You are on page 1of 68

Can we predict the future movement of share price?

WHAT NEXT?

Frustrated???!! !

LIKE TO TRY ONCE MORE???

Can you say something about future share price?

WHAT NEXT?

Still Frustrated???!! !

You can still think to be a winner but you have to

learn

Dr. C. P. Gupta

Before we proceed,

FIRST THING!!!

Technical Analysis deals in probabilities; never certainties.

SECOND THING!!!

Economic Times April 26, 2005

TECHNICAL ANALYSIS ???


attempts to predict future share prices by analysing past share prices. The art of technical analysis is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has reversed. an analysis of past volume and/or price behaviour to identify which shares to purchase/sell and the best time to purchase/sell them.

TECHNICAL ANALYSIS ???


(continued)

an analysis that includes the use of share prices trading volume; and other market data such that one can formulate rules telling the TECHNICIAN when to buy a share or when to sell a share.

FEATURES OF TECHNICAL ANALYSIS


It is mechanical. It is objective. On the other hand, the use of fundamental valuation model requires use of many subjective estimates and forecasts. When a technical rule indicates a buy or sell signal; there are usually no additional information or arguments that the technicians must consider. The pure technical analyst is CHARTIST. Chartists believe that stock price and volume data are all an investor needs and that, extra information only clouds their ability to make relevant buy or sell decisions.

FEATURES OF TECHNICAL ANALYSIS


(continued) Technicians can apply their techniques to forecast the direction of both the stock market, and individual shares. Technical Analysis does not study cause and effect relationship in terms of some economic variables. Technicians use market measures/indicators to measure the strength of market. Based on this, they forecast an UP and DOWN market.

PREMISES OF TECHNICAL ANALYSIS


MARKET ACTION DISCOUNTS EVERYTHING. The premise accepts in a way NEWTONS FIRST PRINCIPLE OF MOTION - everything will continue in its state of rest or motion unless it is acted upon by another external force. MARKET PRICE IS SOLELY DETERMINED BY THE INTERACTION OF THE FORCES OF DEMAND AND SUPPLY. DEMAND AND SUPPLY ARE DETERMINED BY BOTH RATIONAL AS WELL AS IRRATIONAL FACTORS. PRICES MOVE IN TRENDS. REVERSALS OF TRENDS ARE CAUSED BY SHIFTS IN DEMAND AND SUPPLY.

PREMISES OF TECHNICAL ANALYSIS


(continued) SHIFTS IN DEMAND AND SUPPLY CAN BE DETECTED SOONER OR LATER IN CHARTS OR GRAPHS. HISTORY REPEATS ITSELF AND PEOPLE DO NOT LEARN FROM THE HISTORY. THERE IS A TIME-GAP BETWEEN THE TIME A TECHNICIAN PERCEIVES A CHANGE IN THE PRICE OF A SECURITY AND WHEN THE INVESTING PUBLIC ASSESSES THE CHANGE. THE PERSON CONCERNED IN THE MARKET IS A TRADER AND NOT AN INVESTOR.

PROCESS OF TECHNICAL ANALYSIS - CHARTISTS APPROACH


Take Prices and Volume data

Draw graph and charts Identify trends

Bind the trends

Find changes, variations and momentum Market indicators

TOOLS OF TECHNICAL ANALYSIS


CHARTS AND GRAPHS
Line charts : with ordinary scale and with logarithmic scale Bar charts Candle Chart Point and Figure charts Price charts Volume charts Rate of Change charts

THE MARKET INDICATORS


Investors sentiments Contrary opinion Professional investors behaviour Economic data Other

