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S.

K SOMAIYA COLLEGE OF ARTS, SCIENCE &
COMMERCE

VIDYAVIHAR (EAST), MUMBAI - 400077

PROJECT ON:
“TECHNICAL ANALYSIS”

MASTERS OF COMMERCE
(BANKING & FINANCE)

PART 2 (SEM-3)
(2016-2017)

Submitted:
In Partial Fulfillment of the requirements
For the Award of the Degree of
MASTERS OF COMMERCE
(BANKING & FINANCE)
BY
JIGNA M. BHANUSHALI
1

ROLL NO : 05

CERTIFICATE

This is to certify that MS. JIGNA M. BHANUSHALI of M.Com (BANKING
AND FINANCE) Semester- 3(2016-17) has successfully completed the project
on Technical Analysis under the guidance of Mr.Ajay

________________ ________________
Course Coordinator Principal

________________
Project Guide/Internal Examiner

_______________
External Examiner

Date:

2

DECLARATION

I JIGNA M. BHANUSHALI student of class in M.com (BANKING
& FINANCE) PART 2 (SEM-3), ROLL NO.05 , academic year
2016-2017 Studying at S.K. SOMAIYA COLLEGE OF ARTS,
SCIENCE AND COMMERCE, hereby declare that the work done
on the project Entitled “Technical Analysis” is true and original and
any Reference used in this project is duly acknowledged.

Date:

Place:

_________________

Student Signature

JIGNA BHANUSHALI

Roll No. 05

3

ACKNOWLEDGEMENT

Talent and capabilities are of course necessary but opportunities and good
guidance is very important things without which no person can climb those
infant ladders towards progress.

With regard to my project I would like to thank each and every one who offered
help, guidance and support whenever required.

I take immense pleasure in thanking Ms.Shama shah and other staff for their
support and guidance in the project work.

I am extremely grateful to my Ms.Shama shah for his valuable guidance and
kind suggestions.

Finally and yet importantly I would like to express my heartfelt thanks to my
beloved parents and friends for their blessings, my classmates for their help and
wishes for the successful completion of this project.

_______________

JIGNA M. BHANUSHALI

4

INDEX Sr. 1. Technical Analysis v/s Fundamental Analysis 10-12 4. What is Chart? 13-15 5. Case study 38-41 9. Types of chart 16-20 6. Particulars Page No. What is technical Analysis 7-9 3.No. Importance of support & Resistance 32-37 8. Introduction 6 2. Business Cycle & Economic Cycle 21-31 7. Conclusion 42 10 Refrence 43 5 .

trends etc. It’s not hard to guess how fascinating it is and so I decided to unlock the mystery as far as possible in this two months time. RTS for Russia etc Once the company is listed everything a company does / doesn’t is reacted upon by the public and the prices of the share of the respective company fluctuate. Dowjones for USA. Which stock will rise today and which ones will fall? 3. Where will NIFTY go from here? 2. Should I hold it or square off my positions? 4. But the real piece of magic lies in making money by trading shares either Intraday or holding for a short term. HANGSENG for Hong Kong. But this uncertainty of the price gives people a chance to make money both in long term & short term. Why is hedging required / how is it done? 6 . NIKKEI for Japan. they wouldn’t mind if its over valued but it hurts when the stocks get under valued. Long term investment is mainly based upon studying fundamentals of the company and its growth potential. charts. If one wants to make money in this way he / she needs to know the technical side of the stock i.e. Now the company would always want a true picture of the company to be represented by share price. one has to see to believe. understand and implement it and that was my main objective after all who doesn’t want to know the answers of following questions: 1. INTRODUCTION In today’s world companies become known or considered big when they are listed on reputed Stock Exchanges namely NSE (NIFTY) & BSE (SENSEX) for India. This field is very difficult to be taught in classroom perhaps beyond scope.

technical analysts don't care whether a stock is undervalued . whereas fundamental analysis does look at the actual facts of the company. Technical analysts. through recognition of chart patterns. Technical analysis "ignores" the actual nature of the company. regressions. or financial institution will typically have both a technical analysis and fundamental analysis team. Some rely on chart patterns. inter-market and intra-market price correlations. primarily price and volume. In any case. T E C H N I C ALAN ALYS I S What Is 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. For example. and most use some combination of the two. such as the relative strength index. technical analysis considers only the actual price and volume behavior of the market or instrument. may employ models and trading rules based on price and volume transformations. Technical analysis stands in distinction to fundamental analysis. sometimes called "chartists"." that is to say price and volume information. Unlike fundamental analysts.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. 7 . any large brokerage. market. Just as there are many investment styles on the fundamental side. there are also many different types of technical traders. technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. currency or commodity and is based solely on "the charts. currency or commodity. market. trading group. classically. cycles or. moving averages. In its purest form. others use technical indicators and oscillators.

