Technical Analysis

Technical analysis
Technical analysis differs significantly from
fundamental analysis.
Technical analysis is a controversial set of
techniques for predicting market direction
based on
Historical price and volume behavior
Investor sentiment

Technical analysts essentially search for

bullish (positive) and bearish (negative)
signals about stock prices or market direction.

Assumptions

The market value of the scrip is

determined by the interaction of
supply and demand.
The market discounts everything.
The market moves in trend.
Any layman knows the fact that
history repeats itself. It is true to the
stock market also.

Dow theory
The Dow theory is a method that attempts to
interpret and signal changes in the stock market
direction.
Historically, quite popular.
The Dow theory identifies three forces:
a primary direction or trend,
a secondary reaction or trend, and
daily fluctuations

Daily fluctuations are essentially noise and are of

no real importance.

Dow theory cont

Hypotheses:
1. No single individual or buyer can
influence the major trend in the
market.
2. The market discounts everything.
3. The theory is not infallible. It is not a
tool to beat the market but provides
a way to understand it better.

Dow theory cont

The trend is divided into primary,
intermediate and short term trend.
Primary trends are long-term, lasting
several months or longer and are the
most important.
Secondary trends are short-term
deviations from the primary trend, lasting
a few days or a few weeks.
Minor trends are daily fluctuations. It is
also known as oscillations or fluctuations.

Trend
Trend is direction of movement. The
share price can either rise or fall or
remain flat.
Trend reversal : the rise or fall in
share cannot go on forever. The price
movement may reverse its direction.

Reverse is true with the bear market. Here first phase

of fall start with the abandonment of hopes. This
results in sale of shares.
In the second phase, companies are reporting lower
profits and dividends. This would lead to selling
pressure.
The final phase is characterised by the distress sale of
shares. Shares sell below their par values.

Support and Resistance

level

Support level exists at a price where

considerable demand for that stack is
expected to prevent further fall in the price
level.
The fall in the price may be halted for the
time being or it may result even in price
reversal.
In the resistance level, the supply of scrip
would be greater than the demand and
further rise in price is prevented. The selling
pressure is greater and the increase in price
is halted for the time being.

Indicators
Market Volume: Higher volume gives strong
confirmation to price trend.
Breadth: The spread between the number of
advancing issues and the number of declining issues.
Advances means the number of shares whose prices
have increased from the previous days trading.
Declines means the number of shares whose prices
have fallen from the previous days trading.
Advances > declines = bullish
Advances < declines = bearish

 Short sales: refers to selling of shares that are not owned.

High volume investors should be bearish.
Low volumeinvestors should be bullish.
or
High volume investors should be bullish.
Low volumeinvestors should be bearish.
Odd lot trading: (less than 100 shares): Small investors tend to
miss key market turning points.
- Odd-lot buying heavy investors should be bearish.
- Odd-lot selling heavy investors should be bullish.

Relative strength index:

Moving Averages:
Average price over some historical period (5
weeks or 200 days)
When current price crosses the average a
trading signal occurs
Bullish signal when the current price rises
above the moving average
Bearish sign when the current price falls below
the moving average

Moving Average: Average over a

given interval,
continuously
updated.
Price
And
M.A.

Price

Bullish Signal

Bearish Signal

Moving Average
Averaging interval

Time

Charts
Point and figure charts
Bar charts
Chart patterns:
- V formation

 Tops and Bottoms

Double Top and Bottom

 Head and Shoulders

 Inverted Head and Shoulders

 Triangles: symmetrical, ascending and

descending
Symmetrical triangle

 Flags

Thank you