trend while readings above 40 signal a strong trend. Aroon 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. Aroon 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.

Moving Average Convergence

Developed by Gerald Apple, Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply. MACD Formula The most popular formula for the standard MACD is the difference between a securitys 26-day and 12-day Exponential Moving Averages (EMAs). This is the formula that is used in many popular technical analysis programs, including sharp

charts, and quoted in most technical analysis books on the subject. Apple and others have since tinkered with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws. Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line. A bullish crossover occurs when MACD moves above its 9-day EMA and a bearish crossover occurs when MACD moves below its 9-day EMA. The chart below shows the 12-day EMA (thin blue line) with the 26-day EMA (thin red line) overlaid the price plot. MACD appears in the box below as the thick black line and its 9-day EMA is the thin blue line. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA. The moving average convergence divergence (MACD) is one of the most well known and used indicators in technical analysis. This indicator is comprised of two exponential moving averages, which help to measure momentum in the security. The MACD is simply the difference between these two moving averages plotted against a centerline. The centerline is the point at which the two moving averages are equal. Along with the MACD and the centerline, an exponential moving average of the MACD itself is plotted on the chart. The idea behind this momentum indicator is to measure short-term momentum compared to longer term momentum to help signal the current direction of momentum.

MACD= shorter term moving average - longer term moving average When the MACD is positive, it signals that the shorter term moving average is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative - this signals that the shorter term is below the longer and suggest downward momentum. When the MACD line crosses over the centerline, it signals a crossing in the moving averages. The most common moving average values used in the calculation are the 26-day and 12-day exponential moving averages. The signal line is commonly created by using a nineday exponential moving average of the MACD values. These values can be adjusted to meet the needs of the technician and the security. For more volatile securities, shorter term averages are used while less volatile securities should have longer averages. A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

There are three common methods used to interpret the MACD: Crossovers: - As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering into a position too early, as shown by the first arrow. The point on a stock chart when a security and an indicator intersect. Crossovers are used by technical analysts to aid in forecasting the future movements in the price of a stock. In most technical analysis models, a crossover is a signal to either buy or sell.

Dramatic rise: - When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels. Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator. What Does MACD Do? MACD measures the difference between two Exponential Moving Averages (EMAs). A positive MACD indicates that the 12-day EMA is trading above the 26day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate of change of the faster moving averages is higher than the rate of change for the slower moving average. Positive momentum is increasing, indicating a bullish period for the price plot. If MACD is negative and declining further, then the negative gap between the faster moving average (blue) and the slower moving average (red) 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. MACD Bullish Signals

 Positive Divergence Bullish Moving Average Crossover 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. Bullish Moving Average Crossover A Bullish Moving Average Crossover occurs when MAND moves above its 9-day EMA. Bullish Moving Average Crossovers are probably the most common signals and as such are the least reliable. If not used in conjunction with other technical analysis tools, these crossovers can lead to whipsaws and many false signals. Bullish Moving Average Crossovers are used occasionally to confirm a positive divergence. The second low or higher low of a positive divergence can be considered valid when it is followed by a bullish moving average crossover.

Bullish Centerline Crossover A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a cleat indication that momentum has changed from negative to positive or from bearish to bullish. After a Positive Divergence and Bullish Centerline Crossover, the Bullish Centerline Crossover can act as a confirmation signal.

Using a Combination of Signals Even though some traders may use only one of the above to form a buy or a sell signal, using a combination generate more robust signals. Bearish signals Negative Divergence Bearish Moving Average Crossover 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. There are two possible means of confirming a negative divergence. First, the indicator can form a lower low. This is traditional peak-and-trough analysis applied to an indicator. Second, a Bearish Moving Average crossover can act to confirm a negative divergence. As long as MACD is trading above its 9-day EMA, or trigger line, it has not turned down and the lower high is difficult to confirm. Bearish Moving Average Crossover A Bearish Moving Average Crossover occurs when MACD declines below its 9day EMA. Not only are these signals the most common, but they also producing the most false signals. As such, moving average crossovers should be confirmed with other signals to ovoid whipsaws and false reading. Bearish Centerline Crossover A Bearish centerline Crossover occurs when MACD movers 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. Combining Signals As with bullish MACD signals, bearish signals can be combined to create more robust signals, in most cases, stocks fall faster than they rise. Using momentum indicators like MACD, technical analysis can sometimes provide clues to impending weakness. Being able to spot weakness can enable traders to take a more defensive position.

