A STUDY ON TECHNICAL ANALYSIS AS AN INDICATOR FOR INVESTMENT DECISION-MAKING
SUMMER INTERNSHIP PROJECT REPORT SUBMITTED TO UTKAL UNIVERSITY FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENTS OF MASTER OF FINANCE & CONTROL (MFC) DEGREE
Submitted by: SANTOSH KUMAR SAHOO (SESSION 2008-10)
Under the guidance of:
External Supervisor: Mr. Sangeet Mishra Branch Head Apollo Sindhoori Capital Investments Ltd. Bhubaneswar Branch
Faculty Supervisor: Mr. Sanjay Kumar Parida Faculty, Deptt. Of Finance VISWASS
VIVEKANANDA INSTITUTE OF SOCIAL WORK AND SOCIAL SCIENCES
ROLL NO.: 13759U083017
REGD. NO.: 16419/05
DECLARATION
I hereb hereby y decla declare re that that the proje project ct repor reportt entit entitle led d “A STUDY STUDY ON TECHNI TECHNICAL CAL ANALYS ANALYSIS IS AS AN INDIC INDICATO ATOR R FOR FOR INVEST INVESTME MENT NT DECIS DECISION ION-M -MAKI AKING” NG” is
submitted by me for partial fulfillment of the requirements of the degree of MASTER OF FINANCE AND CONTROL, as a course curriculum under UTKAL UNIVERSITY, is an
authentic record of study carried out by me under professional guidance and supervision.
Due acknowledges acknowledges and references references have been made where ever necessary. necessary. This project report is a result of my original work and except some conceptual aspects, technical charts and some images as prescribed, no portion of the said report has been copied or duplicated duplicated nor has any project report similar to this one ever been submitted to any of the university or any other organization of this sort.
Date: Place:
(SANTOSH KUMAR SAHOO)
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who gave me the possibility to complete this thesis. I would like to thank my college authorities and my H.O.D. Miss Kulveen Kaur Anand first for providing me the opportunity to work with one of the most
prestigious organization. I express my hearty thanks to Mr. Sangeet Thee Branc Branch h Head, Head, Apoll Apollo o Sangeet Mishra Mishra, Th Sindhoor Sindhoorii Capital Capital Investm Investment entss Ltd., Ltd., Bhubanes Bhubaneswar war Branch Branch and Mrs. Samita Mishra , my company guide who gave and confirmed this permission permission and encouraged me to go ahead with my thesis. I am deeply indebted to my faculty guide Mr. Sanjay Parida , whose help, stimulating suggestions and encouragements helped me in all the times of research and for writing the thesis. I also want to thank Miss Sonali Pattanaik and Mr. Lala Susant Roy who always stood beside me and encouraged me to complete my project work. My friends who have supported me in my research work, I want to thank them for all their help, support, interest and valuable hints. Especially, I would like to give my hearty thanks to my parents, their love and blessings enabled me to complete this work.
Date: Place: (SANTOSH KUMAR SAHOO)
PREFACE
The money which is earned is partly spent and the rest saved for meeting future expenses. Instead Instead of keeping the savings idle, people like to use savings in order to get return on it in the future. This is called Investment. One needs to invest to:
earn return on his idle resources generate a specified sum of money for a specific goal in life make a provision for an uncertain future
As per return is concerned Stock Market is treated as the best place to earn higher returns as compared to other means of investment. A huge number of companies are listed there to facilitate effective mobilization and utilization of savings. In today’s world companies become known or considered big when they are listed on reputed Stock Exchanges namely NSE (NIFTY) & BSE (SENSEX) for India, DOWJONES for USA, HANGSENG for Hong Kong, NIKKEI for Japan, RTS for Russia, etc. Once the company is listed everything a company does / doesn’t is reacted upon by the public and the prices of the share of the respective company fluctuate. fluctuate. Now the company would always always want a true picture of the company to be represented by share price, they wouldn’t mind if its overvalued but it hurts when the stocks get undervalued. But this uncertainty of the price gives people a chance to make money both in long term & short term. Long term investment is mainly based upon studying fundamentals of the company and its growth potential. But the real piece of magic lies in making money by trading shares either Intraday or holding for a short term. If one wants to make money in this way, he / she need to know the technical side of the stock i.e. charts, trends etc. It’s not hard to guess how fascinating it is and so it has been decided to unlock the mystery mystery as far as possible in these two months of time. This field is very difficult difficult to be taught in classroom perhaps beyond scope. One has to see to believe, understand and implement it and that was my main objective after all to find out the answers of following questions: 1. Where will NIFTY go from here? 2. Which stock will rise today and which ones will fall? 3. Should I hold it or square off my positions? 4. Why is hedging required / how is it done? To find the answer of the above questions and many more it has been chosen to do summer internship in the field of Technical Analysis. Hope the project report will serve the necess necessit ity y of the needy needy stude students nts,, invest investors ors and and resea research rch schol scholars ars to find find out strate strategi gicc implications of technical analysis at the time of taking investment decisions and will guide them to unlock the “market-sutra” to sustain in the financial market.
“A STUDY ON TECHNICAL ANALYSIS AS AN INDICATOR FOR INVESTMENT DECISION-MAKING” CONTENTS
CHAPTERS
PARTICULARS
PAGE NO.
INTRODUCTION AND RESEARCH METHODOLOGY
2
1.1
Introduction
1.2
Research Methodology
1.2. 1.2.1 1
Need Need for for the the stud study y
1.2. 1.2.2 2
Obje Object ctiv ives es of the the stu study dy
1.2. 1.2.3 3
Sourc urces of of Dat Dataa
1.2. 1.2.4 4
Rese Resear arch ch Desi Design gn
1.2. 1.2.5 5
Samp Sampli ling ng Meth Method od
1.2. 1.2.6 6
Sampling Size
1.2. 1.2.7 7
Limi Limita tati tion onss of the the stu study dy
1.1. 1.1.8 8
Chapt hapteer Plan
COMPANY PROFILE
1-4
5-7
2.1 2.1 About About Apoll Apollo o Sindh Sindhoor oorii 2.2 Service Servicess provide provided d by the Organiza Organizatio tion n 2.3 2.3 Busi Busine ness ss Netw Networ ork k 2.4 2.4 Boar Board d of of Dir Direc ecto tors rs 2.5 2.5 Comp Compan any y Infor Informa mati tion on 2.6
3
Conclusion
TECHNICAL ANALYSIS
3.1 3.1 Meani Meaning ng of Tech Technic nical al Anal Analysi ysiss 3.2 Assumpt Assumptions ions of Technic Technical al Analysi Analysiss 3.3 Technic Technical al Analys Analysis is and Funda Fundamen mental tal Analy Analysis sis 3.4 The Critic Criticss of of Techn Technica icall Analy Analysis sis 3.5 Co-exist Co-existence ence of Technic Technical al Analysi Analysiss and Fundamenta Fundamentall Analysis Analysis 3.6 3.6 Techn echnic ical al Too Tools ls 3.6. 3.6.8 8
Supp Suppor ortt and and Resi Resist stan ance ce
8-45
3.6.9
Volume
3.6.10 3.6.10 RandomRandom-Wal Walk k Hypothe Hypothesis sis 3.6.1 3.6.11 1 Tech Technic nical al Trends Trends 3.6.1 3.6.12 2 Tren Trend-L d-Leng engths ths 3.6.1 3.6.13 3 Tren Trend-L d-Line ine 3.6. 3.6.14 14 Chan Channe nels ls 3.6.1 3.6.15 5 Tech Technic nical al Charts Charts 3.6.15.1 Properties
Chart
3.6.15.2 Charts 3.6.15.3 Patterns
Types of Chart
3.7 3.7 Tech Techni nica call Indi Indica cato tors rs .7.1
Moving Average Convergence Divergence
.7.2
Relative Strength Index
.7.3
Stochastic Oscillator
.7.4
The Dow-Theory
.7.5
The Short-Interest Ratio
.7.6
The Confidence Index
.7.7
Spreads
.7.8
The Advance-Decline Ratio
.7.9
The Market Breadth Index
.7.10
The Odd-lot Ratio
.7.11
Insider Transactions
.7.12
Mutual Fund Activity
.7.13
The Credit-Balance Theory
.7.14
Performance of Linked Markets 3.8 Summary
4
A SAMPLE SURVEY
46-55
4.7 4.7 Objec Objecti tives ves of the Survey Survey 4.8 4.8 Samp Sample le Com Compo posi siti tion on 4.9 4.9 Outco Outcome mess of of the the Surve Survey y 4.10 Opinion of the Investors 5
FINDINGS AND SUGGESTIONS
5.1 5.2
Findings Suggestions
56-57
5.3
Conclusion
BIBLIOGRAPHY WEBLIOGRAPHY APPENDIX
CHAPTER – 1 INTRODUCTION AND RESEARCH METHODOLOGY 1.1 INTRODUCTION
Money is honey for modern man!! In this modern and fast changing world where a cutthroat competition exits it is treated as the essence of life. It has become the sole purpose of every human activity. It is the sole target of every start. Starting from the unsunshine lower levels of deep blue Pacific to the upper layers of Troposphere each and every component is money oriented now a days. To fulfill such need of money and wealth, modern man uses investment as a want satisfying and wealth maximizing tool. Taking investment decisions has become a part of our economic life. Everybody makes such decisions in different contexts at different times. The appropriateness of such decisions makes makes some someone one Warre Warren n Buff Buffet et wher wheree as some some becom becomee bankr bankrupt upts. s. Th There erefor fore, e, it is very very important to understand and know the right way to take sound investment decisions which can be made in order to improve the chance of making profits through them. As investment is concerned, the stock market is treated as the most profitable and efficient battle field. It gives a scope to earn extra ordinary income by taking high level of risk where uncertainty exists always. So it is not a game of a child to find the right time and right choice to invest in. Investment decision-making in such situation can best be viewed as an integrated process to which security analysis makes its unique contribution. And, in the process of security analysis, Technical Analysis is treated as the Polestar which shows the direction to proceed.
