What is meant by Technical Analysis?
‡ It s a method of evaluating securities
± Assumptions that market data ± Such as charts, volume, etc. ± Can help predict future market trends

‡ Technical analysts believe that
± Predict future price of a stock ± Historical prices and trading variables

Why study Price???
The market price reflects the hopes and fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers Price is the only figure that counts.

‡ A method of market and security analysis that studies investor attitudes and psychology as revealed in charts of stock price movements and trading volumes. This analysis may be used to assess possible future price action. ‡ Research and examination of the market and securities as it relates to their supply and demand in the marketplace. The technician uses charts and computer programs to identify and project price trends.

Assumptions of Technical Analysis
1. Price discounts everything. ‡ In a nut shell, this first assumption seeks to incorporate all the fundamental, political, macro and micro economic data as well as the risk component of a stock into the current market price at any one period. ‡ This infers that the market price can be heavily influenced by an investor's perception of supply and demand, as well as the general broad economic overview at the time the price is captured.

2. Prices usually always move in trends This theory is based on the fact that markets are efficient and information dissemination occurs instantaneously across the market. In the real world however, this is never entirely achievable because of a varying number of factors and therefore complete randomness in its true form is never absolutely reflected.


3. History repeats itself over time. ‡ The most significant factor to realize is that you are not the only person motivated by profit. All traders tend to react in the same way each time they encounter a situation which is similar.

‡ While it is true that some traders react positively from any mistakes made and learn from them, other participants decide to leave the market and therefore create a balancing pendulum of traders entering and leaving the market. ‡ Consequently, the same oversights are made by each generation of traders in the market which infers that history tends to repeat itself as time moves forward


Technical v/s Fundamental analysis
Fundamental analysis  Long term values movements. 
Decisions depend upon upon only Company, industry and Financial analysis. 85% logical and 15% and 15% Psychological. Appeals long term Investors.

Technical analysis Short term price Decisions depend price and volume 85% psychological Logical. appeal short term traders.

Several ways the technicians thinks and acts : Technicians believe that behind the fundamentals are important factors.  Technicians are not committed to a buy and hold policy.  Technicians do not separate income from capital gains. Total returns = Realized price (price paid + dividend received)  Technicians act more quickly to make commitments and to take profits and losses.

Technicians recognize that the more experience one has with the technical indicators, the more alert one becomes to pitfalls and failure of investing.  Technicians insist that the market always repeats.  Technicians believe that breakouts from previous trends are important signals.  Technicians recognize that the securities of strong company are often weak and vice versa.  Technicians use charts to confirm fundamentals.


‡ This graphical representation of a chart allows us to perform a visual interpretation of a security's price behavior. ‡ Technical indicators or studies can be plotted on a chart to help you see what prices have done in the past, what they are currently doing, and what they may do in the future.

‡ A chart displays the price movement of a specific symbol, this price data can be displayed as Bars, Candlesticks or Lines. ‡ Every chart has a base security. This base security is the security or the ticker symbol that was selected when the chart was originally created.

‡ In the line chart, only the CLOSING PRICE of the stock is plotted on the chart for each successive day. ‡ Many chartists believe that because of the closing price is the most critical price of the trading day, a LINE (or close only) chart is more valid measure for price activity.


‡ The daily bar chart has already been acknowledged as most widely used types of charts in Technical analysis. ‡ It is called as bar charts because they show each day s/month s/year s range is represented in vertical bars. ‡ It shows open ,close, high & lows. ‡ The tic of RIGHT SIDE is closing price ‡ The tic of LEFT SIDE is opening price


‡ This chart shown the same price action but in more compressed formats. ‡ Here, To notice the X s and O s in alternating column. ‡ The X column shows RISING IN PRICE while O column shows DECLINING IN PRICES ‡ DUE TO MORE FLEXIBLITY, this chart is more easier & precise to spot buying & selling signals than Bar charts.


‡ Started in Japan in 1700s for RICE TRADE. ‡ There s link between price & supply & demand of rice but there s also EMOTIONS OF TRADERS. ‡ Thus, There s a difference between the price and the value of rice caused by trader emotion. ‡ The candlestick chart analysis measures the MARKET EMOTIONS. ‡ So, It reflects the SHORT-TERM OUTLOOKS.

‡ a. b. c. ‡ a. b. c. d. LONG BODY:Prices of stock was in wide range during trading session. Open near low/high and closed near high/low of the day. Tells us bearish or bullish SMALL BODY:Prices are in variations , Open and closed near the same price. It is neutral or indecisive of market Look @ the trend of market preceding the patterns


Hanging Man
when it is after a rally, it can suggest a beginning of a downward trend. ‡ There are also types of various clusters of clusters have their exotic names such as 1. Dark cloud cover 2. Doji star 3. Harmani cross 4. Two day tweezers tops

Hanging MAN Lucent Technologies 3 days of stock price rising Then hanging man Next day, stock price drops over 20%

