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Technical Analysis
 Technical Analysis Introduction

! Two major types of analysis for

predicting the performance of a
company¶s stock
fundamental
technical
 Technical Analysis vs. Fundamental Analysis

ð

 









½eaning Fundamental analyst must Technicians trade when a

process new information move to a new equilibrium
and quickly determine a is underway but a
new intrinsic value, but fundamental analyst finds
technical analyst merely undervalued securities that
has to recognize a may not adjust to ³correct´
movement to a new prices as quickly
equilibrium

Time Approach Long Term Short Term

Purpose Investment Trading

 Œifference

ð

 

 
Analysis Complex and Tedious Simple And easy
Tools Financial Statements Charts
Introduction
á Technical analysis is the attempt to
forecast stock prices on the basis of
market-derived data.
á Technicians (also known as quantitative
analysts or chartists) usually look at
price, volume and psychological
indicators over time.
á They are looking for trends and patterns
in the data that indicate future price
movements.
 @  
Technical analysis really just studies supply and demand in a
market in an attempt to determine what direction, or trend,
will continue in the future. In other words, technical
analysis attempts to understand the emotions in the market
by studying the market itself, as opposed to its
components. If you understand the benefits and limitations
of technical analysis, it can give you a new set of tools or
skills that will enable you to be a better trader or investor.

 @  is the belief that

important information about future
stock price movements can be
obtained by studying the historical
price movement.
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





 
 ! 
Assumptions of T.A
! The market value of security is solely
determined by the interaction of demand
and supply factors operating in market.
! The demand and supply of a security are
surrounded by numerous factor ; both
rational as well as irrational.
! The security prices moves in trends and
waves which can be both upward and
downward.
! The present trends are influenced by the
past trends.
Continue«..
! Trends in stock prices influenced by
changes in demand and supply factors.
e.g:- if there is high demand of a stock then
the price of the stock will be high.
! Some times chart trend tend to repeat
themselves.Patterns which are projected
by charts records price movements and
these patterns are used by technical
analysis for making forecasts about the
future patterns.
 ^ 
@  


The use of "bull

bull"" and "bear
"bear"" to describe markets comes from the
way in which each animal attacks its opponents. That is, a
bull thrusts its horns up into the air, and a bear swipes
its paws down. These actions are metaphors for the movement
of a market: if the trend is up, it is considered a bull market. And
if the trend is down, it is considered a bear market.

The Bull market is when everything in the economy is great, people

are finding jobs, gross domestic product (GŒP) is growing, and
stocks are rising. Things are just plain rosy! Picking stocks
during a bull market is easier because everything is going up.
Bull markets cannot last forever though, and sometimes they
can lead to dangerous situations if stocks become overvalued. If
a person is optimistic and believes that stocks will go up, he or
she is called a "bull" and is said to have a "bullish outlook".
 ^ 


Bear ½arkets characterize the attitude of investors

who believes that a particular security or market
is headed downward. Bears attempt to profit
from a decline in prices. Bears are
generally pessimistic about the state of a given
market. Bearish sentiment can be applied to all
types of markets including commodity markets,
stock markets and the bond market.
 Basic Technical Tools
! Œow theory
! Points and figure
! OHLC
! Head and shoulders
! Œouble bottom
! Support and resistance
! Cup and handles
! Triangles
! Line charts
! Bar charts
! Trend lines
! Candle stick charting

"
! This theory was first stated by Charles Œow in
nineteenth century (1900),the editor of THE
WALL STREET JOURNAL, Œow theory is
perhaps the oldest and best known theory of
T.A. In the words of Charles Œow:
³The market is always considered as
having 3 movements, all going at the
same time.´
1.Narrow movement (running from day to day)
2.Short swing (running from 2 weeks to 1 month.
3.½ain movement (at least 4 years)
    


The Œow theory views the movement of

market prices as occurring in three
categories
1. u
  
 bull and bear
markets
2. 
  
 up and down
movements of stock prices that last for a
few months and are called corrections
3. 
 
 meaningless random
daily fluctuations
Œow Theory Trends (2)
!  
 
 Point and figure charts:-
Features of PFC:-
! 1.On a PFC only significant price changes are
recorded.
for e.g.:-for a stock price in the range of say
30 to 50price changes of one rupee or more
may be posted.
! 2.While on the vertical scale on the PFC represent
the price of stock, horizontal line does not
represent the time scale in the usual sense.
! 3.Each column on the horizontal scale of a pfc
represent a significant reversal of price movement
and not a trading day.
 Point and Figure Chart
! Plots day-to-day increases and declines
in price.
! A rising stack of XXXX¶s represents
increases
! A rising stack of OOOO¶s represents
decreases.
! Typically used for intraday charting
! If used for multi-day study, only closing
prices will be used
 Œrawing Point & Figure Charts

! Point & Figure

charts are
independent of
time.
! An X represents
an up move.