Technical Analysis serves the investment decision-maker by pointing the direction that is most likely to produce the desired results and to meet the expectations of the investors. Whether Technical analysis will ever be classified as a science is doubtful, but research, train training ing and and exper experie ience nce have have devel develope oped d it into into a disci discipli pline, ne, which which means means a struct structure ured, d, consistent and orderly process without rigidity in either concepts or methods. 1.2 RESEARCH METHODOLOGY 1.2.1 NEED FOR THE STUDY
Where the herds of bulls and beers are peeping to the stock market in an expectation to grab the opportunity to take the advantage of volatility, a study on Technical Analysis Analysis is very much needed to cope with the moment-change market fluctuations in the expected direction to earn desired profits. This research study fulfills the needs of the speculators, investors and students to acquire knowledge regarding various technical aspects of investing the most liquid and hard-earned money not only in profitable stocks, but also at the right time and at the right price. The thesis describes the various trends and chart patterns which are very much helpful to find the timing of investment at different market situations. This study contributes to the knowledge of Stock analysis through integration of the review review of literat literature ure and methodo methodology logy developed developed for the understa understandin nding g and resolut resolution ion of various various related related indicato indicators rs and techniq techniques ues regardin regarding g investm investment ent decision decision-mak -making ing in stock stock market, and empirical work done there on. The purpose of the summer project report is to allow the study within a coherent, organized and standardized framework which is necessary to enhance understanding to grasp knowledge and to clarify the subject matter. It is needed for the direction and procedure of the study to bring it up to the required scope, coverage, rigor and also to enhance the quality of research effort. 1.2.2 OBJECTIVES OF THE STUDY
This project was started with an objective to know the basic tools, trends and chart patterns of Technical Analysis and their implications at the time of investment decisionmaking. How investors can gain more out of their investment by using the tools of Technical Analysi Analysiss is the central central objecti objective ve of this this research research study. study. Collect Collecting ing informa informatio tion n regardin regarding g investors’ response and belief towards Technical Analysis is also an additional objective that forced to undertake such research study.
1.2.3 SOURCES OF DATA
This section of the project emphasizes on the procedure used to accomplish the project. For this purpose some data have been collected basically from two sources:
Primary Source
Secondary Source
Primary Source
The data collected from primary sources are raw-data. These are the data that are collected first-hand and have not had any previous meaningful interpretation. The primary data will be collected through observation, questionnaire and through well-tested personal interviews with the investors at the door of number of broking houses. Secondary Source
Any data used that have been collected earlier for some other purposes are known as Secondary Data. The secondary data has been collected such from various internet portals, research articles, reference books and various T.V. programmes related to the topic. 1.2.4 RESEARCH DESIGN
The present present research research study study will will adopt adopt Descrip Descriptive tive Researc Research h Design Design for properly properly designing the research work. Through this, the topic will be studied thoroughly and it will be presented by giving necessary findings and conclusions. 1.2.5 SAMPLING METHOD
The method adopted is Convenient Sampling method because it was necessary to cover all types of investors and at different places all over the city, even if by taking the help of cell phone. 1.2.6 SAMPLE SIZE
The total sample size was 50 and included small investors, speculators, businessmen, researc research h scholar scholarss and finance finance students students.. Th Thee inter intervi view ew was was condu conduct cted ed insid insidee the the city city of Bhubaneswar only. 1.2.7 LIMITATIONS OF THE THE STUDY STUDY
Although necessary precautions have taken, still this study suffers from the following limitations:
The study consists of detailed theoretical explanations.
The time period allowed for the study was quite insufficient to cover and analyse all the technical aspects and to compare it with the behavior of the stock market.
More importance has been given to the subject matter of Technical Analysis only.
The wide range of chart-patterns and trends may create confusion while going through these.
The study may act as a magic-pedia for a layman having no basic knowledge regarding securities market.
Confi Confiden denti tiali ality ty of infor informa mati tion on was was the bigge biggest st limi limitat tation ion that that corpor corporat atee people people and and investors were not willing to share.
Thee Th
prima primary ry limi limitat tatio ion n of the study is that that,, the survey survey is limi limite ted d withi within n the the city city of
Bhubaneswar only. 1.2.8 CHAPTER PLAN
The study has been divided in to two parts such as the Theoretical aspect and the Practical aspect. The first part contains a wide explanation of the theories of Technical analysis where as the second part is enriched with the response of the investors’ and their beliefs with respect to Technical Analysis. By looking chapter-wise, Chapter-1 opens the door to enter in to the subject. Chapter-2 gives information about the company under which the summer internship has been made. Chapter-3 gives a broad idea regarding Technical Analysis. It narrates about the tools available in Technical Analysis and explains the various indicators that signals signals investor investor-act -action ion and guides guides to expect expect the future future uncerta uncertain in market market conditi condition. on. Chapter-4 analyses the data that has been collected from primary sources reflecting the role of techni technical cal chart chartss and trends trends at the the time time of invest investme ment nt decis decision ion-ma -makin king. g. It gives gives an idea idea regarding the applicability and popularity of Technical Analysis in investor-world. It depicts the response of the investors. And, lastly the study comes to an end with chapter-5 that narrates the findings and suggestions extracted from this study with conclusion.
CHAPTER – 2 COMPANY PROFILE 2.1 ABOUT APOLLO SINDHOORI
Apol Apollo lo Sind Sindho hoor orii Capi Capita tall Inve Invest stme ment ntss Limi Limite ted d was was a professionally managed Financial Services organization, belonging to Apoll Apollo o Hospi Hospita tals ls Group Group.. Bein Being g the the group’ group’ss maide maiden n foray foray into into the the financia financiall service servicess sector, sector, Apollo Apollo Sindhoo Sindhoori ri successf successfull ully y carried carried the
FIGURE NO. – 2.1 FIGURE TITLE COMPANYLOGO
strong linage of service, as demonstrated by the flagship company of the group. Apoll Apollo o Sindh Sindhoor oorii is a leadi leading ng play player er in broki broking ng space space with with nearl nearly y 14 year yearss of experience. Incorporated in 1995, the Company became a part of Aditya Birla Group in March 2009, when the group acquired 76% of the Company through Aditya Birla Nuvo. The Aditya Birla Group is a household name in India, a US $28 billion conglomerate that is in the league of the Fortune 500 companies. The Aditya Birla Group has a strong presence across various financial services verticals as a part of the Aditya Birla Financial Services Group (ABFSG) that include life insurance, fund management, distribution & wealth management, security based lending, insurance broking and private equity. The six companies companies representing representing ABFSG are Birla Sun Life Insurance Company, Company, Birla Sun Life Asset Management Company, Birla Sun Life Distribution Company, Aditya Birla Capital Advisors, Birla Global Finance Company and Birla Insurance Advisory & Broking Services. The consolidated revenues from these companies crossed the US $ 1 billion mark, in 2007-08. Headquartered in Chennai, ASCIL is listed on National Stock Exchange of India Limited [NSE] and The Bombay Stock Exchange Limited [BSE]. It is also registered as Depository Participant with both NSDL and CDSL. 2.2 MANAGEMENT OF THE ORGANISATION
Mr. Pankaj Razdan Mr. Kanwar Vivek Mr. Manoj Kedia Mr. K.R. Sudhakar –Executive Director Mr. Sudhir Rao
Mr. G. Vijayaraghavan 2.3 SERVICES PROVIDED BY THE ORGANISATION
ASCIL offers following services: •
Trading facility in Equity segment on and Derivative segment on NSE & BSE through a single screen.
•
Trading facility in commodity segment, including including bullion, oils, gaur seed etc. through our subsidiary, Apollo Sindhoori Commodities Trading Limited
•
Depository Participant [DP] services of NSDL and CDSL at major locations
•
Online bidding for IPO
•
Distribution of Mutual Funds
2.4 BUSINESS NETWORK
The Company has a strong distribution network of over 221 own and 687 franchisee branches, branches, a large customer base in excess of 1,75,000 and a scalable business business model based on a strong technology backbone and a wide product mix. The Company boasts of immense talent pool and vertical specialists which add to its positioning as a leading player in retail broking space. 2.5 COMPANY INFORMATION
Company Name: Apollo Sindhoori Capital Investments Limited Date of Listing (NSE): 07-Feb-2008 Face Value: 1.00 ISIN: INE865C01022 Industry: FINANCE Issued Cap. : 55400000(shares) as on 14-Aug-2009 Market Cap. : Rs. 190.30(Cr) as on 14-Aug-2009 Impact Cost: 3.38 as on Jul-2009 52 week high/low price: 59.00/9.25
2.6 CONCLUSION
As the financial markets are going towards development with the pace of economic growth, the post-recession market expects a lot from the investors. In this regard it can be seen that there is a huge scope for the companies providing financial services in coming days. So, the opportunity to gain more and create a brand equity is there and it is not too hard for a market player like Apollo Sindhoori to achieve such. A mare sophistication and improvement in services can pay much.
