Professional Documents
Culture Documents
Submitted to
Supervised by:
Ankush Padha
CUN110551002
DECLARATION
I, Ankush Padha. hereby declare that the work presented herein is genuine work done
originally by me and has not been published or submitted elsewhere. Any literature, date or
work done by
others and cited in the report has been given due acknowledgement and
Ankush Padha
TO WHOMSOEVER IT MAY
CONCERN
This is to certify that the project titled A Comparative Study On Fundamental and
Technical Analysis As An Indicator For Investment Decision-Making carried out
By Mr.Ankush Padha,
s/o
His dissertation represent his original work and is worthly of consideration for the award
of the degree of Master of Business Administration.
EXECUTIVE SUMMARY
EQUITY ANALYSIS is the systematic study of the performance of companies in stock
market with help of fundamental analysis and technical analysis. Equity analysis
consists of fundamental analysis & technical analysis. While decision in investment of
shares should be base on actual movement of shares price measured more in money &
percentage term & nothing else.
In equity analysis, calculations are based on FACTS & not on HOPE. The subject of equity
analysis, i.e. the to attempt to determine future share price movement with the help of
RATIO ANALYSIS, STUDY OF GRAPH. Equity analysis does not discuss how to buy &
sell shares, but does discuss the methods, which enables the investor to arriving at buying &
selling decision.
The Technical Approach to investment is essentially a reflection of the idea that prices
moves in a trend that are determined by the changing attitude of investors toward a variety
of economic, monetary, political and psychological forces. The art of technical analysis, for
it is an art, is to identify a trend reversal at a relatively early stage and ride on that trend
until the weight of the evidence shows or proves the trend has reversed.
CONTENTS
CHAPTERS
NO.
1.
19
PARTICULARS
1-
About Destimoney
Services provided by the Organization
Key Management
Business Network and Source of Finance
Mission and Vision
SWOT analysis of the company
Distribution structure
Financial Statement And Trend Analysis of the Company
Conclusion
2.
3.
FUNAMENTAL ANALYSIS
3.1
Meaning of fundamental Analysis
3.2
Two analytical models
3.3
Interpretation
3.3.1Economic analysis
3.3.2Industry analysis
3.3.3Company analysis
3.4
Use by different portfolio styles
3.5
Top-down and bottom-up
3.6
Procedures
3.7
Conclusion
4.
PAGE
TECHNICAL ANALYSIS
4.1
Meaning of Technical Analysis
4.2
Assumptions of Technical Analysis
4.3
Technical Analysis and Fundamental Analysis
4.4
The Critics of Technical Analysis
4.5
Co-existence of Technical Analysis and Fundamental Analysis
1
5
6
9
12
13
16
17
19
20-23
20
21
21
21
22
22
22
22
23
23
25-35
25
26
27
27
29
30
33
33
34
34
36-71
36
36
38
39
40
4.6
41
4.7
4.8
Technical Tools
4.6.8 Support and Resistance
4.6.9 Volume
4.6.10Random-Walk Hypothesis
4.6.11 Technical Trends
4.6.12 Trend-Lengths
4.6.13 Trend-Line
4.6.14 Channels
4.6.15 Technical Charts
Technical Indicators
4.7.1Moving Average Convergence Divergence
4.7.2Relative Strength Index
4.7.3Stochastic Oscillator
4.7.4The Dow-Theory
4.7.5The Short-Interest Ratio
4.7.6The Confidence Index
4.7.7Spreads
4.7.8The Advance-Decline Ratio
4.7.9The Market Breadth Index
4.7.10The Odd-lot Ratio
4.7.11Insider Transactions
4.7.12The Credit-Balance Theory
4.7.13Performance of Linked Markets
Summary
41
44
46
46
47
48
49
50
63
64
66
66
67
68
69
69
69
69
70
70
71
71
71
5.
A SAMPLE SURVEY
5.1
Objectives of the Survey
5.2
Sample Composition
5.3
Outcomes of the Survey
5.4
Opinion of the Investors
87
75-87
75
75
78
6.
90-92
90
91
92
BIBLIOGRAPHY
WEBLIOGRAPHY
APPENDIX
93
94
95
CHAPTER 1
COMPANY PROFILE
growth. We plan to do this, by distributing all financial products and manufacturing a select
few and building an organization that unlocks the potential across four dimensions, viz.
individual, team, customer and market place
In providing services to our clients, we take the fiduciary trust they place in us very seriously.
By strictly adhering to our core values, we ensure that our processes, risk management
systems, and staffing are concentrated solely on preserving and ncreasing our clients hard
earned capital within a transparent and controlled investment process.
1.2
SERVICES PROVIDED BY THE ORGANIZATION
1.Sudip Bandyopadhyay
MD & CEO
A Chartered Accountant by profession, he has over 23 years of experience in the financial
sector in the areas of capital market, money market and currency market operations.He
has worked with reputed organizations like HLL, ITC & Reliance Money. He created &
led Reliance Money, the largest retail broking and distribution company during his stint in
Reliance as MD & CEO. Sudip was also responsible for the acquisition of AMP Sanmar
that launched Reliances foray in the Life Insurance segment.
2.Jhuma Guha
President
A Chartered Accountant and a Company Secretary with over 18 years of experience in the
Finance, Legal, Compliance, Risk, M&A and General Management domains.Worked with
companies such as ITC and Reliance Money.
3.K Giri
Chief Finance Officer
Former Country Controller - Nestle (Uzbekistan) and Group CFO for Destimoney
Enterprises for more than 3 years.
4.Gurmeet Singh
Head of Broking
Over 12 years experience in Product Management & Business Development.Has worked in
start-up teams of leading organisations such as Baazee.com (now eBay), ICICI Direct,
Reliance Money & NSEL.
5.Anand Maliwal
Chief Technology Officer
Anand Maliwal, is an Engineer and an MBA. He has over a decade of experience in
technology and operations, across a wide spectrum of banking & financial services
companies in India, Japan & UK, including Networth Stock Broking, India Infoline and
Cognizant Technology Solutions.
6.Sunando Guha
Chief Human Resources Officer
A Chartered Accountant with an accumulated experience of 20 years in the manufacturing
sector and financial services in India and abroad, which includes stints with organisations like
Tata Tea , Philips, Ceat, Wall Street Finance and HSBC Holdings plc.
7.Zahid Gawandi
Chief Marketing Officer
An MBA in Marketing from Mumbai University, he has over 16 years of experience in
Marketing & Brand management. Having worked for Advertising Agencies like Dentsu,
Percept & Corporates like Reliance Money & Spice Group, he has successfully handled high
profile MNC & Indian brands, winning accolades for excellence in formulating and
executing inventive brand communication strategies.He was also instrumental in launching
the Reliance Money brand in India.