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 average 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 to bearish. This can serve a san alert for traders to take some profits in long positions, or for aggressive traders to

consider initiating a short position. Gie that level of flexibility, each individual should adjust the MACD to suit his or own trading style, objectives and risk tolerance. MACD Drawbacks One of the beneficial aspects of the MACD is also one of its drawbacks. Moving averages, be they simple, exponential or 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.

MACD calculates the absolute difference between two moving averages and not the percentage difference. MACD is calculated by subtracting one moving average from the other. As a security increases in price, the difference (both positive and negative) between the two moving averages is destined to grow. This makes its difficult to compare MACD levels over a long period of time, especially for stocks that have grown exponentially. Pros and Cons of the MACD Since Gerald Apple developed the MACD, 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 straight forward, and its construction is simple, yet it remains one of the most reliable indicators around. The effectiveness of the MACD will 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-Histogram In 1986, Thomas Aspray developed the MACD-Histogram. Some of his findings were presented in a series of articles for technical analysis of stocks and commodities. Aspray noted that MACDs lag would sometimes miss important moves in a security, especially when applied to weekly charts. He first experimented by changing the moving averages and found that shorter moving averages did indeed speed up the signals. one of the answers he came up with was the MACD-Histogram. The MACD-Histogram represents the difference between the MACD and its trigger line, the 9-day EMA of MACD. The plot of the difference is presented as a histogram, making centerline crossovers and divergences easily identifiable. A centerline crossover for the MACD-Histogram is the same as a moving average crossover for MACD. It is already said that, a moving average crossover occurs when MACD moves above or below the trigger line. If the value of MACD is larger than the value of its 9-day EMA, then the value on the MACD-Histogram will be positive. Conversely, if the value of MACD is less than its 9-day EMA, then the value on the MACD-Histogram will be negative. Further increases or decreases in the gap between MACD and its trigger line will be reflected in the MACD-Histogram. Sharp increases in the MACD-Histogram

indicate that MACD is rising faster than its 9-day EMA and bullish momentum is strengthening. Sharp declines in the MACD-Histogram indicate that MACD is falling faster than its 9-day EMA and bearish momentum is increasing. Usage Thomas Aspray designed the MACD-Histogram as a tool to anticipate a moving average crossover in the MACD. Divergence between MACD and the MACDHistogram are the main tool used to anticipate moving average crossovers. A Positive Divergence in the MACD-Histogram indicates that the MACD is strengthening and could be on the average of a Bullish Moving Average Crossover. A Negative Divergence in the MACD-Histogram indicates that the MACD is weakening, and it foreshadows a Bearish Moving Average Crossover in the MACD. In his book, Technical analysis of the financial markets, John Murphy asserts that the best use for the MACD-Histogram is in identifying periods when the gap between the MACD and its 9-day EMA is either widening or shrinking. Broadly speaking, a widening gap indicates strengthening momentum and a shirking gap indicates weakening momentum. Usually a change in the MACD-Histogram will precede any changes in the MACD. MACD-Histogram Benefits The main benefit of the MACD-Histogram is its ability to anticipate MACD signals. Divergences usually appear in the MACD-Histogram before MACD moving average crossovers do. Armed with this knowledge, traders and investors can better prepare for potential changes.

The MACD-Histogram can be applied to daily, weekly or monthly charts. Using weekly charts, the broad underlying trend of a stock can be determined. Once the broad trend has been determined, daily charts can be used to time entry and exit strategies. The weekly MACD-Histogram can be used to generate a long-term signal in order to establish the tradable trend. Then only short-term signals that agree with the major trend would be considered. If the long-term were bullish, only negative divergence with bearish centerline crossovers would be considered valid for the MACD-Histogram. If the long-term trend were bearish, only positive divergences with bullish centerline crossovers would be considered valid.