CHAPTER – 3 TECHNICAL ANALYSIS
3.1 MEANING OF TECHNICAL ANALYSIS Technical analysis is a security analysis technique that claims the ability to forecast
the future direction of prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts, sometimes called "chartists", may employ models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns. Technical analysis stands in distinction to fundamental analysis. Technical analysis "ignores" the actual nature of the company, market, currency or commodity and is based solely on "the charts," that is to say price and volume information, whereas fundamental analysis does look at the actual facts of the company, market, currency or commodity. For example, example, any large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team. Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclus exclusive ive use of histor historic ical al price price and volum volumee data data is what what separ separat ates es them them from from their their fundamental fundamental counterparts. counterparts. Unlike fundamental fundamental analysts, analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future. 3.2 ASSUMPTIONS OF TECHNICAL ANALYSIS
Technical Analysis is based on certain assumptions. It does not matter whether the assumptions are reflected in actual practice or not, investors take those in to consideration while taking investment decisions and analyzing technical indicators. These basic assumptions are:
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market. 2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption. 3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. 4. Not Just for Stocks
Technical analysis can be used on any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex, etc. In this report, we'll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is more frequently associated with commodities and forex, where the participants are predominantly traders.
3.3 TECHNICAL ANALYSIS & FUNDAMENTAL ANALYSIS
Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities. The Differences 1. Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash cash flow flow state stateme ment nt and and incom incomee state stateme ment nt,, a funda fundame menta ntall analy analyst st tries tries to deter determi mine ne a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements). Technical Technical traders, on the other hand, believe there is no reason to analyze a company's company's fundamentals fundamentals because these are all accounted for in the stock's price. Technicians Technicians believe that all the information they need about a stock can be found in its charts. 2. Time Horizon
Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases.
Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't don 't emer emerge ge on a daily daily basis basis like like price price and volum volumee inform informat ation ion.. Also Also remem remember ber that that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts. 3. Trading Versus Investing
Not only is technical technical analysis more short term in nature that fundamental fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools. 3.4 THE CRITICS OF TECHNICAL ANALYSIS
Some critics see technical technical analysis as a form of black magic. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. In fact, technical analysis has only recently begun to enjoy some mainstream credibility. While most analysts on Wall Street focus on the fundamental side, just about any major brokerage now employs technical analysts as well. Much Mu ch of the the crit critic icis ism m of tech techni nica call anal analys ysis is has has its its root rootss in acad academ emic ic theo theory ry specifically specifically the efficient efficient market hypothesis hypothesis (EMH). This theory says that the market's price is always the correct one - any past trading information is already reflected in the price of the stock and, therefore, any analysis to find undervalued securities is useless. There are three versions of EMH. In the first, called weak form efficiency, all past price information information is already included included in the current price. According to weak form efficiency, efficiency, technical analysis can't predict future movements because all past information has already been accounted for and, therefore, analyzing the stock’s past price movements will provide no insight into its future movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be of little use in finding investment opportunities. The third is strong form efficiency, which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental can provide investors with an edge. The vast majority of academics believe in at least the weak version of EMH, therefore, therefore, from their point of view, if technical analysis works, market efficiency will be called into question.
3.5 CO-EXISTENCE OF TECHNICAL ANALYSIS &FUNDAMENTAL ANALYSIS
Although technical analysis and fundamental analysis are seen by many as polar opposites - the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved. Alternatively, some technical traders might look at fundamentals to add strength to a techni technical cal signa signal. l. For For exam exampl ple, e, if a sell sell signa signall is given given throu through gh techn technic ical al patte patterns rns and indicators, indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental fundamental data. Oftentimes, having both the fundamentals fundamentals and technical’s on your side can provide the best-case scenario for a trade. While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school, there are certainly benefits to at least understanding both schools of thought. 3.6 TECHNICAL TOOLS
In Technical Analysis, there are a lot of tools and strategies that enable us to draw necessary conclusions at the time of taking important decisions. Some of the most applicable and appreciated tools are discussed below: 3.6.1 SUPPORT AND REGISTANCE
A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level. A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level.
Once you understand the concept of a trend, the next major concept is that of support and resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support). FIGURE NO.: 3.1 FIGURE TITLE: SUPPORT AND RESISTANCE
SOURCE: www.metastock.com www.metastock.com
As it can be seen in this Figure, support is the price level through which a stock or market seldom falls (illustrated (illustrated by the blue arrows). Resistance, Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the red arrows). Why does it happen?
Thes Th esee supp suppor ortt and and resi resist stan ance ce leve levels ls are are seen seen as impo import rtan antt in term termss of mark market et psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trend lines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance will likely be established. The Importance of Support and Resistance
Support and resistance analysis analysis is an important important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies identifies an important important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level.
Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance level of an up trending channel, the trend have accelerated and not reversed. This means that the price appreciation is expected to be faster than it was in the channel. Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance resistance level, it is important important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support. Round Numbers and Support and Resistance
One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be impor importa tant nt in suppor supportt and resist resistanc ancee leve levels ls becau because se they they often often repres represen entt the the major major psychological turning points at which many traders will make buy or sell decisions. Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as INR 50, which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major psychological points as well. Role Reversal
Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. resistance. If the price rises above a resistance resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For
a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance. FIGURE NO.: 3.2 FIGURE TITLE: ROLE REVERSAL
SOURCE: www.trending123.com www.trending123.com
For example, as you can see in above, the dotted line is shown as a level of resistance that has prevented the price from heading higher on two previous occasions (Points 1 and 2). However, once the resistance resistance is broken, it becomes a level of support (shown by Points Points 3 and 4) by propping up the price and preventing it from heading lower again. Many traders who begin using technical analysis find this concept hard to believe and don't realize that this phenomenon occurs rather frequently, even with some of the most wellknown companies. In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels. This is most often seen when a stock is trading in a generally sideways manner as the price moves through successive peaks and troughs, testing resistance and support. 3.6.2 VOLUME
Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. Higher volume means the security has been more active. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.
FIGURE NO.: 3.3 FIGURE TITLE: VOLUME OF SHARES
SOURCE: www.metastock.com www.metastock.com Why Volume is important?
Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story. Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal. Volume should move with the trend. If prices are moving in an upward trend, volume should should increase increase (and vice versa). versa). If the previous previous relations relationship hip between between volume volume and price price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end.
When volume tells a different story, it is a case of divergence, which refers to a contradiction contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume. Volume and Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened. Volume Precedes Price
Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end. 3.6.3 RANDOM WALK HYPOTHESIS
The random walk hypothesis is a financial financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. It has been described as 'jibing' with the efficient market hypothesis. Economists have historically accepted the random walk hypothesis. They have run several tests and continue to believe that stock prices are completely random because of the efficiency of the market. 3.7.4 TECHNICAL TRENDS One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different different from the general definition definition of the term - a trend is really nothing more than the general general direction direction in which a security or market is headed.
It is important to be able to understand and identify trends so
that you can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders. There are three types of trends as: Up-Trend
As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend.
Downtrend
It describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.
FIGURE NO.: 3.4 FIGURE TITLE: DOWNTREND OF SHARE PRICE
SOURCE: www.investopedia.com www.investopedia.com
Downtrend
is
th e
opposite
of
uptrend.
Many traders seek to
avoid
downtrends downtrends because they they can drastically drastically affect affect the value of any investment. investment. A downtrend downtrend can last for minutes, days, weeks, months or even years so identifying a downtrend early is very important. Once a downtrend has been established (series of lower peaks) a trader should be very cautious about entering into any new long positions. Sideways/Horizontal Sideways/Horizontal Trends
It describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move. A sideways price trend is also commonly known as a "horizontal trend". Sideways trend is generally a result of the price traveling between strong levels of support and resistance. It is not uncommon to see a horizontal trend dominate the price action of a specific asset for a prolonged period before starting a move higher or lower. Brief consolidation is often needed during large price runs, as it is nearly impossible for such large price moves to sustain themselves over the longer term. 3.6.5 TREND LENGTHS
Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a nearterm term tren trend d is anyt anythi hing ng less less than than a mont month. h. A long long-t -ter erm m tren trend d is comp compos osed ed of seve severa rall intermediate trends, which often move against the direction of the major trend. If the major trend trend is upwar upward d and there there is a downw downwar ard d corre correct ction ion in price price movem movement ent follow followed ed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term short-term trends are components components of both major and intermediate intermediate trends. Take a look a Figure 4 to get a sense of how these three trend lengths might look. FIGURE NO.:3.5 FIGURE TITLE: TRENDLENGTHS
SOURCE: www.metastock.com www.metastock.com
When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend.
3.6.6 TRENDLINE
A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a general trend. These lines lines are used to clearly show the trend and are also used in the identification of trend reversals. As it can be seen in the figure, an upward trendline is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trendline helps traders to anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high. FIGURE NO.: 3.6 FIGURE TITLE: TRENDLINE
SOURCE: www.metastock.com www.metastock.com 3.6.7 CHANNELS
A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance. The upper trendline connects a series of highs, while the lower trendline connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.
