Technical Analysis

Technical Analysis Introduction
‡ Two major types of analysis for predicting the performance of a company s stock
± fundamental ± technical

‡ Technical
± looks for peaks, bottoms, trends, patterns, and other factors affecting a stock s price movement ± makes a buy/sell decision based on those factors

Technical Analysis vs. Fundamental Analysis
‡ Technical analysis involves the development of trading rules based on past price and volume data for individual stocks and the overall stock market. ‡ Fundamental analysis involves economic, industry, and company analysis that lead to valuation estimates for companies, which can then be compared to market prices to aid in investment decisions.

‡ Technical analysis is the attempt to forecast stock prices on the basis of market-derived data. ‡ Technicians (also known as quantitative analysts or chartists) usually look at price, volume and psychological indicators over time. ‡ They are looking for trends and patterns in the data that indicate future price movements.

What is Technical Analysis? (Continued)
‡ Method of evaluating securities by analyzing statistics generated by
± Market activity ± Past Prices ± Volume

‡ Do not attempt to measure intrinsic value ‡ Instead look for patterns and indicators on charts to determine future performance

What is Technical Analysis? (Continued) ‡ Technicians believe that securities move in very predictable trends and patterns ‡ Trends continue until something happens to change the trend ‡ Until that change takes place. price levels are predictable .

What is Technical Analysis? (Continued) ‡ Most agree that technical analysis is much more effective when combined with fundamental analysis .

Bar Charts Bar Charts helps us to find the trends in the market plotting the past movements in the stock price. based on which decisions can be made Each bar is composed of 4 elements: ± Open ± High ± Low ± Close Bar Charts are of two types ‡ Standard Bar Chart ‡ Japanese Candle stick .

Standard Bar Charts example of a single day standard bar chart where the stock closes higher compared to previous day s .

Standard Bar chart showing the stock closes lower from the previous day s close .

high. close or OHLC)of AMAT from early July to mid October 2001. low.‡ Standard Bar chart (open. .

Japanese Candle Stick Charting .

but uses color to show if stock was up (green) or down (red) from the previous day s close .Japanese Candle Stick Charting (Continued) ‡ Been around for hundreds of years ‡ Often referred to as Japanese Candles because the Japanese would use them to analyze the price of rice contracts ‡ Similar to bar chart.

The stock opened at (or near) its high and dropped substantially to close near its low . the stock opened at (or near) its low and closed near its high ‡ Red is an example of a bearish pattern.Japanese Candle Stick Charting (Continued) ‡ Green is an example of a bullish pattern.

‡ This is a Japanese Candlestick (open. low. close) chart of AMAT from early July to mid October 2001 . high.

Basic Technical Tools ‡ ‡ ‡ ‡ Trend Lines Moving Averages Price Patterns Technical Indicators .

± A Trading Range ( Flat trend / chicken market ). ± A Down trend where prices are generally decreasing ( Bearish trend ). .Trend Lines ‡ There are three basic kinds of trends: ± An Up trend where prices are generally increasing ( Bullish market ).

Trendlines ‡ Draw a trendline through the edges of congestion areas ‡ The most important feature of a trendline is its angle ‡ Trendlines show the action of bulls and bears .

a sell signal is generated .Up Trend ‡ Connect two or more daily price lows ±Preferably 10 days apart ‡ When market closes below an uptrend line.

Up Trend Sell Signal .

a buy signal is generated .Down Trend ‡ Connect two or more daily price highs ±Preferably 10 days apart ‡ When market closes above a downtrend line.

Down Trend .

‡ Resistance results from the inability to surpass prior highs. ‡ Support results from the inability to break below to prior lows.Support & Resistance ‡ Support and resistance lines indicate likely ends of trends. Support Breakout Resistance .

at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher .Resistance and Support ‡ Price levels at which movement should stop and reverse direction. ± Act as floor and ceiling ± Different strengths (major and minor) ‡ Support ± Price level below the current market price at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower ‡ Resistance ± Price level above the current market price.

± Market price falls below a support level. it will go back down ‡ Support/Resistance reverse roles once penetrated. it will go back up ± When price rises to a resistance level. then the former support level becomes a resistance level when the market later trades back up to that level .Resistance and Support One of two things can happen when stock approaches resistance/support ‡ Can act as a reversal point ± When price drops to a support level.

Resistance and Support Resistance Resistance/Support Support .

. ‡ They are used to smooth out fluctuations of less than N periods.Simple Moving Averages ‡ A moving average is simply the average price (usually the closing price) over the last N periods.

50.Using the Moving Average ‡ The most commonly used averages are of 20.30. the less sensitive the moving average to daily price changes ± Moving averages are used to emphasize the direction of a trend . 100 and 200 days ± The longer the time span.

Moving Average .