market participants tend to provide a consistent reaction to similar market stimuli over time. 2. ignoring the fundamental factors of the company. the future price movement is more likely to be in the same direction as the trend than to be against it. removing the need to actually consider these factors separately. at any given time. This only leaves the analysis of price movement. they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. The Market Discounts Everything A major criticism of technical analysis is that it only considers price movement. History Tends To Repeat Itself Another important idea in technical analysis is that history tends to repeat itself. are all priced into the stock. Technical analysis uses chart patterns to analyze market movements and understand trends. mainly in terms of price movement. technical analysis assumes that. which technical theory views as a product of the supply and demand for a particular stock in the market. 8 . 3. Technical analysts believe that the company's fundamentals. Although many of these charts have been used for more than 100 years. However. Price Moves in Trends In technical analysis. along with broader economic factors and market psychology. a stock's price reflects everything that has or could affect the company . Most technical trading strategies are based on this assumption. in other words.ASSUMPTIONS 1. The repetitive nature of price movements is attributed to market psychology. This means that after a trend has been established.including fundamental factors. price movements are believed to follow trends.

but keep in mind that these concepts can be applied to any type of security. futures and commodities. technical analysis is more frequently associated with commodities and forex. forex.Not Just for Stocks Technical analysis can be used on any security with historical trading data. Now that you understand the philosophy behind technical analysis. etc. we'll usually analyze stocks in our examples. In this tutorial. fixed-income securities. In fact. One of the best ways to understand what technical analysis is (and is not) is to compare it to fundamental analysis. where the participants are predominantly traders. This includes stocks. T E C H N I C ALAN ALYS I S & F U N D AM E N TALAN ALYS I S 9 . we'll get into explaining how it really works.

As we've mentioned. a technical analyst approaches a security from the charts. Technicians believe that all the information they need about a stock can be found in its charts. a fundamental analyst tries to determine a company's value. technical analysis looks at the price movement of a security and uses this data to predict its future price movements. an analyst attempts to measure a company's intrinsic value. on the other hand. In financial terms. investment decisions are fairly easy to make . cash flow statement and income statement. By looking at the balance sheet. Financial Statements At the most basic level. on the other hand. 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. days or even minutes. while a fundamental analyst starts with the financial statements . fundamental analysis often looks at data over a number of years. While technical analysis can be used on a timeframe of weeks.if the price of a stock trades below its intrinsic value. known as fundamentals. The Differences Charts vs.Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical traders. believe there is no reason to analyse a company's fundamentals because these are all accounted for in the stock's price. Time Horizon Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. In this approach. it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements). looks at economic factors. 10 . Fundamental analysis.

but it does characterize a difference between the two schools. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. in some cases. Also remember that fundamentals are the actual characteristics of a business. etc. therefore. a gain is not realized until the stock's market price rises to its "correct" value. while traders buy assets they believe they can sell to somebody else at a greater price. marketing campaigns. Furthermore. It can take a long time for a company's value to be reflected in the market. New management can't implement sweeping changes overnight and it takes time to create new products. supply chains. In general. so when a fundamental analyst estimates intrinsic value. Part of the reason that fundamental analysts use a long-term timeframe. The line between a trade and an investment can be blurry. 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. but the goals of a purchase (or sale) of a stock are usually different for each approach. Trading Versus Investing Not only is technical analysis more short term in nature that fundamental analysis. the numbers that a fundamentalist analyzes are only released over long periods of time. technical analysis has only recently begun to enjoy some mainstream credibility. whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value. 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. The Critics Some critics see technical analysis as a form of black magic. While most 11 .The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. technical analysis is used for a trade. In fact. This type of investing is called value investing and assumes that the short-term market is wrong.

just about any major brokerage now employs technical analysts as well. Much of the criticism of technical analysis has its roots in academic theory . the gains on the investment can be greatly improved. technical analysis can't predict future movements because all past information has already been accounted for and. Alternatively. The third is strong form efficiency. some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. By timing entry into a security. a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. therefore. fundamental analysis is also claimed to be of little use in finding investment opportunities. semi- strong form efficiency. The vast majority of academics believe in at least the weak version of EMH. In the first. Oftentimes.specifically the efficient market hypothesis (EMH). any analysis to find undervalued securities is useless. therefore.any past trading information is already reflected in the price of the stock and. This theory says that the market's price is always the correct one . this situation occurs when the security is severely oversold. market efficiency will be called into question.analysts on Wall Street focus on the fundamental side. from their point of view. if a sell signal is given through technical patterns and indicators. For example. For example. all past price information is already included in the current price. Oftentimes. According to weak form efficiency. having both the fundamentals and 12 .the oil and water of investing . some technical traders might look at fundamentals to add strength to a technical signal. There are three versions of EMH. if technical analysis works. which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental can provide investors with an edge. In the second. called weak form efficiency. therefore. Can They Co-Exist? Although technical analysis and fundamental analysis are seen by many as polar opposites . analyzing the stock’s past price movements will provide no insight into its future movements.many market participants have experienced great success by combining the two.

charts are similar to the charts that you see in any business setting. By looking at the graph we see that in October 2004 (Point 1). the price of the security is shown. a chart may show a stock's price movement over a one-year period. 13 . whereas in June 2005 (Point 2). The bottom of the graph. the price of this stock was around INR 245. the stock's price is around INR 265. A chart is simply a graphical representation of a series of prices over a set time frame. there are certainly benefits to at least understanding both schools of thought. What is Chart? In technical analysis. is the date or time scale. On the right hand side. For example.5 year period. It is a representation of the price movements of a stock over a 1. This tells us that the stock has risen between October 2004 and June 2005.technicals on your side can provide the best-case scenario for a trade. running vertically (y-axis). running horizontally (x-axis). While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school. where each point on the graph represents the closing price for each day the stock is traded: Figure 1 provides an example of a basic chart.