GAP OF 20%


‡ This chart shown a bars in black candles & white candles augmenting the daily trading range lines. ‡ BLACK CANDLES :- IF the opening prices exceeds the closing prices the body of candle is black. ‡ WHITE CANDLES:- When the stock is up(the close exceeds the open), represent the stock advances ‡ REAL BODY:- THE THICK PORTION OF AN ENTRY ‡ WICK:- THE VERTICAL LINES

‡ Duo to difference in interpretations, we can make as many assumptions as we think. ‡ Every chartist following its own method & change frequently its method . ‡ Most of them followers are those investors who either know little or nothing about company in which they have invested(i.e. they only follow the chart)


‡ Proposed by CHARLES DOW editor of the wall street journal in U.S.A. ‡ Believed in fundamental analysis ‡ Provides a time tested method of reading the stock market barometer . ‡ Might work only when a long, wide, upward or downward movement is registered in the market


‡ Primary/major market trend ‡ Secondary intermediate trend ‡ Minor trend

‡ Industrial average ‡ Transportation average ‡ Utility average

1.revival of confidence 2. improvement in corporate earnings 3. speculation & inflation

1. abandonment of hopes 2. reporting lower profits & lower dividends 3. distress selling

‡ Not a theory but an interpretation of knowing data ‡ Not explain the averages should be able to forecast future stock prices ‡ Not attempt to explain a pattern of the stock price movement It is mostly unsuitable reverse for short & intermediate trend & suitable only primary trend


± Trend is the direction of the movement in the share price Share prices do not rise or fall in a straight line

Trend reversal..
‡ The rise or fall in share price cannot go on forever ‡ Up trend ‡ Down trend

‡ TYPES Primary trend Secondary trend Minor trend

‡ Bull market
± Each peak is higher than prev. peak . ± Bottoms are also higher than prev. bottom CAUSES
Revival encourage investor Improvement in corporate profits further price rise speculation -price advances due to inflation

‡ BEAR MARKET  First fall  Chance of moving back to prev. high is less.  sale of shares.

± Lower profit & dividend ± (-) flow of information in mkt ± Global mkt effect

‡ Intermediate trends moves against the main trend & lead to correction. ‡ In bull mkt the ST would result in fall of the earlier rise. ‡ In the bear mkt the secondary trend carries the price upward & correct the main trend.

± Daily price fluctuation ± Corrects the secondary trend movement

± When the stk touches a certain level & then drops

± If the stk reaches down to a certain level & then rises there exist a support level.



Moving avg are used to provide a smooth ref. pt for
± Individual securities ± Mkt indices ± Commodity prices ± Interest rate ± Foreign exchange rates 

Moving avg changes each day Recent day is added & oldest day is dropped Volatile condition

Technicians analyze
Diff between Daily Prices & Moving avg

If Penetration of daily prices over the moving avg

Daily price moves down then moving avg
Sell signal 

Daily price are abv moving price
End of bull mkt may be near.

Buying & Selling of stock
‡ Moving avg analysts ‡ Moving avg analysts recommend buying stock recommend selling of if stock if
± M.A lines flattens & stk price moves up through moving avg lines ± Price of stk falls below MA lines that is rising ± M.A lines flattens & stock price drops down through moving avg lines ± Stk price temporarily rises abv a declining moving avg line

± Stk price is above M.A line, falls & rise again without penetrating moving avg line.

‡ Stk prices falls through M.A lines & turns around only to fall again without penetrating abv. Moving avg line

How moving avg is calculated?
‡ Strategy is more successful if M.A is calculated over a longer time frame ‡ Can subscribe to chart delivery services ‡ Can buy years of historical daily prices and draw own charts ‡ Can stimulate trading by managing hypothetical trades.

MA Example 1: Google (GOOG)

MA Example 2: Apple (AAPL)

MA Example 3: JSC Tatneft (TNT)


‡ Most of the technical indicators make sense when examined individually but when one examines many technical indicators simultaneously, the interpretation of their collective meaning is often contradictory and confusing.

‡ There are some major technical indicators described here. The short interest ratio theory Confidence index Spreads Advance-decline Ratio Market Breadth Index

The odd-Lot Ratio Insider Transactions Moving Average


Technical indicators
‡ THE SHORT INTEREST RATIO THEORY The short interest ratio is derived by dividing the reported short interest or the number of shares sold short, by the average volume for about 30 days. When short sales increases relative to total volume,the indicator rises. A ratio above 150 per cent is considered bullish, and a ratio below 100 per cent is considered bearish.



‡ The logic behind this ratio is that speculators and other investors sell stocks at high prices in anticipation of buying them back at lower prices. ‡ The increase short selling- market weakness, ‡ Decreasing short selling-market strength.

Cont .
CONFIDENCE INDEX It is the ratio of a group of a lower-grade bonds to a group of higher-grade bonds. According to this theory underlying this index, when the ratio is high, investors confidence is likewise high, as reflected by their purchase of relatively more of the lower-grade securities.



‡ When they buy relatively more of the higher grade securities, this is taken as an indication that confidence is low, and is reflected in a low ratio.