8.Sanjay Nayak
Head of Operation
Sanjay Nayak is a Post Graduate in commerce from Mumbai University. He has an
experience of two decades in the Industry In Operations. Has worked `with J.M. Share and
Stock Brokers (currently known as J.M.Financial), Prime Broking Services, SG Asia
Securities. Previous tenure was with India Infoline Limited for eight years as Head of
Operations. He has a complete proficiency with the entire gamut of Broking Operations
including Institution Broking, Retail Broking, Settlements, Fund Accounting, Depository
Operations, Wealth Management and PMS Operations.
9.Anirudh Jain
Head of Distribution
Anirudh is an MBA & also an Associate Financial Planner. He has detailed knowledge and
understanding of Insurance and Investment space in India for the last 10 years. Prior to
joining Destimoney, he was associated with the Banking sector having worked for reputed
organizations like HDFC Bank & India Bulls where he was instrumental in spearheading the
Bancassurance Business looking after Life & General Insurance Business across all the
verticals. His go-to-market strategies helped in successful market penetration and product
launches for various customer segments. Anirudh has displayed leadership skills in managing
consistent branch performances Pan-India & develop strategies and action plans to win new
business & revenue streams.
10.Prashant Bansal
Head of Wealth Management
Prashant has more than 15 years of experience behind him in the areas of Private Banking,
Product Management and Sales Strategy. Prior to joining Destimoney he worked with
American Express, Standard Chartered
Destimoney distributes all financial products, and manufactures a select few. They develop
individually structured financial products for their customers - from universal real life needs
for family, security, health assurance and education to wealth creation and home ownership;
on to lifestyle and business requirements, and continuing along the road to retirement and
estate planning,
Strategic partnership with PNB to acquire up to a 49% stake in its housing finance
subsidiary.
Destimoney recently entered into a partnership with Dhanlaxmi Bank to enable the
Banks customers to trade on Destimoneys online e-broking platform.
Under the new partnership with Artha Money, Artha moneys customers will be able to
seamlessly access and use Destimoneys online equity trading platform, while
Destimoneys customers will be able to use Artha Moneys online commodity trading
platform.
DESTIMONEY GROUP
Destimoney India Services Pvt. Ltd, which provides portfolio management services.
Destimoney Enterprises Pvt. Ltd, which provides financial advisory services and
distributes
o Insurance products
o Loans
Personal loans.
Destimoney Securities Pvt. Ltd., which deals with broking of stocks & shares.
1.5
Destimoney vision is to build a world class customer centric financial services enterprise that
fulfils the financial needs of Middle India with Global Processes and focuses on
profitable growth. Destimoney plans to do this, by distributing all financial products and
manufacturing a select few and building an organization that unlocks the potential across four
dimensions, viz. individual, team, customer and market place.
MISSION
Organizations mission is to forge strong, sustained relationships with the clients by creating
value for them within a transparent and controlled investment process.
1.6
SWOT ANALYSIS
STRENGTHS
Destimoney Enterprises Pvt. Ltd. is a leading financial service provider under Asias
leading non financial organization New silk Route with Strategic partnership with
PNB to acquire up to a 49% stake in its housing finance subsidiary.
Destimoney recently entered into a partnership with Dhanlaxmi Bank to enable the
Banks customers to trade on Destimoneys online e-broking platform.
Under the new partnership with Artha Money, Artha moneys customers will be able
to seamlessly access and use Destimoneys online equity trading platform, while
Destimoneys customers will be able to use Artha Moneys online commodity trading
platform.
WEAKNESSE
Destimoney is very new brand for investors in the market. So it is struggling to make
its name in the market due to intense completion.
Till now company hasnt done much in terms of promotional activities to attract the
customers from the market.
Companys online service is only for its own products like mutual funds and DMAT
accounts.
Companys online service approach is not very effective as it does not provide any
kind of information about product and investment details accept its business domain.
OPPORTUNITIES
Company is concentrating on middle class investors under its middle India Plan.
But still there are other segments which can be targeted simultaneously.
Although company has done well in order to establish new partnerships with
financial & non financial institutions but still company may expand its domain by
involving new product series in its product mix.
Destimoney is also going to launch its own product line along with currently
available DMAT facility. So it will provide a good opportunity to the company to
promote it self not as a third party service provider but also as a leading financial
service company.
THREATS
As the company is new in the market, it is very selective in its approach whether it is
related to sale or to its partners. But due to intense competition in the market,
company is finding it difficult to establish a brand value against the companies like
India Bulls, Religare, and Standard Chartered etc.
The lack in technical knowledge about the products & instruments among sales staff
is not a cost effective venture for the company.
Mar
Mar
Mar
Mar
'11
'10
'09
'08
'07
Current Ratio
2.05
1.37
1.58
1.1
1.37
Quick Ratio
2.06
1.68
1.54
1.04
1.31
5.27
4.75
5.52
5.23
4.61
8.37
7.42
7.62
7.11
6.71
2.1
1.59
1.72
1.81
2.23
0.07
0.13
0.06
0.11
0.12
2.12
1.61
1.71
1.81
2.24
1.99
1.58
1.58
1.71
2.06
62.93
63.99
72.5
73.47
68.65
Margin(%)
62.03
62.84
71.66
72.68
67.84
Cash Profit
29.84
23.29
25.94
30.75
33.91
Praticulars
Liquidity Ratios
Operating Ratios
Operating Profit Per
Share (Rs)
Net Operating Profit
Per Share (Rs)
Leverage Ratios
Interest Cover
Total Debt to
Owners Fund
Financial Charges
Coverage Ratio
Financial Charges
Coverage Ratio Post
Tax
Profitability Ratios
Operating Profit
Margin(%)
Gross Profit
Margin(%)
Net Profit
Margin(%)
28.88
22.04
25.11
30.01
33.16
7.46
7.63
11.39
16.68
13.3
4.28
3.01
4.7
7.14
6.97
9.04
8.35
13.45
16.94
13.5
Return On Capital
Employed(%)
Return On Net
Worth(%)
Return on Long
Term Funds(%)
(b) Trend Analysis
------------------- in Rs. Cr. ------------------
Praticulars
Sales Turnover
Net Profit
Earnings Per Share
Mar
Mar
Mar
Mar
Mar
'11
'10
'09
'08
'07
5.73
4.6
4.72
4.06
3.83
13.06
13.27
8.58
13.82
8.87
2.47
1.66
2.18
2.64
2.43
Sale Turnover is
also increase as compare to its previous year as on 2011 it is 5.73 as compare to its previous
year which is 4.6.Net profit is also stable as on 2011 its net profit is Rs.13.06crore.Earning
per share of the company also increase as on 2011 it is 2.47 which is sufficient and as
compare to its previous 3year it is highest.