MACD-Histogram Drawback The MACD-Histogram is an indicator of an indicator or a derivative of a derivative. The MACD is the first derivative of the price action of a security, and the MACD-Histogram is the second derivative of the price action of a security. Keep in mind that this is an indicator of an indicator. The MACD-Histogram should not be compared directly with the price action of the underlying security. Because MACD-Histogram was designed to anticipate MACD signals, there is a temptation to jump the gun. The MACD-Histogram should be used in conjunction with other aspects of technical analysis. This will help to alleviate the temptation for early entry. Another means to guard against early is to combine weekly signals with daily signals. Of course, there will be more daily signals than weekly signals. However, by using only the daily signals that agree with the weekly signals, there

will be fewer daily signals to act on. By acting only on those daily signals that are in agreement with the weekly signals, you are also assured of trading with the longer trend and not against it.

John J. Murphy "One way to get started in technical analysis is to read a good book on the subject. One of my favorites is Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy." "No one in this generation has contributed more to technical analysis than John Murphy. Through his series of books, he has both opened the door to many and raised the standard for all who use technical analysis. His book should be required reading for everyone in the securities business and are never more than a step away from my desk." In the late 1980s, John J. Murphy's massive Technical Analysis of the Futures Markets created uproar when it burst upon the scene. The most comprehensive, yet easy-to-follow guide to the concepts of technical analysis and their application to

the futures markets, it swiftly became a classic--cited in research studies by the Federal Reserve and used as a primary source in the Market Technicians Association testing program. Today, it is widely considered the bible in its field. In response to widespread demand, John Murphy has completely updated and revised this landmark volume, broadened its scope, and expanded it to cover all financial markets. This outstanding reference has already taught thousands of traders the concepts of technical analysis and their application in the futures and stock markets. Covering the latest developments in computer technology, technical tools, and indicators, the second edition features new material on candlestick charting, intermarket relationships, stocks and stock rotation, plus state-of-the-art examples and figures. From how to read charts to understanding indicators and the crucial role technical analysis plays in investing, readers gain a thorough and accessible overview of the field of technical analysis, with a special emphasis on futures markets. Revised and expanded for the demands of today's financial world, this book is essential reading for anyone interested in tracking and analyzing market behavior.

Steve Achelis This book is updated and revised - with over 35 brand new indicators! It is a comprehensive catalog of today's major technical analysis indicators indispensable for trading in stocks, bonds, futures, and options! 'There is an urgent need for a concise reference on such a vast array of technical tools. Achelis' new edition fulfills that need and should provide an invaluable guide to newcomers and veterans alike' - John J. Murphy President, MurphyMorris.com, Author, "Technical Analysis of the Financial Markets and Intermarket Technical Analysis".'Steve Achelis has done it again. The first edition was a wonderfully comprehensive encyclopedia of market indicators. The second edition is even better' - Martin Pring

President, International Institute of Economic Research Author, "Technical Analysis Explained" and "Martin Pring's Introduction to Technical Analysis". 'Often technical analysis, because of its depth and complexity, can seem like magic. Steve Achelis' "Technical Analysis from A to Z" helps the reader transition from the realm of magic to the land of understanding. This revision of his classic reference on technical techniques and indicators is a must for any technical analysis library' - John Bollinger, CFA, MFT Bollinger Capital Management.

CHAPTER III

COMPANY PROFILE

COMPANY
A leading stock brokerage house and Asset & Wealth Management company, provides investment and wealth management service to institutional, high net worth, NRIs and retail investors and their advisors. It is located in # 6-2-30/C, Parbat, Lakdi-ka-pool, Saifabad and Hyderabad-INDIA. It was established in 1996, the managing Directors are Mr. Zaheer Uddin Ali Khan, Mr. Ehasanuddin, and Mr. Sunil C Kapadia. Employees work force of 20 holding back office, securities operations, marketing and administration with clear division in their ranks and right men assigned right job.

OVERVIEW
MIDEAST INVESTMENT has significant volumes in the both the segments of equity and derivatives with Bombay Stock and National Stock Exchanges aggregating Rs. 10000 corers per annum. The advantages of the company having more than 1000 ready customer base that will help us in reach out to the people with trust they have in us over a decade. The company under stand customer need very well as already enjoying highest customer satisfaction in services which is the key area. The company does better than anyone else the unique or lowest-cost resources have access to have tied up with leading daily publication house by which the add pending will be considerable low targeting twin cities clients. The company reaches NRI community with help of WWW.Siasat.Com and WWW.ideasgulf.Com.

