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Technical analysis

(Analysis of State Bank of India)


Rishikesh R Kshirsagar
Masters in Financial Services Management (M.F.S.M)
Academic Year !"##$#!
%nder the &'idance of
(rof. Pankaj Bhattacharjee
University of Mumbais
Alkesh Dinesh Mody Institute For
Financial and Management Studies
#
Declaration
I) Mr. Rishikesh Ravindra Kshirsagar *YMFSM St'dent of
Alkesh +inesh Mody Instit'te for Financial and
Management St'dies) here,y declare that I have
com-leted the -ro.ect titled *echnical analysis of State
Bank of India d'ring the academic year !"##$!"#!.
*he re-ort /ork is original and the information0data
incl'ded in the re-ort is tr'e to the ,est of my
Kno/ledge. +'e credit is e1tended on the /ork of
2iterat're0Secondary S'rvey ,y endorsing it in the
Bi,liogra-hy as -er -rescri,ed format.


Signat're of the St'dent
/ith +ate
Rishikesh Ravindra
Kshirsagar
!
University of Mumbais
Alkesh Dinesh Mody Institute For
Financial and Management Studies
Certifcate
I) (rofessor Pankaj Bhattacharjee here,y certify that
Mr. Rishikesh Ravindra Kshirsagar) *YMFSM St'dent of
Alkesh +inesh Mody Instit'te for Financial and
Management St'dies has com-leted a -ro.ect titled
*echnical analysis of State Bank of India in the
academic year !"##$!"#!. *he /ork of the st'dent is
original and the information incl'ded in the -ro.ect is
tr'e to the ,est of my Kno/ledge.
Signat're of &'ide /ith +ate
(rof. (anka. Bhattachar.ee
3
TAB! "F #"$T!$TS
S%$"% &A'TI#UA'S &A(!
$"%
1. Introduction 5
2. Technical analysis 8
3 Dow Theory 10
4 Drawbacks / limitations o technical analysis 15
5 Tools ! Instruments in technical analysis 18
" #hart Ty$es 20
% Trends In Technical &nalysis 3%
8 'hy (olume Is Im$ortant 45
) #hart *atterns 48
10 Technical Indicators %3
11 Technical analysis o +,tate -ank o India. 8%
12 -iblio/ra$hy )5
4
I$T'"DU#TI"$)*
+,ATS T,IS !-UIT. A$A.SIS/
*roessional in0estor will make more money ! less loss than1 who
let their heart rule. Their head eliminate all emotions or decision makin/.
-e ruthless ! calculatin/1 you are out to make money. Decision should be
based on actual mo0ement o share $rice measured both in money !
$ercenta/e term ! nothin/ else. 2reed must be a0oided
*atience may be a 0irtue1 but im$atience can re3uently be
$roitable.
In !0uity Analysis antici$ated /rowth1 calculations are based on
considered 4&#T, ! not on 56*7. 73uity analysis is basically a
combination o two inde$endent analyses1 namely fundamental analysis
1 Technical analysis% The sub8ect o 73uity analysis1 i.e. the attem$t to
determine uture share $rice mo0ement ! its reliability by reerences to
historical data is a 0ast one1 co0erin/ many as$ect rom the calculatin/
0arious FI$A$#IA 'ATI"S1 $lottin/ o #,A'TS to e9tremely
so$histicated indicators.
& /eneral in0estor can a$$ly the $rinci$les by usin/ the sim$lest o
tools: $ocket calculator1 $encil1 ruler1 chart $a$er ! your cautious mind1
watchul attention. It should be $ointed out that1 this e3uity analysis does
not discuss how to buy ! sell shares1 but does discuss a method which
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enables the in0estor to arri0e at buyin/ ! sellin/ decision. The inancial
analysts always need yardsticks to e0aluate the eiciency !
$erormances o any business unit at the time o in0estment. 4undamental
analysis is useul in lon/ term in0estment decision. In 4undamental
analysis a com$any s /oodwill1
It;s $erormances1 li3uidity1 le0era/e1 turno0er1 $roitability ! inancial
health was checked ! analysis with the hel$ o ratio analysis or the
$ur$ose o lon/ term successul in0estment.
Technical analysis reers to the study o market /enerated data like
$rices ! 0olume to determine the uture direction o $rices mo0ements.
Technical analysis mainly seeks to $redict the short term $rice
tra0els. The ocus o technical analysis is mainly on the internal market
data1 i.e. $rices ! 0olume data. It a$$eals mainly to short term traders.
It is the oldest a$$roach to e3uity in0estment datin/ back to the late
1)th century.
Assum2tions for the !0uity Analysis%
1. 'orks only in normal share<market conditions with /reat reliability1 it
also works in abnormal share<market conditions1 but with low reliability.
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2. 73uity analysis is $urely based on the I=(7,T>7=T *5I?6,6*5@1
so the in0estment ob8ect has 0ital im$ortance associated to return alon/
with risk.
3. #ash mana/ement /ets the ma/nitude role1 because the scenario o
e3uity analysis is re0ol0in/ around the term money
4. *ortolio mana/ement1 risk mana/ement was u$ to the in0estor s
knowled/e.
5. #a$ital market trend is always a riend1 whether it is short run or lon/
run.
". @ou are buyin/ stock ! not com$anies1 so don t are curious or $anic to
do
*ost<mortem o com$anies; $erormances
%. 5istory re$eats: in0estors ! s$eculators react the same way to the
same ty$es o e0ents homo/eneously.
8. #a$ital market has a ty$ical market $sycholo/y alon/ with other issues
likeA $erce$tions1 the crowd (s the indi0idual1 tradition s ! trust.
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). &n indi0idual $erce$tions about the in0estment return ! associated
risk may dier rom indi0idual to indi0idual.
10. &lthou/h the e3uity analysis is art as well as sciences so1 it also has
some
79ce$tions
!-UIT. A$A.SIS


FU$DAM!$TA T!#,$I#A
A$A.SIS A$A.SIS
Technical analysis)*
Technical analysis refers to the study of market generated data
like prices & volume to determine the future direction of prices
movements.
Technical analysis mainly seeks to $redict the short term $rice
tra0els. It is im$ortant criteria or selectin/ the com$any to in0est. It also
$ro0ides the base or decision<makin/ in in0estment. The one o the most
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re3uently used yardstick to check ! analyBe underlyin/ $rice $ro/ress.
4or that matter a 0erity o tools was consider.
This Technical analysis is hel$ul to /eneral in0estor in many
ways. It $ro0ides im$ortant ! 0ital inormation re/ardin/ the current
$rice $osition o the com$any.
Technical analysis in0ol0es the use o 0arious methods or
chartin/1 calculatin/ ! inter$retin/ /ra$h ! chart to assess the
$erormances ! status o the $rice. It is the tool o inancial analysis1
which not only studies but also relectin/ the numerical ! /ra$hical
relationshi$ between the im$ortant inancial actors.
The ocus o technical analysis is mainly on the internal market
data1 i.e. $rices ! 0olume data. It a$$eals mainly to short term traders. It
is the oldest a$$roach to e3uity in0estment datin/ back to the late 1)th
century.
It uses charts and com$uter $ro/rams to study the stock;s tradin/
0olume and $rice mo0ements in the ho$e o identiyin/ a trend.
In act the decision made on the basis o technical analysis is done only
&ter inerrin/ a trend and 8ud/in/ the uture mo0ement o the stock on
the basis o the trend. Technical &nalysis assumes that the market is
eicient and the $rice has already taken into consideration the other
actors related to the com$any and the industry. It is because o this
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assum$tion that many think technical analysis is a tool1 which is eecti0e
or short<term in0estin/.
D"+ T,!"'.)*
#harles Dow who was editor o 'all ,treet Cournal in
1)00 is known or the most im$ortant theory de0elo$ed by
him with technical indicators. In act1 the theory /ained so
much si/niicance that the theory was named ater him.
The Dow Theory has been urther de0elo$ed by other
technical analysts and it orms the basis o the technician;s
theory.
The theory $redicts trends in the market or indi0idual and
total e9istin/ securities. It also shows re0ersals in stock
$rices.
&ccordin/ to DDow theory;1 the market always has three
mo0ements and the mo0ements are simultaneous in the
nature. These mo0ements may be described as:<
The narrow mo0ement which occurs rom day to day.
#"
The short swin/ which usually mo0es or short time like
two weeks and e9tends u$ to a monthA this mo0ement can
be called a short term mo0ement1 and
The third mo0ement is also the main mo0ement and it
co0ers or years in its duration.
&ccordin/ to the ty$e o mo0ements1 they ha0e been /i0en
s$ecial names.
The narrow mo0ement is called 3fluctuations the short
swin/ is better known as 3secondary movements and the
main mo0ement is also called the 32rimary trends%
=arrow mo0ements are called 3fluctuations% ,econdary
mo0ements are those which last only or a short while and
they are also known as 4corrections5% *rimary trends are1
thereore1 the main mo0ement in the stock market. It is
also called 3Bears5 and 3Bulls5 market%
&ccordin/ to the Dow Theory1 the $rice mo0ements in a
market can be identiied by means o a line<chart.
##
In this chart the technical analyst should $lot the $rice o
the share. 'ith it1 he should also mark the market a0era/e
e0ery day.
This would hel$ in identiyin/ the $rimary and secondary
mo0ements.