FIGURE NO.: 3.7
FIGURE TITLE: CHANNEL
SOURCE: www.metastock.com www.metastock.com
Figure illustrates a descending channel on a stock chart; the upper trendline has been placed on the highs and the lower trendline is on the lows. The price has bounced off of these lines several times, times, and has remained range-bound range-bound for several months. months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue. 3.6.8 TECHNICAL CHARTS
In technical analysis, charts are similar to the charts that you see in any business setting. A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock's price movement over a one-year one-year period, where each point on the graph represents the closing price for each day the stock is traded: FIGURE NO.: 3.8 FIGURE TITLE: A SAMPLE CHART
SOURCE: www.stockcharts.com www.stockcharts.com
The above figure provides an example of a basic chart. It is a representation of the price movements of a stock over a 1.5 year period. The bottom of the graph, running horizontally (x-axis), is the date or time scale. On the right hand side, running vertically (yaxis), the price of the security is shown. By looking at the graph we see that in October 2004 (Point 1), the price of this stock was around INR 245, whereas in June 2005 (Point 2), the stock's price is around INR 265. This tells us that the stock has risen between October 2004 and June 2005. 3.6.8.1 CHART PROPERTIES
There are several things that you should be aware of when looking at a chart, as these factors can affect the information information that is provided. They include include the time scale, the price scale and the price point properties used. 1. The Time Scale
The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually. The shorter the time frame, the more detailed the chart. Each data point can represent the closing price of the period or show the open, the high, the low and the close depending on the chart used. Intraday charts charts plot price movement within the period of one day. This means that the time scale could be as short as five minutes or could cover the whole trading day from the opening bell to the closing bell. Daily charts are comprised of a series of price movements in which each price point on the chart is a full day’s trading condensed into one point. Again, each point on the graph can be simply the closing price or can entail the open, high, low and close for the stock over the day. These data points are spread out over weekly, monthly and even yearly time scales to monitor both short-term and intermediate trends in price movement. Weekly, monthly, quarterly and yearly charts are used to analyze longer term trends in the movement of a stock's price. Each data point in these graphs will be a condensed version of what happened over the specified period. So for a weekly chart, each data point will be a representation of the price movement of the week. For example, if you are looking at a chart of weekly data spread over a five-year period and each data point is the closing price for the week, the price that is plotted will be the closing price on the last trading day of the week, which is usually a Friday.
2. The Price Scale and Price Point Properties
The price scale is on the right-hand side of the chart. It shows a stock's current price and compares it to past data points. This may seem like a simple concept in that the price scale goes from lower prices to higher prices as you move along the scale from the bottom to the top. The problem, however, is in the structure of the scale itself. A scale can either be constructed constructed in a linear (arithmetic) (arithmetic) or logarithmic logarithmic way, and both of these options are available on most charting services. If a price scale is constructed using a linear scale, the space between each price point (10, 20, 30, 40) is separated by an equal amount. A price move from 10 to 20 on a linear scale is the same distance on the chart as a move from 40 to 50. In other words, the price scale measures moves in absolute terms and does not show the effects of percent change. FIGURE NO.: 3.9 FIGURE TITLE: PRICE SCALE
SOURCE: www.metastock.com www.metastock.com
If a price scale is in logarithmic terms, then the distance between points will be equal in terms of percent change. A price change from 10 to 20 is a 100% increase in the price while a move from 40 to 50 is only a 25% change, even though they are represented by the same distance on a linear scale. On a logarithmic scale, the distance of the 100% price change from 10 to 20 will not be the same as the 25% change from 40 to 50. In this case, the move from 10 to 20 is represented by a larger space one the chart, while the move from 40 to 50, is represented by a smaller space because, percentage-wise, it indicates a smaller move. In Figure 2, the logarithmic logarithmic price scale on the right leaves the same amount of space between 10 and 20 as it does between 20 and 40 because these both represent 100% increases.
3.6.8.2 TYPES OF CHARTS
There are four main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types are: the line chart, the bar chart, the candlestick chart and the point and figure chart. 1. Line Chart
The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time time frame frame.. Line Line charts charts do not provid providee visua visuall inform informati ation on of the tradi trading ng range range for the the individual individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts. FIGURE NO.: 3.10 FIGURE TITLE: LINE CHART
SOURCE: www.metastock.com www.metastock.com 2. Bar Charts
One of the basic tools of technical analysis is the Bar Chart, where the open, close, high, and low prices of stocks or other financial instruments are embedded in bars which are plotted as a series of prices over a specific time period. Bar charts allow traders to see patterns more easily. In other words, each bar is actually just a set of 4 prices for a given day, or some other time period, that is connected by a bar in a specific way—hence, it is often referred to as a price bar.
FIGURE NO.: 3.11 FIGURE TITLE: PRICE BAR
SOURCE: www.thismatter.com www.thismatter.com
A price bar shows the opening price of the financial instrument, which is the price at the beginning of the time period, as a left horizontal line, and the closing price, which is the last price for the period, as a right horizontal line. These horizontal lines are also called tick marks. The high price is represented by the top of the bar and the low price is depicted by
the bottom of the bar. Thee bar Th bar char chartt expa expand ndss on the the line line char chartt by addi adding ng seve severa rall more more key key piec pieces es of information information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal horizontal dash. The opening price on a bar chart is illustrated illustrated by the dash that is located on the left side of the vertical bar. Conversely, Conversely, the close is represented represented by the dash on the right. Generally, Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open). Following is a bar chart that represents the details:
FIGURE NO.: 3.12 FIGURE TITLE: BAR CHART
SOURCE: www.metastock.com www.metastock.com 3. Candlestick Charts
Another type of chart used in technical analysis is the candlestick chart, so called because the main component of the chart representing prices looks like a candlestick, with a thick body, called the real body, and usually a line extending above and below it, called the upper shadow and lower shadow, respectively. The top of the upper shadow represents the
high price, while the bottom of the lower shadow represents the low price. Patterns are formed both by the real body and the shadows. Candlestick patterns are most useful over short periods of time, and mostly have significance at the top of an uptrend or the bottom of a downtrend, when the patterns most often signify a reversal of the trend. FIGURE NO.: 3.13 FIGURE TITLE: CANDLE-STICK BAR PARTS
SOURCE: www.wikipedia.com
While the candlestick chart shows basically the same information as the bar chart, certain patterns are more apparent in the candlestick chart. The candlestick chart emphasizes opening and closing prices. The top and bottom of the real body represents the opening and closing prices. Whether the top represents the opening or closing price depends on the color of the real body—if it is white, then the top represents the close; black , or some other dark color, indicates that the top was the opening price. The length of the real body shows the difference between the opening and closing prices. Obviously, white real bodies indicate bullishness, while while black black real bodies indicate indicate bearishn bearishness, ess, and their their pattern pattern is easily easily observab observable le in a candlestick chart. The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in the formation of a wide bar on the vertical line, line, which which illus illustra trate tess the the diffe differen rence ce betwe between en the open open and close close.. Th Ther eree are are two two color color constructs for days up and one for days that the price falls. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. If the stock's price has closed above the previous day’s close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day. It can be illustrated as: FIGURE NO.: 3.14 FIGURE TITLE: CANDLE-STICK CHART
SOURCE: www.metastock.com www.metastock.com
4. Point-and-Figure Charts: Point-and-figure Point-and-figure charts list only significant price information as columns of X's and
O's without regard to time, so that trends, resistance and support levels are more apparent. Although time is depicted on the horizontal axis, the units of time are determined by when the trend changes. There are several ways of constructing point-and-figure charts, but all are based on minimum price differential necessary before a price is recorded as an X box size, which is the minimum or an O. Columns of X's show an uptrend, and O's show a downtrend. Generally, closing price differentials are used. There is no high, low, opening, or closing prices recorded, since only the change in price greater than the box size is recorded as an X if the price differential is up or as an O if it is down. Each consecutive X is recorded in the same column above the previous X until the price reverses by more than the box size, then a new column is started by recording an O in a box below and to the right of the highest X in the previous column. O's are added downward with each price decrease greater than the box size until the downtrend reverses to an uptrend, starting a new column where the 1st X is placed in the box above and to the right of the last O in the previous column. The construction of point-and-figure charts simplifies the drawing of trend lines, and support and resistance levels, which is why point-and-figure charts are ideal for detecting trends, and determining support and resistance levels. Following is the point-and-figure chart of Intel Corporation. In this chart, the X's are green and the O's are red, which increases their contrast, making patterns more apparent. FIGURE NO.: 3.15 FIGURE TITLE: POINT AND FIGURE CHART
Source: www.tradestation.com www.tradestation.com
This seems to be the most common type of point-and-figure chart, but there are several variations that differ significantly from the above description. Charts are one of the most fundamental aspects of technical analysis. It is important that one should clearly understand what is being shown on a chart and the information that it provides. 3.6.8.3 CHART PATTERNS
A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. The theory behind chart patterns is based on the third assumption that is history repeats itself. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern setting up a certain price movement, chartists look for these patterns to identify trading opportunities. While there are general ideas and components to every chart pattern, there is no chart pattern that will tell you with 100% certainty where a security is headed. This creates some leeway and debate as to what a good pattern looks like, and is a major reason why charting is often seen as more of an art than a science. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns can be found over charts of any timeframe. timeframe. In this section, we will review some of the more popular chart patterns. 1. Head and Shoulders
This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern pattern that when formed, signals that the security is likely to move against the previous trend. As you can see in Figure, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend. FIGURE NO.: 3.16
FIGURE TITLE: HEAD AND SHOULDER CHART PATTERN
SOURCE: www.metastock.com www.metastock.com
Figure: Head and shoulders top is shown on the left. Head and shoulders bottom, or inverse head and shoulders, is on the right. Both of these head and shoulders patterns patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side in Figure 1, the left shoulder is made up of a high followed by a low. In this pattern, the neckline neckline is a level of support or resistance. It can be remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows. 2. Cup and Handle
A cup and handle chart is a bullish continuation continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed. FIGURE NO.: 3.17 FIGURE TITLE: CUP AND HANDLE CHART PATTERN
SOURCE: www.metastock.com www.metastock.com
As it can be seen in the above figure, the price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue. There is a wide ranging time frame for this type of pattern, with the span ranging from several months to more than a year. 3. Double Tops and Bottoms
This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals.