as these factors can affect the information that is provided. Again. each data point will be a representation of the price movement of the week. monthly and even yearly time scales to monitor both short-term and intermediate trends in price movement. The most frequently used time scales are intraday. weekly. So for a weekly chart. Intraday charts plot price movement within the period of one day. Each data point can represent the closing price of the period or show the open. The Price Scale and Price Point Properties The price scale is on the right-hand side of the chart.Chart Properties There are several things that you should be aware of when looking at a chart. This means that the time scale could be as short as five minutes or could cover the whole trading day from the opening bell to the closing bell. the price scale and the price point properties used. They include the time scale. quarterly and annually. Daily charts are comprised of a series of price movements in which each price point on the chart is a full day’s trading condensed into one point. daily. low and close for the stock over the day. The shorter the time frame. the more detailed the chart. For example. monthly. The Time Scale The time scale refers to the range of dates at the bottom of the chart. which can vary from decades to seconds. high. Each data point in these graphs will be a condensed version of what happened over the specified period. These data points are spread out over weekly. if you are looking at a chart of weekly data spread over a five-year period and each data point is the closing price for the week. monthly. the low and the close depending on the chart used. the price that is plotted will be the closing price on the last trading day of the week. the high. quarterly and yearly charts are used to analyze longer term trends in the movement of a stock's price. which is usually a Friday. This may seem like a simple concept in that the price scale goes from lower prices to higher 14 . each point on the graph can be simply the closing price or can entail the open. It shows a stock's current price and compares it to past data points. Weekly.

then the distance between points will be equal in terms of percent change. while the move from 40 to 50. TYPES OF CHARTS 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. is in the structure of the scale itself. percentage-wise. 20. The problem. the logarithmic price scale on the right leaves the same amount of space between 10 and 20 as it does between 20 and 40 because these both represent 100% increases. The line is formed by 15 . In Figure 2. it indicates a smaller move. however. A price change from 10 to 20 is a 100% increase in the price while a move from 40 to 50 is only a 25% change. 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. In other words. The chart types are: the line chart. On a logarithmic scale. 25 the move from 10 to 20 is represented by a larger space one the chart. 30. the space between each price point (10. A scale can either be constructed in a linear (arithmetic) or logarithmic way. the distance of the 100% price change from 10 to 20 will not be the same as the 25% change from 40 to 50. In this case. If a price scale is constructed using a linear scale. the candlestick chart and the point and figure (not used in Microsec as such) chart. 40) is separated by an equal amount. even though they are represented by the same distance on a linear scale.prices as you move along the scale from the bottom to the top. If a price scale is in logarithmic terms. the bar chart. 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. the price scale measures moves in absolute terms and does not show the effects of percent change. and both of these options are available on most charting services. is represented by a smaller space because.

low and opening prices. Line charts do not provide visual information of the trading range for the individual points such as the high. which means it has gained value. the close is represented by the dash on the right. along with the closing price. This vertical line represents the high and low for the trading period. representing an up period for the stock. 16 . However. A bar that is colored red signals that the stock has gone down in value over that period. 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. the dash on the right (close) is lower than the dash on the left (open). The chart is made up of a series of vertical lines that represent each data point. Generally. The close and open are represented on the vertical line by a horizontal dash. if the left dash (open) is lower than the right dash (close) then the bar will be shaded black.connecting the closing prices over the time frame. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. BarCharts The bar chart expands on the line chart by adding several more key pieces of information to each data point. When this is the case. Conversely.

candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. like bar charts.Candlestick Charts The candlestick chart is similar to a bar chart. There are two color constructs for days up and one for days that the price falls. but it differs in the way that it is visually constructed. which illustrates the difference between the open and close. depending on the site. Similar to the bar chart. it is important to understand the candlestick configuration used at the chart site you are working with. When the price of the stock is up and closes above the opening trade. If the stock's price has closed above the previous day's close but below the day's open. the candlestick will usually be white or clear. The difference comes in the formation of a wide bar on the vertical line. is that different sites use different standards. then the candlestick will usually be red or black. the candlestick also has a thin vertical line showing the period's trading range. however. the candlestick will be black or filled with the color that is used to indicate an up day. 17 . And. If the stock has traded down for the period. therefore. A major problem with the candlestick color configuration.