! An O represents




a down move.


! Typically, P&F
 
charts use a 1-
 


point box
 : Point & Figure Charts
! This is a Point & Figure chart of A½AT from early July to
mid October 2001.
 Œrawing Bar (OHLC) Charts
! 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  
! Note: You should print  $  

  $  

the example charts (next
   

%

   


two slides) to see them
more clearly
! Bar Chart:-

ÿ


Dollar
Price of
Stock

Trading Days
 Types of Charts: Bar Charts
! This is a bar (open, high, low, close or OHLC)
chart of A½AT from early July to mid October
2001.
OHLC
SESA GOA OHLC CHART FOR LAST
3 ½ONTH
 Head and Shoulders

! Resembles an ³½´ in which a stock¶s

price
Rises to a peak and then declines, then
Rises above the former peak and again
declines, and then
Rises again but not the second peak and
again declines
! The first and third peaks are shoulders,
and the second peak forms the head.
! This is a bearish indicator.
 Head and Shoulders
 
! This formation is
 
characterized by two small
peaks on either side of a   
 '#  

larger peak. (price falls
below the neckline hence
%

bearish development, signal
to sell) 

! This is a reversal pattern, %


meaning that it signifies a

change in the trend. (price   
 '#  

rises above the neckline
hence bullish development  

signal to buy)
Head & Shoulders Example



 

 Œouble Bottom
! Occurs when a stock price drops to a
similar price level twice within a few
weeks or months
! The double-bottom pattern resembles a
³W´
! Buy when the price passes the highest
point in the handle.
! In a perfect double bottom, the second
decline should normally go slightly lower
than the first decline .
! The middle point of the ³W´ should not
go into new high ground.
! This is a very bullish indicator
Œouble Tops and Bottoms
(
)
! These formations are
similar to the H&S
formations, but there is no
head. (bearish development
hence signal to sell)
  
  

! These are reversal patterns

with the same measuring
implications as the H&S.
(bullish development,
hence signal to buy) (
ð 
Œouble Bottom Example
Support & Resistance
! Price levels at which movement should
stop and reverse direction.
Act as floor and ceiling
Œifferent 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, at
which selling pressure should be strong
enough to overcome buying pressure and
thus keep the price from going any higher
 Support & Resistance
! Support and
resistance lines
indicate likely ends of
trends.
! Resistance results
from the inability to
surpass prior highs.
! Support results from
the inability to break
below to prior lows.
! If price fell below the )) 



support line ,this

would be a bearish
signal.
Resistance and Support

resistance

Support
 Candle Stick Charting

! Been around for hundreds of years

! Often referred to as ³Japanese Candles´
because the Japanese would use them to
analyze the price of rice contracts
! Similar to bar chart, but uses color to
show if stock was up (green) or down
(red) over the day
! ½ore than 20 patterns are used by
technicians for candlestick charting.
Some of the most popular include the
following.
Candle Stick Charting
 Candle Stick Charting
(Continued)
! Green is an example of a
bullish pattern, the stock
opened at (or near) its low
and closed near its high
! Red is an example of a
bearish pattern. The stock
opened at (or near) its
high and dropped
substantially to close near
its low
Candle Stick Charting (Continued)
RELIANCE POWER CANŒLE STICK
CHART FOR LAST 3 ½ONTHS
 Cup and Handle

Pattern on bar chart as short as 7 weeks or as

long as 65 weeks
Cup in the shape of a U; Handle has a slight
downward drift
Right hand side of pattern has low trading
volume
As the stock comes up to test old highs, the
stock will incur selling pressure by the people
who bought at or near the old high
Selling pressure will take the stock price
sideways for 4 days to 4 weeks, then it takes
off
Charting Patterns
 Trend Lines
! There are three
basic kinds of
trends:
An Up trend where
prices are generally
increasing.
A Œown trend where
prices are generally
decreasing.
A Trading Range.
 Triangles
! Triangles are
continuation 
#
formations.
! Three flavors:
Ascending  

Œescending
Symmetrical
 

! Typically,
triangles should
break out about
half to three-
quarters of the 
#
way through the
formation.
 G

 
! G

  a graph of successive day¶s
closing prices

Closing
Prices

Trading Days
 Rounded Tops & Bottoms
! Rounding ' #
formations are 

characterized by
a slow reversal of
trend.

' # 
Rounded Bottom Chart Example
 Broadening Formations
! These formations
 #


are like reverse

triangles.
! These formations
usually signal a
reversal of the
trend.

 # 

ŒJIA Oct 2000 to Oct 2001 Example

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