Dow theorists belie0e in Dmomentum;1 which1 accordin/ to
them1 kee$s the $rice mo0in/ in the same direction.
They belie0e in $rimary trends1 which accordin/ to them
are momentum or bear and bull markets. The momentum
will carry the $rices urther but momentum o $rimary
trend will be halted by the terminolo/y used by technical
analysts called Dsu$$ort areas; and Dresistance areas;.
#riticism of Do6 Theory
The Dow Theory is sub8ect to 0arious limitations in actual
$ractice.
Dow has de0elo$ed this theory to de$ict the /eneral trend
o the market but not with the intention o $ro8ectin/ the
#!
uture trend or to dia/nose the buy and sell si/nals in the
market.
These a$$lications o the Dow Theory ha0e come in the
li/ht o analytical studies o inancial analysts.
This theory is criticiBed on the /round that it is too
sub8ecti0e and based on historical inter$retationA it is not
inallible as it de$ends on the inter$retati0e ability o the
analyst.
The results o this theory do not also /i0e meanin/ul and
conclusi0e e0idence o any action to be taken in terms o
buy and sell o$erations.
#andlestick #harting
The candle is com$rised o two $arts1 the body and the
shadows. The body encom$asses the o$en and closin/
$rice or the $eriod. The candle body is black i the
security closed below the o$en1 and white i the close was
hi/her than the o$en or the $eriod. The candlestick
shadow encom$asses the intra $eriod hi/h and low.
#3
,istory of Technical Analysis)
Technical &nalysis as a tool o in0estment or the a0era/e in0estor
thri0ed in the late nineteenth century when #harles Dow1 then editor o
the 'all ,treet Cournal1 $ro$osed the Dow Theory. 5e reco/niBed that the
mo0ement is caused by the action/reaction o the $eo$le dealin/ in stocks
rather than the news in itsel.
Technical analysis is a method o e0aluatin/ securities by
analyBin/ the
,tatistics /enerated by market acti0ity1 such as $ast $rices and 0olume.
Technical analysts do not attem$t to measure a securityEs intrinsic 0alue1
but instead use charts and other tools to identiy $atterns that can su//est
uture acti0ity. Cust as there are many in0estment styles on the
undamental side1
There are also many dierent ty$es o technical traders. ,ome rely on
chart $atternsA others use technical indicators and oscillators1 and most
use some combination o the two. In any case1 technical analystsE
e9clusi0e use o historical $rice and 0olume data is what se$arates them
rom their undamental counter$arts. Fnlike undamental analysts1
technical analysts donEt care whether a stock is under0alued the only
#4
thin/ that matters is a securityEs $ast tradin/ data and what inormation
this data can $ro0ide about where the ,ecurity mi/ht mo0e in the uture.
Basic 2remises of technical analysis)
7% >arket $rices are determined by the interaction o su$$ly ! demand
orces.
8% ,u$$ly ! demand are inluenced by 0ariety o su$$ly ! demand
ailiated
4actors both rational ! irrational
9% These include undamental actors as well as $sycholo/ical actors.
:% -arrin/ minor de0iations stock $rices tend to mo0e in airly $ersistent
trends.
;% ,hits in demand ! su$$ly brin/ about chan/e in trends.
<% This shit s can be detected with the hel$ o charts o manual !
com$uteriBed action1 because o the $ersistence o trends ! $atterns
analysis o $ast market data can be used to $redict uture $rices
beha0iours.
#5
Dra6backs = limitations of technical analysis)
1. Technical analysis does not able to e9$lain the reBones behind the
em$loyment or selection o s$eciic tool o Technical analysis.
2. The technical analysis ailed to si/nal an u$trend or downtrend in time.
3. The technical analysis must be a sel deeatin/ $ro$osition. &s more !
more $eo$le use1 em$loy it the 0alue o such analysis trends to reduce.
+hy 6e use T!#,$I#A A$A.SIS/
1G Technical analysis $ro0ides inormation on the best entry and
79it $oints or a trade.
2G 6n a chart1 the trader can see where momentum is risin/1 a
Trend is ormin/1 a $rice is di$$in/ or other e0ents are de0elo$in/ that
show the best entry $oint and time or the most $roitable trade. 'ith the
constant mo0ement o 0arious currencies a/ainst each other in the 4ore9
market1 most
Traders will ocus on usin/ technical indicators to ind and $lace their
Trades
IS T!#,$I#A A$A.SIS DIFFI#UT/
1G Technical analysis is not diicult1 but it re3uires studyin/
Dierent ty$es o charts such as the hourly or daily charts1 knowin/
which technical indicators to use and how to use them.
2G #om$uters and the Internet ha0e made this $rocess much easier.
#6
>ost brokers $ro0ide basic charts and technical indicators or ree or at a
0ery low cost.
3G 6ne way to a0oid /ettin/ rustrated by all the lines1 colours1 and
2ra$hics is to ocus on usin/ only a ew indicators that will
*ro0ide you with the inormation needed. Try not to clutter your
#hart with too much inormation.
Fundamental vs% Technical Analysis
Technical analysis and undamental analysis are the two main
schools o thou/ht in the inancial markets. &s weE0e mentioned1
technical analysis looks at the $rice mo0ement o a security and uses this
data to $redict its uture $rice mo0ements. 4undamental analysis1 on the
other hand1 looks at economic actors1 known as undamentals.
4undamental analysis takes a relati0ely lon/<term a$$roach
to analyBin/ the market com$ared to technical analysis. 'hile
technical analysis can be used on a timerame o weeks1 days or
e0en minutes1 undamental analysis oten looks at data o0er a
number o years.
The future can be found in the 2ast
#7
I $rices are based on in0estor e9$ectations1 then knowin/ what a
security should sell or Hi.e.1 undamental analysisG becomes less
im$ortant than knowin/ what other in0estors e9$ect it to sell or. ThatEs
not to say that knowin/ what a security should sell or isnEt im$ortant<<it
is. -ut there is usually a airly stron/ consensus o a stockEs uture
earnin/s that the a0era/e in0estor cannot dis$ro0e.
Technical analysis is the $rocess o analyBin/ a securityEs historical
$rices in an eort to determine $robable uture $rices. This is done by
com$arin/ current $rice action Hi.e.1 current e9$ectationsG with
com$arable historical $rice action to $redict a reasonable outcome. The
de0out technician mi/ht deine this $rocess as the act that history re$eats
itsel while others would suice to say that we should learn rom the $ast.
Usually the follo6ing tools 1 instruments are used to
do the technical analysis)
&rice Fields
Technical analysis is based almost entirely on the analysis o $rice and
0olume. The ields which deine a securityEs $rice and 0olume are
e9$lained below.
#8
"2en < This is the $rice o the irst trade or the $eriod He./.1 the irst
trade o the dayG. 'hen analyBin/ daily data1 the 6$en is es$ecially
im$ortant as it is the consensus $rice ater all interested $arties were able
to Islee$ on it.I
,igh < This is the hi/hest $rice that the security traded durin/ the $eriod.
It is the $oint at which there were more sellers than buyers Hi.e.1 there are
always sellers willin/ to sell at hi/her $rices1 but the 5i/h re$resents the
hi/hest $rice buyers were willin/ to $ayG.
o6 < This is the lowest $rice that the security traded durin/ the $eriod.
It is the $oint at which there were more buyers than sellers Hi.e.1 there are
always buyers willin/ to buy at lower $rices1 but the ?ow re$resents the
lowest $rice sellers were willin/ to acce$tG.
#lose < This is the last $rice that the security traded durin/ the $eriod.
Due to its a0ailability1 the #lose is the most oten used $rice or analysis.
The relationshi$ between the 6$en Hthe irst $riceG and the #lose Hthe last
$riceG are considered si/niicant by most technicians. This relationshi$ is
em$hasiBed in candlestick charts.
>olume < This is the number o shares Hor contractsG that were traded
durin/ the $eriod. The relationshi$ between $rices and 0olume He./.1
increasin/ $rices accom$anied with increasin/ 0olumeG is im$ortant.
#9
"2en Interest < This is the total number o outstandin/ contracts Hi.e.1
those that ha0e not been e9ercised1 closed1 or e9$iredG o a uture or
o$tion. 6$en interest is oten used as an indicator.
Bid < This is the $rice a market maker is willin/ to $ay or a security
Hi.e.1 the $rice you will recei0e i you sellG.
Ask < This is the $rice a market maker is willin/ to acce$t Hi.e.1 the $rice
you will $ay to buy the securityG.
&rice Styles ?#harts Ty2es@
*rice in a chart can be dis$layed in our styles:
1. -ar #hart.
2. ?ine #hart.
3. #andlestick #hart.
4. *oint and 4i/ure #harts
1) Bar #harts )
The hi/hs and lows o a orei/n currency are $lotted in a dia/ram and the
$oints are 8oined with 0ertical lines HbarsG. & small horiBontal tick to the
let denotes the o$enin/ le0el while a small horiBontal tick to the ri/ht
re$resents the closin/ $rice o each inter0al.
!"
2G ?ine #hart.
It /i0es the detailed inormation about e0ery as$ect.
The e9chan/e rates or each time $eriod are $lotted in a dia/ram and the
$oints are 8oined. *rices on the y<a9is1 time on the 9<a9is.
The line chart chooses or e9am$le the closin/ $rice o consecuti0e time
$eriods1 but can also work with daily1 oicial i9in/s.