PATTERNS THE DOW THEORY MEASURES


Moving averages Momentum and oscillators Breadth

1000

1050

1100

1150

1200

1250

1300

13-Oct-03 25-Oct-03 7-Nov-03 20-Nov-03 5-Dec-03 19-Dec-03 5-Jan-04 19-Jan-04 4-Feb-04 18-Feb-04 4-Mar-04 18-Mar-04 1-Apr-04 17-Apr-04 3-May-04 17-May-04 31-May-04 14-Jun-04 28-Jun-04 12-Jul-04 26-Jul-04 9-Aug-04 23-Aug-04 6-Sep-04 20-Sep-04 4-Oct-04 18-Oct-04 2-Nov-04 17-Nov-04 2-Dec-04 16-Dec-04 30-Dec-04 13-Jan-05 31-Jan-05 14-Feb-05 28-Feb-05 14-Mar-05 29-Mar-05

850

900

950

CLOSING PRICES - RANBAXY - LINE CHART

10000.00

1000.00

100.00

10.00

1.00
1/1/01 4/1/01 7/1/01 10/1/01 1/1/02 4/1/02 7/1/02 10/1/02 1/1/03 4/1/03 7/1/03 10/1/03 1/1/04 4/1/04 7/1/04 10/1/04 1/1/05

LOGARITHMIC CHART - RANBAXY

1010

1030

1050

1070

1090

1110

14-Feb-05 16-Feb-05 18-Feb-05 22-Feb-05 24-Feb-05

28-Feb-05 2-Mar-05 4-Mar-05 8-Mar-05 10-Mar-05 14-Mar-05 16-Mar-05 18-Mar-05 22-Mar-05 24-Mar-05 29-Mar-05 31-Mar-05

990

BAR CHART - RANBAXY

1010

1030

1050

1070

1090

1110

14-Feb-05 16-Feb-05 18-Feb-05 22-Feb-05

24-Feb-05 28-Feb-05 2-Mar-05 4-Mar-05 8-Mar-05 10-Mar-05 14-Mar-05 16-Mar-05 18-Mar-05 22-Mar-05 24-Mar-05 29-Mar-05 31-Mar-05

990

CANDLE CHART - RANBAXY

TRADED VOLUME (Rs. Cr.)


10 20 30 40 50 60 70 0 28-Jan-05 1-Feb-05 3-Feb-05 7-Feb-05 9-Feb-05 11-Feb-05 15-Feb-05 17-Feb-05 21-Feb-05 23-Feb-05 25-Feb-05 1-Mar-05 3-Mar-05 7-Mar-05 9-Mar-05 11-Mar-05 15-Mar-05 17-Mar-05 21-Mar-05 23-Mar-05 28-Mar-05 30-Mar-05 960 980 1000 1020 1040 1060 1080 1100

PRICE AND VOLUME CHART - RANBAXY

AVERAGE SHARE PRICE

13-Oct-03 25-Oct-03 7-Nov-03 20-Nov-03 5-Dec-03 19-Dec-03 5-Jan-04 19-Jan-04 4-Feb-04 18-Feb-04 4-Mar-04 18-Mar-04 1-Apr-04 17-Apr-04 3-May-04 17-May-04 31-May-04 14-Jun-04 28-Jun-04 12-Jul-04 26-Jul-04 9-Aug-04 23-Aug-04 6-Sep-04 20-Sep-04 4-Oct-04 18-Oct-04 2-Nov-04 17-Nov-04 2-Dec-04 16-Dec-04 30-Dec-04 13-Jan-05 31-Jan-05 14-Feb-05 28-Feb-05 14-Mar-05 29-Mar-05

300

350

400

450

500

550

600

CLOSING PRICES - SBI - LINE CHART

14-Feb-05 16-Feb-05 18-Feb-05 22-Feb-05 24-Feb-05

28-Feb-05 2-Mar-05 4-Mar-05 8-Mar-05 10-Mar-05 14-Mar-05 16-Mar-05 18-Mar-05 22-Mar-05 24-Mar-05 29-Mar-05 31-Mar-05

400

420

440

460

480

500

520

CANDLE CHART - SBI

14-Feb-05 16-Feb-05 18-Feb-05 22-Feb-05 24-Feb-05 28-Feb-05

2-Mar-05 4-Mar-05 8-Mar-05 10-Mar-05 14-Mar-05 16-Mar-05 18-Mar-05 22-Mar-05 24-Mar-05 29-Mar-05 31-Mar-05

