Technical Analysis

14th Sept 2022

INDIAN INSTITUTE OF BANKING & FINANCE

Session Objectives

- to understand the meaning, importance & the need for technical analysis
- to understand the usage of technical indicators in analysing and interpreting those
indicators in decision making

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Technical Analysis …meaning

It is a trading discipline employed to

- evaluate & analyze existing investments/position/portfolio of assets with reference to price

& volumes.,
- identify new trading opportunities
- analyze the statistical trends gathered from trading activities with reference to price &
volumes

Technical analysis believes in past trading activity and price changes of a security which
becomes valuable indicators of the security’s future price.

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Technical Analysis …importance

- helps in generating short term trading signals in respect of the existing securities

- helps in improving the evaluation of a security’s strength or weakness relative to the

broader market or the respective sectors.,

- helps in improving the overall estimates of the movements of the prices of such securities.

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Technical Analysis …principles

- all relevant details and information about the security is already reflected in the price

- prices move in trends i.e. the trends are seen when there is a shift in the demand and
supply factor.

- history tends to repeat itself

- market discounts everything because market has inertia

- market value of a security is related to demand & supply factors operating in the market

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Technical Analysis v/s Fundamental analysis
- fundamental analysis focus on Company’s financials rather than the historical price
patterns and trends.
- involves analyzing a Company’s financial statements to determine the fair value of the
business.
- it looks into the intrinsic value of a stock
- looks into the overall economy, industry conditions and management.

- on the other hand, technical analysis focus on historical data, prices, volumes and trends
& scrutinizes the way supply & demand affect the changes in prices , volumes and
implied volatility.

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Technical Analysis …assumptions

- markets are efficient with values representing factors that influence a security price.

- random market price movements appear to move in identifiable patterns & trends that
tend to repeat over time.

- the company’s fundamentals & the investors psychology are already factored in the stock
price movements.

- stock prices are likely to continue a past trend more than erratic movement.

- history tends to repeat itself.

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Technical Analysis …limitations

- History do not repeat itself and hence the price patterns are dubious

- Stop loss orders

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Technical Analysis …tools
… charts …line charts
- provides the investors/traders/dealers a clear visualization of where the price of a
stock/position/security has travelled over a given time period as compared to the market
index.
- most basic and simplest of the charts and generally takes the closing prices of securities
vis-à-vis the market index.
Stock price of Infosys vis-a-vis NSE Index
18000.00
16000.00
14000.00
12000.00
10000.00
8000.00
6000.00
4000.00
2000.00
0.00

NSE Index (X) Infosys (Y)

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Technical Analysis …tools
… charts …BAR charts
- provides open, high, low and closing rates of a particular security or a position or a
portfolio. Also known as OHLC charts.
- helpful in spotting trends, monitoring stock/security/currency prices and helps dealers in
taking positions or exiting such positions.
USD/INR - Open/High/Low/Closing -Last week
74.70
74.60
74.50
74.40
74.30
74.20
74.10
74.00
73.90
73.80
73.70
02-08-2021 03-08-2021 04-08-2021 05-08-2021 06-08-2021

Open High Low Adj Close

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 Technical Analysis …tools
- … charts …candlestick charts
- markets, traditionally & sometimes, were strongly influenced by emotions and price
movements due to sentiments & emotions came to be known as candlestick movements.
- candlestick charts are used by dealers/traders to determine possible price movements
based on past patterns of sentiments/emotions.
- generally used for short term direction of price movements & for taking cash/spot,
spot/fortnight and fortnight/month end positions.
Stock price of Zomato over 2 week period
150.00
145.00
140.00
135.00
130.00
125.00
120.00
115.00
110.00

Open High Low Adj Close

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 Technical Analysis …tools
…trend lines
- trend lines represent a consistent change in the prices and showing a trend in the market
movements.
- may be either a rising trend or a falling trend.

USD/INR rising trend line (INR depreciation) during the Lehmann Crisis
47.50
47.00
46.50
46.00
45.50
45.00
44.50
44.00
43.50
43.00
42.50

Open High Low Adj Close

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 Technical Analysis …tools
…trend lines
- trend lines represent a consistent change in the prices and showing a trend in the market
movements.
- may be either a rising trend or a falling trend.

USD/INR during June-July 2021 – trending opening /closing levels

75.5

75

74.5

74

73.5

73

72.5

72

71.5
7-Jun
8-Jun
9-Jun

1-Jul
2-Jul
3-Jul
4-Jul
5-Jul
6-Jul
7-Jul
8-Jul
9-Jul
23-Jun
10-Jun
11-Jun
12-Jun
13-Jun
14-Jun
15-Jun
16-Jun
17-Jun
18-Jun
19-Jun
20-Jun
21-Jun
22-Jun

24-Jun
25-Jun
26-Jun
27-Jun
28-Jun
29-Jun
30-Jun

10-Jul
11-Jul
12-Jul
Open Close

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USD/INR levels – Analysis of economic data

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USD/INR levels at 8.30 am – analysis of global clues

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Technical Analysis …tools
Channels
trend channels – parallel trend lines.
Technical analysts use the trend channels for short term trading decisions, generally 1 week to 1
month of the long or a short position.

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Technical Analysis …tools
Channels
- envelope channels – Bollinger Bands - parallel bands.
- Technical analysts use the bands for long terms trading decisions and generally for taking care
of asset liability mismatches.

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 Technical Analysis …tools
…..moving averages

- Moving averages is an indicator that is commonly used in technical analysis.

- Moving averages helps the analysts to smoothen out the price data over a specific period
of time by constantly updating the average prices.
- Moving averages can be SMA (simple moving average) or EWMA (Exponentially
weighted moving average)
- EWMA gives greater importance to the price of a security on more recent perods making
the result more responsive to the recent changes in both the market factors and the
fundamental factors.
- Moving averages helps in analyzing the uptrends in the prices and enables decision
making in holding the position or liquidating the position.
…exercises

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Technical Analysis …indicators
Support & Resistance
- Support level indicates the level at which the price of security does not fall any further. In
other words, the price is likely to bounce back and moves in opposite direction. This is a
level where the demand from buyers is expected to be much higher than that of sellers.
- Resistance level is the opposite of Support level. i.e. the level at which the price of the
security is not expected to rise further and this is the level at which there are more sellers
in the market.
- Zomata Rs. 135 – Rs. 180

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Volume

In the stock markets, volume is a measure of the total number of shares that are traded in a
specific time period.
In other words, it indicates the number of times a particular stock was bought and sold
(changed hands). So, if the stock was traded heavily during a particular day, it means the
trade volume was high.
Importance and relevance of Volume in trading
Volume can help traders to identify trends in the market. This is because, the stock price
and trading volume generally move in the same direction. For example, if the trading
volume of a particular stock is increasing, the price, too, goes north.

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Technical Patterns in Trading
There are five Important charts that can help technical analysts identify and exploit market
movements.

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Questions ?

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 Somasekhar
somforex@hotmail.com
8454946661

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