FIGURE NO.: 3.18 FIGURE TITLE: DOUBLE TOPS AND BOTTOMS CHART PATTERN
SOURCE: www.metastock.com www.metastock.com
In the case of the double top pattern in Figure 3.17, the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward. 4. Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle triangle,, ascendin ascending g and descendi descending ng triangl triangle. e. These These chart chart patterns patterns are consider considered ed to last anywhere from a couple of weeks to several months.
FIGURE NO.: 3.19 FIGURE TITLE: TRIANGLES CHART PATTERN
SOURCE: www.metastock.com www.metastock.com
The symmetrical triangle in Figure 4 is a pattern in which two trendline converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trendline is flat, while the bottom trendline is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, triangle, the lower trendline is flat and the upper trendline is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout.
5. Flag and Pennant
These two short-term chart patterns are continuation patterns that are formed when there is a sharp movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks.
FIGURE NO.: 3.20 FIGURE TITLE: FLAG AND PENNANT CHART PATTERN
SOURCE: www.metastock.com www.metastock.com
As you can see, there is little difference between a pennant and a flag. The main differen difference ce between between these these price movement movementss can be seen in the middle middle section section of the chart chart pattern. In a pennant, the middle section is characterized by converging trendline, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trendline. In both cases, the trend is expected to continue when the price moves above the upper trendline. 6. Wedge
The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symm symmetr etrica icall tria triangl nglee except except that that the the wedge wedge patte pattern rn slant slantss in an upwar upward d or downw downwar ard d direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over longer periods, usually between three and six months.
FIGURE NO.: 3.21
FIGURE TITLE: WEDGE CHART PATTERN
SOURCE: www.metastock.com www.metastock.com
The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. In the above figure, we have a falling wedge in which two trend lines are converging in a downward direction. If the price was to rise above the upper trendline, it would form a continuation pattern, while a move below the lower trendline would signal a reversal pattern. 7. Gaps
A gap is witnessed very recently when the trade was halted due to upper freeze @ 20%. A gap in a chart is an empty space between a trading period and the following trading period. This occurs when there is a large difference in prices between two sequential trading periods. For example, if the trading range in one period is between INR 25 and INR 30 and the next trading period opens at INR 40, there will be a large gap on the chart between these two periods. Gap price movements can be found on bar charts and candlestick charts but will not be found on point and figure or basic line charts. Gaps generally show that something of sign signif ific ican ance ce has has happ happen ened ed in the the secu securi rity ty,, such such as a bett better er-t -tha hann-ex expe pect cted ed earn earnin ings gs announcement. There are three main types of gaps, breakaway, runaway (measuring) and exhaustion. A breakaway gap forms at the start of a trend, a runaway gap forms during the middle of a trend and an exhaustion gap forms near the end of a trend.
3.7 TECHNICAL INDICATORS
Indicators are calculations based on the price and the volume of a security that
measure such things as money flow, trends, volatility and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals. There are two main types of indicators: leading and lagging. A leading indicator precedes price movements, giving them a predictive quality, while a lagging indicator is a confirmation confirmation tool because it follows price movement. movement. A leading indicator is thought to be the stronges strongestt during during periods periods of sideway sidewayss or non-tre non-trendin nding g trading trading ranges, ranges, while while the lagging lagging indicators are still useful during trending periods. There are also two types of indicator constructions: those that fall in a bounded range and those that do not. The ones that are bound within a range are called oscillators - these are the most common type of indicators. Oscillator Oscillator indicators have a range, for example between zero and 100, and signal periods where the security is overbought (near 100) or oversold (near zero). Non-bounded indicators still form buy and sell signals along with displaying strength or weakness, but they vary in the way they do this. The two main ways that indicators are used to form buy and sell signals in technical analysis is through crossovers and divergence. Crossovers are the most popular and are reflected when either the price moves through the moving average, or when two different movin moving g avera averages ges cross cross over over each each other other.. Th Thee second second way way indic indicato ators rs are are used used is throug through h divergence, which happens when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. This signals to indicator users that the direction of the price trend is weakening. Indicators that are used in technical analysis provide an extremely useful source of additio additional nal informa information tion.. These These indicato indicators rs help identif identify y momentu momentum, m, trends, trends, volatil volatility ity and various other aspects in a security to aid in the technical analysis of trends. It is important to note that while some traders use a single indicator solely for buy and sell signals, they are best used in conjunction with price movement, chart patterns and other indicators.
3.7.1 MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD):
The moving average convergence divergence divergence (MACD) is one of the most well known and used indicators in technical analysis. This indicator is comprised of two exponential moving averages, which help to measure momentum in the security. The MACD is simply the difference between these two moving averages plotted against a centerline. The centerline is the point at which the two moving averages are equal. Along with the MACD and the centerline, an exponential moving average of the MACD itself is plotted on the chart. The idea behind this momentum indicator is to measure short-term momentum compared to longer term momentum to help signal the current direction of momentum. MACD= shorter term moving average – longer term moving average
When the MACD is positive, it signals that the shorter term moving average is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative - this signals that the shorter term is below the longer and suggest downward momentum. When the MACD line crosses over the centerline, it signals a crossing in the moving averages. The most common moving average values used in the calculation calculation are the 26-day and 12-day exponential moving averages. The signal line is commonly created by using a nine-day exponential moving average of the MACD values. These values can be adjusted to meet the needs of the technician and the security. For more volatile securities, shorter term averages are used while less volatile securities should have longer averages. Another aspect to the MACD indicator that is often found on charts is the MACD histogram. histogram. The histogram is plotted on the centerline and represented represented by bars. Each bar is the difference difference between the MACD and the signal line or, in most cases, the nine-day exponential moving average. The higher the bars are in either direction, the more momentum behind the direction in which the bars point. As you can see in below figure, one of the most common buy signals is generated when the MACD crosses above the signal line (blue dotted line), while sell signals often occur when the MACD crosses below the signal.
FIGURE NO.: 3.22 FIGURE TITLE: MOVING AVERAGE CONVERGENCE DIVERGENCE
SOURCE: www.metastock.com www.metastock.com 3.7.2 RELATIVE STRENGTH INDEX (RSI):
It is another one of the most used and well-known momentum indicators in technical analysis. RSI helps to signal overbought and oversold conditions in a security. The indicator is plotted in a range between zero and 100. A reading above 70 is used to suggest that a security is overbought, while a reading below 30 is used to suggest that it is oversold. This indicator helps traders to identify whether a security’s price has been unreasonably pushed to current levels and whether a reversal may be on the way. FIGURE NO.: 3.23 FIGURE TITLE: RELATIVE STRENGTH INDEX
SOURCE: www.metastock.com www.metastock.com
The standard calculation for RSI uses 14 trading days as the basis, which can be adjusted to meet the needs of the user. If the trading period is adjusted to use fewer days, the RSI will be more volatile and will be used for shorter term trades. 3.7.3 STOCHASTIC OSCILLATOR
The stochastic oscillator is one of the most recognized momentum indicators used in technical analysis. The idea behind this indicator is that in an uptrend, the price should be closing near the highs of the trading range, signaling upward momentum in the security. In downtr downtrend ends, s, the the price price shoul should d be closi closing ng near near the the lows lows of the the tradi trading ng range range,, signa signali ling ng downward momentum. Thee stoch Th stochast astic ic oscil oscilla lator tor is plott plotted ed withi within n a range range of zero zero and 100 and signal signalss overbought conditions above 80 and oversold conditions below 20. The stochastic oscillator contains two lines. The first line is the %K, which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. The second line is the %D, which is simply a moving average of the %K. The %D line is considered to be the more important of the two lines as it is seen to produce better signals. The stochastic oscillator generally uses the past 14 trading periods in its calculation but can be adjusted to meet the needs of the user.