The point and figure chart removes the noise. or insignificant price movements. which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis.Point and Figure Charts The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. in the stock. 18 .

or vice versa. The Xs represent upward price trends and the Os represent downward price trends. which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or. a box represents $1. On most charts where the price is between $20 and $100. it shifts to the right. 19 .When first looking at a point and figure chart. There are also numbers and letters in the chart. these represent months. Each box on the chart represents the price scale. you will notice a series of Xs and Os. signaling a trend change. in other words. and give investors an idea of the date. The other critical point of a point and figure chart is the reversal criteria. or 1 point for the stock. how much the price has to move in order for a column of Xs to become a column of Os. This is usually set at three but it can also be set according to the chartist's discretion. When the price trend has moved from one trend to another.

price inflation. pay for its imports and service foreign debts.the world economy. can be a tremendous burden on an economy. The political equation A stable political environment is necessary for steady. However. It may have splendid managers and a tremendous product. Foreign Debt and the Balance of Trade Foreign debt. therefore. government policy and societal factors (to name just a few elements) within a business cycle framework. balanced growth. If a country is ruled by a stable government which takes decisions for the long-term development of the country. especially if it is very large. The Threat of Nationalization The threat of nationalization is a real threat in many countries – the fear that a company may become nationalized. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators. demand falls. As a consequence. taxes and a host of others. It is important. ECONOMIC ANALYSIS: POLITICO-ECONOMIC ANALYSIS: No industry or company can exist in isolation. Foreign Exchange Reserves A country needs foreign exchange reserves to meet its commitments. its sales and its costs are affected by factors. Within the country it erodes purchasing power. I. Inflation Inflation has an enormous effect in the economy. crystallizing the exposure. India pays around $ 5 billion a year in principal repayments and interest payments. some of which are beyond its control . industry and companies will prosper. Restrictive Practices Restrictive practices or cartels imposed by countries can affect companies and industries. If the rate of inflation in the country from which a company imports is high then the cost of production in that country will automatically go up.Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. 20 . to have an appreciation of the politico-economic factors that affect an industry and a company. Foreign Exchange Risk This is a real risk and one must be cognizant of the effect of a revaluation or devaluation of the currency either in the home country or in the country the company deals in.

The four stages of an economic cycle are: Depression Recovery Boom Recession Depression At the time of depression. Demand starts falling. If tax rates are low. Prices that had been rising begin to stabilize and even fall. Interest rates and inflation are high. Investment begins anew and the demand grows. Companies start finding it difficult to sell their goods. Gradually as time goes on. Conspicuous spending begins once again. close down plants built at times of higher demand.. Companies begin to post profits. high interest rates result in higher cost of production and lower consumption.Interest Rates A low interest rate stimulates investment and industry. demand and the profitability of companies. crippled by high borrowing and falling sales. The economy slowly begins to downturn. Recession The economy slowly begins to downturn. Then as the boom period matures prices begin to rise again. Companies. Interest rates are low. Inflation is high and so are interest rates. as the directors will always argue that the performance was satisfactory. and let workers go. demand is low and falling. the economy begins to recover. employment. A government that is perceived to be proindustry will attract investment. Elaborates on the directors' views of the company's prospects in the future. Investment is also high. If adverse economic conditions are usually at fault. skepticism. THE ECONOMIC CYCLE: It affects investment decisions. 5. people have more disposable income. 21 . supply begins to exceed the demand. Government Policy Government policy has a direct impact on the economy. are forced to curtail production. demand reaches an all time high. Taxation The level of taxation in a country has a direct effect on the economy. Conversely. There is an increase in demand. During this phase. Boom In the boom phase. Recovery.

Industry conditions and the management's knowledge of the business must be considered. present a true and fair view of the state of the company. Auditors are required to report whether the financial statements presented do. An investor must intelligently evaluate the issues raised in a Director’s Report. and the Profit and Loss Account or Income Statement summarizing the activities of the company for the accounting period. Investors must remember that the auditors are their representatives and that they are required by law to point out if the financial statements are not true and fair. The Auditor's Report The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors. B.Financial Statements The published financial statements of a company in an Annual Report consist of its Balance Sheet as at the end of the accounting period detailing the financing condition of the company at that date. Discusses plans for new acquisition and investments. BALANCE SHEET The Balance Sheet details the financial position of a company on a particular date. and liabilities (that which the company owes). in fact. It must however. C. 6. grouped logically under specific heads. be noted that the Balance Sheet details the financial position on a particular day and that the position can be materially different on the next day or the day after. of the company's assets (that which the company owns).. SOURCES OF FUNDS SHAREHOLDERS FUNDS SHARE CAPITAL (i) Private Placement (ii) (ii) Public Issue (iii) iii) Rights issues RESERVES i) Capital Reserves ii) Revenue Reserves LOAN FUNDS iii) Secured loans: Unsecured loans FIXED ASSETS INVESTMENTS STOCK OR INVENTORIES 22 .

Selling expenses to sales. 23 . Debt to assets and 5. 3. Current assets to current liabilities. a year or longer. It is. in effect. Gross profit to sales.its competence. RATIOS: Ratios express mathematically the relationship between performance figures and/or assets/liabilities in a form that can be easily understood and interpreted. Sales to stock. 4. These relate an item on the balance sheet to another in the profit and loss account such as: 1. a quarter. six months. It details the income earned by the company. 3. Net income to assets employed. The more common of these ratios are: 1. (C) Balance Sheet and Profit and Loss Account Ratios. Liabilities to assets. Net profit to sales and 4. 2.i) Raw materials ii) Work in progress iii) Finished goods CASH AND BANK BALANCES LOANS AND ADVANCES PROFIT AND LOSS ACCOUNT The Profit and Loss account summarizes the activities of a company during an accounting period which may be a month. (B) Balance Sheet Ratios These deal with the relationship in the balance sheet such as : 1. its cost and the resulting profit or loss. Sales to cost of goods sold. Shareholders equity to borrowed funds. 3. No single ratio tells the complete story Ratios can be broken down into four broad categories: (A) Profit and Loss Ratios These show the relationship between two items or groups of items in a profit and loss account or income statement. foresight and ability to lead. the performance appraisal not only of the company but also of its management. 2. 2. Liabilities to net worth. Earnings to shareholder's funds. and the result achieved by the company.

