This action might not be possible to undo. Are you sure you want to continue?
The re-emergence of technical analysis as a viable and efficient approach to individual stock selection and market analysis has drawn a great deal of interest among practitioners and academicians. Technical analysis, or the use of past prices to predict future prices, has been popular among investors and financial analysts despite its criticisms levelled at it. All stock broking firms and major daily newspaper analyze and publish technical commentary on the performance of the market as whole and selected stocks on a daily basis. Public seminar and consulting firms that solely based on technical analysis are even formed. 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, Dowjones for USA, HANGSENG for Hong Kong, NIKKEI for Japan, 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. Now the company would always want a true picture of the company to be represented by share price, they wouldn’t mind if its over valued but it hurts when the stocks get under valued. But this uncertainty of the price gives people a chance to make money both in long term & short term. Long term investment is mainly based upon
studying fundamentals of the company and its growth potential. A general investor can apply the principles by using the simplest of tools: pocket calculator, pencil, ruler, chart paper & your cautious mind, watchful attention. It should be pointed out that, this analysis does not discuss how to buy & sell shares, but does discuss a method which enables the investor to arrive at buying & selling decision. The financial analysts always need yardsticks to evaluate the efficiency & performances of any business unit at the time of investment. Fundamental analysis is useful in long term investment decision. In Fundamental analysis company s goodwill, its performances, liquidity, leverage, turnover, profitability & financial health was checked & analysis with the help of ratio analysis for the purpose of long term successful investment. Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements. Technical analysis mainly seeks to predict the short term price travels. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. The real piece of magic lies in making money by trading shares either Intraday or holding for a short term It appeals mainly to short term traders. If one wants to make money in this way he / she needs to know the technical side of the stock i.e. charts, trends etc. This analysis uses varied technical patterns and indicators for predicting future prices and trends in the stock. The main objective is to know the answers of following questions: 1. Where will stocks go from here? 2. Which stock will rise today and which ones will fall? 3. Should I hold it or square off my positions?
4. Why is hedging required / how is it done? The emergence of equity markets in Asia provides great opportunities for local and global investors. This paper examines some popularly used technical indicators and patterns, namely the moving average, Moving Average Convergence and Divergence (MACD), relative strength index (RSI), Stochastic Oscillator, Bollinger bands, Commodity Channel Index (CCI) etc. and the patterns like Double Top, Double Bottom, Head and Shoulder Bottom Reversal / Top Reversal, Rounding Top, Rounding Bottom, Flag and Pennant continuation, Triangles ( ascending, descending and symmetrical), Wedges, Megaphone Patterns etc. and breakout by using different levels of length which are considered to be appropriate in the local trading environment. The blue chip stocks of the National Stock Exchange (NSE) are used in this study. The index is influenced more by local factors and forces rather than global information variables. This paper contributes to a more comprehensive understanding of the predictive ability and technical analysis of stocks listed in NSE.
Technical analysis is explained by “The technical approach to investigate is essentially a reflection of the ides prices moves in trends which determined by the changing attitudes of the investors toward a variety of economic, monitory, political and psychological forces. Technical analyst do not attempts to measure a security’s intrinsic value, but instead use charts to identify the patterns that can suggest future activity. Testing of technical analysis is important to enjoy the benefits. William sharpe said “if you torture the data long enough, it will confess to any crime” so the important is the rule must work on data other than that used to discover it. There are many evidence to support technical analysis, in July 1990 journal of finance article, Jaegadeesh found predictable patterns in monthly returns for the period 1934 to 1987. his study reveals that stocks with large losses in one month tend to show a significant reversal in the following month and vice versa. In December 2002 journal of finance article Lo, Mamaysky, and Wang found that several technical indicators have some practical value as they provide incremental information. Brown and Jennings (1989) showed that technical analysis has value in a model in which prices are not fully revealing and traders have rational conjectures about the relation between prices and signals. Frankel and Froot (1990) showed evidence for the rising importance of chartists. Neftci (1991) showed that a few of the rules used in technical analysis generate well-defined techniques of forecasting, but even well-defined rules
were shown to be useless in prediction if the economic time series is Gaussian. However, if the processes under consideration are non-linear, then the rules might capture some information. Tests showed that this may indeed be the case for the moving average rule. Taylor and Allen (1992) report the results of a survey among chief foreign exchange dealers based in London in November 1988 and found that at least 90 per cent of respondents placed some weight on technical analysis, and that there was a skew towards using technical, rather than fundamental, analysis at shorter time horizons. In a comprehensive and influential study Brock, Lakonishok and LeBaron (1992) analyzed 26 technical trading rules using 90 years of daily stock prices from the Dow Jones Industrial Average up to 1987 and found that they all outperformed the market. Blume, Easley and O’Hara (1994) show that volume provides information on information quality that cannot be deduced from the price. They also show that traders who use information contained in market statistics do better than traders who do not. Cheol-Ho Park and Scott H. Irwin wrote ‘the profitability of technical analysis: A review’ Park and Irwin (2004), an excellent review paper on technical analysis.
