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SAPM ASSIGNMENT

SUBMITTED BY: NEERAJ NAMAN MBA (GEN), 2013 A-37 SAPM-2

Question: - How to interpret the share market with

Volume indicators

Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move. When volume is low, but gains and losses are big, the professionals tend to get overly excited about a possible turn in market direction. Volume is the indicator at which chartists constantly look to determine whether or not a move in the markets, a sector or a single issue, has conviction. It simply indicates enthusiasm or lack thereof for an issue and it has nothing to do with the price. To confirm a market turnaround or trend reversal, the technical analyst must determine whether or not the measurements of price and volume momentum agree with each other. If they do not, it is a sure indicator of weakness in the trend, and thus a trend reversal may be well on the horizon.

Market breadth
A technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. Positive market breadth occurs when more companies are moving higher than are moving lower, and it is used to suggest that the bulls are in control of the momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum. A large number of advancing issues is a sign of bullish market sentiment and is used to confirm a broad market uptrend. Traders will specifically look at the number of companies that have created a 52-week high relative to the number that created a 52-week low because this data can provide longer term information about whether the bullish or bearish trend will continue

Market thickness
It is the difference between ask and bid price. More thickness means there are more chances of trading. Market thickness is basically the difference between the price that has been bid by the buyer and the price at which the seller wants to sell the stock. For example: If the buyer wants to buy a stock at the price of Rs.1000 per share and the seller is ready to sell it at the price of Rs.1010 per share. Therefore, the difference of Rs.10 is the market thickness. Therefore, if there is more number of buyers in the market than the sellers, the market will go up and vice versa. This concept is based on the traditional concept of demand and supply on which the stock market is based i.e. when demand is more than supply the price will rise.

Thin Market A market with a low number of buyers and sellers is called a thin market. Since few transactions take place in a thin market, prices are often more volatile and assets are less liquid. The low number of bids and asks will also typically result in a larger spread between the two quotes. A thin market has high price volatility and low liquidity. If supply or demand changes abruptly, resulting in more buyers than sellers or vice versa, there will typically be a material impact on prices. Since few bids and asks are quoted, potential buyers and sellers may find it difficult to transact in a thin market. Thick Market A thick market occurs when there is high volume of trading on a particular exchange. When a market is thick, transactions that occur on the exchange will be very similar in price. Market thickness (which is an index of demand) matters in determining quality only up to a certain level. It acts as an additional discount factor in evaluating the future when the buyer to seller ratio is relatively low

Market Considerations People should be cautious when buying thin stocks because they may be harder to sell in the future. If a market is thin, this indicates a lack of investor confidence in the market. Since the stock market is based on investor expectations and leads economic activity, a thin stock market often means that a market slowdown is on the horizon.

Moving averages
Technical analysis has been around for decades and through the years, traders have seen the invention of hundreds of indicators. While some technical indicators are more popular than others, few have proved to be as objective, reliable and useful as the moving average. Moving averages come in various forms, but their underlying purpose remains the same: to help technical traders track the trends of financial assets by smoothing out the day-to-day price fluctuations, or noise By identifying trends, moving averages allow traders to make those trends work in their favor and increase the number of winning trades. Some of the primary functions of a moving average are to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. 1) Trend Identifying trends is one of the key functions of moving averages, which are used by most traders who seek to "make the trend their friend". Moving averages are lagging indicator, which means that they do not predict new trends, but confirm trends once they have been established. As it is given in Figure 1, a stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend.

Figure 1 2) Momentum If one pays close attention to the time periods used in creating the average, as each time period can provide valuable insight into different types of momentum. In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 20 days or less. Looking at moving averages that are created with a period of 20 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum. A 15-day moving average is a more appropriate measure of short-term momentum than a 200-day moving average. One of the best methods to determine the strength and direction of an asset's momentum is to place three moving averages onto a chart and then pay close attention to how they stack up in relation to one another. The three moving averages that are generally used have varying time frames in an attempt to represent short-term, medium-term and long-term price movements. In Figure 2, strong upward momentum is seen when shorter-term averages are located above longer-term averages and the two averages are diverging. Conversely, when the shorter-term averages are located below the longer-term averages, the momentum is in the downward direction.

Figure 2

3) Support Another common use of moving averages is in determining potential price supports. The falling prices of an asset will often stop and reverse direction at the same level as an important average.

Figure 3 In Figure 3 you can see that the 200-day moving average was able to prop up the price of the stock after it fell from its high near $32. Many traders will anticipate a bounce off of major moving averages and will use other technical indicators as confirmation of the expected move. 4) Resistance Once the price of an asset falls below an influential level of support, such as the 200-day moving average, it is not uncommon to see the average act as a strong barrier that prevents investors from pushing the price back above that average. As it is clear from the chart below, this resistance is

often used by traders as a sign to take profits or to close out any existing long positions. Many short sellers will also use these averages as entry points because the price often bounces off the resistance and continues its move lower.

Figure 4 5) Stop-Losses The support and resistance characteristics of moving averages make them a great tool for managing risk. The ability of moving averages to identify strategic places to set stop-loss orders allows traders to cut off losing positions before they can grow any larger.

Figure 5 As it is clear in Figure 5, traders who hold a long position in a stock and set their stop-loss orders below influential averages can save themselves a lot of money. Using moving averages to set stoploss orders is key to any successful trading strategy.

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