FIGURE NO.: 3.24 FIGURE TITLE: STOCHASTIC OSCILLATOR
SOURCE: www.metastock.com www.metastock.com
3.7.4 THE DOW THEORY
The Dow Theory is a major corner stone of technical analysis. It is one of the oldest and best known methods used to determine the major trend of stock prices. It tells about the future prospects regarding regarding a particular particular stock. It indicates indicates the direction direction of the price of the share by looking in to which an investor can think for investment on that particular stock. Seven Basic Principles of Dow's Theory :
price Average Averages, s, specifi specificall cally, y, the Dow-Jone Dow-Joness Industri Industrial al Everythi Everything ng is discount discounted ed by the price Avera Average ge and the the DowDow-Jon Jones es Tran Transpo sport rtati ation on Averag Average. e. Since Since the the Avera Averages ges refle reflect ct all all information, experience, knowledge, opinions, and activities of all stock market investors, everything that could possibly affect the demand for or supply of stocks is discounted by the Averages. There are three trends in stock prices. 1) The Primary Tide is the major long-term trend. But
no trend moves in a straight line for long, and 2) Secondary Reactions are the intermediateintermediateterm corrections corrections that interrupt and move in an opposite direction against the Primary Primary Tide. 3) Ripples are the very minor day-to-day fluctuations that are of concern only to short-term
traders and not at all to Dow Theorists. 3. Primary Tides going up, also known as Bull Markets, typically unfold in three up moves in stock prices. The first move up is the result of far-sighted investors accumulating stocks at a time when business is slow but anticipated to improve. The second move up is a result of invest investors ors buy buyin ing g stock stockss in react reaction ion to impr improve oved d funda fundame ment ntal al busin business ess condi conditi tions ons and increasing corporate earnings. The third and final up move occurs when the general public finally notices that all the financial news is good. During the final up move, speculation runs rampant. 4. Primary Tides going down, also known as Bear Markets, typically unfold in three down moves in stock prices. The first move down occurs when far-sighted investors sell based on
their their exper experien ience ced d judgem judgemen entt that that high high valua valuati tions ons and boom booming ing corpo corpora rate te earni earnings ngs are unsustainable. The second move down reflects panic as a now fearful public dumps at any price the same stock they just recently bought at much higher prices. The final move down results from distress selling and the need to raise cash. 5. The two averages must confirm each other . To signal a Primary Tide Bull Market major trend, both averages must rise above their respective highs of previous upward Secondary Reactions. Reactions. To signal a Primary Primary Tide Bear Market major trend, both the Dow-Jones Industrial Average and the Dow-Jones Dow-Jones Transportation Average must drop below their respective lows of previous Secondary Secondary Reactions. Reactions. A move to a new high or low by just one average alone is not
meaningful. Also, it is not uncommon for one average to signal a change in trend before the other. The Dow Theory does not stipulate any time limit on trend confirmation by both averages. 6. Only end-of-day, closing prices on the averages are considered. Price movements during the day are ignored. 7. The Primary Tide remains in effect until a Dow Theory reversal has been signaled by both averages. It can act as an yardstick to choose the growing stocks and investing in those in anticipation of future profits. 3.7.5 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 foe about 30 days. When short sales increase relative to total volume, the indicator rises. A ratio above 150% is considered bullish, and a ratio below 100% is considered bearish. The logic behind this ratio is that speculators and other investors sell stocks at high price in anticipation of buying them back at lower prices. Thus, increasing short selling is viewed as a sign of general market weakness, and short covering (as evidenced by decreasing short positions) as a sign of strength. An existing large short interest is considered a sign of strength, since the cover (buying) is yet to come; whereas an established slight short interest is considered a sign of weakness (more short-sells are to come). 3.7.6 THE CONFIDENCE INDEX
It is the ratio of a group of lower-grade bonds to a group of higher-grade bonds. According According to the theory underlying underlying this index, when the ratio is high, investors’ confidence 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. 3.7.7 SPREADS
Large spread 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. In short, the larger the spreads, the lower the ratio and the less the confidence. The smaller the spreads, the greater the ratio, indicating greater confidence. 3.7.8 THE ADVANCE-DECLINE RATIO
The index-relating advance to decline is called the Advance-Decline Ratio. When advances persistently out number declines, the ratio increases. A bullish condition is said to exist, and vice-versa. Thus, an Advance-Decline Ratio tries to capture the market’s underlying strength by taking in to account the number of advancing and declining issues. 3.7.9 THE MARKET BREADTH INDEX
The Market Breadth Index is a variant of the Advance-Decline Ratio. To compute it, we take the net difference between the number of stocks rising and the number of stocks falling, added (or subtracted) to the previous. For example, if in a given week 600 shares advanced, 200 shares declined, and 200 were unchanged, the breadth would be 2 i.e., (600200)/200. The figure of each week is added to previous week’s figure. These data are then plotted to establish the pattern of movement of advance and decline. The purpose of the Market Breadth Index is to indicate whether a confirmation of some index has occurred. If both the stock index and the market breadth index increase, the market is bullish; when the stock index increase but the breadth index does not, the market is bearish. 3.7.10 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 small buyers or sellers are not very bright especially at tops and bottoms when they need to be the brightest. The Odd-lot ratio theory assumes that the odd-lot short sellers are even more likely to be wrong than odd-lotters in general. This indicator relates odd-lot sales to purchases. 3.7.11 INSIDER TRANSACTIONS
The hypothesis hypothesis that insider insider activit activity y may be indicat indicative ive of future future stock stock prices prices has received some support in academic literature. Since insiders 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 indicator and vice versa. Stockholders do not like to hear that the president of a company is selling large blocks of stock of the company. Although 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. 3.7.12 MUTUAL FUND ACTIVITY
Mutual Funds represent one of the most potent institutional forces in the market, and they are a source of abundant data that are readily available. The cash position of the funds and their net subscriptions are followed closely by technicians. Mutual Funds keep cash to take advantage of favourable market opportunities and/or to provide or redemption of shares by holders. It is convenient convenient to express mutual-fund mutual-fund cash as a percentage of net assets on a daily, monthly or annual basis. In theory, a low cash ratio would indicate a reasonably fully invested position, with the implication that not much reserve buying power remains remains in the hands of funds as a group. Low ratios (on the order of 5 to 5 and ½ percent) are frequently equated with market heights. At market-buttoms, the cash ratio would be high to reflect heavy redemptions, among other things. Such a build-up of the cash ratio at market lows is an indication of potential purchasing power that can be injected in to the market to propel it upward. Another Mutual Fund indicator that is quite closely is net subscriptions subscriptions (subscriptions (subscriptions to new shares, less redemptions of existing shares). Like the Odd-lot statistics, this indicator measures public sentiment and the outlook for the stock market. The trend to more or less buying moves in random with the “odd-lot purchase to sell ratio.” The sells redemption differential narrows considerably prior to market analysis. In effect market advances are preceded by a relative shift towards redemption. Shifts towards relative buying (sells of new shares) tend to precede market declines. 3.7.13 THE CREDIT-BALANCE THEORY
Typically, Typically, investors receive credit balances in their accounts at their brokerage houses when they sell stock. At this point the investor has two choices: he can either have the credit balance forwarded forwarded to him or leave the credit balance in the account. However, However, these balances frequently earn no interest. Thus, the only reason for maintaining the credit balance in the account would be for purposes of reinvestment of these funds in the very near future. Some feel that a build-up in these cash balances represent large reserve of potential buying power. In effect, investors are leaving the credit balances in their brokerage firm accounts because they anticipate a drop in prices, thus a buying opportunity. Conversely, a drop in credit balance suggests that prices will go up. Because, an increase in prices was
expected, investors have already used up their credit balances. However, However, Technicians feel that investors in general, as their actions get reflected reflected in credit balances are usually wrong; that is, the investors are buying stocks when they should be selling them and selling stocks when they should be buying. As such, the credit balance theory is a contrary opinion theory. In other words, words, technicia technicians ns suggests suggests that
wise wise investor investor will buy stocks stocks as credit credit
balances balances are rising and sell stocks as credit balances are dropping. In short technicians technicians say the wise investor should do the opposite of what the credit balances are doing. 3.7.14 PERFORMANCE OF LINKED MARKETS
For an investor, the performances of the markets play a vital role to estimate the future perfo perform rmanc ancee of the the mark market et in which which it trades trades in. in. If relat relative ive marke markets ts show show a posit positiv ivee performance it can be anticipated that the market will go positively. If it shows a downward trend, it can be anticipated that the market will take a down turn. Generally, for Indian investors the NASDAQ, DOWZONES and Singapore have a much relation to guard their decisions to anticipate the future market tendency. 3.8 SUMMARY Techn Technic ical al analy analysi siss is a metho method d of evalu evaluati ating ng securi securiti ties es by analy analyzi zing ng the the stati statisti stics cs •
generated by market activity. It is based on three assumptions: 1) the market discounts everything, 2) price moves in trends and 3) history tends to repeat itself. •
Technicians Technicians believe believe that all all the the information information they need about about a stock can be found in its charts.
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Technical traders take a short-term approach to analyzing the market.
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Crit Critic icism ism of techni technica call analy analysis sis stem stemss from the effi effici cient ent marke markett hypothe hypothesis sis,, which which states states that the market price is always the correct one, making any historical analysis useless.
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One of of the most most import important ant concep concepts ts in techni technical cal analy analysis sis is that that of a trend, trend, which which the general direction that a security is headed is. There are three types of trends: Uptrends, downtrends and sideways/horizontal trends.
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A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock.
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A channe channel, l, or chann channel el lines lines,, is the addi additi tion on of two two parall parallel el trend trendli lines nes that that act act as strong strong areas of support and resistance.
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Support is the the price price level level through which a stock stock or market seldom falls. Resistance Resistance is is the the price level that a stock or market seldom surpasses.
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Volume Volume is the the number number of shares shares or or contrac contracts ts that that trade trade over a given given period period of of time, time, usually a day. The higher the volume, the more active the security.