400

420

440

460

480

500

520

540

BAR CHART - SBI

1000.00

100.00

10.00

1.00
1/1/01 4/1/01 7/1/01 10/1/01 1/1/02 4/1/02 7/1/02 10/1/02 1/1/03 4/1/03 7/1/03 10/1/03 1/1/04 4/1/04 7/1/04 10/1/04 1/1/05

LOGARITHMIC CHART - SBI

600

TATA MOTORS (15.908x47.724-H/L)

600

550

550

500

500

450

450

400

400

350

350

300

300

250

250

200

200

150

150

2003

Nov2004

21 23 Feb06 13 16 25 Mar11 30 Apr May21 Jun 24 Jul AugOct 2005

17 18 28 Mar08 09 10 11 14 15 16 17 18

THE DOW THEORY


Oldest but still the most popular technical - technique.
Basically a CHARTING approach and was founded by CHARLES H. DOW, a co-founder of the Dow Jones Company and an editor of the Dow Jones owned
newspaper - The Wall Street Journal.

FEATURES OF THE THEORY


It is absolutely technical in nature in the sense that it is built upon and concerned with only market data or market actions. It is a chartist approach. It assumes that the majority of shares follow the underlying trend of the market most of the time. In order to measure the market, two indices are used - one is INDUSTRIAL AVERAGE which is a combination of some bluechip shares from industry and another is TRANSPORTATION AVERAGE which consists of shares of transport companies. The purpose of the second average is to reinforce the conclusions obtained from that of Industrial Average.

THE DOW THEORY


(continued) It assumes that a trend should continue in effect until such time as its reversal has been definitely signaled. It assumes that the securities of the most established companies tended to go up or down in prices together. It believes that averages discounts everything. It intends to show the general trend/direction of the market as a whole and does not predict the direction of change in a particular security.

THE DOW THEORY THE BASIC PRINCIPLES


The Dow Theory believes that the market moves in swings or moves which show some pattern. To make forecast and predictions, the Dow Theory identifies the following three movements which depict underlying trends and patterns: MAJOR/PRIMARY TRENDS
first and the most important trend broad and overall trend that lasts for few years are usually caused by business cycles and intrinsic value of a security long term investors are usually concerned with it such trends are either BULLISH or BEARISH and they reflect the longrun direction of the market.

THE DOW THEORY THE BASIC PRINCIPLES (Continued)


SECONDARY TRENDS
are important reactions that interrupt the progress of prices in primary trends/directions are intermediary reactions to primary trends such trends usually last for several months such trends are contrary to primary trends such trends when set in may give wrong signals and may confuse the market not of much importance to long term investors but may be important to weak holders During a phase of UPWARD PRIMARY TREND, when prices decline temporarily, it is called TECHNICAL REACTION. During a phase of DOWNWARD PRIMARY TREND, when prices rise temporarily, it is called TECHNICAL RALLY. TECHNICAL REACTION and TECHNICAL RALLY are together called TECHNICAL CORRECTIONS. Such trends are eliminated by correction that is reversion back to primary trend.

THE DOW THEORY THE BASIC PRINCIPLES (Continued)


MINOR/TERTIARY TRENDS
are brief,daily, narrow or day-to-day movements in the security prices are of mainly random nature not of much use to technical analysts except these are building blocks to secondary trends

The principle of confirmation of trends/change in trends : Whatever the trends that are emerging or changing in Industrial Average must be confirmed by Transportation Average.
If trends in share prices are in contradiction with the trends in the industrial production or transportation of goods, then one should not design a trading strategy in shares and must wait till one gets the confirmation of trends.

THE DOW THEORY THE BASIC PRINCIPLES (Continued)


Lines indicate movement. In Dow Theory, a line is defined as a price movement two to three weeks or longer, during which the price variation of both averages moves within a range of approximately 5% of their mean averages. Such a movement indicates either accumulation or distribution.
an advance above the limits of the line indicates accumulation and predicts higher prices, and vice versa. When a line occurs in the middle of a primary advance, it is really forming a horizontal secondary movement and should be treated as such.