!#
The relati0ely easy handlin/ o line charts is a /reat ad0anta/e. ?ine
charts do not show $rice mo0ements within a time $eriod. This can be a
$roblem because im$ortant inormation or e9chan/e rate analysis can be
lost. This *roblem was remedied with the de0elo$ment o bar charts that
re$resent a more so$histicated orm o line chart.
3G #andlestick #hart.
& candlestick is black i the closin/ $rice is lower than the o$enin/ $rice.
& candlestick is white i the closin/ $rice is hi/her than the o$enin/ $rice.
!!
!3
In the 1"00s1 the Ca$anese de0elo$ed a method o technical analysis to
analyBe the $rice o rice contracts. This techni3ue is called candlestick
chartin/. ,te0en =ison is credited with $o$ulariBin/ candlestick chartin/
and has become reco/niBed as the leadin/ e9$ert on their inter$retation.
#andlestick charts dis$lay the o$en1 hi/h1 low1 and closin/ $rices in a
ormat similar to a modern<day bar chart1 but in a manner that e9tenuates
the relationshi$ between the o$enin/ and closin/ $rices. #andlestick
#harts are sim$ly a new way o lookin/ at $rices1 they donEt in0ol0e any
calculations. -ecause candlesticks dis$lay the relationshi$ between the
o$en1 hi/h1 low1 and closin/ $rices1 they cannot be dis$layed on securities
that only ha0e closin/ $rices1 nor were they intended to be dis$layed on
securities that lack o$enin/ $rices.
The inter$retation o candlestick charts is based $rimarily on $atterns.
The most $o$ular $atterns are e9$lained below.
Bullish &atterns
7@ ong 6hite ?em2ty@ line% This is a bullish line. It occurs when
$rices o$en near the low and close si/niicantly hi/her near the
$eriodEs hi/h.
!4
8@ ,ammer% This is a bullish line i it occurs ater a si/niicant
downtrend. I the line occurs ater a si/niicant u$<trend1 it is called
a 5an/in/ >an. & 5ammer is identiied by a small real body Hi.e.1
a small ran/e between the o$en and closin/ $ricesG and a lon/
lower shadow Hi.e.1 the low is si/niicantly lower than the o$en1
hi/h1 and loseG. The body can be em$ty or illed<in.
9@ &iercing line% This is a bullish $attern and the o$$osite o a dark
cloud co0er. The irst line is a lon/ black line and the second line is
a lon/ white line. The second line o$ens lower than the irst lineEs
low1 but it closes more than halway abo0e the irst lineEs real body.
!5
:@ Bullish engulfing lines% This $attern is stron/ly bullish i it occurs
ater a si/niicant downtrend Hi.e.1 it acts as a re0ersal $atternG. It
occurs when a small bearish Hilled<inG line is en/uled by a lar/e
bullish Hem$tyG line.
;@ Morning star% This is a bullish $attern si/niyin/ a $otential
bottom. The IstarI indicates a $ossible re0ersal and the bullish
Hem$tyG line conirms this. The star can be em$ty or illed<in.
!6
<@ Bullish doAi star% & IstarI indicates a re0ersal and a do8i indicates
indecision. Thus1 this $attern usually indicates a re0ersal ollowin/
an indecisi0e $eriod. @ou should wait or a conirmation He./.1 as in
the mornin/ star1 abo0eG beore tradin/ a do8i star. The irst line can
be em$ty or illed in.
Bearish &atterns
!7
7@ ong black ?filled*in@ line% This is a bearish line. It occurs when
$rices o$en near the hi/h and close si/niicantly lower near the
$eriodEs low.
8@ ,anging Man% These lines are bearish i they occur ater a
si/niicant u$trend. I this $attern occurs ater a si/niicant
downtrend1 it is called a 5ammer. They are identiied by small real
bodies Hi.e.1 a small ran/e between the o$en and closin/ $ricesG and
a lon/ lower shadow Hi.e.1 the low was si/niicantly lower than the
o$en1 hi/h1 and closeG. The bodies can be em$ty or illed<in.
!8
9@ Dark cloud cover% This is a bearish $attern. The $attern is more
si/niicant i the second lineEs body is below the centre o the
$re0ious lineEs body Has illustratedG.
:@ Bearish engulfing lines% This $attern is stron/ly bearish i it
occurs ater a si/niicant u$trend Hi.e.1 it acts as a re0ersal $atternG.
It occurs when a small bullish Hem$tyG line is en/uled by a lar/e
bearish Hilled<inG line.
!9
;@ !vening star% This is a bearish $attern si/niyin/ a $otential to$.
The IstarI indicates a $ossible re0ersal and the bearish Hilled<inG line
conirms this. The star can be em$ty or illed in.
<@ DoAi star% & star indicates a re0ersal and a do8i indicates indecision.
Thus1 this $attern usually indicates a re0ersal ollowin/ an indecisi0e
$eriod. @ou should wait or a conirmation He./.1 as in the e0enin/ star
illustrationG beore tradin/ a do8i star.
3"
B@ Shooting star% This $attern su//ests a minor re0ersal when it
a$$ears ater a rally. The starEs body must a$$ear near the low $rice
and the line should ha0e a lon/ u$$er shadow.
'eversal &atterns
7@ ong*legged doAi% This line oten si/niies a turnin/ $oint. It occurs
when the o$en and close are the same1 and the ran/e between the hi/h
and low is relati0ely lar/e.
3#
8@ Dragon*fly doAi% This line also si/niies a turnin/ $oint. It occurs
when the o$en and close are the same1 and the low is si/niicantly
lower than the o$en1 hi/h1 and closin/ $rices.
9@ (ravestone doAi% This line also si/niies a turnin/ $oint. It occurs
when the o$en1 close1 and low are the same1 and the hi/h is
si/niicantly hi/her than the o$en1 low1 and closin/ $rices.
3!
:@ Star% ,tars indicate re0ersals. & star is a line with a small real body
that occurs ater a line with a much lar/er real body1 where the real
bodies do not o0erla$. The shadows may o0erla$.
;@ DoAi star% & star indicates a re0ersal and a do8i indicates indecision.
Thus1 this $attern usually indicates a re0ersal ollowin/ an indecisi0e
$eriod. @ou should wait or a conirmation He./.1 as in the e0enin/ star
illustrationG beore tradin/ a do8i star.
$eutral &atterns
33
7@ S2inning to2s% These are neutral lines. They occur when the
distance between the hi/h and low1 and the distance between the
o$en and close1 are relati0ely small.
8@ DoAi% This line im$lies indecision. The security o$ened and
closed at the same $rice. These lines can a$$ear in se0eral
dierent $atterns. Double do8i lines Htwo ad8acent do8i linesG
im$ly that a orceul mo0e will ollow a breakout rom the
current indecision.
34
:@ &oint And Figure #harts
The $oint and i/ure chart is not well known or used by the
a0era/e in0estor but it has had a lon/ history o use datin/ back to the
irst technical traders. This ty$e o chart relects $rice mo0ements and is
not as concerned about time and 0olume in the ormulation o the $oints.
The $oint and i/ure chart remo0es the noise1 or insi/niicant $rice
mo0ements1 in the stock1 which can distort tradersE 0iews o the $rice
trends. These ty$es o charts also try to neutraliBe the skewin/ eect that
time has on chart analysis.
'hen irst lookin/ at a $oint and i/ure chart1 you will notice a series o
Js and 6s. The Js re$resent u$ward $rice trends and the 6s re$resent
downward $rice trends. There are also numbers and letters in the chartA
35
these re$resent months1 and /i0e in0estors an idea o the date. 7ach bo9
on the chart re$resents the $rice scale1 which ad8usts de$endin/ on the
$rice o the stock: the hi/her the stockEs $rice the more each bo9
re$resents. 6n most charts where the $rice is between K20 and K1001 a
bo9 re$resents K11 or 1 $oint or the stock. The other critical $oint o a
$oint and i/ure chart is the re0ersal criteria. This is usually set at three
but it can also be set accordin/ to the chartistEs discretion. The re0ersal
criteria set how much the $rice has to mo0e away rom the hi/h or low in
the $rice trend to create a new trend or1 in other words1 how much the
$rice has to mo0e in order or a column o Js to become a column o 6s1
or 0ice 0ersa. 'hen the $rice trend has mo0ed rom one trend to another1
it shits to the ri/ht1 si/nallin/ a trend chan/e.
Summary of charts
36
37
T'!$DS I$ T!#,$I#A A$A.SIS
The Use of Trends
6ne o the most im$ortant conce$ts in technical analysis is that o
trend. The meanin/ in inance isnEt all that dierent rom the
/eneral deinition o the term < a trend is really nothin/ more than
the /eneral direction in which a security or market is headed. Take
a look at the chart below:
Isn;t it hard to see that the trend is u$L 5owe0er1 itEs not always
this easy to see a trend:
38
There are lots o u$s and downs in this chart1 but there isnEt a clear
indication o which direction this security is headed.
A More Formal Definition
Fnortunately1 trends are not always easy to see. In other
words1 deinin/ a trend /oes well beyond the ob0ious. In any /i0en
chart1 you will $robably notice that $rices do not tend to mo0e in a
strai/ht line in any direction1 but rather in a series o hi/hs and
lows. In technical analysis1 it is the mo0ement o the hi/hs and
lows that constitutes a trend. 4or e9am$le1 an u$trend is classiied
as a series o hi/her hi/hs and hi/her lows1 while a downtrend is
one o lower lows and lower hi/hs.