Kavajecz and Odders-White (2004) show that support and resistance levels coincide with peaks in depth on the limit order book 1 and moving average
forecasts reveal information about the relative position of depth on the book. They also show that these relationships stem from technical rules locating depth already in place on the limit order book.
3.Objective of Study:
The professional objectives which are being covered by me in this project are as followingTo understand the Technical Analysis which is a security analysis technique that claims the ability to forecast the future direction of prices through the study of past market data
To understand the use of charts and other tools to identify patterns that can suggest future activity.
To understand the use of various technical indicators and patterns for evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume.
To test whether the investment yields any extra returns in stocks with the help of technical indicators and patterns or not.
a) The study: 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 behavior of the market or instrument. Technical analysts 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. The major technical indicators will be uses for the study are: A simple moving average (SMA) is the un weighted mean of the previous n data points.[ For example, a 10-day simple moving average of closing price is the mean of the previous 10 days' closing prices. If those prices are then the formula is
When calculating successive values, a new value comes into the sum and an old value drops out, meaning a full summation each time is unnecessary,
In technical analysis there are various popular values for n, like 10 days, 40 days, or 200 days. The period selected depends on the kind of movement one is concentrating on, such as short, intermediate, or long term. In any case moving average levels are interpreted as resistance in a rising market, or support in a falling market. An exponential moving average (EMA), also known as an exponentially weighted moving average (EWMA), is a type of infinite impulse response filter that applies weighting factors which decrease exponentially. The weighting for each older data point decreases
exponentially, never reaching zero. The formula for calculating the EMA at time periods t > 2 is
The coefficient α represents the degree of weighting decrease, a constant smoothing factor between 0 and 1. A higher α discounts older observations faster. Alternatively, α may be expressed in terms of N time periods, where α = 2/(N+1). For example, N = 19 is equivalent to α = 0.1. The half-life of the weights (the interval over which the weights decrease by a factor of two) is approximately N/2.8854 (within 1% if N > 5). Yt is the observation at a time period t. St is the value of the EMA at any time period t.
Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades. Bollinger Bands consist of:
a middle band being an N-period simple moving average (MA) an upper band at K times an N-period standard deviation above the middle band (MA + Kσ) a lower band at K times an N-period standard deviation below the middle band (MA − Kσ)
Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages are a common second choice. Usually the same period is used for both the middle band and the calculation of standard deviation. Relative Strength Index: is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. And many other indicators and Patterns will be used for the purpose. b) The Sample: For the purpose of this study a sample size of 3 real estate companies (UNITECH Limited, DLF Limited and Housing Development & Infrastructure Limited (HDIL)) listed in the NSE and they were the most active securities during the year 2009-2010. The data of the companies are then constructed with help of information available on their websites and on the other financial service providers’ website. The technical parameters being used in the study are the different patterns and indicators like moving average, Moving Average Convergence and Divergence (MACD), relative strength index (RSI), Stochastic Oscillator, Bollinger bands, Commodity Channel Index (CCI) etc. and the patterns like Double Top, Double Bottom, Head and Shoulder Bottom Reversal / Top Reversal, Rounding Top, Rounding Bottom, Flag and Pennant continuation, Triangles ( ascending, descending and symmetrical), Wedges, Megaphone Patterns etc.
C) The Tools Tools for Data Collection: This step helps in deciding and selecting the techniques that shall be used to collect relevant information which can be used to solve the research problem. The techniques used by me for data collection are: • Secondary data • Tertiary data SECONDARY DATA Secondary data means data are already available i.e., they refer to the data, which have already been collected and analyzed by someone else. Secondary data are: Internet Books Newspapers Publication of various associations Research reports My research will be based on the information available on the different secondary data sources and guidance provided by my research guide who helped in interpreting the intricate data. Tools for Data Analysis: • Moving Average
• Accumulation/Distribution • Bollinger Bands • Commodity Channel Index:
Book- Research Methodology Methods and Techniques by C.R.
Kothari, All About Stock [Author - Mr. Esmehe Faerber], V. K. Bhalla- working capital management, security ananlysis and portfolio management by Punithavathy Pandian. Newspapers ( Economic Times, Business Standard etc)
Other Research Papers: Technical Analysis in the Malaysian Stock
Market: An Empirical Evidence, Understanding and Implementing Technical Analysis on Capital Markets, Technical Analysis and the Stochastic Properties of the Jordanian Stock Market Index Return, The Evaluation of the Lithuanian Stock Market with the Weak-form Market Efficiency Hypothesis etc. WEBLIOGRAPHY Moneycontrol.com www.nseindia.com www. Chittorgarh.com Profit.ndtv.com
www.investopedia.com Websites of each Company.