THE DOW THEORY THE BASIC PRINCIPLES (Continued)


Price/Volume relationships provide background. The normal relationship is for volume to expand on rallies and contract on decline. If volume becomes dull on a price advance and expands on a decline, a warning is given that the prevailing trend may soon be reversed. However, it should used only as background information since actual reversals would be signaled by the averages. Price action determines the trend.
Bullish indications are given when successive rallies penetrates peaks while the trough of an intervening decline is above the preceding trough. Bearish trends indications come from a series of declining peaks and troughs.

AVERAGES DISCOUNT EVERYTHING!!!!


Moving Averages
Simple Moving Average Weighted Moving Average

Exponential Moving Average Averages are basically to identify the underlying TRENDS!!!!!

EXPONENTIAL MOVING AVERAGE


EMAt = EMAt-1 + E[Pt - EMAt-1] Suggested value of E for EMA:
No. of Weeks
5 10 20 40 80

E
0.40 0.20 0.10 0.05 0.025

Usually, it is calculated as 2/(number of weeks)

TRENDS HAVE TO BE BOUNDED!!!


TREND CHANNELS - these are created by drawing two parallel lines.
First line is one that represents the basic trend and is known as BASIC TRENDLINE. And, the second line, parallel to it, is called RETURN TRENDLINE.
The RETURN TRENDLINE is useful from two points of viewfirst, it represents area of SUPPORT or RESISTANCE depending upon the direction of underlying trend; and second, penetration of the return trendline represents a signal that either the trend will accelerate or a reversal is about to take place.

ENVELOPS - these are created by drawing two symmetrical parallel


lines to a moving average. This is based on the principle that share prices fluctuate around a given trend in cyclical movements. Envelops consists of the points of maximum and minimum divergence from some moving average. BOLLINGER BANDS are envelops plotted as some standard deviation above and below an average usually based on closing prices.

PRICES HAVE MOMENTUM!!!!


OMomentum/oscilliator measures the velocity of the price move.
Rate of Change Moving Average Convergence Divergence [MACD] Relative Strength Index (RSI) Stochastic:
%K %D Williams %R

MACD trading method is a form of trend-deviation indicator using two EMAs. MACD = Difference between two EMAs or a ratio. If it is a ratio then it is obtained by dividing the shorter duration EMA by the longer duration one. MACD can be further smoothed by calculating another EMA; and plotted as a separate line. Such a line is called SIGNAL LINE.

Relative Strength Index


RSI = 100 - (100/(1+RS))
where RS = (Average of x day s up closes/ Average of x day s down closes)

If RSI is over 70 then it is called the OVERBOUGHT ZONE and if RSI is below 30 then it is called the OVERSOLD ZONE.

STOCHASTIC % K = 100 (C - L14) / (H14 - L14) % D = A 3-PERIOD MOVING AVERAGE OF %K.


%D is a smooth version of %K. %K is usually plotted as a solid line while %D is a dotted line.

Williams %R = 100 (H14 - C) / (H14 - L14)

THE MARKET INDICATORS


 Investors sentiments
Such indicators try to indicate the DEGREE OF INVESTORS CONFIDENCE in the market. They usually gauge confidence by one of two general approaches: one is to compare yields on risky securities to yields on less risky securities; another is to measure confidence by indicating the WIDTH of a market change across all securities. [A] BARRON S CONFIDENCE INDEX : A ratio between Yield on best graded bonds and yield on intermediate graded bonds.

THE MARKET INDICATORS


(continued)
 SHARE MARKETS HAVE BREADTH!!!!
[B] High-Low Index : measures market strength and thereby market confidence by comparing the number of shares making ANNUAL NEW HIGHS and number of shares making ANNUAL NEW LOWS. It is a ratio between number of shares with annual new highs to (number of shares with annual new highs + number of shares with annual new lows) [C] Advance-Decline Ratio : the market indices in general indicates whether the market on average is rising or falling but does not provide the breadth of the market. ADR gauge this market breadth by defining a ratio of number of advances to (number of advances + number of declines). [D] SHORT INTEREST RATIO : Short interest is defined as number of shares sold short and this ratio is number of shares sold short to average daily volume.