39
It is an e9am$le o an u$trend. *oint 2 in the chart is the irst hi/h1 which
is determined ater the $rice alls rom this $oint. *oint 3 is the low that is
established as the $rice alls rom the hi/h. 4or this to remain an u$trend
each successi0e low must not all below the $re0ious lowest $oint or the
trend is deemed a re0ersal.
Ty2es of Trend
There are three ty$es o trend:
1. F$trend
2. Downtrend
3. ,ideways/5oriBontal Trends
&s the names im$ly1 when each successi0e $eak and trou/h is
hi/her1 itEs reerred to as an u$ward trend. I the $eaks and trou/hs are
/ettin/ lower1 itEs a downtrend. 'hen there is little mo0ement u$ or down
4"
in the $eaks and trou/hs1 itEs a sideways or horiBontal trend. I you want
to /et really technical1 you mi/ht e0en say that a sideways trend is
actually not a trend on its own1 but a lack o a well<deined trend in either
direction. In any case1 the market can really only trend in these three
ways: u$1 down or nowhere.
Trend engths
&lon/ with these three trend directions1 there are three trend
classiications. & trend o any direction can be classiied as a lon/<
term trend1 intermediate trend or a short<term trend. In terms o the
stock market1 a ma8or trend is /enerally cate/oriBed as one lastin/
lon/er than a year. &n intermediate trend is considered to last
between one and three months and a near<term trend is anythin/
less than a month. & lon/<term trend is com$osed o se0eral
intermediate trends1 which oten mo0e a/ainst the direction o the
ma8or trend. I the ma8or trend is u$ward and there is a downward
correction in $rice mo0ement ollowed by a continuation o the
u$trend1 the correction is considered to be an intermediate trend.
The short<term trends are com$onents o both ma8or and
intermediate trends. Take a look a 4i/ure 4 to /et a sense o how
these three trend len/ths mi/ht look.
4#
'hen analyBin/ trends1 it is im$ortant that the chart is constructed
to best relect the ty$e o trend bein/ analyBed. To hel$ identiy
lon/<term trends1 weekly charts or daily charts s$annin/ a i0e<year
$eriod are used by chartists to /et a better idea o the lon/<term
trend. Daily data charts are best used when analyBin/ both
intermediate and short<term trends. It is also im$ortant to
remember that the lon/er the trend1 the more im$ortant it isA or
e9am$le1 a one<month trend is not as si/niicant as a i0e<year
trend.
Trend ines
& trend line is a sim$le chartin/ techni3ue that adds a line to
a chart to re$resent the trend in the market or a stock. Drawin/ a
4!
trend line is as sim$le as drawin/ a strai/ht line that ollows a
/eneral trend. These lines are used to clearly show the trend and
are also used in the identiication o trend re0ersals.
&n u$ward trend line is drawn at the lows o an u$ward trend.
This line re$resents the su$$ort the stock has e0ery time it mo0es
rom a hi/h to a low. =otice how the $rice is $ro$$ed u$ by this
su$$ort. This ty$e o trend line hel$s traders to antici$ate the $oint
at which a stockEs $rice will be/in mo0in/ u$wards a/ain.
,imilarly1 a downward trend line is drawn at the hi/hs o the
downward trend. This line re$resents the resistance le0el that a
stock aces e0ery time the $rice mo0es rom a low to a hi/h.
43
#hannels
& channel1 or channel lines1 is the addition o two $arallel
trend lines that act as stron/ areas o su$$ort and resistance. The
u$$er trend line connects a series o hi/hs1 while the lower trend
line connects a series o lows. & channel can slo$e u$ward1
downward or sideways but1 re/ardless o the direction1 the
inter$retation remains the same. Traders will e9$ect a /i0en
security to trade between the two le0els o su$$ort and resistance
until it breaks beyond one o the le0els1 in which case traders can
e9$ect a shar$ mo0e in the direction o the break. &lon/ with
clearly dis$layin/ the trend1 channels are mainly used to illustrate
im$ortant areas o su$$ort and resistance.
44
& descendin/ channel on a stock chartA the u$$er trend line has
been $laced on the hi/hs and the lower trend line is on the lows.
The $rice has bounced o o these lines se0eral times1 and has
remained ran/e<bound or se0eral months. &s lon/ as the $rice
does not all below the lower line or mo0e beyond the u$$er
resistance1 the ran/e<bound downtrend is e9$ected to continue.
The Im2ortance of Trend
It is im$ortant to be able to understand and identiy trends so that
you can trade with rather than a/ainst them. Two im$ortant sayin/s in
technical analysis are Ithe trend is your riendI and IdonEt buck the
trend1I illustratin/ how im$ortant trend analysis is or technical traders
IM&"'TA$#! "F >"UM!)*
+hat Is >olume/
(olume is sim$ly the number o shares or contracts that
trade o0er a /i0en $eriod o time1 usually a day. The hi/her the
0olume the more acti0e the security. To determine the mo0ement o
45
the 0olume Hu$ or downG1 chartists look at the 0olume bars that can
usually be ound at the bottom o any chart. (olume bars illustrate
how many shares ha0e traded $er $eriod and show trends in the
same way that $rices do.
+hy >olume Is Im2ortant/
(olume is an im$ortant as$ect o technical analysis
because it is used to conirm trends and chart $atterns. &ny $rice
mo0ement u$ or down with relati0ely hi/h 0olume is seen as a
stron/er1 more rele0ant mo0e than a similar mo0e with weak
0olume. ,ay1 or e9am$le1 that a stock 8um$s 5M in one tradin/ day
ater bein/ in a lon/ downtrend. Is this a si/n o a trend re0ersalL
46
This is where 0olume hel$s traders. I 0olume is hi/h durin/ the
day relati0e to the a0era/e daily 0olume1 it is a si/n that the
re0ersal is $robably or real. 6n the other hand1 i the 0olume
is below a0era/e1 there may not be enou/h con0iction to su$$ort a
true trend re0ersal. (olume should mo0e with the trend. I $rices
are mo0in/ in an u$ward trend1 0olume should increase Hand 0ice
0ersaG. I the $re0ious relationshi$ between 0olume and $rice
mo0ements starts to deteriorate1 it is usually a si/n o weakness in
the trend. 4or e9am$le1 i the stock is in an u$trend but the u$
tradin/ days are marked with lower 0olume1 it is a si/n that the
trend is startin/ to lose its le/s and may soon end. 'hen 0olume
tells a dierent story1 it is a case o di0er/ence1 which reers to a
contradiction between two dierent indicators. The sim$lest
e9am$le o di0er/ence is a clear u$ward trend on declinin/
0olume.
>olume and #hart &atterns
The other use o 0olume is to conirm chart $atterns.
*atterns such as head and shoulders1 trian/les1 la/s and other $rice
$atterns can be conirmed with 0olume1 a $rocess which weEll
describe in more detail later in this tutorial. In most chart $atterns1
there are se0eral $i0otal $oints that are 0ital to what the chart is
47
able to con0ey to chartists. -asically1 i the 0olume is not there to
conirm the $i0otal moments o a chart $attern1 the 3uality o the
si/nal ormed by the $attern is weakened.
>olume &recedes &rice
&nother im$ortant idea in technical analysis is that $rice is
$receded by 0olume. (olume is closely monitored by technicians and
chartists to orm ideas on u$comin/ trend re0ersals. I 0olume is startin/
to decrease in an u$trend1 it is usually a si/n that the u$ward run is about
to end. =ow that we ha0e a better understandin/ o some o the im$ortant
actors o technical analysis1 we can mo0e on to charts1 which hel$ to
identiy tradin/ o$$ortunities in $rices mo0ements.
#,A'T &ATT!'$S)*
& chart $attern is a distinct ormation on a stock chart that creates
a tradin/ si/nal1 or a si/n o uture $rice mo0ements. #hartists use these
$atterns to identiy current trends and trend re0ersals and to tri//er buy
and sell si/nals.
In the irst section o this tutorial1 we talked about the three
assum$tions o technical analysis1 the third o which was that in technical
analysis1 history re$eats itsel. The theory behind chart $atterns is based
48
on this assum$tion. The idea is that certain $atterns are seen many times1
and that these $atterns si/nal a certain hi/h $robability mo0e in a stock.
-ased on the historic trend o a chart $attern settin/ u$ a certain $rice
mo0ement1 chartists look or these *atterns to identiy tradin/
o$$ortunities. 'hile there are /eneral ideas and com$onents to e0ery
chart $attern1 there is no chart $attern that will tell you with 100M
certainty where a security is headed. This creates some leeway and debate
as to what a /ood $attern looks like1 and is a ma8or reason why chartin/ is
oten seen as more o an art than a science. There are two ty$es o
$atterns within this area o technical analysis1 re0ersal and continuation.
& re0ersal $attern si/nals that a $rior trend will re0erse u$on com$letion
o the $attern. & continuation $attern1 on the other hand1 si/nals that a
trend will continue once the $attern is com$lete. These $atterns can be
ound o0er charts o any timerame. In this section1 we will re0iew some
o the more $o$ular chart $atterns.
