Para 6.

2 TECHNICAL ANALYSIS
254
shares for a fairly long period of time. However there are many
especially Speculators who do not want to invest for long. Their investors,
horizon is
short
tively short term.
term and hence they want to predict stock prices in
rm. This chapter deals with the second approach of
investment
rela.
securi
of
valuation- Technical analysis. security
6.1 TECHNICAL ANALYSIS
Technical analysis is based on the premise that "history repeats itself and
hence movement in stock prices follow an established trend which can be
gauged from past price and volume data. As per Technical Analysis future
price behaviour can be predicted on the basis of pastpriceanalysis. Technical
analysis involves the study of various charts, ratios and patterns to predict
futuredirection of stockprices. It helps in answering the questions likeIs it
the right time to buy a share?" or "Is it the right time to sell a share?" Hence
once it is decided to invest in the shares of a particular company, the right
timing of investment can be decided on the basis of technical analysis.
6.2 DIFFERENCE BETWEEN FUNDAMENTAL
ANALYSIS AND
TECHNICAL ANALYSIS
Two approaches to security valuation -fundamental analysis and technical
analysis can be distinguished on the following basis :
() Meaning and basic philosophy : As per fundamental
analysis, the
share price should be equal to its intrinsic value in long term.
value of a share is equal to the present value allfuture expected Intrinsic
inflows from the share. Technical analysis is based on the premise cash
that 'history repeats itself and hence stock prices can be
based on past price and volume data. The basic philosophy predicted
fundamental analysis is that every security has a real worth.behind II its
price is less than its real worth then an investor can
earn superior
returns by investing in it. On the other hand, the basic
of Technical analysis is that the share prices move in philosophy
patterns which can be exploited by investors to predict near trends and
price mnovements. future
(iD Objectives : In case of fundamental analysis the main
objective is to
determine the intrinsic value (or true worth)of a security.
objective of Technical analysis is to identify future trend inThe man
security
prices.
(iü) Source of information:Fundamental analysis is based on
the intor*
mationrelated toEconomy, industry and company fundamentals.El
framework is the backbone of fundamental analysis. The information
 DIFFERENCE BETWEEN FUNDAMENTAL & TECHNICAL ANALYSIS Para 6.2