THE MARKET INDICATORS


(continued)

 MEASURES OF CONTRARY OPINION


 The basic premise of this theory is that there are certain groups in the market who make consistently wrong decisions especially at the turns in the market. Find the decisions made by them and then, do THE OPPOSITE in the market.

[A] THE ODD-LOT THEORY : Usually, odd-lot transactions are undertaken by small investors who are not having access to necessary information and they are not intelligent investors. Thus, if they sell more, it is a BUY signal and if they buy, it is a SELL signal. The following are usually used indicators in this regard:
Odd - Lot Balance Index Odd - Lot Short Sales Index

[B] MUTUAL FUND LIQUID ASSET RATIO : it is a ratio between Mutual Funds liquid assets and total Mutual Funds assets.

1000

1200

1400

200 6/3/96 9/3/96 12/3/96 3/3/97 6/3/97 9/3/97 12/3/97 3/3/98 6/3/98 9/3/98 12/3/98 3/3/99 6/3/99 9/3/99 12/3/99 3/3/00 6/3/00 9/3/00 12/3/00 3/3/01 6/3/01 9/3/01 12/3/01 3/3/02 6/3/02 9/3/02 12/3/02 3/3/03

400

600

800

Average Share Price - RANBAX

10000

1000

100

10

1
6/3/96 9/3/96 12/3/96 3/3/97 6/3/97 9/3/97 12/3/97 3/3/98 6/3/98 9/3/98 12/3/98 3/3/99 6/3/99 9/3/99 12/3/99 3/3/00 6/3/00 9/3/00 12/3/00 3/3/01 6/3/01 9/3/01 12/3/01 3/3/02 6/3/02 9/3/02 12/3/02 3/3/03

LOGARITHMIC CHART - RANBAXY

590 8/27/96 8/29/96 8/31/96 9/2/96 9/4/96 9/6/96 9/8/96 9/10/96 9/12/96 9/14/96 9/16/96 9/18/96 9/20/96 9/22/96 9/24/96 9/26/96 9/28/96 9/30/96 10/2/96 10/4/96 10/6/96 10/8/96 10/10/96 10/12/96 10/14/96 10/16/96 10/18/96 10/20/96 10/22/96

600

610

620

630

640

650

BAR CHART - RANBAX

CANDLE CHART - RANBAX


700

690

680

670

660

650

640

630

620

610

600 3/27/03 3/31/03 4/4/03 4/8/03 4/12/03 4/16/03 4/20/03 4/24/03 4/28/03

0.98 480

0.99 17-Jan-03 21-Jan-03 23-Jan-03 27-Jan-03 29-Jan-03 31-Jan-03 4-Feb-03 6-Feb-03 10-Feb-03 12-Feb-03 17-Feb-03 19-Feb-03 21-Feb-03 25-Feb-03 27-Feb-03 3-Mar-03 5-Mar-03 7-Mar-03 11-Mar-03 13-Mar-03 19-Mar-03 21-Mar-03 24-Mar-03 26-Mar-03 28-Mar-03 1-Apr-03 3-Apr-03 7-Apr-03 9-Apr-03 11-Apr-03 16-Apr-03 21-Apr-03 23-Apr-03 25-Apr-03 29-Apr-03 530

1.01

1.02

1.03

1.04

1.05

1 580

MACD - RANBAX

630

680

730

10 17-Jan-03 21-Jan-03 23-Jan-03 27-Jan-03 29-Jan-03 31-Jan-03 4-Feb-03 6-Feb-03 10-Feb-03 12-Feb-03 17-Feb-03 19-Feb-03 21-Feb-03 25-Feb-03 27-Feb-03 3-Mar-03 5-Mar-03 7-Mar-03 11-Mar-03 13-Mar-03 19-Mar-03 21-Mar-03 24-Mar-03 26-Mar-03 28-Mar-03 1-Apr-03 3-Apr-03 7-Apr-03 9-Apr-03 11-Apr-03 16-Apr-03 21-Apr-03 23-Apr-03 25-Apr-03 29-Apr-03 570 590

