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Group 8 Technical Analysis Itc v2

Group 8 Technical Analysis Itc v2

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Published by Atul Bhatia
ITC Technical Analysis
ITC Technical Analysis

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Published by: Atul Bhatia on Jul 10, 2013
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10/03/2015

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INVESTMENT MANAGEMENT

TECHNICAL ANALYSIS

SUBMITTED TO: Prof. Vipul

SUBMITTED BY: Group No. 8 (Section B) Atul Bhatia (PGP28318) Priyadarshini Kumari (PGP28315) Vishnu Khandelwal (PGP28166) Sandeep Rawat (PGP28016)

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................ 5 Back-testing and Insightful patterns ..................... 3 Back-testing and insightful patterns ....................................................................................................................................................................................................................................Hold .... 6 Plot and assumptions .................................................. 7 Back-testing and Insightful Patterns ....................................................................................................................................................................................................................... 3 Recommendation: BUY or HOLD ............................................... Moving Average Convergence Divergence (MACD) .... 11 2 .............................. Price – Volume Patterns................................................................................................................................................. 5 Recommendation – BUY .. 6 Recommendation – BUY ............................................................... 8 Recommendation ............................................... 3 Plot and Assumptions ....................................................................................... Final recommendation ... 3 Support and Resistance: ...................................................................................Contents I................................................................................................................................... 9 VI....................................................................... Point and Figure Chart ................................................................................ 9 Back-testing and Insightful Patterns ............................................................................................................................................................................... 7 V..................................................................................................................................... 7 Plot and assumptions ................................................................................. 5 Back-testing and Insightful patterns ..................................................................................................................................................... 5 III.................. 5 Plot and assumptions .................................................. Stochastic ................................................................................... Relative Strength Index (RSI)............................................................................................................. 10 VII........................... 6 IV...................................................................................................................................................................................................................................................................................................................................................... 4 II.... Bullish / Bearish Engulfing............................. 4 Plot and Assumptions ................................................................................................. 9 Recommendation – BUY ............................................................. 5 Recommendation – BUY ... 6 Back-testing and Insightful patterns ....................

Volume is also an important indicator in technical analysis as it is used to confirm trends and chart patterns.Oct 05. 2012) while the stock was still going up. Fundamental developments in a stock are followed by price movements. This decline in volume indicated the weakness in the bullish trend and on October 20.  As shown in the Chart 1.I. Back-testing and insightful patterns  Average Volume decreased from around 10M (during Sep 17. Price – Volume Patterns Price pattern analysis is the basis of technical analysis of stocks. if the price of the stock is increasing but the volume declines. Price movement with relatively high volumes is seen as a strong trend as compared with one with low volumes. 2012 . However. 2012) to 5M (during Oct 06. it signals a weakening of upward trend and a possible reversal. High. Low and Closing prices are used to analyze the price action of a stock. Similar patterns can be seen at other points as well as indicated in the chart below Chart 1 Recommendation: BUY or HOLD The recent trend of the stock price shows the reversal of downward trend as shown in the green circle. 2012 . Plot and Assumptions  A rise in share price accompanied by increasing volumes indicates a sustained upward trend while a decline in price along with increasing volumes indicates a strong downtrend.October 18. thus the trend is still not strong enough to confirm an upward movement in the coming days 3 . the increase in the price of the stock has been very marginal in the recent days. 2012 the stock price started declining. The upward movement is backed by increase in volumes.

2013. ITC stock had a strong resistance at Rs 310 from Feb. RECOMMENDATION: BUY or HOLD with a stop loss of Rs 315 II. moving averages.Support and Resistance: Chart 2 Resistance Resistance Support Support As shown in the chart above. into a momentum oscillator by subtracting the longer moving average from the shorter moving average. cross and diverge. Current resistance and support levels of the stock are Rs 355 and Rs 315 respectively as shown in the chart. The stock broke the resistance in the third week of April. 2013. 4 . The MACD fluctuates above and below the zero line as the moving averages converge. 2013 to Mid-April. 2013 and reached a high of Rs 355 on May 11. The MACD turns two trend-following indicators. Moving Average Convergence Divergence (MACD) Chart 3 Sell Buy Sell Sell Buy Buy Sell Buy Buy Buy MACD is a momentum indicator.