255 regarding economy.and industryis obtained from government reports

database. Information regarding company analysis is obtained
and
fromthe annuallfinancial statements of the companyconcerned. Here
Wedo not
use stock price data to analyse astock. Technical analysis
sbased onthe. analysis of past stock prices and volume dataso asto
predictfuture prices. Hence technical analysis requires information
whichisseasily. available fromthe stock market i.e. pricesand volume.
Therefore sometimes it is said that fundamental analysis is based
on
external data while technical analysis is based on data which is
internal to stock market.
Types of information : Both fundamental analysis and technical
of fun
analysis are primarily based on secondary data. But in case
(v)
the
damental analysis the information required is extensive. HereGDP
fundamental analyst requires macroeconomic data such as
as
data such
growth rate, intlation rate, interest rate etc., industry
as com
nature of industry, competition, growth stage etc. as wellTechnical
pany specificdata such as sales, profitability, liquidity etc.
analysis, on the other hand, requires data related to securities only,
so on.
such as security prices, volume, benchmark index data and
Fundamental analysis is based
() Tools and Techniques for analysis : company level data.
on the assessment of economy, industry and
Hence a variety of accounting and statistical tools and techniques
regression
such as ratio analysis, discounted cash flow analysis, analysis (what if
analysis, probability distribution method, sensitivity fundamental
analysis), and econometric modeling is used in case of primarily on
analysis. Technical analysis on the other hand is based
trend analysis and chart patterns.
analysis an
) Investment decision (Buy-Sell signals) : In fundamental than the
nvestor is advised to buy a stock if its market price is lower then
ntrinsic value. If market price is higher than the intrinsic value
the 'sell' advice is given. In technical analysis, buy and sell signals are
Dased on the analysis of various chart patterns and market as well as
future, a
SoCk indicators,If stock prices are expected to rise in near
in near
uy signal is advised. If stock prices are expected to decline
future a sell signal is, given.
(vin) Where to Invest V8. When to invest : Fundamental analysis answers
the question - Is this the right security to invest or Where to invest?
securities
Hence analysis, one can identify the timingthe
using fundamental Technical
which are worth investing. analysis is useful in technical
market ie. When to buy or sell? Hence fundamental and
and a
analysis are not mutually exclusive. They are complementary
 TECHNICAL ANALYSIS
Para 6.3 256
requires both-ie..the
t right kind
wise investment decision
and right time of investment.
offsecurities
Fundamental analysis determines intrinsic value of
(vii) aTime horizon :
share and hence the investment decisions based on fundamental
analysis is done fora relatively longer period. Technical analvis
in near future. Hence technicall
used to predict stock investment making such as traders. analysis
prices
is useful in short term emphasis is on th
In case of fundamental analysis, the
(ix) Emphasis :
and comnpany fundamentals. It is not driven h
economic, industry Hence the intrinsic value f
investor behaviour.
market forces or is a change in these fundamental
change only if there
a share will on the other hand, is based on market
factors. Technical analysis,
movement of prices as determined by demand and supply forces
affect technical analysis. In recent
Hence investors' behaviour does stock market, investors do not
behave
times it has been shown that in and are subject to a number of
rationally. Investors are irrational
overconfidence, regret avoidance, loSs
behavioural biases such as- finance ie. Behavioural
of research in
aversion etc. Hence a new area
Finance has recently been developed.
Who uses : Fundamental analysis is used primarily by long termn
(*) is used primarily by speculators
investors whereas technical analysis
market.
or short term traders in the
points of differences between funda
As explained above there are many These two approaches of secuity
mental analysis and technical analysis. not mean that fundamenta
valuation arefundamentally different. Butit doesThey are complementarya5
and technical analysis are mutually exclusive. of securites
-ie. the right kindidentification
a wise investment decision requires both helpsin
and right time of investment. Fundamental analysis
having higher real wortnfut-
of the right type of securities ie. securities supplements
intrinsic value than the market price. Technical analysis be used wiselyto
damental analysis in terms of timing the market. It can
decide about the right time to buy or sel.
ANALYSIS
6.3 BASIC TENETS (PROPOSITIONS) OF TECHNICAL.
propositions.
Technical analysis is based on certain tenets, premises or
fundamentalists use
Technicians do not consider value inthe sense in which f reflected
are
and supply of these pat-
it. The technicians believe that forces of demandexamination technicians
in the patterns of price and volume trading. By down. Thås
terns they predict whether prices will move up or
 TOOLS OF
257
TECHNICAL ANALYSIS
believe that price
fluctuationsreflect
beenets or premises of technical analysislogical and emotional
Para 6.4

price of a are. forces. The

1. The security determined
is by the
forces operating in a market. demand
and supply
2. Prices tend to move in trends over
sets the direction of market prices. long term. This long term trend
2 Price fluctuations
reflect logical and emotional forces.
A Price
movements, whatever their cause, once in force persist for
some period of time and can be detected.
5 The trends in security prices may
reverse due to
shift in demand and
supply.
6. The changes in demand and supply can be predicted well in advance
with the help of charts and technical tools.
Hence the real task of a Technical analyst is to
i Identify the trend and
ii. Recognize when one trend comes to an end and prices start
moving in the opposite direction.
For this, technical analyst uses a number of charts, patterns charts
and technical
are the
nicators which are discussed below. It must be noted that
basic tools for technical analysis.
6.4 ToOLS OF TECHNICAL ANALYSI5
both at the market level and at in-
Technical performed
analysis can beusing various types of charts, ratios, patterns or
dividual company level market indicators and individual stock
indicators. Here we will examine
Indicators separately.
6.4.1 Charts a
performing technical analysis. It provides
Charts are the basic tools for
in detectingevolvingand changing
analyst such as Line
vichartpatterns
sual, assischart,
as
tance Point and Figure
to tthetechnical may be of various types
of price behaviour. ChartsChart and Candlestick chart. It must be
individual securities
Doted Bar both in the analysis of
day, the price ofa
as wellthat charts are useful particular
analysis. On a prices prevailingfor a
as market movement the
share varies to plot allgenerallythefollowingfour
many times. It is difficult
day. Therefore Lowand Close.
partpricesicularear of interest
stock particular
ona
to an
Open,
investor-
High,
 TECHNICAL ANALYSIS
Para 6.4

price at which the trading on a

Open Price : Open price is the
onHighaparticular
day.
price : High price is the highest price at which the share ha
share
star
traded on a particular day.
price at which the share has
Low price: Low price is the lowest been trade
aparticular day.
onClose price: Close price is the price at which trading on ashare closes oa
a particular day.
anal.s
There are various types of charts which are used in technical
i Line chart
ii Bar chart
iüü. Bar chart of prices with volume
iv. Point and figure chart
v. Candlestick chart
These charts are explained below:
i. Line Chart:On a line chart X axis shows the time or number d
days/week. On Y axis stock prices are shown. On a line chart oat
closing prices of a stock are shown. They are connected with eact
other successively with straight lines as shown in Fig 6.1. The stdi
prices on five days are Rs. 14, 15, 14, 17 and 12.
Line Chart
Pgices
16
14
12
10
-StockPrice
6
4

1 2 3 4 Time

FIG 6.1 -LINE CHART lanything

aboul
Although line chart is convenient to draw, it does not reveala praes

the intraday volatility of onlythe closing.

the
and not other prices such as stock
high price,
price.low shows
lt price or open price.
 TOOLS OF TECHNICAL ANALYSIS
259 Para 6.4
t.BarChart:

A Bar
chart'shows high, low and closing prices of a
stock
Openpriceof.aday is generally equaltotthe close price of every day.
day. Henceit is generally not shown on abar chart. But if theprevious
required
one can also show open price of the share in a bar chart. On a
bar
chart Xaxis show time while Y axis shows stock prices. The
length
Eshe bar shows the range ot price i.e. the highest price minus lowest
price,i aparticular day and hence if bar lengths increase overtime,
mav be regarded as a signal of increasing stock volatility. One bar
is placedevery day and closing and opening prices may be depicted
with some signs such as - or X. In Fig 6.2 a bar chart is shown using
the stock price data given in the following table.
Day High CLose
1 15 6 14
2 17 9 15
3 19 12 14

4 18 16 17

5 14 10 12

20
18
16
14
12 High
10 Low
- Close

0
4 Time
3
1

CHART
FIG 6.2:BAR
iii, Point and Figure Chart for increase and O
Xis placed
Itis a chart made up of X and O's. implied when Xlines are
buy signalis every
for
decrease in stock price. A Olines are going down afterdo not
after every Oline. If the axis
moving
Xline
up
then a sell signal is triggered.
In this chart
Para 6.4 TECHNICAL ANALYSIS
260
represent time or price level, rather they just show the
movement of prices irrespective of the quantity of change. directiona
E.g. Astock's price over the past 30 days is recorded as Rs. 20,
28, 26, 25, 35, 37, 40,42, 38, 35, 37,39, 41, 34, 28,25, 37, 40, 38.36
36,39, 41, 45, 43, 42, 40, 38.
The point and figure chart will appear as shown in Fig 6.3:

FIG 6.3 : POINT AND FIGURE CHART

It must be noted that whenever there is a change in price Xor Oart

placed. The columns are changed when there is a change in dire
tion ie. from increasing prices if the price starts declining then e
switched to second column and indicator O. After that the price stars
increasing therefore we shifted to third column and put Xsigns to
every increase.
The main advantage of such achart pattern is that it can compress
large volumes of data in asmall group which can be used inanalysis
v. Candlesticks Charts
day
As the name suggests this chart type shows a candlefor every -open,
pricemovements. It is achart pattern which shows fourprices-thenthe
close, high and low. If close price is lower than open price
increasingl
box is filled with black colour otherwise left empty. Anmeasuretime
dark candlesticks are bearish indicators. On Xaxis we provides
and on Yaxis we measure stock prices. This chart patternbothintraday
a bird's eye view as to the movement of stock pricess -
and inter day.
 TOOLS OF TECHNICAL ANALYSIS Para 6.4

6.4,
candlesticks. are shown for the following 5 days.
InFig.
Open High Low Close
Day
16 20 6 14
17 9 15
12
2
16 19 12 14
3
20 23 16 17
4
11 14 10 12
5

25

20

Open
15

10
H High
Low

Close

2 3 5
Time

FIG 6.4:CANDLESTICKS CHART PATTERN

v. Price and Volume Chart: Price -volume chart shows the high, low and
close price of a share along with its volume in the same chart. The
utility of this chart is that it provides information about the volume
Or trading regarding that share besides showing the relevant prices.
FTice and volume chart for the data given in the following table can
be depicted as shown in Fig 6.5.
Day Volume
(in 000) High Low Close
10000 20 6 14

11000 17 9 15
3 15000 19 12 14
A 16 17
14000 23
17000 14 10 12
Para 6,4 TECHNICAL ANALYSIS

18000 25
16000

14000 20

12000
15
10000
Volume
8000
10
High
6000 Low
4000 5
-lose
2000

2 3 4

FIG 6.5:PRICE- VOLUME CHART

6.4.2 TechnicalIndicators and Technical ChartPatterns

Anumber of technical indicators and chart patterns are used by technical
analysts. Some important indicators and chart patterns are discussed blow:
Market indicators :Market indicators are charts,or trends which provide
the general direction of the market. It covers the following theories ar
indicators:
1. Dow Theory : Charles Dow, the grandfather of technical analysa
propounded what is popularly known as Dow theory now. Dow theur
is based on the assumption that stock market does not move on rar
dom basis rather there are set trends which can detect the directou
of market movement. According to this theory in any type of mar
whether bullish or bearish, three trends are simultaneously at wort
the primary trend, the intermediate trend and the minor trend:
lasting
i Primary trend is the long term trend over a period direction
for more than one year. This trend sets the overall is
of the market. If primary trend is upward then bull maarket
in operation whereas if primary trend is downwardthen
market is bearish. 'months
iü. Intermediate trend, on the other hand lasts for afewtrendIf
and operate in the opposite direction of primary
trendwillbe
the primary trend is upward then intermediate intermediate
downward movement and vice versa. Therefore
trends are also known as "secondarycorrections.
 TOOLS OF TECHNICAL ANALYSIS Para 6.4

Tertiary or ninor
it tions
Hor trends are day-to-day or intra-day fluctua-
in stock market which do not last for long. These trends
provide non meaningful conclusion regarding the overall market
movemnent and hence are given least importance.

Bull Market: As per Dow theory a bull market is in operation when

successive high points are higher than the previous high and succes-
sive lowpoints
are also higher than the previous low point. This can
beeunderstood with the help of Fig. 6.6.
ur
As shown in Fig. 6.6 one can easily make out that the primary trend
isin upward moving. The intermediate trend is the period of decline
this bull market. Therefore during bull market, it is good time to
huy during secondary corrections i.e. the periods of decline which
do not last for long. By doing so the investor would be able to buy at
low prices and in the long term he can expect increase in stock prices
due to bull market. Minor trends are day to day fluctuations in stock
market index and are of no use in deciding about the investment.

Primary Trend

Price
Secondary Trend

Time

FIG 6.6: BULL MARKET (DOW THEORY)

Bear Market :, As per Dowtheory a bull market is in operation when
lows and suc-
successi
cessive ve
low highpoints are lower than the previous
points are also lower than the previous low point.
This
can be understood with the help of Fig. 6.7. Here, primary trend is
trend is the period of increase
downward sloping. The intermediate
Para 6.4
TECHNICAL ANALYSIS
in this bear
market. Here also it is termed as
Therefore in abear
Secondar
market,the right time to sell iss
of intermediate corrections. y
during thecor eci
Price
Secondary
Trend
period

Primary Trend

Time
FIG 6.7: BEAR MARKET
(DOW THEORY)
2. Elliott Wave
Theory
A related theory is Elliott Wave
theory, which is a
variant of Dow
theory. As per Eliott Wave theory stock prices can be described b
a set of wave patterns - long term, short term and
minor waves
Long term waves carry the entire market up or down while shot
term wave move in the opposite direction. Minor waves are daily
fluctuations in the market and can be ignored by investors.
Elliott proposed that prices move in repetitive patterns, whichhe
termed as"waves".According to him, these waves are causedbyinves
tors' reaction to external factors or predominant market; psycholog
and
prevalent at the time. Moreover, prices move in sets of trends
patterns
corrections. Based on unique characteristics of the wave
he identified:
trendand
1. Impulsive wave- A wave which goes with the main d-
main
always shows five waves in its pattern. It shows the
rection of prices. trendi i
2. Corrective wave - A wave which moves aggainstthe
the sideways movement in the prices.
 TOOLS OF TECHNICAL ANALYSIS Para 6.4

The Elliott Wave Theory categorizes the waves from largest tosmall-
estasfolows:
GrandI Supercycle, Supercycle, Cycle, Primary,Intermediate, Minor,
Minute, Minuette, Sub-Minuette
Key Points
"Every action is followed by a reaction.
Five waves move in the direction of the main trend, followed
by three corrective waves (a 5-3 move).
+A 5-3move completes a cycle.
This 5-3 move then becomes two sub-divisions of the next
higher 5-3 wave.
The underlying 5-3 pattern remains constant, though the time
span of each may vary.
5

3
B

4 A
1
C

PiG 6.8 A5-3 WAVE PATTERN IN BULL MARKET (ELLIOTT WAVE THEORY)
3. Moving Average Analysis
Moving average is a statistical technique to find out average of a
enes on rolling basis. Moving average is an important indicator or
toolin technical lanalysis. Moving average can be used to analyse the
ovement of the entire market as well as individual stock prices. 200
or 53 weeks moving averages are most popular in the analysis
daysoverall market trend. The 200 days moving average is one of the
Streliable and easily understandable technical indicators available
to
technical analysts and investors.
A200 day moving average is calculated as follows - first of all the
stock prices are added for first 200 days and then divided by200 so
as to cakculate: simple average of these 200 stock prices. This average
is kept at the middle ie. 100.5th day. Next we drop first stock price
and take one more stock price from below and
calculate average
 SPECIFIC STOCK INDICATORS
Para 6.5

ratio =
Odd lot purchases
Oddlot Odd lot sales
ratio is greater than 1
Ifthe and
pliesthat market will turn bearishcontinuously increasing then it im-
in near future.
65SPECIFICSTOCK INDICATORS
Anumber ofindicators, chart patterns are used to identify buy and sell
signalsonindividual stocks. These are explained below:
and Resistance Level
(a) Support
Sunnort and resistance levels can be identified both for the market
ndex as well as individual stocks. Support level is that price,
hich the price is not expected to fall. Resistance level is that below
above which the price does not go. For example assume thatprice, the
price of SBI share starts to decline whenever it reaches Rs. 3000
and it starts to rise whenever it approaches Rs 2000. The SBI share
price have been moving in the range of Rs. 2000 to Rs. 3000 for
0ong. Then Rs 2000 may be considered as its Support level (or sup
port price) and Rs. 3000as its Resistance level(or resistance price).
Hence if a stock's price approaches its support level, it is a good buy
opportunity. If a stock's price reaches its resistance level, it provides
agood opportunity to sell. For example if the support and resistance
price of SBIshare is Rs. 2000 and Rs. 3000 respectively, then it is
expected that SBI share price will generally lie between Rs. 2000 and
Rs. 3000. If SBI share price reaches Rs. 2000, it is considered as a
good opportunity to buy. On the other hand if SBI share price reaches
Rs. 3000, it is considered to be a good opportunity to sell SBI share.
I stock price breaches its support level, it indicates a bearish trend
for the stock price. In that case, stock price is further expected to
decline. On the other hand is stock price breaches the Resistance
level, it indicates a bullish phase for the stock and stock price is ex
Pected to rise further. Fig 6.9 shows the formation of Support and
Resistance level.
Two important points about Support and Resistance Levels are
and Upper
L Support and Resistance levels indicate the Lowerexpected
prices are to
mit respectively, within which stock constant overtime.
nove, However these limits do not remain
and resistance
hey may change, In a bull market the support
market these levels
levels may be revised upwards. In a bear
may be revised downward.
 TECHNICAL ANALYSIS
Para 6.4 271

breadth is calculating
Another way to analyse market the
ratio. It is computed by dividing
number of declining shares. It compares the
advance-decl
number of advancing shares
number of stocks by tie.
higher against the number of stocks that
that
closed lower than their close
day's closing prices. previous
Advance-Decline Ratio =
No. of stocks advancing 6.5
No. of stocks declining
An
Advance decline ratio greater than 1 (Positive market breadth)
more stocks in the index have shown positive price movement dendte
wheres
s sign
(a
advance decline ratio less than 1 (Negative market breadth) implies m
stocks had negative price movement in the index.
TABLE 6.1: MARKET BREADTH ANALYSIS
88888808*o8080

Day Advances Declines

88888
MarketBreadth Cumulative Breadtt
300 200 100 100
2 350 220 130 230
3 300 50 250 480
4 320 170 150 630
5 270 160 110 740
5. Confidence Index
Confidence index as the name suggests, provides information as to
how confident are investors about the market performance. Barron's
confidence index is calculated as the ratio of average yield on 10top
rated corporate bonds divided by average yield on 10 intermediale
grade corporate bonds. Higher values of confidence index sugges
bullish nature of themarket.This ratio will always be below 1becaus
yield of top rated bonds cannot exceed those on low grade bonds
Confidence Index Average Yield on Top 10 rated bonds
6. Odd lot theory
Average Yield on 10 intermediate rated bons
Odd lotis tradingin shares insmaller quantity thanthe marketlotsize
Small investors buy and sell shares in odd lots. As per oddlottheor%
the
small investors are generally wrong especially before achangein jus
direction of market. It implies that small investors buy heavily
at the peak of the market and sell in huge quantities atthe bottom
of the market. Therefore shouldtrade
contrarian view is that one oddlot
in the opposite direction of that of small For this
ratio is calculated as below: investors.
Para 6.5 TECHNICAL ANALYSIS

2
ii Support and Resistance levels does notimply that
cannot move beyond these levels. Stock price stock piek
may
support and resistance levels. If the stock price goes
breach
resistance level, it suggests a strong move in upward
and hence the future stock prices are predicted dib
reey
cin
ad
n
provides a good opportunity to buy. On the otherobe higher.
stock price goes belowsupport level, it suggests a hand it
in downward direction and hence the future stockstrong move
pryictoes are
predicted to be lower. It provides a good opportunity
sel.
Price

Resistance Level

Support
Level

Time

FIG 6.10: SUPPORT AND RESISTANCE LEVEL

(b) Relative Strength

Inrelative strength analysis we compare a stock's performance otesame
stocksinthe
recent period to the market performance or other? divided by market
industry. Relative strength ratio is the stock price strength ofthe
index. If the ratio increases overtime it showss relative
stock and hence profitable investment opportunity.
(c) Chart Patterns or Formations
() Double Bottom and Double Top top
whiledouble
stoct
Double bottom Chart Pattern looks ike"W" shapetlevelforttheshow
looks like M'shape'. Two bottoms showthe supportbottom. Two
tops
Dooubk
and hence provides a buy opportunity at the Fig6.10shows
the resistance level and an opportunity to sell.
Top and Fig 6.10A shows Double Bottom chart patterns.
 SPECIFIC STOCK INDICATORS Para 6.5
3
Price

--- Resistance
Level

Time

FIG 6.11: DOUBLE TOP

Price

B B Support Level

Time

FIG6.11A: DOUBLE BOTTOM

(1) Higher Top, Higher Bottom
t is featured by a series of higher highs and higher lows. The stock con
secutively reaches a high which higher than the previous high as so on.
t shows a continuous formation of higher top and higher bottom. Such
astock is in uptrend. It is advisable to opt a By on dip' strategy because
here is optimism that the stock may rise further.
 TECHNICAL ANALYSIS
Para 6.5
214
Price

Higher Top,

Higher Bottom

Time

BOTTOM
FIG 6.12: HIGHER TOP HIGHER

(iii) Lower Top, Lower Bottom

The stock consecu
It is featured by a series of lower highs & lower lows.
tively reaches a high which lower than the previous high as so on. Whereas,
previous low. It shows
it touches a low price' which is further below the
lower bottom. The stock is in
a continuous formation of lower top and willtake the
downtrend. It is advisable to "Sell on bounces"as pessimism
stock further lower.
Price

Lower Top

Lower Bottom

Time

FIG 6.12A: LOWWER TOP LOWER BOTTOM

 SPECIFIC STOCKINDICATORS Para 6.5

Headand Shoulder
Head andishoulder chart pattern is the most popularamongalll chart
patterns. Attheend of along term trend (especially a bull run) we
mayfind head and shoulder configuration. This pattern has a high
nie head and two small tops on its either side ie. shoulders. One
can drawa neckline by joiningthe bottom of the shoulders. If stock
price goes below the neckline, it indicates bearish phaseFig
in 6.11
near
auture and hence a sell signal to the short term investor.
shows Head and Shoulder chart pattern.

Price

Time

SHOULDER
FIG 6.13: HEAD AND

() Inverted Head and Shoulder

of headand shoulder configuration. Inverted head
Itisjust the reverse Inverted head and shoulder
patern is shown in Fig 6.14.
shoulder
inverted head and two inverted shoulders. If
Chart pattern has an neckline, it indicates bullish phase for the
Stock price rises above the
provides a 'buy signal':.
Stock in near future and hence
Para 6.5 TECHNICAL ANALYSIS

216
Price

S,

S1
H

Time
FIG 6.14: INVERTED HEADAND SHOULDER
(vi) Triangles
Triangle patterns can also be detected in stock price charts. Tn
angle patterns can be of three types - symmetrical, ascending and
descending triangle. Symmetrical triangle suggests a range bound
market till it is complete. When ascending triangle breaks towards
above, it suggests bullrun in near future and hence a buy signal. I
descending triangle breakstowards below,it implies price decline n
near future and hence suggests a 'sell signal'. Triangles are shown in
Fig 6.15, 6.15A and 6.15B.
 SPECIFIC STOCK INDICATORS Para 6.5

Price

Time

FIG. 6.15:SYMMETRICAL TRIANGLE

Price

Time

TRIANGLE
FIG. 6.15A :ASCENDING
 TECHNICAL ANALYSIS
Para 6.5

Price

Time

FIG. 6.15B: DESCENDING TRIANGLE

(vit) Flags:
Aflag chart pattern is detected when a bull rally or bear phase enters
into a consolidation pattern which appears as a rectangle or para
lelogram. The consolidation phase forms the flag' for a continuing
trend. It is predicted that after the consolidation phase is over, the
stock price will move in the same direction in which they were movng
before the formation of flag pattern.
Price

Time

FIG. 6.16 : BULLISH FLAG PATTERN

 LIMITATIONS OF TECHNICAL ANALYSIS Para 6.6
279
ld) VolumeIndicator
Ache chart patterns and indicators discussed so far, used only past
price data for stocks. However stock'sSpast volume data also provides
useful insightsinto its short term price movement and hence can be
nsed in predicting stock prices. Researchers have observed that -
Rising volume in bullish market is further bullish.
Declining volume in bullish market suggests that market will
turn bearish in near future.
+Risingvolume in bearish market farther strengthens the bearish
trend.
Declining volume in bearish market suggests that market will
turn bullish in near future.
6.6 LIMITATIONS OF TECHNICAL ANALYSIS
Technical analysis is an important approach of security valuation, as it
helps in identifying the timing of buy or sell decision. It is based on a variety
of tools, techniques and trend analysis. Technical analysis is frombased on the
certain
analysis of past price and volume data. However it suffers
limitations.
and patterns
i Requirement ofInterpretational skills:Various charts skilled ana
of technical analysis requires careful interpretation by
lysts. Hence technical tools and indicators may not be used widely
by common investors.
ii Subjective analysis and Behaviouralbiases:Technical analysts, are
interpreting various chart
subject to many behavioural biases while
the analysis of
patterns and predicting future stock prices based onare- over-confi
past price data. Some of these behavioural biases
dence, framing, regret avoidance and so on.
Late response to a chart pattern :Once a chart pattern is detected,
technical analyst
needs to be acted upon immediately. Hence the gains out of it.
must be a quick identifier of a chart pattern to make observed.
n practice, such a quickness or promptness is rarely
chartist is short term
onort term perspective:The perspective of a based on technical
not
ahence long term predictions are generally fundamental analysis
(ools and techniques. For long term analysis,
is a better approach to find outthe real worth of a share.