Technical indicators
‡ SPREADS ‡ Large spreads between yields indicate low confidence and are bearish, the market appears to require a large compensation for business, financial and inflation risks. ‡ Small spreads indicate high confidence and are bullish.

Cont .
‡ In short, ‡ The large the spreads, the lower the ratio and less the confidence. the smaller the spreads, the greater the ratio, indicating greater confidence.

Technical Indicators
‡ ADVANCE-DECLINE RATIO: ‡ The index relating advances to declines is called the advance decline ratio. The Advances persistently outnumber decline- the ratio increase. A bullish condition is said to exist, and vice versa.

Technical indicators
‡ MARKET BREADTH INDEX: ‡ The market breadth index is a variant of the advance decline ratio. To compute it we take net difference between the number of stocks rising and the number of stocks falling.



‡ Example: ‡ If in a given week 600 shares advanced, 200 shares declined, and 200 were unchanged, the breadth would be

Cont .
‡ In short, ‡ If the both the stock index and the market breadth index increase, the market is bullish, ‡ When the stock index increases but the breadth index does not, the market is bearish.

Technical indicators
‡ THE ODD-LOT RATIO: ‡ Odd-lot transactions are measured by odd-lot changes in index. Odd-lots are stock transactions of less than, say, 100 shares. The odd-lot ratio is sometimes referred to as a yardstick of uniformed sentiment or an index of contrary opinion because the odd-lot theory assumes that buyers or sellers are not very bright especially at tops and bottoms when they need to be brightest.

Technical Indicators
‡ INSIDER TRANSACTION: ‡ The hypothesis that insider activity may be indicative of future stock prices has received some support in the academic literature. Since insiders may have the best picture of how the firm is faring, some believers of technical analysis feel that these inside transactions offer a clue, to future earnings, dividend and stock price performance.

‡ If the insiders are selling heavily, it is considered a bearish and vice-versa. ‡ Although the president s reason for selling the stock may not be related to the future growth of the company, it is still considered bearish as investors figure the president, as an insider, must know something bad about the company that they, as outsiders, do not know.

Technical Indicators
‡ MOVING AVERAGE ‡ A moving average is a smoothed presentation of underlying historical data. Each data points is the arithmetic average of a portion of the previous data. ‡ A 10-day / 20-days /30-days moving avg. ‡ measures Avg values over the previous (10/20)days and so on.



‡ Regardless of the time period use, each day a new observation is included in the calculation and the oldest is dropped. So a constant number of points are always being averaged.


Pros of Technical Analysis
1. Prominent institutions survey foreign exchange dealers and find that the vast majority place some weight on technical analysis. 2. There may be positive investment opportunities even in an efficient market given the diverse strategies and goals (e.g. hedging and risk reduction vs. profit maximization) of different traders.

Pros of Tech. Ana.(Cont )
3. Some technical analysis methods seem to mirror natural human strategies (buy when it breaks through a high, sell when it is declining, etc.) 4. Many natural (e.g. daily/ annual weather patterns) and human phenomena (e.g. meal times) revolve around rhythms & cycles why not market phenomena which is a combination of both?

Cons of Technical Analysis
1. If you believe in market hypothesis/ random walk theory, technical analysis cannot work because complete knowledge of past history about stock prices, volume and trends is reflected in the current price. 2. In many trading theories, the patterns are ambiguous and the trading strategies not rigorously defined. Thus, two people can take the opposite position on a trade while still following the same theory. This makes the quality of the theory doubtful.

Cons of Tech. Ana. (Cont )
3. The cycles of the market may be like the cycles of a child on a swing, periodic, but unpredictable due to irregularities of kicking patterns and wind gusts (sudden and violent blast of wind) 4. Short term claims of excellent performance often just reflect luck. 5. Published studies generally reach ambiguous conclusions.


Signal the change by comparing rate of change in price action. Compare to the past, has it move very far away? Usually signal overbought and oversold Be careful: it might just be the beginning of the trend, only use it in trading in neutral market Examples of oscillators used: -Relative Strength Index (RSI) -Moving Average Convergence Divergence (MACD) -Stochastic

Measure the buying and selling forces, range between 0 and 100 RSI = 100 - 100/(1 + RS) RS = Average of x days up closes/ Average of x days down closes

Moving Average Convergence Divergence (MACD)
‡ MACD line: subtracting 26-day exponential MA from 12-day EMA ‡ Signal line: 9-day EMA of MACD ‡ What is EMA? ‡ - it s a weighted MA, giving more emphasis to more recent trading days ‡ Crossovers: ‡ MACD falls under signal line = bearish ‡ MACD rises above signal line = bullish


In an uptrend market, closing prices tend to be near the highs In a downtrend market, closing prices tend to be near the lows %K line and %D line

%K = 100[(C - L14)/(H14 - L14)]
C = current closing price L14 = lowest low price during 14-day period H14 = highest high during 14-day period% D%= K smoothed over three days


When to use technical analysis: looking for short-term Indicators are only indicators