STOCK BROKERAGE
The companys managers have over 1000 man-hours of ringside broking experience, which is being utilized to hilt by fully computerized VAST access at its Hyderabad office. MIDEAST $68 billion (Rs. 2,38,000Cr)annually. a corporate member of the National Stock Exchange of India limited, which is Indias largest exchange transacting over US

EQUITY RESEARCH

Based on fundamental and technical strengths of Indian corporations and the market environment MIDEAST provides consultancy for investments. MIDEAST assists individuals and institutions maximize their earnings through stock market investment & Mutual Fund as other financial instruments scientifically through their portfolio management services.

NRI PLACEMENT AND RELATED SERVICES

The analysis of opportunities for NRIs the primary and secondary market is focus area of MIDEAST investments with the boom in the stock market, evaluation of companies to invest become critical particularly for NRIs for trading in these markets. Hence MIDEAST provides the services.

CHAPTER IV

DATA ANALYSIS

Oil and Natural Gas Corporation Limited (ONGC)

Awarded Asias Best Oil and Gas Company, Oil and Natural Gas Corporation Limited is seen as the flagship for oil and gas companies (Public Sector) in India. Its competitive strength lies in strong intellectual property base, information, knowledge, and skilled and experienced human resource base. Oil and Natural Gas Corporation Limited (ONGC) (incorporated on June 23, 1993) is an Indian public sector petroleum company. It is a Fortune Global 500 company ranked 335th, and contributes 77% of India's crude oil production and 81% of India's natural gas production. It is the highest profit making corporation in India. It was set up as a commission on August 14, 1956. Indian government holds 74.14% equity stake in this company. ONGC is engaged in exploration and production activities. It is involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India. It produces about 30% of India's crude oil requirement. It owns and operates more than 11,000 kilometers of pipelines in India. Until recently (March 2007) it was the largest company in terms of market cap in India. Pioneering Efforts ONGC is the only fullyintegrated petroleum company in India, operating along the entire hydrocarbon value chain:

Holds largest share of hydrocarbon acreages in India. Contributes over 78 per cent of Indians oil and gas production. About one tenth of Indian refining capacity. Created a record of sorts by turning Mangalore Refinery and Petrochemicals Limited around from being a stretcher case for referral to BIFR to the BSE Top 30, within a year.

Interests in LNG and product transportation business.

In terms of its human resource base, ONGC has the following noteworthy features: ONGC has an experienced and professional human resource base of more than 40,000 employees. Apart from the quarterly and other job incentives, ONGC has successfully incorporated various reward and recognition schemes, grievance handling scheme and suggestion scheme. ONGC has also set up 9 institutes offering specialized courses in refining, mining, etc. International rankings

ONGC has been ranked at 198 by the Forbes Magazine in their Forbes Global 2000 list for the year 2007 ONGC has featured in the 2008 list of Fortune Global 500 companies at position 335, a climb of 34 positions from rank of 369 in 2007. ONGC is ranked as Asias best Oil & Gas company, as per a recent survey conducted by US-based magazine Global Finance 2nd biggest E&P company (and 1st in terms of profits), as per the Platts Energy Business Technology (EBT) Survey 2004 Ranks 24th among Global Energy Companies by Market Capitalization in PFC Energy 50 (December 2004).

Market Capitalization, Net Worth and Net Profits.

Strategic Vision: 2001-2020 To focus on core business of E&P, ONGC has set strategic objectives of:

Doubling reserves (i.e. accreting 6 billion tones of O+OEG). Improving average recovery from 28 per cent to 40 per cent. Tie-up 20 MMTPA of equity Hydrocarbon from abroad.

The focus of management will be to monetize the assets as well as to assetise the money. Financials (2007-08) ONGC posted a net profit of Rs. 167.016 billion, the Highest by any Indian Company Net worth Rs. 699 billion Practically Zero Debt Corporate Contributed over Rs. 300 billion to the exchequer

National Thermal Power Corporation

NTPC, the largest power Company in India, was setup in 1975 to accelerate power development in the country. It is among the worlds largest and most efficient power generation companies. In Forbes list of Worlds 2000 Largest Companies for the year 2007, NTPC occupies 411th place.