7% ,ead And Shoulders
This is one o the most $o$ular and reliable chart $atterns in
technical analysis. 5ead and shoulders is a re0ersal chart $attern that
49
when ormed1 si/nals that the security is likely to mo0e a/ainst the
$re0ious trend. &s you can see1 there are two 0ersions o the head and
shoulders chart $attern. 5ead and shoulders to$ Hshown on the letG is a
chart $attern that is ormed at the hi/h o an u$ward mo0ement and
si/nals that the u$ward trend is about to end. 5ead and shoulders bottom1
also known as in0erse head and shoulders Hshown on the ri/htG is the
lesser known o the two1 but is used to si/nal a re0ersal in a downtrend.
CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC
CCC
5"
-oth o these head and shoulders $atterns are similar in that there are our
main $arts: two shoulders1 a head and a neckline. &lso1 each indi0idual
head and shoulder is com$rised o a hi/h and a low. 4or e9am$le1 in the
head and shoulders to$ ima/e shown on the let side1 the let shoulder is
made u$ o a hi/h ollowed by a low. In this $attern1 the neckline is a
le0el o su$$ort or resistance. Nemember that an u$ward trend is a $eriod
o successi0e risin/ hi/hs and risin/ lows. The head and shoulders chart
$attern1 thereore1 illustrates a weakenin/ in a trend by showin/ the
deterioration in the successi0e mo0ements o the hi/hs and lows.
8% #u2 and ,andle
a cu$ and handle chart is a bullish continuation $attern in which the
5#
u$ward trend has $aused but will continue in an u$ward direction once
the $attern is conirmed.
The $rice $attern orms what looks like a cu$1 which is $receded by an
u$ward trend. The handle ollows the cu$ ormation and is ormed by a
/enerally downward/sideways mo0ement in the securityEs $rice. 6nce the
$rice mo0ement $ushes abo0e the resistance lines ormed in the handle1
the u$ward trend can continue.
9% Double To2s and Bottoms
This chart $attern is another well<known $attern that si/nals a trend
re0ersal < it is considered to be one o the most reliable and is commonly
used. These $atterns are ormed ater a sustained trend and si/nal to
chartists that the trend is about to re0erse. The $attern is created when a
5!
$rice mo0ement tests su$$ort or resistance le0els twice and is unable to
break throu/h. This $attern is oten used to si/nal intermediate and lon/<
term trend re0ersals.

A double to2 2attern is sho6n on the leftD 6hile a double bottom
2attern is sho6n on the right% In the case o the double to$ $attern1 the
$rice mo0ement has twice tried to mo0e abo0e a certain $rice le0el. &ter
two unsuccessul attem$ts at $ushin/ the $rice hi/her1 the trend re0erses
and the $rice heads lower. In the case o a double bottom Hshown on the
ri/htG1 the $rice mo0ement has tried to /o lower twice1 but has ound
su$$ort each time. &ter the second bounce o o the su$$ort1 the security
enters a new trend and heads u$ward.
:% Triangles
53
Trian/les are some o the most well<known chart $atterns used in
technical analysis. The three ty$es o trian/les1 which 0ary in
construct and im$lication1 are the symmetrical trian/le1 ascendin/
and descendin/ trian/le. These chart $atterns are considered to last
anywhere rom a cou$le o weeks to se0eral months.
The symmetrical is a $attern in which two trend lines con0er/e toward
each other. This $attern is neutral in that a breakout to the u$side or
downside is a conirmation o a trend in that direction. In an ascendin/
trian/le1 the u$$er trend line is lat1 while the bottom trend line is u$ward
slo$in/. This is /enerally thou/ht o as a bullish $attern in which chartists
look or an u$side breakout. In a descendin/ trian/le1 the lower trend line
54
is lat and the u$$er trend line is descendin/. This is /enerally seen as a
bearish $attern where chartists look or a downside breakout.
;% Flag and &ennants
These two short<term chart $atterns are continuation $atterns that are
ormed when there is a shar$ $rice mo0ement ollowed by a /enerally
sideways $rice mo0ement. This $attern is then com$leted u$on another
shar$ $rice mo0ement in the same direction as the mo0e that started the
trend. The $atterns are /enerally thou/ht to last rom one to three weeks.
There is little dierence between a $ennant and a la/. The main
dierence between these $rice mo0ements can be seen in the middle
section o the chart $attern. In a $ennant1 the middle section is
characteriBed by con0er/in/ trend lines1 much like what is seen in a
symmetrical trian/le. The middle section on the la/ $attern1 on the other
hand1 shows a channel $attern1 with no con0er/ence between the trend
55
lines. In both cases1 the trend is e9$ected to continue when the $rice
mo0es abo0e the u$$er trend line
<% Tri2le To2s and Bottoms
Tri$le to$s and tri$le bottoms are another ty$e o re0ersal chart $attern in
chart analysis. These are not as $re0alent in charts as head and shoulders
and double to$s and bottoms1 but they act in a similar ashion. These two
chart $atterns are ormed when the $rice mo0ement tests a le0el o
su$$ort or resistance three times and is unable to break throu/hA this
si/nals a re0ersal o the $rior trend.
#onusion can orm with tri$le to$s and bottoms durin/ the ormation o
the $attern because they can look similar to other chart $atterns. &ter the
irst two su$$ort/resistance tests are ormed in the $rice mo0ement1 the
$attern will look like a double to$ or bottom1 which could lead a chartist
to enter a re0ersal $osition too soon.
56
B% 'ounding Bottom
a roundin/ bottom1 also reerred to as a saucer bottom1 is a lon/<term
re0ersal $attern that si/nals a shit rom a downward trend to an u$ward
trend. This $attern is traditionally thou/ht to last anywhere rom se0eral
>onths to se0eral years.
& roundin/ bottom chart $attern looks similar to a cu$ and handle $attern
but without the handle. The lon/<term nature o this $attern and the lack
o a conirmation tri//er1 such as the handle in the cu$ and handle1 make
it a diicult $attern.
SU&&"'T A$D '!SISTA$#!)*
57
6nce you understand the conce$t o a trend1 the ne9t ma8or conce$t
is that o su$$ort and resistance. @ouEll oten hear technical analysts talk
about the on/oin/ battle between the bulls and the bears1 or the stru//le
between buyers HdemandG and sellers Hsu$$lyG. This is re0ealed by the
$rices a security seldom mo0es abo0e HresistanceG or below Hsu$$ortG.
,u$$ort is the $rice le0el throu/h which a stock or market seldom alls
Hillustrated by the blue arrowsG. Nesistance1 on the other hand1 is the $rice
le0el that a stock or market seldom sur$asses Hillustrated by the Ned
&rrowsG.
These su$$ort and resistance le0els are seen as im$ortant in terms
o market $sycholo/y and su$$ly and demand. ,u$$ort and resistance
58
le0els are the le0els at which a lot o traders are willin/ to buy the stock
Hin the case o a su$$ortG or sell it Hin the case o resistanceG. 'hen these
trend lines are broken1 the su$$ly and demand and the $sycholo/y behind
the stockEs mo0ements is thou/ht to ha0e shited1 in which case new
le0els o su$$ort and resistance likely be established.
'ole 'eversal
6nce a resistance or su$$ort le0el is broken1 its role is re0ersed. I
the $rice alls below a su$$ort le0el1 that le0el will become resistance. I
the $rice rises abo0e a resistance le0el1 it will oten become su$$ort. &s
the $rice mo0es $ast a le0el o su$$ort or resistance1 it is thou/ht that
su$$ly and demand has shited1 causin/ the breached le0el to re0erse its
role. 4or a true re0ersal to occur1 howe0er1 it is im$ortant that the $rice
make a stron/ mo0e throu/h either the su$$ort or resistance.
For eEam2leD as you can see1 the dotted line is shown as a le0el o
resistance that has $re0ented the $rice rom headin/ hi/her on two
$re0ious occasions H*oints 1 and 2G. 5owe0er1 once the resistance
59
is broken1 it becomes a le0el o su$$ort Hshown by *oints 3 and 4G
by $ro$$in/ u$ the $rice and $re0entin/ it rom headin/ lower
a/ain.
>any traders who be/in usin/ technical analysis ind this conce$t
hard to belie0e and donEt realiBe that this $henomenon occurs rather
re3uently1 e0en with some o the most well<known com$anies. 4or
e9am$le1 this $henomenon is e0ident on the 'al<>art ,tores Inc.
H'>TG chart between 2003 and 200". =otice how the role o the
K51 le0el chan/es rom a stron/ le0el o su$$ort to a le0el o
resistance.
In almost e0ery case1 a stock will ha0e both a le0el o su$$ort and a
le0el o resistance and will trade in this ran/e as it bounces
between these le0els.
The Im2ortance of Su22ort and 'esistance
6"
,u$$ort and resistance analysis is an im$ortant $art o trends
because it can be used to make tradin/ decisions and identiy when a
trend is re0ersin/.
,u$$ort and resistance le0els both test and conirm trends and
need to be monitored by anyone who uses technical analysis. &s lon/ as
the $rice o the share remains between these le0els o su$$ort and
resistance1 the trend is likely to continue. It is im$ortant to note1 howe0er1
that a break beyond a le0el o su$$ort or resistance does not always ha0e
to be a re0ersal.
