PART-B CHAPTER-1

THEORITICAL BACKGROUND INTRODUCTION: What is TECHNICAL ANALYSIS?

Technical analysis involves a study of market generated data like prices and volumes to determine the future direction of price movement. In his book Technical Analysis Ex-plained, Martin.J.Pring explains; The technical approach to investing is essentially a reflection of the idea that prices move in trends which determined by the changing attitudes of investors toward a variety of economic, monetary, political and psychological forces. The art of technical analysis-for it is and art-is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has been reversed. Basic Premises The basic premised underlying technical analysis, as articulated by

Robert.A.Levy, is as follows. 1. Market prices are determined by the interaction of supply and demand forces. 2. Supply and demand are influenced by a variety of factors, both rational and irrational. These include fundamental factors as well as psychological factors. 3. Barring minor deviations, stocks prices tend to move in fairly persistent trends. 4. Shifts in demand and supply bring about changes in trends. 5. Irrespective of why they occur, shifts in demand and supply can be detected with the help of charts of market action. 6. Because of the persistence of trends and patterns, analysis of past market data can be used to predict future price behavior.

Differences between Technical Analysis and Fundamental Analysis. The key differences between technical analysis and fundamental analysis are as follows; 1. Technical analysis mainly seeks to predict short-term price movements, whereas fundamental analysis tries to establish long-term values.

2. The focus of technical analysis is mainly on internal market data, particularly price and volume data. The focus of fundamental analysis is on fundamental factors relating to the economy, the industry, and the firm.

3. Technical analysis appeals mostly to short-term traders, whereas fundamental analysis appeals primarily to long-term investors.

PROBLEM STATEMENT Technical analysis is very important to invest smartly. every investor would like to have handful information to decide : On what type of security to invest? When it should be bought? When it should be sold? Whether to hold the security?

The basic idea behind the research is to make buy, hold and sell decisions of stocks. To make this decision one should have sound information base. The increasing trend towards complexity in investment decisions calls for security analysis.

OBJECTIVE OF THE STUDY The objectives of the study are stated as under:1. To study the applicability of technical analysis in stock market 2. To know how various tools of technical analysis such as charts and graphs are Used in determining stocks prices. To make buy, hold or sell decisions. 3. To know how to use charting techniques to identify, buy and sell opportunities. 4. To study the Indian IT sectors stock movement taking sample of five IT companies.

SCOPE OF THE STUDY The study mainly focuses on guiding investors on making buy, hold and sell decisions by determining the pattern of price movement through technical analysis. The analysis is confined only to four companies listed on the National Stock Exchange (NSE) namely, 1. 2. 3. 4. Infosys Technologies Ltd., Tata Consultancy Services Ltd., Tech Mahindra Ltd., Wipro Ltd.,

RESEARCH METHODOLOGY Descriptive research design is adopted to learn in detail the technical analysis to predict the short term price movements and establish long term patterns. Quantitative techniques are used to analyze the technical indicators. Sample size taken is four Companies namely Infosys Technology, Wipro, Tech Mahindra Ltd., and Tata Consultancy Services. The four companies are listed on the NSE. Secondary data is collected from Books, Journals, News Paper and Web Sites.

The data collected is then analyzed using the following methods:1. Moving Average Convergence Divergence.

The closing prices are taken into consideration and the short term exponential moving average and the long term exponential following formulae :EMAS EMAL = = EMASn-1 EMALn-1 + + ((2 ((2 / / (n (n + + 1)) 1)) * * (Pn (Pn EMASn-1)) EMALn-1)) moving average are calculated using the

MACD = EMAS EMAL The signal line is calculated by taking the exponential moving average of the MACD. 2. Relative Strength Index (RSI).

The RSI also considers the closing price and is calculated as follows: RSI = 100 100/(1 + RS) RS = Average Gain / Average Loss Average Gain = Total of Gains during past 14 periods / 14 Average Loss = Total of Losses during past 14 periods / 14

3. Rate of Change Indicator (ROC).

To calculate the seven day rate of change, each days price which prevailed seven days ago and then one is subtracted from this price ratio. ROC = (Current price / Price 7 period ago) 1.