Oversold – 40% Back-testing and Insightful patterns  For the given time period. the stock movement is as expected post crossover. these regions can be different based on overall nature of the market which could be bullish or bearish  We assume bullish market for the given time period (1-Jan-2012 to 2-Jul-2013) and hence the range selected is: Overbought – 70%. Relative Strength Index (RSI) RSI is momentum indicator in the category of leading oscillator designed to lead the price movements. And as shown in the chart. 2013 developing a bearish trend in the stock Recommendation – BUY  As on July 02. the MACD line has turned upwards and is likely to cross the Center Line showing bullish trend in the stock III.  Generally. 2013 the MACD line is intersecting with the signal line and is expected to crossover the signal line in the upward direction thereby indicating bullishness in the stock. the RSI line has crossed from overbought region to the normal region just thrice (shown in RED circles) but interesting point is that without exception the stock has lost some value every single time it happened.Plot and Assumptions  Standard parameters are considered for MACD as they seem to work well for this stock: o MACD Line (Green): 12-day EMA – 26-day EMA o Signal Line (Blue) : 9-day EMA of MACD Line o MACD Histogram: MACD Line – Signal Line    The stock is expected to be bullish when the MACD line crosses the Signal Line upwards Bearish Crossover occurs when the MACD line crosses the Signal Line downwards Crossovers can last a few days or a few weeks depending on the strength of the move Back-testing and Insightful patterns  Single Line Crossovers: Since October 2012. MACD line has crossed the signal line 9 times – 5 times in upward direction and 4 times in downwards. Plot and assumptions  The first step in RSI is to identify “overbought” and “oversold” regions. Stock has gained around 42% during this period  MACD line went below 0 on June 18.  Also. Though. the MACD line has remained above the center line indicating a fairly continuous uptrend in the stock.12. Thus MACD(26. one must mention that the overall fall in the price has not been significant due to very strong fundamentals and defensive nature of the stock even in bearish market sentiment 5 .9) serves as a powerful indicator of this stock’s momentum  Center Line Crossovers: In the last 18 months. the market considers ‘below 30%’ and ‘above 70%’ as the threshold limits for “oversold” and “overbought” region respectively  However.

it indicates a BUY signal. We have observed that in all the 4 cases when this has happened the stock has moved up (indicated with blue circles). This has been indicated in the cases marked (A)  The stochastic has entered the ‘overbought’ region several times in the defined period (9 times). the rally has been very strong like that indicated in the region marked (A) Recommendation – BUY  We see this trend we see that RSI has very recently crossed from oversold region to the normal region. In line with the expectations. the RSI line has crossed from oversold to normal region 5 times and every time the stock has gained in price.  In line with the commonly followed trend. o One interesting observation is that if the upside movement is very steep and it does not change its direction any time till it hits the overbought region (above 80% threshold). the stochastic oscillator has entered the oversold region only 4 times. for the given time period. it is very likely to go up from here as well IV. the stock is expected to fall. we consider ‘below 20%’ and ‘above 80%’ as the threshold limit for “oversold” and “overbought” region respectively Back-testing and Insightful patterns  In the defined period from 1-Jan-2012 till date. whenever this 6 .(  Similarly. We know that whenever %K line crosses %D (dotted blue) line in the ‘overbought’ region. when this touches the lows of 30% area. Stochastic Stochastic is similar to RSI as it is also a leading momentum indicator and falls in the oscillators category. 7 out of the 9 cases in the past. it is a STRONG BUY signal. Plot and assumptions  Similar to RSI plotted above. the first step in Stochastic is to identify “overbought” and “oversold” regions. We know that in the oversold region if %K line crosses the %D (dotted blue) line. The trend here is not as strong as in the case of ‘oversold’ region. Particularly. Going by this past trend marked by Green circles.