4or e9am$le1 i $rices mo0ed abo0e the resistance le0els o an
u$ward trendin/ channel1 the trend ha0e accelerated1 not re0ersed. This
means that the $rice a$$reciation is e9$ected to be aster than it was in
the channel.
-ein/ aware o these im$ortant su$$ort and resistance $oints should
aect the way that you trade a stock. Traders should a0oid $lacin/ orders
at these ma8or $oints1 as the area around them is usually marked by a lot
o 0olatility. I you eel conident about makin/ a trade near a su$$ort or
resistance le0el1 it is im$ortant that you ollow this sim$le rule: do not
$lace orders directly at the su$$ort or resistance le0el. This is because in
many cases1 the $rice ne0er actually reaches the whole number1 but lirts
with it instead. ,o i youEre bullish on a stock that is mo0in/ toward an
6#
im$ortant su$$ort le0el1 do not $lace the trade at the su$$ort le0el.
Instead1 $lace it abo0e the su$$ort le0el1 but within a ew $oints. 6n the
other hand1 i you are $lacin/ sto$s or short sellin/1 set u$ your trade
$rice at or below the le0el o su$$ort.
M">I$( A>!'A(!S)*
>ost chart $atterns show a lot o 0ariation in $rice
mo0ement. This can make it diicult or traders to /et an idea o a
securityEs o0erall trend. 6ne sim$le method traders use to combat
this is to a$$ly mo0in/ a0era/es. & mo0in/ a0era/e is the a0era/e
$rice o a security o0er a set amount o time. -y $lottin/ a
securityEs a0era/e $rice1 the $rice mo0ement is smoothed out. 6nce
the day<to<day luctuations are remo0ed1 traders are better able to
identiy the true trend and increase the $robability that it will work
in their a0our.
Ty2es of Moving Averages: <
There are a number o dierent ty$es o mo0in/ a0era/es that 0ary
in the way they are calculated1 but how each a0era/e is inter$reted
remains the same. The calculations only dier in re/ards to the wei/htin/
that they $lace on the $rice data1 shitin/ rom e3ual wei/htin/ o each
6!
$rice $oint to more wei/ht bein/ $laced on recent data. The three most
common ty$es o mo0in/ a0era/es are sim$le1 linear and e9$onential.
#. Sim2le Moving Average ?SMA@
This is the most common method used to calculate the mo0in/
a0era/e o $rices. It sim$ly takes the sum o all o the $ast closin/ $rices
o0er the time $eriod and di0ides the result by the number o $rices used
in the calculation. 4or e9am$le1 in a 10<day mo0in/ a0era/e1 the last 10
closin/ $rices are added to/ether and then di0ided by 10. &s you can see
in 4i/ure 11 a trader is able to make the a0era/e less res$onsi0e to
chan/in/ $rices by increasin/ the number o $eriods used in the
calculation. Increasin/ the number o time $eriods in the calculation is
one o the best ways to /au/e the stren/th o the lon/<term trend and the
63
likelihood that it will re0erse.
>any indi0iduals ar/ue that the useulness o this ty$e o
a0era/e is limited because each $oint in the data series has
the same im$act on the result re/ardless o where it occurs in
the se3uence. The critics ar/ue that the most recent data is
64
more im$ortant and1 thereore1 it should also ha0e a hi/her
wei/htin/. This ty$e o criticism has been one o the main
actors leadin/ to the in0ention o other orms o mo0in/
a0era/es.
8% inear +eighted Average
This mo0in/ a0era/e indicator is the least common out o the
three and is used to address the $roblem o the e3ual wei/htin/. The
linear wei/hted mo0in/ a0era/e is calculated by takin/ the sum o all the
closin/ $rices o0er a certain time $eriod and multi$lyin/ them by the
$osition o the data $oint and then di0idin/ by the sum o the number o
$eriods. 4or e9am$le1 in a i0e<day linear wei/hted a0era/e1 todayEs
closin/ $rice is multi$lied by i0eA yesterdayEs by our and so on until the
irst day in the $eriod ran/e is reached. These numbers are then added
to/ether and di0ided by the sum o the multi$liers.
9% !E2onential Moving Average ?!MA@
This mo0in/ a0era/e calculation uses a smoothin/ actor to $lace
a hi/her wei/ht on recent data $oints and is re/arded as much more
eicient than the linear wei/hted a0era/e. 5a0in/ an understandin/ o the
65
calculation is not /enerally re3uired or most traders because most
chartin/ $acka/es do the calculation or you. The most im$ortant thin/ to
remember about the e9$onential mo0in/ a0era/e is that it is more
res$onsi0e to new inormation relati0e to the sim$le mo0in/ a0era/e.
This res$onsi0eness is one o the key actors o why this is the mo0in/
a0era/e o choice amon/ many technical traders. & 15<$eriod 7>& raises
and alls aster than a 15<$eriod ,>&. This sli/ht dierence doesn;t seem
like much1 but it is an im$ortant actor to be aware o since it can aect
returns.
MaAor Uses of Moving Averages
>o0in/ a0era/es are used to identiy current trends and trend
re0ersals as well as to set u$ su$$ort and resistance le0els. >o0in/
a0era/es can be used to 3uickly identiy whether a security is mo0in/ in
an u$trend or a downtrend de$endin/ on the direction o the mo0in/
a0era/e. 'hen a mo0in/ a0era/e is headin/ u$ward and the $rice is
66
abo0e it1 the security is in an u$trend. #on0ersely1 a downward slo$in/
mo0in/ a0era/e with the $rice below can be used to si/nal a downtrend.
&nother method o determinin/ momentum is to look at the order o a
$air o mo0in/ a0era/es. 'hen a short<term a0era/e is abo0e a lon/er<
term a0era/e1 the trend is u$. 6n the other hand1 a lon/<term a0era/e
abo0e a shorter<term a0era/e si/nals a downward mo0ement in the trend.
>o0in/ a0era/e trend re0ersals are ormed in two main ways: when
the $rice mo0es throu/h a mo0in/ a0era/e and when it mo0es throu/h
mo0in/ a0era/e crosso0ers. The irst common si/nal is when the $rice
mo0es throu/h an im$ortant mo0in/ a0era/e. 4or e9am$le1 when the
$rice o a security that was in an u$trend alls below a 50<$eriod mo0in/
a0era/e1 it is a si/n that the u$trend may be re0ersin/.
67
The other si/nal o a trend re0ersal is when one mo0in/ a0era/e crosses
throu/h another. 4or e9am$le1 i the 15<day mo0in/ a0era/e crosses
abo0e the 50<day mo0in/ a0era/e1 it is a $ositi0e si/n that the $rice will
start to increase.
68
I the $eriods used in the calculation are relati0ely short1 or e9am$le 15
and 351 this could si/nal a short<term trend re0ersal. 6n the other hand1
when two a0era/es with relati0ely lon/ time rames cross o0er H50 and
2001 or e9am$leG1 this is used to su//est a lon/<term shit in trend.
&nother ma8or way mo0in/ a0era/es are used is to identiy su$$ort and
resistance le0els. It is not uncommon to see a stock that has been allin/
sto$ its decline and re0erse direction once it hits the su$$ort o a ma8or
mo0in/ a0era/e. & mo0e throu/h a ma8or mo0in/ a0era/e is oten used
as a si/nal by technical traders that the trend is re0ersin/. 4or e9am$le1 i
the $rice breaks throu/h the 200<day mo0in/ a0era/e in a downward
direction1 it is a si/nal that the u$trend is re0ersin/.
69
>o0in/ a0era/es are a $owerul tool or analyBin/ the trend in a security.
They $ro0ide useul su$$ort and resistance $oints and are 0ery easy to
use. The most common time rames that are used when creatin/ mo0in/
a0era/es are the 200<day1 100<day1 50<day1 20<day and 10<day. The 200<
day a0era/e is thou/ht to be a /ood measure o a tradin/ year1 a 100<day
a0era/e o a hal a year1 a 50<day a0era/e o a 3uarter o a year1 a 20<day
a0era/e o a month &nd 10 O day a0era/e o two weeks. >o0in/
a0era/es hel$ technical traders smooth out some o the noise that is ound
in day<to<day $rice mo0ements1 /i0in/ traders a clearer 0iew o the $rice
trend. ,o ar we ha0e been ocused on $rice mo0ement1 throu/h charts
and a0era/es. In the ne9t section1 weEll look at some other techni3ues
used to conirm $rice mo0ement and $atterns.
Technical Indicators
7"
B"I$(!' BA$DS
"vervie6
-ollin/er -ands are similar to mo0in/ a0era/e en0elo$es. The
dierence between -ollin/er -ands and en0elo$es is en0elo$es are
$lotted at a i9ed $ercenta/e abo0e and below a mo0in/ a0era/e1 whereas
-ollin/er -ands are $lotted at standard de0iation le0els abo0e and below
a mo0in/ a0era/e. ,ince standard de0iation is a measure o 0olatility1 the
bands are sel<ad8ustin/: widenin/ durin/ 0olatile markets and
contractin/ durin/ calmer $eriods.
-ollin/er -ands were created by Cohn -ollin/er.