30 610 630

50 650

70

RSI - RANBAX

670

690

100

120

140

160

180

200

20

40

60

80

0 17-Jan-03 21-Jan-03 23-Jan-03 27-Jan-03 29-Jan-03 31-Jan-03 4-Feb-03 6-Feb-03 10-Feb-03 12-Feb-03 17-Feb-03 19-Feb-03 21-Feb-03 25-Feb-03 27-Feb-03 3-Mar-03 5-Mar-03 7-Mar-03 11-Mar-03 13-Mar-03 19-Mar-03 21-Mar-03 24-Mar-03 26-Mar-03 28-Mar-03 1-Apr-03 3-Apr-03 7-Apr-03 9-Apr-03 11-Apr-03 16-Apr-03 21-Apr-03 23-Apr-03 25-Apr-03 29-Apr-03 480

STOCHASTIC - RANBAX

530

580

630

680

625

675

525

575

475
10/22/02 10/29/02 11/5/02 11/12/02 11/19/02 11/26/02 12/3/02 12/10/02 12/17/02 12/24/02 12/31/02 1/7/03 1/14/03 1/21/03 1/28/03 2/4/03 2/11/03 2/18/03 2/25/03 3/4/03 3/11/03 3/18/03 3/25/03 4/1/03 4/8/03 4/15/03 4/22/03 4/29/03

BOLLINGER BANDS - RANBAX

Closing Daily Price

1000

1200

1400

200 9/15/98 11/15/98 1/15/99 3/15/99 5/15/99 7/15/99 9/15/99 11/15/99 1/15/00 3/15/00 5/15/00 7/15/00 9/15/00 11/15/00 1/15/01 3/15/01 5/15/01 7/15/01 9/15/01 11/15/01 1/15/02 3/15/02 5/15/02 7/15/02 9/15/02 11/15/02 1/15/03 3/15/03

400

600

800

Average Share Price - RANBAX

625

675

525

575

475
10/22/02 10/29/02 11/5/02 11/12/02 11/19/02 11/26/02 12/3/02 12/10/02 12/17/02 12/24/02 12/31/02 1/7/03 1/14/03 1/21/03 1/28/03 2/4/03 2/11/03 2/18/03 2/25/03 3/4/03 3/11/03 3/18/03 3/25/03 4/1/03 4/8/03 4/15/03 4/22/03 4/29/03

14 DAYS' AVERAGE - RANBAXY

Closing Daily Price

SHARE PRICE AND AVERAGES - RANBAXY

7 Days Moving Average 21 Days Moving Average Closing Price

680

660

640

620

600

580

/0 3

/0 3

/0 3

/0 3

/0 3

/0 3

/0 3

/0 3

3/ 7/ 03

4/ 4/ 03

2/ 7/ 03

/0 3

/0 3 4/ 18

/0 3

4/ 25

1/ 24

1/ 31

1/ 17

2/ 14

2/ 21

2/ 28

3/ 14

3/ 21

3/ 28

4/ 11

/0 3

670

690

570
19-Mar-03 20-Mar-03 21-Mar-03 22-Mar-03 24-Mar-03 25-Mar-03 26-Mar-03 27-Mar-03 28-Mar-03 31-Mar-03 1-Apr-03 2-Apr-03 3-Apr-03 4-Apr-03 7-Apr-03 8-Apr-03 9-Apr-03 10-Apr-03 11-Apr-03 15-Apr-03 16-Apr-03 17-Apr-03 21-Apr-03 22-Apr-03 23-Apr-03 24-Apr-03 25-Apr-03 28-Apr-03 29-Apr-03 30-Apr-03 0 5

590
10

610
15 20

630
25

650
30 35

SHARE PRICE AND VOLUME - RANBAXY

40

45