NTPC has installed capacity of 29,394 MW. It has 15 coal based power stations (23,395 MW), 7 gas based power stations (3,955 MW) and 4 power stations in Joint Ventures (1,794 MW). The company has power generating facilities in all major regions of the country. It plans to be a 75,000 MW company by 2017.

NTPC has gone beyond the thermal power generation. It has diversified into hydro power, coal mining, power equipment manufacturing, oil & gas exploration, power trading & distribution. NTPC is now in the entire power value chain and is poised to become an Integrated Power Major.

NTPC's share on 31 Mar 2008 in the total installed capacity of the country was 19.1% and it contributed 28.50% of the total power generation of the country during 2007-08. NTPC has set new benchmarks for the power industry both in the area of power plant construction and operations. Vision A world class integrated power major, powering India's growth with increasing global presence.

CHAPTER V FINDING SUGGESTION & CONCLUSION

Finding Suggestion & Conclusion

This introductory section of the technical analysis has provided a broad overview of technical analysis. Here's a brief summary of what we've covered:

We humans are the only ones that make the 'predictions' and Technical Analysis is purely and simply a way of studying crowd behavior to ascertain what they may be thinking about the price of a stock and what majority are 'predicting'.

Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity. It is based on three assumptions: 1) The market discounts everything, 2) price moves in trends and 3) history tends to repeat itself.

Technicians believe that all the information they need about a stock can be found in its charts. Technical traders take a short-term approach to analyzing the market. Criticism of technical analysis stems from the efficient market hypothesis, which states that the market price is always the correct one, making any historical analysis useless.

One of the most important concepts in technical analysis is that of a trend, which is the general direction that a security is headed. There are three types of trends: uptrends, downtrends and sideways/horizontal trends. A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance. Support is the price level through which a stock or market seldom falls. Resistance is the price level that a stock or market seldom surpasses. Volume is 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. A chart is a graphical representation of a series of prices over a set time frame. The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually. The price scale is on the right-hand side of the chart. It shows a stock's current price and compares it to past data points. It can be either linear or logarithmic. There are four main types of charts used by investors and traders: line charts, bar charts, candlestick charts and point and figure charts. A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. There are two types: reversal and continuation. A head and shoulders pattern is reversal pattern that signals a security is likely to move against its previous trend.

A cup and handle pattern is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed. Double tops and double bottoms are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. A triangle is a technical analysis pattern created by drawing trendlines along a price range that gets narrower over time because of lower tops and higher bottoms. Variations of a triangle include ascending and descending triangles. Flags and pennants are short-term continuation patterns that are formed when there is a sharp price movement followed by a sideways price movement. The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction. A gap in a chart is an empty space between a trading period and the following trading period. This occurs when there is a large difference in prices between two sequential trading periods. Triple tops and triple bottoms are reversal patterns that are formed when the price movement tests a level of support or resistance three times and is unable to break through, signaling a trend reversal. A rounding bottom (or saucer bottom) is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. A moving average is the average price of a security over a set amount of time. There are three types: simple, linear and exponential.

Moving averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend. Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. There are two types: leading and lagging. The accumulation/distribution line is a volume indicator that attempts to measure the ratio of buying to selling of a security. The average directional index (ADX) is a trend indicator that is used to measure the strength of a current trend. The Aroon indicator is a trending indicator used to measure whether a security is in an uptrend or downtrend and the magnitude of that trend. The Aroon oscillator plots the difference between the Aroon up and down lines by subtracting the two lines. The moving average convergence divergence (MACD) is comprised of two exponential moving averages, which help to measure a security's momentum. Many times all analysis proved wrong and Market sentiments become the real winner. So, it is not advisable to completely depend on the analysis. Investor should give all the factors equal importance.

BIBLIOGRAPHY:

BOOKS:

Technical Analysis of the Financial Markets- By John J Murphy Technical Analysis is from A to Z- By Steve Achelis

Websites:

www.investopedia.com www.icharts.in www.stockcharts.com www.moneycontrol.com

Newspapers: 1. Economic Times

2. Business Standard