Inter2retation
-ollin/er -ands are usually dis$layed on to$ o security $rices1
but they can be dis$layed on an indicator. These comments reer to bands
dis$layed on $rices. &s with mo0in/ a0era/e en0elo$es1 the basic
inter$retation o -ollin/er -ands is that $rices tend to stay within the
u$$er< and lower<band. The distincti0e characteristic o -ollin/er -ands
is that the s$acin/ between the bands 0aries based on the 0olatility o the
$rices. Durin/ $eriods o e9treme $rice chan/es Hi.e.1 hi/h 0olatilityG1 the
bands widen to become more or/i0in/. Durin/ $eriods o sta/nant
$ricin/ Hi.e.1 low 0olatilityG1 the bands
=arrow to contain $rices.
7#
4ollowin/ are characteristics o -ollin/er -ands.
P ,har$ $rice chan/es tend to occur ater the bands ti/hten1 as 0olatility
lessens.
P 'hen $rices mo0e outside the bands1 a continuation o the current trend
is im$lied
P -ottoms and to$s made outside the bands ollowed by bottoms and to$s
made inside the bands call or re0ersals in the trend.
P & mo0e that ori/inates at one band tends to /o all the way to the other
band. This obser0ation is useul when $ro8ectin/ $rice tar/ets.
MA#D
"vervie6
The >&#D HI>o0in/ &0era/e #on0er/ence/Di0er/enceIG is a trend
ollowin/ momentum indicator that shows the relationshi$ between two
mo0in/ a0era/es o $rices. The >&#D was de0elo$ed by 2erald &$$el1
$ublisher o ,ystems and 4orecasts. The >&#D is the dierence between
a 2"<day and 12<day e9$onential mo0in/ a0era/e. & )<day e9$onential
mo0in/ a0era/e1 called the Isi/nalI Hor Itri//erIG line is $lotted on to$ o
the >&#D to show buy/sell o$$ortunities. H&$$le s$eciies e9$onential
mo0in/ a0era/es as $ercenta/es. Thus1 he reers to these three mo0in/
a0era/es as %.5M1 15
7!
and 20M res$ecti0ely.G
Inter2retation
The >&#D $ro0es most eecti0e in wide<swin/in/ tradin/ markets.
There are three $o$ular ways to use the >&#D: crosso0ers1
o0erbou/ht/o0ersold conditions1 and di0er/ences.
#rossovers
The basic >&#D tradin/ rule is to sell when the >&#D alls below its
si/nal line. ,imilarly1 a buy si/nal occurs when the >&#D rises abo0e its
si/nal line. It is also $o$ular to buy/sell when the >&#D /oes
abo0e/below Bero.
"verbought="versold #onditions
The >&#D is also useul as an o0erbou/ht/o0ersold indicator. 'hen the
shorter mo0in/ a0era/e $ulls away dramatically rom the lon/er mo0in/
a0era/e Hi.e.1 the >&#D risesG1 it is likely that the security $rice is
o0ere9tendin/ and will soon return to more realistic le0els. >&#D
o0erbou/ht and o0ersold conditions e9ist 0ary rom security to security.
Divergences
73
&n indication that an end to the current trend may be near occurs when
the >&#D di0er/es rom the security. & bearish di0er/ence occurs when
the >&#D is makin/ new lows while $rices ail to reach new lows. &
bullish di0er/ence occurs when the >&#D is makin/ new hi/hs while
$rices ail to reach new hi/hs. -oth o these di0er/ences are most
si/niicant when they occur at relati0ely o0erbou/ht/o0ersold le0els.
M"M!$TUM
"vervie6
The >omentum indicator measures the amount that a securityEs $rice has
chan/ed o0er a /i0en time s$an.
Inter2retation
The inter$retation o the >omentum indicator is identical to the
inter$retation o the *rice N6#. -oth indicators dis$lay the rate<o<
chan/e o a securityEs $rice. 5owe0er1 the *rice N6# indicator dis$lays
the rate<o<chan/e as a $ercenta/e whereas the >omentum indicator
dis$lays the rate<o<chan/e as a ratio.
>"UM!
74
"vervie6
(olume is sim$ly the number o shares Hor contractsG traded durin/
a s$eciied time rame He./.1 hour1 day1 week1 month1 etcG. The analysis o
0olume is a basic yet 0ery im$ortant element o technical analysis.
(olume $ro0ides clues as to the intensity o a /i0en $rice mo0e.
Inter2retation
?ow 0olume le0els are characteristic o the indecisi0e e9$ectations
that ty$ically occur durin/ consolidation $eriods Hi.e.1 $eriods where
$rices mo0e sideways in a tradin/ ran/eG. ?ow 0olume also oten occurs
durin/ the indecisi0e $eriod durin/ market bottoms. 5i/h 0olume le0els
are characteristic o market to$s when there is a stron/ consensus that
*rices will mo0e hi/her. 5i/h 0olume le0els are also 0ery common at the
be/innin/ o new trends Hi.e.1 when $rices break out o a tradin/ ran/eG.
Cust beore market bottoms1 0olume will oten increase due to $anic<
dri0en sellin/.
(olume can hel$ determine the health o an e9istin/ trend. & healthy u$<
trend should ha0e hi/her 0olume on the u$ward le/s o the trend1 and
lower 0olume on the downward Hcorrecti0eG le/s. & healthy downtrend
usually has hi/her 0olume on the downward le/s o the trend and lower
0olume on the u$ward Hcorrecti0eG le/s.
75
'AT! "F #,A$(! ?'"#@
Nate o chan/e measures the rate at which $rices rise or all.
It is based on the $rinci$le that $rices usually rise and all at the astest
$ace well ahead o their $eak and beore their trou/h res$ecti0ely.
7F G Day '"#
The conce$t o N6# can be e9$lained with the hel$ o a sin/le e9am$le.
& ball thrown into the &ir /enerally shoots u$ with s$eed but
subse3uently shows down considerably beore it turns to come down
a/ain. The loss o u$ward momentum that occurs beore the ball chan/es
course can be seen in the stock market also. -eore $eakin/ out1 share
$rocess re/isters a noticeable decrease in momentum.
T57 #&?#F?&TI6= 64 10 D&@ N&T7 64 #5&=27
D&@
,5&N7
*NI#7
,5&N7 *NI#7 10D&@,
&26
N6# 10 D&@,
&26
1 2 3 H4G QH2G/H3G
1 !"79.5
2 !"65."5
3 !#"6."5
4 !#65.!
5 !#5#.#
" !#78.#
% !#89.35
8 !#6"
) !#!5
10 !#97
11 !!47.95 !"79.5 #."8#
12 !343 !"65."5 #.#35
13 !4!#.35 !#"6."5 #.#5"
14 !448 !#65.! #.#3#
15 !!5!.95 !#5#.# #."47
1" !!7" !#78.# #."4!
1% !!"5.#5 !#89.35 #.""7
18 !##9 !#6" ".98#
76
1) !!!9.95 !#!5 #."49
20 !!5".5 !#97 #."!4
21 !!"6 !!47.95 ".98#
22 !!4!.! !343 ".957
23 !#67 !4!#.35 ".895
24 !#48.65 !448 ".878
25 !#5# !!5!.95 ".955
2" !!4"."5 !!7" ".987
2% !3"9.!5 !!"5.#5 #."47
28 !3!8.6 !##9 #."99
2) !357.7 !!!9.95 #."57
30 !!9! !!5".5 #."#8
The conce$t o N6# can be e9$lained with the hel$ o a sin/le e9am$le.
& ball thrown into the air /enerally shoots u$ with s$eed but
subse3uently shows down considerably beore it turns to come down
a/ain. The loss o u$ward momentum that occurs beore the ball chan/es
course can be seen in the stock market also. -eore $eakin/ out1 share
$rocess re/isters a noticeable decrease in momentum. To measure the rate
o chan/e1 the ratio o the most recent closin/ $rice to the $rice or a
certain number o days in the $ast is worked out. To calculate a 10 days
77
N6#1 the latest closin/ $rice is di0ided by the closin/ $rice o the scri$
10 days a/o. I the latest $rice is hi/her than that o the historical $rice or
the ten $re0ious days1 the N6# 0alue will be abo0e the line 1 and 0ice
0ersa. In the ollowin/ table an e9am$le o 10 days N6# is e9$lained.
Fnder column 2 the share $rice mo0ement o a com$any is $ro0ided or
20 days while under column 3 the $rices rulin/ 10 days a/o has been
taken.
In the last column1 the N6# 0alues are arri0ed at by di0idin/ the current
day;s $rice by the $rice 10 days a/o.
The N6# 0alues are a0ailable rom the 11
th
day only as or the irst 10
tradin/ days. The 10 days back share $rices are not a0ailable. It is worth
notin/ that the share $rices are a0ailable only on the tradin/ that actually
took $lace in the market.
Thereore1 the N6# is com$uted or 10 tradin/ days and not 10 calendar
days.
The share $rice has been increased by Ne. 1 on e0ery day tradin/ day
rom day 1 to day 15. 5owe0er1 the N6# declined continuously rom
the 11
th
day to 15
th
day1 thou/h the share $rice in ru$ees terms increased.
This indicates that thou/h there was a share $rice rise in absolute terms1
in $ercenta/e terms the rise in share $rice declined durin/ that $eriod.
I the N6# line is abo0e 1A the current day $rice is hi/her than
that o 10 days a/o.
78
I the N6# line is abo0e 1 and risin/A the dierence between the
current day $rice and 10 days back $rice /rows at an increasin/
rate Hbullish si/nalG.