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A chart is a graphical representation of a series of prices over a set time frame.
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The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually.
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The price scale is on the right-hand right-hand side of of the chart. It shows shows a stock's stock's current price and compares it to past data points. It can be either linear or logarithmic.
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There are four four main main types types of of charts charts used used by investors and traders: traders: line charts, bar charts, charts, candlestick charts and point and figure charts.
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A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. There are two types: reversal and continuation.
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A head and shoulders pattern is reversal pattern that signals a security is likely to move against its previous trend.
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A cup and handle pattern is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.
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Double tops and double bottoms are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through.
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A triangle is a technical analysis pattern created by drawing trendlines along a price range that gets narrower over time because of lower tops and higher bottoms. Variations of a triangle include ascending and descending triangles.
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Flags and pennants are short-term continuation patterns that are formed when there is a sharp price movement followed by a sideways price movement.
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The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction.
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A gap in a chart is an empty space between a trading period and the following trading period. This occurs when there is a large difference in prices between two sequential trading periods.
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A moving average is the average price of a security over a set amount of time. There are three types: simple, linear and exponential.
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Moving averages help technical traders smooth out some of the noise that is found in dayto-day price movements, giving traders a clearer view of the price trend.
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Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. There are two types: leading and lagging.
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The accumulation/distribution accumulation/distr ibution line is a volume indicator that attempts to measure the ratio of buying to selling of a security.
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The moving average convergence convergence divergence divergence (MACD) (MACD) is comprised comprised of of two two exponential exponential moving averages, which help to measure a security's momentum.
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The relative strength index (RSI) helps to signal signal overbought and oversold conditions conditions in a security.
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The stochastic oscillator compares a security's closing price to its price range over a given time period.
CHAPTER-4 A SAMPLE SURVEY
4.1 OBJECTIVES OF THE SURVEY
The survey has been carried out in order to find out:
Whether people invest in stock market?
How much returns one expects by investing in stock market?
Whether investors believe in Technical Analysis and/or Fundamental Analysis?
Do people use Technical Indicators at the time of investment decision-making?
Do Technical Analysis better than Fundamental Analysis as an indicator?
4.2 SAMPLE COMPOSITION
In all 34 persons were interview interviewed. ed. 4 out of them revealed revealed that they they don’t don’t have any interest in securities market. Therefore, those respondents were not considered for answering the questionnaire. The remaining 30 thereby formed the sample size of this survey. 1. Age Composition 20-30 16
30-40 12
40-60 2
More than 60 0
2. Occupation SelfEmployed 6
Salaried Student 15 7
Govt. Employee 0
Retire d 1
Others 1
3. Income Level (Per Month) Less Than Rs. 5,000 8
Rs. 5,000 to Rs. 10,000 14
4.3 OUTCOMES OF THE SURVEY
Rs. 10,000 to Rs. 25,000 3
Rs. 25,000 to Rs. 50,000 4
Rs.50,000 and Above 1
Following are the outcomes that have been revealed from the survey: 1. PEOPLE PEOPLE WH WHO O INVES INVEST T IN STO STOCK CK MARK MARKET ET
As a part of this study it was found that out of 30 people 22 people invest in stock market where as the rest 8 has no believe on the stock market.
Invest 22
Do not Invest 8
2. RETU RETURN RN EXP EXPEC ECTE TED D PER PER ANNU ANNUM M
Out of 22 people that invest in stock stock market, market, most of the investors investors i.e., i.e., 9 in number expect a return of 20-50 percent per annum, where as 8 investor expect a return of more than 50% p.a. 4 investors like 10-20 percent return per annum and there is a single person who is satisfied with an expected return of less than 10% p.a. Less Than 10% 1
10% 20% 4
20%50% 9
More Than 50% 8
3. STOCKS STOCKS IN WHICH WHICH INVESTO INVESTORS RS PREFER PREFER TO INVEST INVEST IN
Out of 22 investors, 14 investors used to invest in midcap stocks, 6 in blue-chips and not a single investor in penny shares. It indicates that most of the investors have a strong believe on midcap stocks. Blue Chip 6
Mid Cap 14
Penny Shares 0
All 2
4. INVEST INVESTORS ORS TRADIN TRADING G INTRAD INTRADAY AY
Out of 22 investors, investors, 13 investors practice intraday where as 9 don’t want to take much risk by doing intraday trading. Practice
Don't Practice
9
13
5. ANALYS ANALYSIS IS INVE INVESTO STORS RS BEL BELIEV IEVE E UPEN UPEN
It was revealed that a major portion of the investors believe in both Technical Analysis as well as in Fundament Analysis as 14 investors believe on both.
Fundamental Analysis 4
Technical Analysis 2
Both 14
None 2
6. INVEST INVESTORS ORS BEL BELIEV IEVE E ON DOW-TH DOW-THEOR EORY Y
An average number of investors believe on the Dow-Theory i.e., 12 where as 10 do not. Use 10
Don't Use 12
7. TYPE TYPE OF CHART CHART USE USED D BY INVEST INVESTORS ORS
Thee Candl Th Candle-s e-stic tick k chart chart is very very pop popul ular ar by invest investors ors while while analy analyzi zing ng the marke markett condition as 6 out of 22 investors rely on that. The major thing is that 6 investors believe on all the four types of charts where as 2 investor never use any of the charts to analyze.
Line Chart 5
Bar Chart 1
Candle Stick Chart 6
Point & Figure Chart 2
All 6
Non 2
8. INVEST INVESTORS ORS TRADE TRADE IN IN DERIV DERIVATI ATIVES VES
Relatively more than the average investors used to invest in derivative instruments as 14 love to invest in derivatives out of 22. Trade 14
9.
Don't Trade 8
TYPE OF DERIVATIVE INVESTORS INVEST IN
Out of 14 investor those invest in derivatives, most of the investors like to invest in Index options as compared to other derivative derivative instruments. The statistics statistics shows that, out of 14
investors trading in derivatives, 5 invest in Index Options, 3 in Stock Options, one in Stock Futures and one in Index Futures. 4 investors invest in all the four types of derivatives. Index Futures 1
10.IS
Index Options 5
TECHNI CHNICA CAL L
Stock Futures 1
ANAL ANALYS YSIS IS
AN
Stock Options 3
INDI NDICATO CATOR R
FOR FOR
All 4
INVES NVESTM TME ENT
DECISION-MAKING DECISION-MAKING ?
From the study, it was found that out of 30 people 19 treat the Technical Analysis as an indicator for investment decision making but 9 people did not agree on that. Some 2 people were unable to decide whether Technical Analysis is an indicator or not. In Favour 19
Against 9
Can't Say 2
As most of the people have the opinion that Technical Analysis indicates the market behavior, it can be accepted that Technical Analysis is an indicator for investment decision making. 5.4 OPINION OF THE INVESTORS
Durin During g the the surve survey, y, differ different ent invest investors ors have have shar shared ed diffe differen rentt view viewss regard regarding ing investment. investment. The discussions and question answer sessions with them revealed lots of practical trading and investing strategies that can help one to take appropriate investment decisions at the right time and at the right way. Some of the most discussed and suggested tips of investment and day-trading are as follows: 1. Check buying volumes
Before buying check out the buying and selling quantity (volumes). If buying volume started increasing then the stock may go up and if selling volumes start increasing the stock price may come down. 2. Check derivative status If poss possib ible le try try to chec check k out out the the deri deriva vati tive ve of the the stoc stock k whic which h you you want want to trad trade. e. If derivative of that particular stock is going up with increasing increasing buying volumes then you can immediately grab (buy) that share/stock. Most of the time it is seen that, if the derivative price goes up, then its share price also goes up. 3. Wait for the target price to buy For example, if buy is given at 150.5 then don’t buy below this price, only buy at 150.5 price or slightly higher than price. Because the given buy price may be the resistance price, if it breaks then share price goes up or else may not go up above 50.5. So plan to buy at given targeted price, don’t buy below target price. 4. Strictly maintain Stop Loss
Strictly maintain the given stop losses. This will help you to minimize your further losses. Suppose for moment the share you bought falls drastically down, then you may end up with huge loss. So always maintain given stop loss. “Stop Loss will reduce your loss”. 5. Down wait for huge profit in single share/trade If you are getting some profit and if you notice that is not further moving up (it’s called consolidation) then you can sell your share/stock and come out of that trade. In this manner, you can earn small profit instead of loss then you can do another trade and again earn small profit. Likewise if you keep earning couple of small profits in a single day then all your small profits will add up to huge profit amount in a single day. “Get satisfied in small profit and do multiple trades”. 6. Don't Overtrade
First and very important is not to Overtrade - Never put all your money/savings in share market. Most of the brokers provide margin amount but it is up to you how to make use of this margin amount. Most of the traders make use of this margin amount for over trading which is risky. 7. Wait, Watch and Trade Do not jump in market early. Wait, watch and trade. Confirm the market direction and make sure and confirm all your strategies like resistance and support levels and then plan to trade. 8. Study tips carefully Do not react to tips given by anyone - First observe that stock, check the volume, where they are increasing increasing or decreasing and then decide decide your trade. Do not buy or sell blindly blindly based on share tips. Most of the share tips do not work if market direction changes. 9. Always go with Market trend Don’t short sell, if the market is going up and don’t buy if the market is falling down. Trade with market direction and don’t go against market direction. 10. Try to minimize your Loss and increase profit Get ready to accept loss if you do wrong trade - Come out of your trade if you have entered in wrong time by accepting accepting loss instead of waiting waiting for trade to reverse and finally it is coming down from top means it is cooling, if you see more buyer than seller then you can hold your position. You must know which share has what momentum, means if the share price is Rs.120 then you can expect upside from Rs.1 to 5 and not Rs.50 to 100. If the scrip is going up, it will go in ladder fashion, it will go up and it will come down bit and it will again continue its upward journey. 12. Wait for opportunity If you are not sure about market movement then watch and wait for opportunity don’t trade forcefully. Some times market move in range bound means market move up-down in very small range at that time it becomes very difficult to judge the market direction and do intraday trading. Its always better to wait instead of losing money.