Moving Average (Continued) ‡ Notice in April when the stock price dropped well below its 50-day average (the green line). ± Bearish signal ‡ February it rose above its 50-day average and continued to rise for several weeks ± Bullish signal ‡ Typically. when a stock moves below its moving average it is a bad sign. above it is a good sign .

smooth line.similar to 20 day but provides a bit more certainty for the trend. It doesn't react to quick movements in the stock price therefore it is rarely used. ± 50 day .choppy line. .Moving Averages (Continued) ‡ What do the different days mean? ± 20 days . and one of the most widely used for long term trends. but is probably the most useful for short term traders. ± 100 day . it is less volatile.even less volatile. It isn't the most accurate. This can be used to detect somewhat longer term trends. ± 30 day .moving averages provide a much less volatile.similar to the 50 day. more of a rolling chart or smooth line. ± 200 day .

. ‡ Price patterns are used to find out the reversals in the trends.Price Patterns ‡ Technicians look for many patterns in the historical time series of prices. ‡ These patterns are reputed to provide information regarding the size and timing of subsequent price moves.

127. +0.000.Reversal patterns NPC (128. 128. 127.000.000) 155 150 145 140 135 130 125 120 115 110 105 100 35000 30000 25000 20000 15000 10000 5000 x100 21 28 7 March 14 21 28 4 11 April 25 3 May 16 24 30 6 June 13 20 27 4 11 July 18 25 1 8 August 15 22 29 5 12 September 19 26 3 10 October 17 25 31 7 November .000.000.

The following are the major reversal patterns: Head & Shoulder Double top and bottom Triangles Rounded Tops and Bottoms .

‡ This is a reversal pattern.Head and Shoulders ‡ This formation is characterized by two small peaks on either side of a larger peak. H&S T Head Left lder Ri t lder eckli e H&S B tt Neckli e Left lder Ri t lder Head . meaning that it signifies a change in the trend.

Head and Shoulders .

but there is no head.Double Tops and Bottoms ‡ These formations are similar to the H&S formations. ‡ These are reversal patterns with the same measuring implications as the H&S. Double Top Target Target Double ottom .

Double Bottom Example .

Triangles ‡ Triangles are continuation formations. ‡ Three flavors: ± Ascending ± Descending ± Symmetrical Ascending Symmetrical Symmetrical ‡ Typically. Descending . triangles should break out about half to three-quarters of the way through the formation.

Rounded Tops & Bottoms ‡ Rounding formations are characterized by a slow reversal of trend. Rounding ottom Rounding Top .

Rounded Bottom Chart Example .

Technical Indicators ‡ There are. literally. ‡ We will look at the below indicators : ± Relative Strength Index (RSI) ± Advance decline line . hundreds of technical indicators used to generate buy and sell signals.

Relative Strength Index ‡ Widely used measure of momentum in the market ‡ 14 day RSI is the most common ‡ To calculate ± Record last 14 day price changes (closes) ± Sum the negative changes and positive changes and divide each by 14 to create (D) down average and (U) up average ± RSI=U/(U+D) * 100 .

RSI Market Indicator ‡ Ranges from 0 to 100 ‡ RSI > 70 ± Market is thought to be over bought ‡ RSI < 30 ± Market is thought to be over sold ‡ RSI is a rescaled measure of the ratio of average price changes on up days to average price changes on down days .

2. 2. 2.08 .02 . 2.02 .02 .48. 2.40. .44.56.57) * 100 = 56 .44. 2. 2.RSI example calculations ‡ Close 2.57 ‡ RSI = 2/(2+1. 2.02 .04 .04 .04 ± Down sum = 22/14=1.02 . 2.02 . 2. 2.36. 2.42.46 ‡ Up .38.52. 2.40.02 .38.36.04 ± Up sum = 28/14 =2 ‡ Down .04 .

RSI Example Chart Overbought Oversold .

It rises when Net Advances is positive and falls when Net Advances is negative.Advance Decline line ‡ The index relating advance to decline is called the advance decline ratio ‡ The Advance Decline Line (AD Line) is a breadth indicator based on Net Advances. . Net Advances is positive when advances exceed declines and negative when declines exceed advances. The AD Line is a cumulative measure of Net Advances. which is the number of advancing stocks less the number of declining stocks.

.Monday. 2010 One could clearly see in the chart above that even though nifty is staying flat for last few trading sessions but advance decline line is deteriorating consistently. March 15. indicating weakness in broader market.

An AD Line that rises and records new highs along with the underlying index shows strong participation that is bullish.Interpretation ‡ The AD Line measures the degree of participation in an advance or a decline. An AD Line that fails to keep pace with the underlying index and confirm new highs shows narrowing participation .

bearish to choppy market ‡ A/D ratio > 2 extremely bullish .Interpreting Advance Decline Ratio Investors are supposed to use the following values for estimating the trend of the market: ‡ A/D ratio > 1.25 bullish ‡ A/D ratio is between 0 and 1.

Sign up to vote on this title
UsefulNot useful