7 . in 2 of the cases it has not shown much negative movement.has happened. However. it has only moved in the upward direction since then indicating an upward trend. However. Point and Figure Chart Point and Figure Chart provides a better way of identifying the trends in the financial market as it ignores the minor fluctuations. this line breaks this upward movement trend. one should reconsider this BUY position V. Whenever. we should be very vigilant in tracking this line. one should be vigilant to hold on to the ‘short’ position because the downward movement has been more pronounced only if the %K line directly enters the ‘oversold’ region ( ( Recommendation – BUY  The %K line crossed the %D line in the ‘oversold’ region some 8-10 days prior to 2-Jul-2013. the stock has lost value (indicated with red circles). We would suggest BUY for the stock based on this trend. An interesting observation is that whenever there is a break in the downward movement of %K line. And. Each box corresponds to 3 units of Stock Price. Plot and assumptions The two key parameters to be considered in point and figure charting are as follows:  Box size: A fixed scale has been considered on the y axis to plot the stock prices.

The patterns observed during the period and the decisions rules based on that are as follows.  Triple Top Patterns: It has occurred twice during this period. stock price has gone up by considerable amount. Three out of these patterns are followed by strong bullish trend. So.  Double Top Patterns: Four Double Top patterns have been observed during this period. Every time this pattern has occurred. Reversal size: Reversal size of 2 boxes has been taken which corresponds to a value of 6 units of Stock Price. So. this pattern has always been followed by increase in Stock prices trend which represents a bullish trend. 8 . As observed. this pattern is a useful indicator for bullish trend and can be used to recommend “Buy” of the stock. The reason behind using 2 box reversal is to smooth out the minor fluctuation with respect to existing price which is around 300 INR. this pattern can be used for recommending a “Buy” of the stock. Back-testing and Insightful Patterns Back Testing has been done on stock prices from 1st Jan 2012 to 30th April 2013.

As on 2nd July none of the previously described patterns i. although this pattern is an indicator of bearish trend but based on our observation for this Stock. Recommendation . after every bullish engulfing pattern. Hence. Here engulfing refers to opening lower and closing higher than the previous day. Every time this pattern has occurred a slight decrease in stock prices has been observed subsequently. The rise has not been great and also no reversal has been observed till 2nd July. Bearish Engulfing: It occurs when bearish candle stick engulfs the previous bullish candlestick especially in upward trend. Engulfing here means opening higher and closing lower than the previous day. Back-testing and Insightful Patterns  In the two figures shown below.e. VI. Triple Top & Double Bottom has been occurred.Hold Although there was a bearish movement in the stock price around mid of June but subsequently stock prices has risen. It signifies that the buyers are overwhelming the sellers and the upside is expected in the future. bullish engulfing is shown by BLUE circles and bearish engulfing by RED circles. there is an upside and after bearish engulfing patter. 9 . Double Top. Double Bottom Pattern: It has been observed 3 times during this period. Investors should wait for change in stock prices and look for patterns before taking any further decision. Bullish / Bearish Engulfing Bullish Engulfing: It occurs when bullish candle stick (shown in blue) engulfs the previous bearish (shown in red) candlestick in downtrend trend. it is not good enough to recommend a “Sell”. So we recommend a “Hold” of the stock. It signifies that the sellers are overwhelming the buyers and the stock is expected to fall in the future. the stock has lost value. As is clearly visible. But the decrease in stock prices has sustained only for a small time.

we expect the stock to go up from here 10 . Though the intensity of engulf is not as high as observed in some instances in the history but the pattern has not shown any exceptions in the past. Therefore.1-Jan-2013 to 2-Jul-2013 6 months ending Dec-2012 Recommendation – BUY The last closing number shows the mild bullish engulfing and is an indication of stock expected to move up from here.

11 . Final recommendation We suggest a BUY recommendation for the stock based on majority of the indicators indicating the bullish trend. Summary recommendations:       Price-Volume: BUY or HOLD MACD: BUY Relative Strength Index (RSI): BUY Stochastic: BUY Point & Figure Chart: HOLD Bullish / Bearish Engulfing: BUY Our final recommendation based on above indicates is BUY. However.VII. Except for Point and Figure Chart and one price volume pattern. all other indicators indicate BUY signal on ITC. we should be cautious to quickly identify reversal of any / all of the patterns above.

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