13. Don’t expect too much Don’t expect too much - Be happy in whatever profit you get, don’t try to grab too much from market. Be realistic, and don’t expect too much. It can be remembered that while doing day trading, you should square off your positions with appropriate profit instead of waiting for big profit.
14. Advice for high returns Lack of Knowledge is very risky and very dangerous, so don’t do trading or investing without having proper knowledge. Read books, refer websites and get prepared before you plan for share market trading or investing.
CHAPTER-5 FINDINGS AND SUGGESTIONS 5.1 FINDINGS:
From this study one can able to extract out the fundamental aspects of Technical Analysis as well as its applicability. Some of the major findings of the study are mentioned below: 1) Unlike Fundament Fundamental al Analysis, Analysis, Technical Technical Analysis Analysis is also very very much important important to play play in the stock market. 2) Fundame Fundamental ntal Analysi Analysiss tells tells about about “right choice” choice” where as Technical Technical Analysi Analysiss tells tells about the “right time” to enter or exit from the market. 3) Tech Technic nical al Analys Analysis is assume assumess that that histo history ry tends tends to repeat repeat itself itself,, but it is not wise wise to believe that the same trend will occure next. 4) Support and and Resistance Resistance levels are are the levels levels at which a lot of traders traders are willing willing to buy buy the stock or sell it. So, an investor has to keep its eyes and ears open at this point of time. 5) Among Among the various various types of charts charts the Candle-St Candle-Stick ick Chart Chart is the most effect effective ive and acceptable tool to evaluate the performance of a stock and forecast the future. 6) When an investo investorr looks in to the numerou numerouss types of chart chart patterns patterns,, it creates creates a lot of confusion and expectations in the minds of the investors. 7) The Moving Moving Average Average Convergen Convergence ce Divergenc Divergencee (MACD) (MACD) is the most well well known and used indicator in Technical Analysis as it is based on real facts of past performance. 8) In trading, trading, volumes volumes have equal equal importance importance along along with price to confirm the the formulation formulation of a trend or a technical pattern. With the help of volumes we can easily determine whether the demand side is greater or supply side is greater for stocks at any given point of time. 9) In Bhubanesw Bhubaneswar, ar, most most of the investors investors are risk-aver risk-averse se in nature. nature. People hesita hesitate te to invest in derivatives by taking much risk. 10) Most of the investors investors are not aware of the sophistic sophisticated ated and well well designed designed tools of technical analysis. They invest without going through the technical analysis. 11) Th Thoug ough h Tech Technic nical al Anal Analys ysis is plays plays a lion’ lion’ss role role to decide decide inves investm tment ent patte pattern rn as Fundamental Analysis, it cannot be treated as a substitute to Fundamental Analysis.
5.2 SUGGESTIONS:
By going through the subject matter, analysis, opinion of the respondents and the findings, the following points can be suggested for the purpose of further reference and implementation:
1) Tech Technic nical al analys analysis is is a game game of charts charts and figure figures. s. So, at the time of taking taking any decision regarding investment, investment, Fundamental Analysis and other factors should also be taken in to consideration along with Technical Analysis. 2) Instead of looking looking in to all all chart patterns, patterns, it is is good to follow follow a single chart chart pattern pattern and to draw timely conclusion by interpreting that. 3) Market Market never never tells tells anythi anything ng of its its own! own! It’s It’s the the invest investor or who has to look in to the the market and catch up the indicator to forecast and expect the market trend. 4) Most of the invest investors ors assume assume that that by using charts charts and pattern patterns, s, they can can earn much by purchasing in low and selling at high prices. But, it is not so easy as they think. So, such believes should be rooted out from mind before looking towards market. 5) As we have a globalise globalised d market, market, along with with the domesti domesticc market market the performan performance ce of the overseas markets should also be considered and the help of modern financial instruments should be taken to reduce risk and maximize the probability of gaining more. 6) And, as per Apollo Apollo Sindhoori Sindhoori Capital Capital Investments Investments Ltd. Ltd. Is concerned, concerned, there there is an an ample scope to expand and increase its revenue in this post-recession-recover post-recession-recovering ing market. So, the organisation has to look in to its service-providing-skills and problems to attract more customers customers in the market. market. Although it has a good brand name, still it has to go for optimum advertisement and well skilled human resources.
5.3 CONCLUSION:
A large number of new investors think that there is easy and quick money in investing and day trading. They think that they can buy at bottoms and sell at tops very easily. They thing that since they can analyse the chart patterns and use technical analysis very well, they can trade consistently with 90% accuracy. They think that they can invest small amount and trade for large amounts to earn big profits by utilizing multiple exposure on their margin amount and fail to understand understand the real market behavior. They fail to understand that investing
is not like like “GO… “GO….. ..ST STOP OP”” game. game. Here, Here, only only disci discipl pline ined d invest investors ors well well equipp equipped ed with with sophisti sophisticate cated d technic technical al tools tools having having presence presence of mind mind can sustain and make the indices indices favourable for them irrespective of market trends whether bull or bear. The only thing that matters in investment is “Right Time and Right Choice” which can be tamed through proper analysis and understanding of the whole game as the NSE has rightly narrated….
“ SOCHKAR, SAMAJHKAR, INVESTKAR” BIBLIOGRAPHY:
1. Bhat Bhat,, Sudh Sudhin indr dra: a: Security Analysis And Portfolio Management , Excel Books, First Edition, 2008 2. Sing Singh, h, Pree Preeti ti:: Investment Management , Himalaya Publishing House, 14th Edition, 2006 3. Chan Chandr dra, a, Pras Prasan anna na:: Investment Analysis And Portfolio Management , Tata Mcgraw Hill Pub. Co. Ltd. 4. Fischer, Fischer, Donald Donald E. E. and and Jordan, Jordan, Ronald Ronald T.: T.: Security Analysis And Portfolio Management , Pearson, Prentice Hill, 16th Edition, 2006 WEBLIOGRAPHY:
To complete this study the following Internet portals have helped a lot: 1. www.moneybhai.com 2. www.moneycontrol.com 3. www.trending123.com 4. www.investopedia.com 5. www.sharevyapaar.com 6. www.nseindia.com 7. www.myiris.com 8. www.wikipedia.com 9. www.metastock.com 10. www.findarticles.com
11. www.tradestati www.tradestation.com on.com 12. www.stockcharts.com 13. www.traderslog.com 14. www.learningmarkets.com 15. www.thismatter.com
APPENDIX: QUESTIONNAIRE FOR THE SURVEY
1.
Name Name of the Respo Responde ndent: nt:___ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ____ _
2.
Cont Contac actt Numb Number er:_ :___ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ___ _
3.
Age:
4.
5.
a)20-30Yrs
b)30-40Yrs
c)40-60Yrs
d)60Yrs & Above
Sex: Sex: Male Male/F /Fem emal alee
Occupation: a)Self-employed
b)Salaried
c)Student
d)Govt. Employee
e)Retired
f)Others
a)Less th than Rs Rs.5000
b)Rs.5000-Rs.10000
c)Rs.10000-Rs.25000
d)Rs.25000-Rs.50000
Income Level:
e)Rs.50000 & Above 6.
Do you invest in stock market?
7.
If ye yes, how how much uch money ney you hav have in invest vesteed?
( Y e s/ N o )
Rs.____________________ 8.
How How much much retu return rn you expe expect ct from from your your inve invest stm ment? ent? Rs.____________________
9.
How many years you have experienced in stock market?
_ __ __ _ _
10.
Which stocks you prefer to invest in? a)Blue Chip
b)Midcap
11.
Do you practice Short-selling or Intraday?
12. 12.
Which analysis sis you you beli elieve upo upon? n?
c)Penny Shares ( Y e s/ N o )
a)Fundamental c)Both 13. 13.
If you beli believ evee on on Tec Techn hnic ical al Analy nalysi sis; s;
a)
Do you use Dow Theory?
b) b)
Whic Which h ty type of char chartt you you pre prefe ferr for for anal analy ysis? sis?
13.
b)Technical d)None
( Y e s/N o )
i) Line Chart
ii)Bar Chart
iii)Candle St Stick Ch Chart
iv)Point &F &Figure Ch Chart
Do you trade in Derivatives?
( Y e s/ N o )
If yes; yes; in which section? a)Stock Futures
b)Stock Options
c)Index Futures
d)Index Options
14. Do you think Technical Technical Analysis is better than Fundamental Analysis? Analysis? (Yes/No) 15. Do you treat Technical Analysis as a compass to forecast and foresee the right direction of the stock market?
( Y e s/N o )
Signature of the Respondent Date:
