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Fundamental

analysis is finding out


the intrinsic value of the share
Technical analyst studies the price
movements in the market
Price-volume and supply-demand for
overall market and individual stock
The technical analyst tries to study
the trend in the market by
considering the historical share prices

The

price fluctuations reflects logical


and emotional forces
The technician must
Identify the trend
Recognise when one trend comes to an

end and prices start in opposite direction.


He

seldom rely upon a single


indicator, as no one indicator is
sufficient for prediction

Price
All

is determined by supply and demand

information is reflected in prices of

share
Market
Past

always moves in a trend

prices predict the future

Based

on the doctrine given by Charles


H. Dow in 1884.
A J Nelson, formalised the Dow theory
for economic forecasting
The Analysts used charts of individual
stocks and moving averages in the
early 1920s.
Generally used techniques:
Market indicators, volume indicators and

other market indicators

He identified three
distinct cyclical trends
that guide the general
direction.
Primary trend: long range

cycle that carries the


entire market up or down
Secondary trend:
corrects the deviations in
the primary trend
Minor trend: day to day
Charles Dow known as the Godfather of TA
fluctuations

bull market is when the current up


swing is more than the previous up
swing and
When the current downward
movement is bellow the previous then
the market is bearish

Price

Primary trend

Secondary Corrections

Time

Primary and Secondary Trend

Minor trend

support level exists at a price where


considerable demand for that stock is
expected to prevent further fall in the price
level.
In support level demand for the particular
scrip is expected.
The negative swing in the price may be
halted.
The price of the stocks will never move
bellow that. For the time being it may result
even in price reversal.

The

supply of scrip would be greater than


the demand and further rise in price is
prevented.
The selling pressure is greater and the
increase in price is halted for the time being.
When the stock prices touches certain level
and then drops, this is called resistance level
When the stock prices reaches down to a
certain level and then rises there exists a
support.

PRICE

Support Level

DAYS

PRICE

Res
ist

DAYS

anc
e Le
vel

Breakout

Support

Resistance

If

the scrip price reverses the


support level and moves downward,
it means that the selling pressure
has overcome the potential buying
pressure signaling the possibility of a
further fall in the value of the scrip.
It is violation of the support level and
bearish market.

If

the scrip penetrates the previous


top and moves above, it is the
violation of resistance level. At this
point buying pressure would be more
than the selling pressure.
If the scrip was to move above the
double top or triple top formation, it
indicates bullish market.

It
It

need not form on the tops or bottoms


can also formed in gaps (time when
the scrip does not change hands)
If the prices are in the upward move
and the high of any day is lower than
the next days low , the gap is said to
have occurred.
If the price closes in a price and opens
in another price then this indicates the
stock has not traded but changes price.

Indicators

are used to find out the direction of


the market.
Indicators are normally price and volume of
share trade
Those are price indicators and volume
indicators
Advances and declines, New Highs and New
lows and The most active list are the price
indicators
Volume of trade, Short sales and Odd Lot
trading are volume indicators.

Price

Indicators

Advances and

declines
New Highs and
New lows
The most active list
Volume

Indicators

Volume of trade
Short sales
Odd Lot trading

Mathematical

Indicators
Moving Averages
Exponential

Moving Averages
Oscillators:
Relative Strength
Index
Rate of Change

Advances and declines are also referred to


as the breadth of the market. It is the
difference between the number of shares
moving up and number of shares moving
down. The net difference is added to the
previous day and plotted in a graph. A
comparison with the index will show the
future market direction. If there is a
divergence the change in market is predicted.

Day

Advan
ce

Declines

Net

Breadt
h

NSE
Nifty

Monday

1486

774

712

712

5876.89

Tuesday

1310

966

344

1056

5883.33

Wednesda
y

898

1225

-327

729

5646.46

Thursday

1108

1091

17

746

5810.17

Friday

931

1279

-348

398

5623.08

It is used as a supplementary to the breadth


High low differential index is prepared
Number of new highs lead to a rising market
The number of BSE stocks making new highs
minus new lows is averaged for a five-day
period.
A moving average smooth out erratic daily
fluctuations and exposes the trend. Such highlow index would normally move with the
market. Divergence is a clue for future
movement.

The

major newspapers and financial


magazines publishes most active list of
stock.
The number of stocks hardly represents
1% of the total issues but account for
around 15% of total volume.
The most active list moves ahead of the
market
The movement of the active list helps in
predicting the market

Volume

of Trade expands as along with the


bull market and narrows down in a bear
market.
The volume will fall with rise in price and vice
versa
Large rise in price or large fall in price leads
to increase in volume
If the volume decline for five consecutive
days, then it will continue for another four
days and the same is true in increasing
volume.

Short

selling refers to selling shares


that re not owned. (Short interest)
Bears are short sellers who sell in the
hope that they will buy the same in
future with a low price
Increase in short selling increases the
future demand and market will become
bullish
These indicators cannot be considered
in isolation.

Monthly

short sales are compared with


the average daily volume of the
preceding month. The ratio between
these two indicates how many days of
trading it would take to use up the total
short interest.
When it is less 1, the market is weak or
weakening. Between 1 to 1.5
considered as neutral. More than 1.5 or
2 indicates bullish and highly favorable.

Small

investors often do not buy more than


100 shares and such buyers and sellers are
termed as odd-lotters.
Ratio of odd lot purchases to odd lot sales is
the odd lot index. (>1 more buying)
If the odd lot volume is increasing shows a
bullish market and reverse for bearish
If odd lotters dominates the market the
market is considered as technically weak.

Simple

Moving Averages

Exponential

Moving Average

Oscillators:
Relative Strength Index
Rate of Change Indicators
Moving Average Convergence and

Divergence

To

smoothen the data moving average


technique is used. (Long Term and Short
Term)
Moving average of 5 days means on the
6th day while calculating average the 1 st
price is ignored and the 6th price is added
and the process continues.
It specifies the trend and predicts the
future movement of the stock
Ten or thirty days moving average is used
for short term forecasting

Day

Price

Average

1-Sep-09
2-Sep-09
3-Sep-09
4-Sep-09

123.25
120.75
119.9
120.25

7-Sep-09
8-Sep-09

121.6
121.6

9-Sep-09

122.7

10-Sep-09

120.9

121.3
120.3
120.583333
3
121.15
121.966666
7
121.733333
3

Individual

stock price average is


compared with market index moving
average. Both are plotted in a graph and
trend is compared
If the stock price is below the market
index then bearish and reverse for bullish
If the stock price penetrates the index
from above then sell signal.
If it pushes up from bellow then buy
signal

The

closing price and the moving


average of the stock prices are
compared
Both the line move along each other
Their intersection indicates a shift in
the move
Downward penetration indicates a
fall and upward indicates a rise in
the prices

When

LT and ST moving averages


intersects with each other, a buy or sell
signal is indicated.
ST moving average intersects the LT
curve and falls below, it is bearish
When the prices are rising the ST
intersects from blow giving a buy
signal
When LT is above the ST expect that
the prices will rise in near future.

Days

Prices

Price

Buy Signal
ST

LT

Day

Price

Sell Signal

LT
ST

Day

EMA = (Current Closing price Previous EMA)


x Factor + Previous EMA

2
Factor n+
Where n = number
for which the
= of days
1
average is to be calculated.

If we are calculating 5 day EMA then the


correct EMA will be from 6th day onwards.
It is prepared with the price trend then
the intersection points are decision
points.

Data sheet

Relative
Rate

Strength Index

of Change Indicators

Moving

Average Convergence and

Divergence

It

indicates the scrip momentum, shows


the share price movement across a
reference across a reference point from
one extreme to another.
The momentum indicates;
Overbought and oversold conditions
Signals possible trend reversal
Rise or decline in the momentum

Developed by Wells Wilder. An oscillator used


to identify the inherent technical strength
and weakness of a particular scrip or market.

10
RSI = 100 1+
0
Average RS
Gain Per
RS = day
Average Loss Per
If

Day

the RSI crosses seventy there may


be downturn and it is time to sell. If RSI
falls below thirty time to buy the
scrip.

It is
The

normally prepared for 14 days basis


RSI of the 14 days interval are
plotted in graph
If RSI is above the Overbought /Over sold
zone time to take action
This kind of situation occurs due to large
buying or large selling
The term oversold speaks that the
market has declined to a new low
The overbought speaks that the market
has touched the new highs

Data sheet

Rate

of change between the current price


and the price n number of days in the
past.
It helps in finding out the overbought or
oversold level
ROC graph is prepared to find out the
overbought and oversold limit (oscillators)

RoC
=

Current price
-1
Price n period
ago

Overbought

Oversold

Data sheet

Easiest tools in technical analysis.


Spot the current trend for buying and

selling
Indicates the probable future action
Shows the past historic movement
Indicates the important areas of support
and resistance level.
James Dines said, Charts are like fire or
electricity. They are brilliant tools if
intelligently controlled and handled but
dangerous to a novice.

The

PF charts are of one dimensional


and there is no indication of time or
volume. The price changes in relation to
previous prices are shown.
The change of price direction can be
interpreted.
The charts are drawn in the ruled paper.
Only whole numbers are considered
The price rise is shown as a X and O
for a price fall.

Sell signal

Buy signal

Simplest

and most commonly used

tool
To draw a bar a dot is entered to
indicate the highest level and another
dot is for the lowest level in a day.
Both the pints are joined to form a bar
and a small nub is drawn at the top
and bottom of the bars to indicate the
opening and closing price.

Each bar is
composed of 4
elements:

Open
High
Low
Close

Note that the


candlestick body
is empty (white)
on up days, and
filled (some
color) on down
days

High

High
Close

Open

Open

Close
Low

Standard
Bar Chart

Low

Japanese
Candlestick

Standard
Bar Chart

Japanese
Candlestick

Date
16Aug10
17Aug10
18Aug10
19Aug10
20Aug10
23Aug10
24Aug10
25Aug10
26Aug10
27Aug10
30Aug10
31Aug10

Open
Price
86
84.5
85.55
85.4
84.8
84.5
85
83.45
83
81.4
81
80.55

High
Price
86.4
88
86.75
86.4
85
85.65
85.2
84.05
83.15
81.9
82.65
80.9

Low
Price
83.2
84.5
83.9
84.65
84.1
84.35
83.4
82.4
81.4
80.05
80.5
78.55

Close
Price
83.45
85.4
84.95
84.95
84.25
84.6
83.55
82.6
81.6
80.2
80.85
79.8

Chart

Patterns: used as a supplement


to other information and confirmation.
V formation: The V patterns occurs
mostly in popular stocks where the
market interest changes quickly from
hope to fear and vice-versa.
Tops and Bottoms: Buy at bottom and
sell at top
Double top and bottom: End of a
trend

Head

and Shoulders: Easy to


identify and the signal generated by
this is considered reliable. Three
rallies resembling the left shoulder, a
head and a right shoulder. A neckline
is drawn connecting the lows of the
tops. When the stock price cuts the
neckline from above, it signals the
bear market.

This formation is
characterized by
two small peaks
on either side of
a larger peak.
This is a reversal
pattern, meaning
that it signifies a
change in the
trend.

H&S Top

Head

Right Shoulder

Left Shoulder

Neckline

H&S Bottom
Neckline

Left Shoulder

Right Shoulder

Head

Triangles are
continuation
formations.
Three flavors:

Ascending

Symmetrical

Ascending: Demand

is high, bullish
Descending: Bearish
trend
Symmetrical:
Temporary halt and
original trend to
come soon

Symmetrical

Descending

Nov to Mar
Trading range

Descending
triangles

Double bottom

Gap, should get


filled

Fundamental analysis studies the stock based on


the companys performance and other macro
economic conditions. But TA mainly focuses on the
historical prices of the stock and volume of trading.
FA Find the long term value of the share but the TA
forecasts the prices on a short term basis.
FA opines that stock prices depends on the
underlying factor, but TA focuses on price and
volume
Fundamental analysis is time consuming but
Technical Analysis is not.

Larry Williams, regarded as one of the great


technicians, entered a trading competition and
returned over 20,000% in a year trading TECHNICAL
picks
Daughter, actress Michelle Williams returns 10,000%
in same competition using her fathers strategies

Develop

a strategy unique to your


personality and comfort levels
Tweak your strategy until it works
the best that it can
Test it using virtual (paper) trading
DO NOT STRAY FROM THE SYSTEM!
Remember that 1% every day leads
to about 290% a year! A little goes a
long way!