1.9 CONCLUSION
As the financial markets are going towards development with the pace of economic growth,
the post-recession market expects a lot from the investors. In this regard it can be seen that
there is a huge scope for the companies providing financial services in coming days. So, the
opportunity to gain more and create a brand equity is there and it is not too hard for a market
player like Destimoney to achieve such. A mare sophistication and improvement in services
can pay much.
CHAPTER 2
INTRODUCTION AND RESEARCH METHODOLOGY
2.1 INTRODUCTION
Money is honey for modern man!! In this modern and fast changing world where a cut-throat
competition exits it is treated as the essence of life. It has become the sole purpose of every
human activity. It is the sole target of every start. Starting from the unsunshine lower levels
of deep blue Pacific to the upper layers of Troposphere each and every component is money
oriented now a days. To fulfil such need of money and wealth, modern man uses investment
as a want satisfying and wealth maximizing tool.
Taking investment decisions has become a part of our economic life. Everybody makes such
decisions in different contexts at different times. The appropriateness of such decisions
makes someone Warren Buffet where as some become bankrupts. Therefore, it is very
important to understand and know the right way to take sound investment decisions which
can be made in order to improve the chance of making profits through them.
As investment is concerned, the stock market is treated as the most profitable and efficient
battle field. It gives a scope to earn extra ordinary income by taking high level of risk where
uncertainty exists always. So it is not a game of a child to find the right time and right choice
to invest in. Investment decision-making in such situation can best be viewed as an integrated
process to which security analysis makes its unique contribution. And, in the process of
security analysis, Technical Analysis is treated as the Polestar which shows the direction to
proceed.
Technical Analysis serves the investment decision-maker by pointing the direction that is
most likely to produce the desired results and to meet the expectations of the investors.
Whether Technical analysis will ever be classified as a science is doubtful, but research,
training and experience have developed it into a discipline, which means a structured,
consistent and orderly process without rigidity in either concepts or methods.
Where the herds of bulls and beers are peeping to the stock market in an expectation to grab
the opportunity to take the advantage of volatility, a study on Technical Analysis is very much
needed to cope with the moment-change market fluctuations in the expected direction to earn
desired profits. This research study fulfils the needs of the speculators, investors and students
to acquire knowledge regarding various technical aspects of investing the most liquid and
hard-earned money not only in profitable stocks, but also at the right time and at the right
price. The thesis describes the various trends and chart patterns which are very much helpful
to find the timing of investment at different market situations.
This study contributes to the knowledge of Stock analysis through integration of the review
of literature and methodology developed for the understanding and resolution of various
related indicators and techniques regarding investment decision-making in stock market, and
empirical work done there on.
The purpose of the summer project report is to allow the study within a coherent, organized
and standardized framework which is necessary to enhance understanding to grasp
knowledge and to clarify the subject matter. It is needed for the direction and procedure of
the study to bring it up to the required scope, coverage, rigor and also to enhance the quality
of research effort.
2.2.2 OBJECTIVES OF THE STUDY
This project was started with an objective to know the basic tools, trends and chart patterns of
Technical Analysis and their implications at the time of investment decision-making. How
investors can gain more out of their investment by using the tools of Technical Analysis is the
central objective of this research study. Collecting information regarding investors response
and belief towards Technical Analysis is also an additional objective that forced to undertake
such research study.
Secondary Source
Primary Source
The data collected from primary sources are raw-data. These are the data that are collected
first-hand and have not had any previous meaningful interpretation. The primary data will be
collected through observation, questionnaire and through well-tested personal interviews with
the investors at the door of number of broking houses.
Secondary Source
Any data used that have been collected earlier for some other purposes are known as
Secondary Data. The secondary data has been collected such from various internet portals,
research articles, reference books and various T.V. programmes related to the topic.
2.2.4 RESEARCH DESIGN
The present research study will adopt Descriptive Research Design for properly designing the
research work. Through this, the topic will be studied thoroughly and it will be presented by
giving necessary findings and conclusions.
2.2.5 SAMPLING METHOD
The method adopted is Convenient Sampling method because it was necessary to cover all
types of investors and at different places all over the city, even if by taking the help of cell
phone.
2.2.6 SAMPLE SIZE
The total sample size was 200 and included small investors, speculators, businessmen,
research scholars and finance students. The interview was conducted inside the city of Delhi,
Jammu and Chandigarh only.
The time period allowed for the study was quite insufficient to cover and analyse all the
technical aspects and to compare it with the behaviour of the stock market.
More importance has been given to the subject matter of Technical Analysis only.
The wide range of chart-patterns and trends may create confusion while going through
these.
The study may act as a magic-pedia for a layman having no basic knowledge regarding
securities market.
Confidentiality of information was the biggest limitation that corporate people and
investors were not willing to share.
The primary limitation of the study is that, the survey is limited within the city of
Bhubaneswar only.
2.2.8 CHAPTER PLAN
The study has been divided in to two parts such as the Theoretical aspect and the Practical
aspect. The first part contains a wide explanation of the theories of Fundamental and
Technical analysis where as the second part is enriched with the response of the investors
and their beliefs with respect to Technical Analysis. By looking chapter-wise, Chapter-1
opens the door to enter in to the subject. Chapter-1 gives information about the company
under which the summer internship has been made. Chapter-3 gives a broad idea regarding
Fundamental Analysis. Chapter-4 gives a broad idea regarding Technical Analysis. It narrates
about the tools available in Technical Analysis and explains the various indicators that signals
investor-action and guides to expect the future uncertain market condition. Chapter-5
analyses the data that has been collected from primary sources reflecting the role of technical
charts and trends at the time of investment decision-making. It gives an idea regarding the
applicability and popularity of Technical Analysis in investor-world. It depicts the response
of the investors. And, lastly the study comes to an end with chapter-6 that narrates the
Conclusion and suggestions extracted from this study with conclusion.
CHAPTER 3
FUNDAMENTAL ANALYSIS
3.1 MEANING OF FUNDAMENTAL ANALYSIS
Fundamental analysis is the study of economic, industry, and company conditions in an effort
to determine the value of a company's stock. Fundamental analysis typically focuses on key
statistics in a company's financial statements to determine if the stock price is correctly
valued.