I N6# line is abo0e 11 but declinin/A the $rice rises at a lower
rate than the earlier /rowth rate Hbearish si/nalG
I the N6# line is below 11 the current day;s $rice is lower than
the $rice 10 days a/o.
I the N6# line is below 1 and allin/1 the dierence between 10
days $rice and 10 days back $rice /rows at a aster rate Hbearish
si/nalG.
I the N6# line is below 11 but risin/1 the rate o decline slows
down Hbullish si/nalG.
The N6# line is so constructed that it is always a ste$ ahead o
the $rice mo0ement. It /i0es an ad0ance si/nal beore the share
$rice line takes a re0ersal direction.
'elative Strength IndeE
Nelati0e ,tren/th Inde9 HN,IG us is one o the 0ery ew so$histicated
6scillators used in technical analysis. The others which we ha0e already
discussed in the $re0ious issues are stochastic and >&#D. The rate o
79
chan/e and momentum are some o the widely used sim$le oscillators.
There are some laws like erratic mo0ement due to sudden dro$ or rise in
the $rice mo0ement e0en in a sin/le tradin/ day in the usa/e o sim$le
oscillators. 4or instance1 in a 10 day momentum1 a shar$ ad0ance or
decline ten days back can cause sudden shits in momentum line e0en i
there is a mar/inal or no chan/e in current $rices. Thereore1 it is
necessary to reduce these distortions and smoothen the oscillator
indicator distortions and smoothen the oscillator indictor distortion and
smoothen the oscillator indicator. The other $roblem in sim$le oscillators
is that there is no s$eciied ran/e on 0ertical scale. >ainly to address
these two ma8or $roblems o sim$le oscillators N,I was de0elo$ed by C.
'elles 'ilder1 Cr. in 1)%8. N,I indicator $ro0ides not only the re3uired
smoothin/ but also 0 and 100 as lower and u$$er limits res$ecti0ely or
its 0ertical scale.
N,I is calculated usin/ the ollowin/ ormula.
N,IQ100 O R100 / H1SN,GT
'here N, Q &0era/e o n $eriods $rice /ains
&0era/e o n $eriods $rice losses
% day N, 0alue Q H8/%G / H4/%G Q 1.143 / 0.5%1Q2
N,IQ 100 O R100 / H1SN,GT
Q 100 O R100 / H1S2GT
Q100< 33.33 Q ""."%.
8"
The N,I 0alue or the se0enth day is ""."%. 4or calculatin/ the N,I 0alue
or the ei/hth day1 we ha0e to e9clude the irst day closin/ $rice and
include the $rice on the ei/hth day. 'e can calculate N,I or any time
$eriod. The most widely used $eriod is 14 days. ,ome technical analysts
also use lesser time $eriods like 5 < day1 % O day1 ) O day to /et the
3uicker si/nals. ?ike I any other 6scillators1 shorter the time $eriod1 the
more sensiti0e and 0olatile the N,I becomes. Thereore1 to reduce the
misleadin/ si/nals 'ilder recommended and used a 14 day $eriod or
constructin/ N,I.
N,I #&?#F?&TI6=

#5&=27 I= *NI#7 6(7N
*N7(I6F, D&@
D&@ #?6,I=2 *NI#7 2&I= ?6,,
1 43 0 0
2 45 2 0
3 44 0 1
4 4" 2 0
5 45 0 1
" 43 0 2
% 4% 4 0

T6T&? 8 4
Inter$retation:
The N,I 0alues are $lotted on chart with a 0ertical scale o 0 to
100.
8#
I the N,I mo0es abo0e the 0alue %01 it is considered as
o0erbou/ht.
I the N,I mo0es below the 0alue 301 it is treated as an o0ersold
Bone.
In other words1 there may be down trends in the $rice ater the N,I
mo0in/ abo0e the %0 le0el and $rices may reco0er and look u$ ater the
N,I alls below 30 le0el. 2enerally1 N,I indicator crosses the %0 le0el
much beore the share $rice touches the $eak. ,imilarly1 N,I line /oes
below the 30 le0el well ahead o $rice litin/ the bottom. 5ence1 N,I
/i0es an ad0ance si/nal or re0ersal share $rice mo0ements.
4ailure swin/s: we can see the ailure in rallies and also in declines when
the N,I is abo0e %0 and 30 res$ecti0ely. 4ailure +&. in rally when the
N,I rises abo0e %0 rises a/ain but ails to reach the le0el %0 and below
the $rior lower le0el. This is a clear sell si/nal. 4ailure at bottom o
when the N,I in a downtrend. 4ailure +-. e9$lains the ailure in decline
when ails to set new low and starts an u$trend to e9ceed $re0ious $eak.
Di0er/ence:
&ccordin/ to 'ilder1 di0er/ence is the most indicati0e character o the
N,I which /i0es a warnin/ si/nal or likely re0ersal in share mo0ement.
8!
5ence1 the di0er/ence is between the N,I line and the share $rice. 4or
instance1 i the N,I line is allin/ below rom the le0el o 80 to %0 and a
same time the share $rice is still in an u$trend1 it /i0es as indication that
the share $rice is also likely to re0erse its direction shortly. This
di0er/ence /i0es a sell si/nal.
,imilarly1 we /et a buy si/nal when the N,I line is mo0in/ u$ below the
le0el 30 and at the same time the share $rice is still continuin/ in a
downtrend.

The N,I indicator sim$ly means
-uy1 when the N,I line is crossin/ u$ throu/h the 50 le0el and
,ell1 when the N,I line is crossin/ down throu/h the 50 le0el.
'e can also identiy the chart $atterns like trian/les1 la/s1 rectan/les in
the N,I line and inter$ret the same way as in $rice chart. ,u$$ort and
Nesistance le0els also can be drawn or N,I charts.
These 6scillators are 3uite useul only or short terms in0estors and
traders. These are not useul or lon/ term in0estors1 because they cannot
sim$ly sell their shares or the sim$le reason that N,I has mo0ed abo0e
the %0 le0el. The irst entry o N,I into the o0erbou/ht Bone is only a
irst warnin/ si/nal. 6ne has to wait or urther conirmations beore
really li3uidatin/ his $ortion
83
84
T!#,$I#A A$A.SIS "F SBI$
State Bank of India* ,istory
The origin of the State Bank of India goes back to the first decade of
the nineteenth century 6ith the establishment of the Bank of #alcutta
in #alcutta on 8 Hune 7IF<% Three years later the bank received its
charter and 6as re*designed as the Bank of Bengal ?8 Hanuary 7IFJ@%
A uni0ue institutionD it 6as the first Aoint*stock bank of British India
s2onsored by the (overnment of Bengal% The Bank of Bombay ?7;
A2ril 7I:F@ and the Bank of Madras ?7 Huly 7I:9@ follo6ed the Bank
of Bengal% These three banks remained at the a2eE of modern
banking in India till their amalgamation as the Im2erial Bank of
India on 8B Hanuary 7J87%
7J;; * "n 7st Huly State Bank of India 6as constituted under the
State Bank of India Act 7J;;D for the 2ur2ose of taking over the
undertaking and business of the Im2erial Bank of India% The
Im2erial Bank of India
85
6as founded in 7J87 under the Im2erial Bank of India Act 7J8F%
The Bank transacts general banking business of every descri2tion
includingD
foreign eEchangeD merchant banking and mutual funds%
Management of * SBI
$ame Designation
&rati2 #haudhuri #hairman = #hair &erson
A Krishna Kumar Managing Director
Ashok HhunAhun6ala Director
S >enkatachalam Director
( D $adaf Director
&arthasarthy Iyengar Director
Subir >ithal (okran Director
Dee2ak Ish6arbhai Amin $on "fficial &art Time Director
$ame Designation
,emant ( #ontractor Managing Director
Di6akar (u2ta Managing Director
Dilee2 # #hoksi Director
D Sundaram Director
'ash2al Malhotra $on "fficial &art Time Director
D K Mittal Director
Hyoti Bhushan Moha2atra Director


86
#"$#USI"$)*
Technical Analysis of State Bank of India)
9 .ears data taken ?7st*Han*8FFJ to 8B
th
*Feb*8F78@
Bar #hart
#andle Stick #hart
87
ine #hart
88
'ate of #hange ?'"#@
'elative Strength IndeE ?'SI@
89
'hen 50 D>& crosses 200 D>& in F$side that time In
Technical words it;s called as 26?D7= #N6,, it;s a stron/
bullish si/nal
9"
&s $er charts ,-I has stron/ su$$ort U 2040 ! 1880 !
Nesistance U 21)01 23)0 ! 2450.
'hereas N,I is crossin/ u$ 50 le0el which Indicate -uy ,i/nal.
and i we see 10 days N6# is abo0e 1 but declinin/ the $rice
rises at lower rate than the earlier /rowth rate which indicate
bearish signal% -ut i we take 3 years data and calculate N6#
then we can see +N6# line is abo0e 1 and risin/A the dierence
between the current day $rice and 10 days back $rice /rows at an
increasin/ rate ?bullish signal@.
9#
Necommendation: < -uy ,-I at current le0el i.e. 2100<
21301
,hort term Tar/et 21)0 ! 23)01 ,to$ ?oss U 2040
?on/ Term Tar/et abo0e 23)0 2540 and abo0e this
le0el 2"00 < < 2%00 Tar/ets is there1 ,to$ ?oss U 2040
9!
BIBI"('A&,.
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