The net result shows whether there has been an excess or deficit of funds and how this was financed. (a) Market value (b) Earnings (c) Profitability (d) Liquidity (e) Leverage (f) Debt Service Capacity (g) Asset Management/Efficiency (h) Margins. Cost of goods sold to creditors. The major ratios that are considered: (i) Market value (ii) Price. 24 .earnings ratio (iii) Market-to-book ratio (iv) Earnings (v) Earning per share (vi) Dividend per share (vii) Dividend payout ratio (viii) Leverage ratios (ix) Return on investments/total assets CASH FLOW: A statement of sources and uses begins with the profit for the year to which are added the increases in liability accounts (sources) and from which are reduced the increases in asset accounts (uses). (D) Financial Statements and Market Ratios These are normally known as market ratios and are arrived at by relative financial figures to market prices: 1. Investors must examine a company's cash flow as it reveals exactly where the money came from how it was utilized. Market value to earnings and 2. Book value to market value. Investors must be concerned if a company is financing either its inventories or paying dividends from borrowings without real growth as that shows deterioration. 4. Sales to debtors and 5.

INDUSTRY ANALYSIS The importance of industry analysis is now dawning on the Indian investor as never before. the industry is new and it can take some time for it to properly establish itself. The Entrepreneurial or Nascent Stage At the first stage. and 4. Entrepreneurial. an industry matures and stabilizes. As the industry grows. it may actually make losses. All industries evolve through the following stages: 1. The Expansion or Growth Stage Once the industry has established itself it enters a growth stage. The Stabilization or Maturity Stage After the halcyon days of growth. sunrise or nascent stage 2. Rewards are low and so too is the risk.II. Decline or sunset stage to properly establish itself. Cycle The first step in industry is to determine the cycle it is in. stagnation or maturity stage. Expansion or growth stage 3. Stabilization. many new companies enter the industry. or the stage of maturity of the industry. In the early days. 25 .

they can destroy an industry. i. THE THREAT OF SUBSTITUTION New inventions are always taking place and new and better products replace existing ones. BARGAINING POWER OF THE BUYERS In an industry where buyers have control. Products are more standardized and less innovative and there are several competitors. 26 . An industry that can be replaced by substitutes or is threatened by substitutes is normally an industry one must be careful of investing in. If such buyers withdraw their patronage. BARRIER TO ENTRY New entrants increase the capacity in an industry and the inflow of funds. 3. demanding better services or higher quality and this often erodes profitability.Growth is moderate. The factors one should check are whether: a) A particular buyer buys most of the products (large purchase volumes). and the like. They can also force prices down. The Decline or Sunset Stage Finally. the industry declines. This may be on account of several factors such as a change in social habits The film and video industries. in a buyer's market. This occurs when its products are no longer popular. Though sales may increase. 1. companies often have to spend large sums of money in advertising and promotion. cans replaced by plastic bottles. buyers are constantly forcing prices down. The question that arises is how easy is it to enter an industry ? There are some barriers to entry: a) Economies of scale b) Product differentiation c) Capital requirement d) Switching costs e) Access to distribution channels f) Cost disadvantages independent of scale g) Government policy h) Expected retaliation j) International carte 2. An industry where this occurs constantly is the packaging industry -bottles replaced by cans. they do so at a slower rate than before.e. To ward off the threat of substitution.

the buyer makes his choice on the basis of price or service. f) The supplier's product does not have a substitute. This rivalry occurs mainly when: a) There are many competitors and supply exceeds demand. e) In some industries economies of scale will necessitate large additions to existing capacities in a company. d) The supplier supplies to various industries. g) The supplier's product is an important input for the buyer's. e) The switching costs are high. additional high cost services or offers. BARGAINING POWER FOR THE SUPPLIERS An industry unduly controlled by its suppliers is also under threat. heavy advertising. RIVALRY AMONG COMPETITORS Rivalry among competitors can cause an industry great harm. c) Demand for the product exceeds. or if there are few suppliers. This occurs when: a) The suppliers have a monopoly. The increase in production could result in over capacity & price cutting. 5. i) The supplier's product is unique. Companies resort to price cuts and advertise heavily in order to attract customers for their goods. b) Buyers can play one company against another to bring prices down. 4. This occurs mainly by price cuts. and the like. d) There is lack of differentiation between the product of one company and that of another. f) Competitors may have very different strategies in selling their goods and in competing they may be continuously trying to stay ahead III. h) The buyer is not important to the supplier. In such cases. b) The industry growth is slow and companies are competing with each other for a greater market share. COMPANY ANALYSIS: 27 . c) The economy is in a recession and companies cut the price of their products and offer better service to stimulate demand. b) Suppliers control an essential.