I realize that some people will find a discussion on fundamental analysis within a book on
technical analysis peculiar, but the two theories are not as different as many people believe. It
is quite popular to apply technical analysis to charts of fundamental data, for example, to
compare trends in interest rates with changes in security prices. It is also popular to use
fundamental analysis to select securities and then use technical analysis to time individual
trades. Even diehard technicians can benefit from an understanding of fundamental analysis
(and vice versa).
Fundamental analysis of a business involves analyzing its financial statements and health, its
management and competitive advantages, and its competitors and markets. When applied
to futures and forex, it focuses on the overall state of the economy, interest rates, production,
earnings, and management. When analyzing a stock, futures contract, or currency using
fundamental analysis there are two basic approaches one can use; bottom up analysis and top
down analysis.[1] The term is used to distinguish such analysis from other types of investment
analysis, such as quantitative analysis and technical analysis.
Fundamental analysis is performed on historical and present data, but with the goal of
making financial forecasts. There are several possible objectives:
to conduct a company stock valuation and predict its probable price evolution,
Fundamental analysis maintains that markets may misprice a security in the short run
but that the "correct" price will eventually be reached. Profits can be made by
purchasing the mispriced security and then waiting for the market to recognize its
"mistake" and reprice the security.
2.
Technical analysis maintains that all information is reflected already in the stock
price. Trends 'are your friend' and sentiment changes predate and predict trend changes.
Investors' emotional responses to price movements lead to recognizable price chart
patterns. Technical analysis does not care what the 'value' of a stock is. Their price
predictions are only extrapolations from historical price patterns.
Investors can use any or all of these different but somewhat complementary methods for
stock picking. For example many fundamental investors use technicals for deciding entry and
exit points. Many technical investors use fundamentals to limit their universe of possible
stock to 'good' companies.
The choice of stock analysis is determined by the investor's belief in the different paradigms
for "how the stock market works". See the discussions at efficient-market hypothesis, random
walk hypothesis, capital asset pricing model, Fed model Theory of Equity Valuation, Marketbased valuation, and Behavioral finance.
3.3 INTERPRETATION
Fundamental analysis includes:
1.Economic analysis
2.Industry analysis
3.Company analysis
3.3.1 ECONOMIC ANALYSIS
The economy is studied to determine if overall conditions are good for the stock market. Is
inflation a concern? Are interest rates likely to rise or fall? Are consumers spending? Is the
trade balance favorable? Is the money supply expanding or contracting? These are just some
of the questions that the fundamental analyst would ask to determine if economic conditions
are right for the stock market.
A. Influence of the economy on the company.
These are the following factor: 01. Economic Growth
02. Populations
03. Monsoons and Agriculture Production
04. Natural resources and availability of raw material
05. Industrial Productions
06. Inflation
07. Interest rate
08. Foreign exchange reserve
Depression: At this stage demand is low and declining inflation often high and so are
interest rate, companies usually reduce activities and securities performance is poor.
Boom: High demand with high investment and production, companies earn more
profit
sector of the key industry group of capital goods or consumers goods group.
Raw Material and Inputs.
Under these head, we have to look in to industries depending on imports of scare raw
materials, competition from other companies and industries and the barriers to entry of new
company, protection from foreign competition, import and export restriction etc.
Capacity Installed and Utilized.
The demand for industrial product in the economy is estimated by the planning
commission and the Government, and the units are given licensed capacity on the basis of
these estimates.
Industry Characteristics.
It included whether the industry is cyclical, fluctuating of stable. It is also important
industry produce seasonal product or FMCG. It also included demand of product freight
charges, cost of production, advertisement cost, skill of operation, profitability.
Demand and Market.
It includes demand of the product in the market and price of raw material and other input
cost like freight, electricity, season, monsoon, etc. if the nature of product is such as drugs,
fertilizer or other consumer goods, whose price and distribution control by Government.
Government Policy with regard to Industry
Government Policy is announced in the industrial policy resolution and Subsequent
announcement from time to time by the Government. The Policy strategy as laid down
in the five years plans according to planning commission and expected demand in the
economy.
3.3.3 COMPANY ANALYSIS
After determining the economic and industry conditions, the company itself is analyzed to
determine its financial health. This is usually done by studying the company's financial
statements. From these statements a number of useful ratios can be calculated. The ratios fall
under five main categories: profitability, price, liquidity, leverage, and efficiency. When
performing ratio analysis on a company, the ratios should be compared to other companies
within the same or similar industry to get a feel for what is considered "normal." At least one
popular ratio from each category is shown below.
At the final stage of fundamental analysis, the investor analyses the company. This analysis
has two thrusts:
1. How has the company performed vis-a-vis other similar companies? and
2. How has the company performed in comparison to earlier years
It is imperative that one completes the economic analysis and the industry analysis before a
company is analysed because the companys performance at a period of time is to an extent a
reflection of the economy, the political situation and the industry.
What does one look at when analysing a company? There is no point or issue too small to
beignored. Everything matters.
Debt Ratio. A company's debt ratio is a leverage ratio calculated by dividing total liabilities
by total assets. This ratio measures the extent to which total assets have been financed with
debt. For example, a debt ratio of 40% indicates that 40% of the company's assets have been
financed with borrowed funds. Debt is a two-edged sword. During times of economic stress
or rising interest rates, companies with a high debt ratio can experience financial problems.
However, during good times, debt can enhance profitability by financing growth at a lower
cost.
Inventory Turnover. A company's inventory turnover is an efficiency ratio calculated by
dividing cost of goods sold by inventories. It reflects how effectively the company manages
its inventories by showing the number of times per year inventories are turned over
(replaced). Of course, this type of ratio is highly dependent on the industry. A grocery store
chain will have a much higher turnover than a commercial airplane manufacturer. As stated
previously, it is important to compare ratios with other companies in the same industry.
Stock Price Valuation
After determining the condition and outlook of the economy, the industry, and the company,
the fundamental analyst is prepared to determine if the company's stock is overvalued,
undervalued, or correctly valued.
Several valuation models have been developed to help determine the value of a stock. These
include dividend models which focus on the present value of expected dividends, earnings
models which focuses on the present value of expected earnings, and asset models which
focus on the value of the company's assets.
There is no doubt that fundamental factors play a major role in a stock's price. However, if
you form your price expectations based on fundamental factors, it is important that you study
the price history as well or you may end up owning an undervalued stock that remains
undervalued.
Buy and hold investors believe that latching onto good businesses allows the
investor's asset to grow with the business. Fundamental analysis lets them find 'good'
companies, so they lower their risk and probability of wipe-out.
Managers may use fundamental analysis to correctly value 'good' and 'bad'
companies. Eventually 'bad' companies' stock goes up and down, creating opportunities
for profits.
Managers may also consider the economic cycle in determining whether conditions
a weighing machine".[2] Fundamental analysis allows you to make your own decision on
value, and ignore the market.
Value investors restrict their attention to under-valued companies, believing that 'it's
hard to fall out of a ditch'. The value comes from fundamental analysis.
Managers may use fundamental analysis to determine future growth rates for buying
The top-down investor starts his analysis with global economics, including both
international
and
national economic
indicators,
such
as GDP growth
rates, inflation, interest rates, exchange rates, productivity, and energy prices. He
narrows his search down to regional/industry analysis of total sales, price levels, the
effects of competing products, foreign competition, and entry or exit from the
industry. Only then he narrows his search to the best business in that area.
3.6 PROCEDURES
The analysis of a business' health starts with financial statement analysis that includes ratios.
It looks at dividends paid, operating cash flow, new equity issues and capital financing. The
earnings estimates and growth rate projections published widely by Thomson Reuters and
others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor
sentiment) based on your perception of their validity.
The determined growth rates (of income and cash) and risk levels (to determine the discount
rate) are used in various valuation models. The foremost is the discounted cash flow model,
which calculates the present value of the future
dividends received by the investor, along with the eventual sale price. (Gordon model)
The amount of debt is also a major consideration in determining a company's health. It can be
quickly assessed using the debt to equity ratio and the current ratio (current assets/current
liabilities).
The simple model commonly used is the Price/Earnings ratio. Implicit in this model of a
perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate
appropriate to the risk of the business. The multiple accepted is adjusted for expected growth
(that is not built into the model).
Growth estimates are incorporated into the PEG ratio, but the math does not hold up to
analysis. Its validity depends on the length of time you think the growth will continue. IGAR
models can be used to impute expected changes in growth from current P/E and historical
growth rates for the stocks relative to a comparison index.
Computer modelling of stock prices has now replaced much of the subjective interpretation
of fundamental data (along with technical data) in the industry. Since about year 2000, with
the power of computers to crunch vast quantities of data, a new career has been invented. At
some funds (called Quant Funds) the manager's decisions have been replaced by proprietary
mathematical models.
3.7 CONCLUSIONS
Fundamental analysis can be valuable, but it should be approached with caution. If you are
reading research written by a sell-side analyst, it is important to be familiar with the analyst
behind the report. We all have personal biases, and every analyst has some sort of bias. There
is nothing wrong with this, and the research can still be of great value. Learn what the ratings
mean and the track record of an analyst before jumping off the deep end. Corporate
statements and press releases offer good information, but they should be read with a healthy
degree of skepticism to separate the facts from the spin. Press releases don't happen by
accident; they are an important PR tool for companies. Investors should become skilled
readers to weed out the important information and ignore the hype.ignore the hype.
CHAPTER 4
TECHNICAL ANALYSIS
4.1 MEANING OF TECHNICAL ANALYSIS
Technical analysis is a security analysis technique that claims the ability to forecast the
future direction of prices through the study of past market data, primarily price and volume.
In its purest form, technical analysis considers only the actual price and volume behaviour of
the market or instrument. Technical analysts, sometimes called "chartists", may employ
models and trading rules based on price and volume transformations, such as the relative
strength index, moving averages, regressions, inter-market and intra-market price
correlations, cycles or, classically, through recognition of chart patterns.
Technical analysis stands in distinction to fundamental analysis. Technical analysis "ignores"
the actual nature of the company, market, currency or commodity and is based solely on "the
charts," that is to say price and volume information, whereas fundamental analysis does look
at the actual facts of the company, market, currency or commodity. For example, any large
brokerage, trading group, or financial institution will typically have both a technical analysis
and fundamental analysis team.
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.
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.
4. 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 report, 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.
the other hand, looks at economic factors, known as fundamentals. Let's get into the details of
how these two approaches differ, the criticisms against technical analysis and how technical
and fundamental analysis can be used together to analyze securities.
The Differences
1. Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a
fundamental analyst starts with the financial statements. By looking at the balance sheet, cash
flow statement and income statement, a fundamental analyst tries to determine a company's
value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this
approach, investment decisions are fairly easy to make - if the price of a stock trades below
its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental
analysis goes beyond just the financial statements).
Technical traders, on the other hand, believe there is no reason to analyze a company's
fundamentals because these are all accounted for in the stock's price. Technicians believe that
all the information they need about a stock can be found in its charts.
2. Time Horizon
Fundamental analysis takes a relatively long-term approach to analyzing the market
compared to technical analysis. While technical analysis can be used on a timeframe of
weeks, days or even minutes, fundamental analysis often looks at data over a number of
years.
The different timeframes that these two approaches use is a result of the nature of the
investing style to which they each adhere. It can take a long time for a company's value to be
reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not
realized until the stock's market price rises to its "correct" value. This type of investing is
called value investing and assumes that the short-term market is wrong, but that the price of a
particular stock will correct itself over the long run. This "long run" can represent a
timeframe of as long as several years, in some cases.
Furthermore, the numbers that a fundamentalist analyzes are only released over long periods
of time. Financial statements are filed quarterly and changes in earnings per share don't
emerge on a daily basis like price and volume information. Also remember that fundamentals
are the actual characteristics of a business. New management can't implement sweeping
changes overnight and it takes time to create new products, marketing campaigns, supply
chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore,
is because the data they use to analyze a stock is generated much more slowly than the price
and volume data used by technical analysts.
3. Trading Versus Investing
Not only is technical analysis more short term in nature that fundamental analysis, but the
goals of a purchase (or sale) of a stock are usually different for each approach. In general,
technical analysis is used for a trade, whereas fundamental analysis is used to make an
investment. Investors buy assets they believe can increase in value, while traders buy assets
they believe they can sell to somebody else at a greater price. The line between a trade and an
investment can be blurry, but it does characterize a difference between the two schools.
A resistance level is the opposite of a support level. It is where the price tends to find
resistance as it is going up. This means the price is more likely to "bounce" off this level
rather than break through it. However, once the price has passed this level, by an amount
exceeding some noise, it is likely that it will continue rising until it finds another resistance
level.
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).
As it can be seen in this Figure, 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 trend lines 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.
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.
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.
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. 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.
4.6.10 Random Walk Hypothesis
The random walk hypothesis is a financial theory stating that stock market prices evolve
according to a random walk and thus the prices of the stock market cannot be predicted. It
has been described as 'jibing' with the efficient market hypothesis. Economists have
historically accepted the random walk hypothesis. They have run several tests and continue to
believe that stock prices are completely random because of the efficiency of the market.
4.7.11 Technical Trends
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.
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.
There are three types of trends as:
Up-Trend
As the names imply, when each successive peak and trough is higher, it's referred to as an
upward trend.
Downtrend
It describes the price movement of a financial asset when the overall direction is downward.
A formal downtrend occurs when each successive peak and trough is lower than the ones
found earlier in the trend.
a general trend. These lines are used to clearly show the trend and are also used in the
identification of trend reversals.
As it can be seen in the figure, 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.
(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 2011 (Point 1), the
price of this stock was around INR 245, whereas in June 2012 (Point 2), the stock's price is
around INR 265. This tells us that the stock has risen between October 2011 and June 2012.
4.6.15.1 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 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.
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.
1. 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.
Source: www.metastock.com
2. Bar Charts
One of the basic tools of technical analysis is the Bar Chart, where the open, close, high, and
low prices of stocks or other financial instruments are embedded in bars which are plotted as
a series of prices over a specific time period. Bar charts allow traders to see patterns more
easily. In other words, each bar is actually just a set of 4 prices for a given day, or some other
time period, that is connected by a bar in a specific wayhence, it is often referred to as a
price bar.
While the candlestick chart shows basically the same information as the bar chart, certain
patterns are more apparent in the candlestick chart. The candlestick chart emphasizes opening
and closing prices. The top and bottom of the real body represents the opening and closing
prices. Whether the top represents the opening or closing price depends on the color of the
real bodyif it is white, then the top represents the close; black, or some other dark color,
indicates that the top was the opening price. The length of the real body shows the difference
between the opening and closing prices. Obviously, white real bodies indicate bullishness,
while black real bodies indicate bearishness, and their pattern is easily observable in a
candlestick chart.
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. 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
It can be illustrated as:
4. Point-and-Figure Charts:
Point-and-figure charts list only significant price information as columns of X's and O's
without regard to time, so that trends, resistance and support levels are more apparent.
Although time is depicted on the horizontal axis, the units of time are determined by when
the trend changes.
There are several ways of constructing point-and-figure charts, but all are based on box size,
which is the minimum price differential necessary before a price is recorded as an X or an O.
Columns of X's show an uptrend, and O's show a downtrend. Generally, closing price
differentials are used. There is no high, low, opening, or closing prices recorded, since only
the change in price greater than the box size is recorded as an X if the price differential is up
or as an O if it is down. Each consecutive X is recorded in the same column above the
previous X until the price reverses by more than the box size, then a new column is started by
recording an O in a box below and to the right of the highest X in the previous column. O's
are added downward with each price decrease greater than the box size until the downtrend
reverses to an uptrend, starting a new column where the 1st X is placed in the box above and
to the right of the last O in the previous column.
The construction of point-and-figure charts simplifies the drawing of trend lines, and support
and resistance levels, which is why point-and-figure charts are ideal for detecting trends, and
determining support and resistance levels.
Following is the point-and-figure chart of Intel Corporation. In this chart, the X's are green
and the O's are red, which increases their contrast, making patterns more apparent.
Source: www.tradestation.com
This seems to be the most common type of point-and-figure chart, but there are several
variations that differ significantly from the above description.
Charts are one of the most fundamental aspects of technical analysis. It is important that one
should clearly understand what is being shown on a chart and the information that it provides.
4.6.15.3 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.
The theory behind chart patterns is based on the third assumption that is history repeats itself.
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.
1. 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, 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.
As it can be seen in the above figure, 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.
3. 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.
ascending and descending triangle. These chart patterns are considered to last anywhere from
a couple of weeks to several months.
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.
4.7.1 Moving Average Convergence Divergence (MACD):
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 nine-day 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.
Another aspect to the MACD indicator that is often found on charts is the MACD histogram.
The histogram is plotted on the centerline and represented by bars. Each bar is the difference
between the MACD and the signal line or, in most cases, the nine-day exponential moving
average. The higher the bars are in either direction, the more momentum behind the direction
in which the bars point.
As you can see in below figure, one of the most common buy signals is generated when the
MACD crosses above the signal line (blue dotted line), while sell signals often occur when
the MACD crosses below the signal.
The standard calculation for RSI uses 14 trading days as the basis, which can be adjusted to
meet the needs of the user. If the trading period is adjusted to use fewer days, the RSI will be
more volatile and will be used for shorter term trades.
4.7.3 STOCHASTIC OSCILLATOR
The stochastic oscillator is one of the most recognized momentum indicators used in
technical analysis. The idea behind this indicator is that in an uptrend, the price should be
closing near the highs of the trading range, signaling upward momentum in the security. In
downtrends, the price should be closing near the lows of the trading range, signaling
downward momentum.
The stochastic oscillator is plotted within a range of zero and 100 and signals overbought
conditions above 80 and oversold conditions below 20. The stochastic oscillator contains two
lines. The first line is the %K, which is essentially the raw measure used to formulate the idea
of momentum behind the oscillator. The second line is the %D, which is simply a moving
average of the %K. The %D line is considered to be the more important of the two lines as it
is seen to produce better signals. The stochastic oscillator generally uses the past 14 trading
periods in its calculation but can be adjusted to meet the needs of the user.
prospects regarding a particular stock. It indicates the direction of the price of the share by
looking in to which an investor can think for investment on that particular stock.
Seven Basic Principles of Dow's Theory:
1.Everything is discounted by the price Averages, specifically, the Dow-Jones Industrial
Average and the Dow-Jones Transportation Average. Since the Averages reflect all
information, experience, knowledge, opinions, and activities of all stock market investors,
everything that could possibly affect the demand for or supply of stocks is discounted by the
Averages.
2.There are three trends in stock prices. 1) The Primary Tide is the major long-term trend.
But no trend moves in a straight line for long, and 2) Secondary Reactions are the
intermediate-term corrections that interrupt and move in an opposite direction against the
Primary Tide. 3) Ripples are the very minor day-to-day fluctuations that are of concern only
to short-term traders and not at all to Dow Theorists.
3. Primary Tides going up, also known as Bull Markets, typically unfold in three up
moves in stock prices. The first move up is the result of far-sighted investors accumulating
stocks at a time when business is slow but anticipated to improve. The second move up is a
result of investors buying stocks in reaction to improved fundamental business conditions and
increasing corporate earnings. The third and final up move occurs when the general public
finally notices that all the financial news is good. During the final up move, speculation runs
rampant.
4. Primary Tides going down, also known as Bear Markets, typically unfold in three
down moves in stock prices. The first move down occurs when far-sighted investors sell
based on their experienced judgement that high valuations and booming corporate earnings
are unsustainable. The second move down reflects panic as a now fearful public dumps at any
price the same stock they just recently bought at much higher prices. The final move down
results from distress selling and the need to raise cash.
5. The two averages must confirm each other. To signal a Primary Tide Bull Market major
trend, both averages must rise above their respective highs of previous upward Secondary
Reactions. To signal a Primary Tide Bear Market major trend, both the Dow-Jones Industrial
Average and the Dow-Jones Transportation Average must drop below their respective lows of
previous Secondary Reactions. A move to a new high or low by just one average alone is not
meaningful. Also, it is not uncommon for one average to signal a change in trend before the
other. The Dow Theory does not stipulate any time limit on trend confirmation by both
averages.
6. Only end-of-day, closing prices on the averages are considered. Price movements during
the day are ignored.
7. The Primary Tide remains in effect until a Dow Theory reversal has been signaled by
both averages.
It can act as an yardstick to choose the growing stocks and investing in those in anticipation
of future profits.
4.7.5 The Short Interest Ratio Theory
The Short Interest Ratio is derived by dividing the reported short interest or the number of
shares sold short, by the average volume foe about 30 days. When short sales increase
relative to total volume, the indicator rises. A ratio above 150% is considered bullish, and a
ratio below 100% is considered bearish.
The logic behind this ratio is that speculators and other investors sell stocks at high price in
anticipation of buying them back at lower prices. Thus, increasing short selling is viewed as a
sign of general market weakness, and short covering (as evidenced by decreasing short
positions) as a sign of strength. An existing large short interest is considered a sign of
strength, since the cover (buying) is yet to come; whereas an established slight short interest
is considered a sign of weakness (more short-sells are to come).
4.7.6 The Confidence Index
It is the ratio of a group of lower-grade bonds to a group of higher-grade bonds. According to
the theory underlying this index, when the ratio is high, investors confidence is likewise
high, as reflected by their purchase of relatively more of the lower-grade securities. When
they buy relatively more of the higher-grade securities, this is taken as an indication that
confidence is low, and is reflected in a low ratio.
4.7.7 SPREADS
Large spread between yields indicate low confidence and are bearish; the market appears to
require a large compensation for business, financial and inflation risks. Small spreads
indicate high confidence and are bullish. In short, the larger the spreads, the lower the ratio
and the less the confidence. The smaller the spreads, the greater the ratio, indicating greater
confidence.
presidents reason for selling the stock may not be related to the future growth of the
company, it is still considered bearish as investors figure the president, as an insider, must
know something bad about the company that they, as outsiders, do not know.
Technicians believe that all the information they need about a stock can be found in
its charts.
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
the general direction that a security is headed is. 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.
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.
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.
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 relative strength index (RSI) helps to signal overbought and oversold
conditions in a security.
The stochastic oscillator compares a security's closing price to its price range over a
given time period.
CHAPTER-5
A SAMPLE SURVEY
5.1 OBJECTIVES OF THE SURVEY
The survey has been carried out in order to find out:
Whether people invest in stock market?
How much returns one expects by investing in stock market?
Whether investors believe in Technical Analysis and/or Fundamental Analysis?
Do people use Technical Indicators at the time of investment decision-making?
Do Technical Analysis better than Fundamental Analysis as an indicator?
5.2 SAMPLE COMPOSITION
In all 220 persons were interviewed. 20 out of them revealed that they dont have any interest
in securities market. Therefore, those respondents were not considered for answering the
questionnaire. The remaining 200 thereby formed the sample size of this survey.
1. Age Composition
20-30
30-40
40-60
More than 60
106
80
14
20-30
30-40
40-60
More than 60
2. Occupation
Self-
Salarie
Employed
Student
Govt. Employee
Retired
Others
40
100
47
Chart Title
Self-Employed
Salaried
Student
Govt. Employee
Retired
Others
Rs. 5,000 to
Rs. 10,000 to
Rs. 25,000 to
Rs. 5,000
Rs. 10,000
Rs. 25,000
Rs. 50,000
Above
54
94
20
26
Rs.50,000 and
Do not Invest
147
53
Invest
Do not Invest
10% -
20%-
More Than
10%
20%
50%
50%
12
21
102
65
Mid
Penny
Chip
Cap
Shares
All
54
127
19
Blue Chip
Mid Cap
Penny Shares
All
Don't Practice
82
118
Practice
Don't Practice
Fundamental
Technical
Analysis
Analysis
Both
None
51
47
84
18
Fundamental
Analysis
Technical Analysis
Both
None
Don't Use
90
110
Use
Don't Use
Candle Stick
Line Chart
Bar Chart
Chart
Chart
All
Non
45
55
18
55
18
Line Chart
Bar Chart
Candle Stick Chart
Point & Figure Chart
All
Non
Trade
Don't Trade
127
73
Trade
Don't Trade
Index Options
Stock Futures
Stock Options
All
45
27
37
Index Futures
Index Options
Stock Futures
Stock Options
All
In Favour
Against
Can't Say
126
60
14
Against
Can't Say
In Favour
As most of the people have the opinion that Technical Analysis indicates the market behavior,
it can be accepted that Technical Analysis is an indicator for investment decision making.
small profits will add up to huge profit amount in a single day. Get satisfied in small profit
and do multiple trades.
6.DontOvertrade
First and very important is not to Overtrade - Never put all your money/savings in share
market. Most of the brokers provide margin amount but it is up to you how to make use of
this margin amount. Most of the traders make use of this margin amount for over trading
which is risky.
7. Wait, Watch and Trade
Do not jump in market early. Wait, watch and trade. Confirm the market direction and make
sure and confirm all your strategies like resistance and support levels and then plan to trade.
8. Study tips carefully
Do not react to tips given by anyone - First observe that stock, check the volume, where they
are increasing or decreasing and then decide your trade. Do not buy or sell blindly based on
share tips. Most of the share tips do not work if market direction changes.
9. Always go with Market trend
Dont short sell, if the market is going up and dont buy if the market is falling down. Trade
with market direction and dont go against market direction.
10. Try to minimize your Loss and increase profit
Get ready to accept loss if you do wrong trade - Come out of your trade if you have entered
in wrong time by accepting loss instead of waiting for trade to reverse and finally it is
coming down from top means it is cooling, if you see more buyer than seller then you can
hold your position. You must know which share has what momentum, means if the share
price is Rs.120 then you can expect upside from Rs.1 to 5 and not Rs.50 to 100. If the scrip is
going up, it will go in ladder fashion, it will go up and it will come down bit and it will again
continue its upward journey.