At the final stage of fundamental analysis. This analysis has two thrusts: How has the company performed vis-à-vis other similar companies and How has the company performed in comparison to earlier years It is imperative that one completes the politico economic analysis and the industry analysis before a company is analysed because the company's performance at a period of time is to an extent a reflection of the economy. It is held in high regard. Whether the company is the market leader in its products or in its segment Another aspect that should be ascertained is whether the company is the market leader in its products or in its segment. What does one look at when analyzing a company? The different issues regarding a company that should be examined are: The Management The Company The Annual Report Ratios Cash flow THE MANAGEMENT: The single most important factor one should consider when investing in a company and one often never considered is its management. 1. A company may have made losses consecutively for two years or more and one may not wish to touch its shares .yet it may be a good company and worth purchasing into. There is a magic to their 28 . There are several factors one should look at. The investor must ascertain the reason and then determine whether the reason will continue into the foreseeable future. In India management can be broadly divided in two types: Family Management Professional Management THE COMPANY: An aspect not necessarily examined during an analysis of fundamentals is the company. the risk is less. competence and aggressiveness. Its management may be known for its maturity. 2. When you invest in market leaders. the investor analyses the company. How a company is perceived by its competitors? One of the key factors to ascertain is how a company is perceived by its competitors. the political situation and the industry. The shares of market leaders do not fall as quickly as those of other companies. vision.

this is prepared every year and distributed to the shareholders. On the other hand. Explains the performance and the financial results of the company in the period under review. Labour Relations Labour relations are extremely important. Annual Reports are usually very well presented. industrious work force has high productivity and practically no disruption of work. C) The Financial Statements. Where the company is located and where its factories are? One must also consider where the companies Plants and Factories are located. 4. 5. A. 3. THE ANNUAL REPORT: The primary and most important source of information about a company is its Annual Report.name that would make individuals prefer to buy their products as opposed to others. It enunciates the opinion of the directors on the state of the economy and the political situation vis-à-vis the company. The Director’s Report The Director’s Report is a report submitted by the directors of a company to its shareholders. This can give it renewed vigour and a new lease of life. a company that has bad industrial relations will lose several hundred man- days as a consequence of strikes and go slows. 2. The Annual Report is broken down into the following specific parts: A) The Director's Report. Company Policies The policy a company follows is also important. B) The Auditor's Report. If it is allowed to live a normal life it will grow up to a point and then begin to level out and eventually die. What is its plans for growth? What is its vision? Every company has a life. and D) The Schedules and Notes to the Accounts. This is an extremely important part. The results and operations of the various separate divisions are usually detailed and investors can determine the reasons for their good or bad performance. It is at the point of levelling out that it must be given new life. A tremendous amount of data is given about the performance of a company over a period of time. 29 . A company that has motivated. By law. advising them of the performance of the company under their stewardship. 1..

that a break beyond a level of support or resistance does not always have to be a reversal. For example. 4. As long as the price of the share remains between these levels of support and resistance. the price never actually reaches the whole 30 . if prices moved above the resistance level of an up trending channel. Recommended by the directors.3. the trend is likely to continue. This paragraph should normally be read with some. This is because in many cases. The Director’s Report details the company's plans for modernization. Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. if a trader identifies an important level of resistance that has been tested several times but never broken. The Importance of Support and Resistance Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. Being aware of these important support and resistance points should affect the way that you trade a stock. For example. expansion and diversification. Without these. he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level. If you feel confident about making a trade near a support or resistance level. Discusses the profit earned in the period under review and the dividend. the trend have accelerated and not reversed. a company will remain static and eventually decline. it is important that you follow this simple rule: do not place orders directly at the support or resistance level. however. Traders should avoid placing orders at these major points. This means that the price appreciation is expected to be faster than it was in the channel. It is important to note. as the area around them is usually marked by a lot of volatility.

What is Volume? Volume is simply the number of shares or contracts that trade over a given period of time. if you are looking at a large price movement. more relevant move than a similar move with weak volume. Therefore. Higher volume means the security has been more active. but within a few points. Any price movement up or down with relatively high volume is seen as a stronger. do not place the trade at the support level. To determine the movement of the volume (up or down). if you are placing stops or short selling.number. usually a day. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do. you should also examine the volume to see 31 . set up your trade price at or below the level of support. place it above the support level. So if you're bullish on a stock that is moving toward an important support level. but flirts with it instead. Instead. chartists look at the volume bars that can usually be found at the bottom of any chart. On the other hand. Why Volume is important ? Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns.

it is a case of divergence. that a stock jumps 5% in one trading day after being in a long downtrend. In most chart patterns. If prices are moving in an upward trend. flags and other price patterns can be confirmed with volume. If volume is starting to decrease in an uptrend. For example. Basically. On the other hand. volume should increase (and vice versa).The other use of volume is to confirm chart patterns. Volume Precedes Price Another important idea in technical analysis is that price is preceded by volume. it is a sign that the trend is starting to lose its legs and may soon end. Is this a sign of a trend reversal? This is where volume helps traders.whether it tells the same story. if the volume is below average. for example. Now that we have a better understanding of some of the important factors of technical analysis. we can move on to charts. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. When volume tells a different story. there are several pivotal points that are vital to what the chart is able to convey to chartists. Indicators are calculations based on the price and the volume of security that measure such things as money flow. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of 32 . triangles. if the volume is not there to confirm the pivotal moments of a chart pattern. which refers to a contradiction between two different indicators. Patterns such as head and shoulders. it is a sign that the reversal is probably for real. trends. the quality of the signal formed by the pattern is weakened. Volume and Chart Patterns . The simplest example of divergence is a clear upward trend on declining volume. if the stock is in an uptrend but the up trading days are marked with lower volume. If the previous relationship between volume and price movements starts to deteriorate. which help to identify trading opportunities in prices movements. Volume should move with the trend. it is usually a sign that the upward run is about to end. volatility and momentum. If volume is high during the day relative to the average daily volume. there may not be enough conviction to support a true trend reversal. Say. it is usually a sign of weakness in the trend.

and signal periods where the security is overbought (near 100) or oversold (near zero). which happens when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. or when two different moving averages cross over each other. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns. Oscillator indicators have a range. A leading indicator is thought to be the strongest during periods of sideways or non-trending trading ranges.these are the most common type of indicators. Indicators that are used in technical analysis provide an extremely useful source of additional information. Along with the MACD and the centerline. The second way indicators are used is through divergence. an exponential 33 . and to form buy and sell a centerline. There are also two types of indicator constructions: those that fall in a bounded range and those that do not. The two main ways that indicators are used to form buy and sell signals in technical analysis is through crossovers and divergence. giving them a predictive quality.There are two main types of indicators: leading and lagging. while the lagging indicators are still useful during trending periods. Crossovers are the most popular and are reflected when either the price moves through the moving average.price movements. This indicator is comprised of two exponential moving averages. These indicators help identify momentum. This signals to indicator users that the direction of the price trend is weakening. volatility and various other aspects in a security to aid in the technical analysis of trends. The ones that are bound within a range are called oscillators . Non-bounded indicators still form buy and sell signals along with displaying strength or weakness. trends.securities. chart patterns and other indicators. A leading indicator precedes . The centerline is the point at which the two moving signals. they are best used in conjunction with price movement. while a lagging indicator is a confirmation tool because it follows price movement. The MACD is simply the difference between these two moving averages plotted against averages are equal. It is important to note that while some traders use a single indicator solely for buy and sell signals. but they vary in the way they do this. which help to measure momentum in the security. MACD: The moving average convergence divergence (MACD) is one of the most well known and used indicators in technical analysis. for example between zero and 100.

This indicator helps traders to identify whether a security’s price has been unreasonably pushed to current levels and whether a reversal may be on the way. which can be adjusted to meet the needs of the user. A reading above 70 is used to suggest that a security is overbought. 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.moving average of the MACD itself is plotted on the chart. The indicator is plotted in a range between zero and 100. RSI (Relative Strength Index) : It is another one of the most used and well-known momentum indicators in technical analysis. The standard calculation for RSI uses 14 trading days as the basis. RSI helps to signal overbought and oversold conditions in a security. If the trading period is 34 . while a reading below 30 is used to suggest that it is oversold.

The stochastic oscillator contains two lines. The %D line is considered to be the more important of the two lines as it is seen to produce better signals. 35 . which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. signaling downward momentum. In downtrends. the price should be closing near the highs of the trading range. 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 stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20. the price should be closing near the lows of the trading range. The stochastic oscillator generally uses the past 14 trading periods in its calculation but can be adjusted to meet the needs of the user.adjusted to use fewer days. which is simply a moving average of the %K. The second line is the %D. signaling upward momentum in the security. the RSI will be more volatile and will be used for shorter term trades. The first line is the %K.

telephone banking. banks also resorted to cross selling of financial products such as credit cards. CASE STUDY HDFC BANK The Indian banking industry: sector overview With the economic growth picking up pace and the investment cycle on the way to recovery. Apart from streamlining their processes through technology initiatives such as ATMs. the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds Public sector banks have been very proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. they are able to bear the cost of using the advantages of technology to their maximum advantage. Economies of scale: Since the existing players in the market are well established and already have a customer base. Retail lending (especially mortgage financing) formed a significant portion of the portfolio for most banks and they customized their products to cater to the diverse demands. b. Capital requirement for entry: 36 . online banking and web based products. PORTER’S FIVE FORCES MODEL FOR THE BANKING INDUSTRY 1) BARRIERS TO ENTRY : a. Windfall treasury gains made in the falling interest rate regime were used for writing off the doubtful and loss assets. mutual funds and insurance policies to augment their fee based income.

all the cost has to be directly born by them. 3) BARGAINING POWER OF THE SUPPLIERS : Suppliers to banks can be both . The Banking Regulation Act prescribes the minimum capital requirements for a bank Moreover. Legislation or Government action: Banks are governed by Banking Regulation Act.300 crore. RBI acts as a supplier to banks by selling govt. ii. the services offered by banks to customers have improved considerably. Government has declared that the foreign banks will be permitted to establish their presence in India by way of setting up a wholly owned banking subsidiary (WOS) with a minimum capital of Rs. e. bonds. RBI is the governing body of banks in India. govt. Cost advantage independent of size: Existing banks have huge databases of customers which they use when they want to sell a new product launched by them. 1949 which specifies the rules and regulations applicable to banks. or other capital requirements as provided by RBI.the customers and RBI. treasury bills. Call money market: Banks sometimes have to borrow from other banks to meet CRR and SLR requirements. 4) THREAT OF SUBSTITUTES: a. Access to distribution channels: Since banks have to set up their own distribution channels. securities. Customers of banks provide money to banks in the form of deposits and in return earn some interest on that. i. etc. banks have to maintain a capital adequacy ratio of 9% under the Basel I norms. c. Product-for-product substitution: 37 . c. d. 2) BARGAINING POWER OF BUYERS : Due to increased competition. b. a.

Banking sector reforms – As per the RBI roadmap for reforms in the first stage from 2005 to 2009 foreign banks will be allowed to set up wholly owned subsidiaries as well as get greater freedom to set up new branches. b. 38 . shares and other securities and life insurance schemes. Extent of competitor balance: b. The first pillar is compatible with the credit risk. ii. Some banks offer locker services to customers for yearly rates. Banks provide interest on deposits made by people. i. High Exit Barriers PEST Analysis for Banking Industry. Banks have also been allowed to set up Offshore Banking Units in SEZ’s. Fulfilling the minimum priority sector credit -The government mandation of fulfilling the minimum priority sector credit (of which 18 per cent is food credit) has forced the domestic banks to cater to this segment despite the low profitability and vulnerability of asset quality. market risk and operational risk. 1. Economic factors -: Basell II norms for the risk management in banking sector - The new Basel Accord has its foundation on three mutually reinforcing pillars. Concurrently. . Similar services are provided by many post offices. c. 2. Similar services are offered by post offices which may act as substitutes to the deposit schemes of banks. Generic substitution: People who deposit their savings in banks can invest their money in other sources like mutual funds. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. it also casts responsibility on the supervisors to review and validate banks’ risk measurement models. Political factors -: The major factors affecting the banking sector are the following. Market growth rates:. 5) COMPETITIVE RIVALRY: a.

It is based on three assumptions: 1) the market discounts everything. Technical factors- The Indian Financial Network (INFINET) was inaugurated in June 1999.This is leading to a greater demand for financial products and customization by the customers. Geographical and Cultural diversity. It is based on satellite communication using VSAT technology and would enable faster connectivity within the financial sector. Retail loans have grown from 19% in FY’99 to 51% FY’06. education loans.HDFCs closest competitor is already into Universal Banking so HDFC is also getting into it as now it is providing retail banking and also depository facilities in the form of demat account.Consumer credit accounts for a meager 28. Universal Banking has been introduced. ICICI Bank . HDFC bank also acquired TIMES BANK in 2001 which increased its customer base by 3 lakh customers. Social factors- Big and growing middle class in India -: This has been a major factor in the growth of the retail loans like consumer loans in the form of home loans. car loans.6 per cent of the country's GDP and the buoyancy in the economy offers sufficient scope for it to grow. 39 . 3. Consolidation and merger and acquisitions in the banking sector-. Banks (All): No of players = 40 Sector statistics: We see the sector aggregates and make a financial comparison for the major banks Conclusion • Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity. auto loans etc. 4. 2) price moves in trends and 3)history tends to repeat itself.

co. • The time scale refers to the range of dates at the bottom of the chart.com 4. • A channel. www. The most frequently used time scales are intraday.valuenotes.myiris. candlestick charts and point and figure charts. The higher the volume. • Support is the price level through which a stock or market seldom falls. There are three types of trends: Uptrends.livecharts.bseindia. It shows a stock's current price and compares it to past data points. • One of the most important concepts in technical analysis is that of a trend. • Criticism of technical analysis stems from the efficient market hypothesis. downtrends and sideways/horizontal trends.com 5. It can be either linear orlogarithmic. quarterly and annually. • Technical traders take a short-term approach to analyzing the market.uk 40 . is the addition of two parallel trendlines that act as strong areas of support and resistance. bar charts. • The price scale is on the right-hand side of the chart. • A chart is a graphical representation of a series of prices over a set time frame. which can vary from decades to seconds.com 6. daily. www. the more active the security.com 2. monthly. www. which states that the market price is always the correct one. Resistance is the price level that a stock or market seldom surpasses.nseindia. www. usually a day. weekly. making any historical analysis useless. References Online: 1. • There are four main types of charts used by investors and traders: line charts. • Volume is the number of shares or contracts that trade over a given period of time.microsec.in 3. www. which the general direction that a security is headed is. • A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. or channel lines.• Technicians believe that all the information they need about a stock can be found in its charts. www.

7. IGIDR.equis. www. Tejinder Singh Rawal. 41 . www.com Books: 1.sebi.) Frequently asked questions on Derivatives by Ajay Shah and Susan Thomas.) How to invest in shares by Dr.gov.in 8. Mumbai 2.