11. Wait for opportunity
If you are not sure about market movement then watch and wait for opportunity dont trade
forcefully. Some times market move in range bound means market move up-down in very
small range at that time it becomes very difficult to judge the market direction and do
intraday trading. Its always better to wait instead of losing money.
CHAPTER-6
CONCLUSION AND SUGGESTIONS
6.1 FINDINGS:
From this study one can able to extract out the fundamental aspects of Technical Analysis as
well as its applicability. Some of the major findings of the study are mentioned below:
1) Unlike Fundamental Analysis, Technical Analysis is also very much important to play in
the stock market.
2) Fundamental Analysis tells about right choice where as Technical Analysis tells about
the right time to enter or exit from the market.
3) Technical Analysis assumes that history tends to repeat itself, but it is not wise to believe
that the same trend will occure next.
4) Support and Resistance levels are the levels at which a lot of traders are willing to buy
the stock or sell it. So, an investor has to keep its eyes and ears open at this point of time.
5) Among the various types of charts the Candle-Stick Chart is the most effective and
acceptable tool to evaluate the performance of a stock and forecast the future.
6) When an investor looks in to the numerous types of chart patterns, it creates a lot of
confusion and expectations in the minds of the investors.
7) The Moving Average Convergence Divergence (MACD) is the most well known and
used indicator in Technical Analysis as it is based on real facts of past performance.
8) In trading, volumes have equal importance along with price to confirm the formulation
of a trend or a technical pattern. With the help of volumes we can easily determine
whether the demand side is greater or supply side is greater for stocks at any given point
of time.
9) In Bhubaneswar, most of the investors are risk-averse in nature. People hesitate to invest
in derivatives by taking much risk.
10) Most of the investors are not aware of the sophisticated and well designed tools of
technical analysis. They invest without going through the technical analysis.
11) Though Technical Analysis plays a lions role to decide investment pattern as
Fundamental Analysis, it cannot be treated as a substitute to Fundamental Analysis.
6.2 SUGGESTIONS:
By going through the subject matter, analysis, opinion of the respondents and the findings,
the following points can be suggested for the purpose of further reference and
implementation:
1) Technical analysis is a game of charts and figures. So, at the time of taking any decision
regarding investment, Fundamental Analysis and other factors should also be taken in to
consideration along with Technical Analysis.
2) Instead of looking in to all chart patterns, it is good to follow a single chart pattern and
to draw timely conclusion by interpreting that.
3) Market never tells anything of its own! Its the investor who has to look in to the market
and catch up the indicator to forecast and expect the market trend.
4) Most of the investors assume that by using charts and patterns, they can earn much by
purchasing in low and selling at high prices. But, it is not so easy as they think. So, such
believes should be rooted out from mind before looking towards market.
5) As we have a globalised market, along with the domestic market the performance of the
overseas markets should also be considered and the help of modern financial
instruments should be taken to reduce risk and maximize the probability of gaining
more.
6) And, as per Apollo Sindhoori Capital Investments Ltd. Is concerned, there is an ample
scope to expand and increase its revenue in this post-recession-recovering market. So,
the organisation has to look in to its service-providing-skills and problems to attract
more customers in the market. Although it has a good brand name, still it has to go for
optimum advertisement and well skilled human resources.
6.3 CONCLUSION:
A large number of new investors think that there is easy and quick money in investing and
day trading. They think that they can buy at bottoms and sell at tops very easily. They thing
that since they can analyse the chart patterns and use technical analysis very well, they can
trade consistently with 90% accuracy. They think that they can invest small amount and trade
for large amounts to earn big profits by utilizing multiple exposure on their margin amount
and fail to understand the real market behavior. They fail to understand that investing is not
like GO..STOP game. Here, only disciplined investors well equipped with sophisticated
technical tools having presence of mind can sustain and make the indices favourable for them
irrespective of market trends whether bull or bear. The only thing that matters in investment
is Right Time and Right Choice which can be tamed through proper analysis and
understanding of the whole game as the NSE has rightly narrated.
There are no secret formulas to succeed in the markets and players have to adapt constantly to the changes the
market throws at them.
Success is simple. Do what's right, the right way, at the right time.
SOCHKAR,
SAMAJHKAR,
INVESTKAR
BIBLIOGRAPHY:
1. Bhat, Sudhindra: Security Analysis And Portfolio Management, Excel Books, First
Edition, 2008
2. Singh, Preeti: Investment Management, Himalaya Publishing House, 14th Edition,
2006
3. Chandra, Prasanna: Investment Analysis And Portfolio Management, Tata Mcgraw
Hill Pub. Co. Ltd.
4. Fischer, Donald E. and Jordan, Ronald T.: Security Analysis And Portfolio
Management, Pearson, Prentice Hill, 16th Edition, 2006
WEBLIOGRAPHY:
To complete this study the following Internet portals have helped a lot:
1. www.destimoney.com
2. www.moneycontrol.com
3. www.trending123.com
4. www.investopedia.com
5. www.sharevyapaar.com
6. www.nseindia.com
7. www.myiris.com
8. www.wikipedia.com
9. www.metastock.com
10. www.findarticles.com
11. www.tradestation.com
12. www.stockcharts.com
13. www.traderslog.com
14. www.learningmarkets.com
15. www.thismatter.com
16. www.bseindia.com
APPENDIX:
Graduate
Post Graduate & above
8. What is your occupation?
Accounts, Finance & Investment
Professionals
Others
9.you invest in stock market?
(Yes/No)
_______
_______
b)Midcap
c)Penny Shares
(Yes/No)
16. What is your risk tolerance level for short term fluctuations in your invested money in
case of equity investments?
Very low____________________________________1
Low________________________________________2
Moderate____________________________________3
High_______________________________________4
Very high__________________________________ 5
17. What is your attitude towards the following Financial Instruments, in the Indian Capital
Market? (Please mark the suitable option)
Highly
Favourable
Favourable
Very Not
Favourable
at
favourable
a) Shares
b)Debentures
c)Mutual Funds
d)Bonds
18. What is your level of financial knowledge about the various investment avenues in the
market?
Excellent____________________________________1
Good_______________________________________2
Moderate____________________________________3
Not much___________________________________4
Very low____________________________________5
19. What are the various sources of investment information for you?
Newspapers/Magazines
Electronic Media (T.V.)
Peer group/Friends
Broker/Financial advisor
Internet
all
b)Technical
d)None
22.
(Yes/No)
(Yes/No)
(Yes/No)
(Yes/No)
i) Line Chart
ii)Bar Chart
(Yes/No)
b)Stock Options
c)Index Futures
d)Index Options
(Yes/No)
25. Do you treat Technical Analysis as a compass to forecast and foresee the right direction of the
stock market?
(Yes/No)