5. Money Flow Index The data require for money flow index are Day high, Day low, Day close and the volume traded per day. MFI is calculated using the following formulae: Typical Price = (Day high + Day low + Day close) / 3 Money Flow = (Typical Price) X Volume Money Ratio = positive money flow / Negative money flow Finally, the MFI can be calculated using this ratio: Money Flow Index- 100-(100 / (1 + money ratio))

LIMITATIONS OF THE STUDY . The limitations of the study are as enumerated below:1. The study limits to use of only few technical tools like MACD, RSI, MFI, ROC,

Bollinger Bands and Candlestick Charts. 2. The study is purely of academic interest with no experience in the field makes it

less precise and non-professional. 3. As technical analysis involves collection, presentation and interpretation of voluminous data it becomes very difficult to concise the analysis. 4. 5. The data used for the analysis pertains to six to eight months only. Each method provides its own unique interpretation, with its own benefits and

drawbacks. Hence it is difficult to conclude by just considering two or three technical indicators.

THEORITICAL REFERENCE TO TECHNICAL ANALYSIS: DOW THEORY: Dow Theory is a heterodox theory on stock price movements that is used as the basis for technical analysis. The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (18511902), journalist, founder and first editor of the Wall Street Journal and co-founder of Dow Jones and Company. Following Dow's death, William P. Hamilton, Robert Rhea and E. George Schaefer organized and collectively represented "Dow Theory," based on Dow's editorials. Dow himself never used the term "Dow Theory," nor presented it as a trading system. The six basic tenets of Dow theory as summarized by Hamilton, Rhea, and Schaefer are described below. Six basic concepts of Dow Theory 1. The market has three movements (1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement. 2. Trends have three phases Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing

(releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3). 3. The stock market discounts all news Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow theory agrees with one of the premises of the efficient market hypothesis. 4. Stock market averages must confirm each other In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverges, it is a warning that change is in the air. 5. Trends are confirmed by volume Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. However, when price movements are accompanied by high volume, Dow believed this represented the "true" market view. If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained

that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing. 6. Trends exist until definitive signals prove that they have ended Dow believed that trends existed despite "market noise". Markets might temporarily move in the direction opposite the trend, but they will soon resume the prior move. The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Technical analysis tools attempt to clarify this but different investors can interpret them differently. 1.2 ELLIOT WAVE THEORY R. N. Elliott believed markets had well-defined waves that could be used to predict market direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series (1-2-3-5-8-13-21). According to the Elliott Wave Theory, stock prices tend to move in a predetermined number of waves consistent with the Fibonacci series. Specifically, Elliott believed the market moved in five distinct waves on the upside and three distinct on the downside. The basic shape of the wave is shown below.

Waves one, three and five represent the 'impulse', or minor up-waves in a major bull move. Waves two and four represent the 'corrective,' or minor down-waves in the major bull move. The waves lettered A and C represents the minor down-waves in a major bear move, while B represents the one up-wave in a minor bear wave. Elliott proposed that the waves existed at many levels, meaning there could be waves within waves. To clarify, this means that the chart above not only represents the primary wave pattern, but it could also represent what occurs just between points 2 and 4. The diagram below shows how primary waves could be broken down into smaller waves.

Elliott Wave theory describes names to the waves in order of descending size: 1. Grand Supercycle 2. Supercycle 3. Cycle 4. Primary 5. Intermediate 6. Minor 7. Minute 8. Minuette 9. Sub-Minuette

The major waves determine the major trend of the market, and minor waves determine minor trends. This is similar to the way Dow Theory postulates primary and secondary trends. Elliott provided numerous variations on the main wave, and placed particular importance on the golden mean, 0.618, as a significant percentage for retrenchment. Trading using Elliott Wave patterns is quite simple. The trader identifies the main wave or Super cycle, enters long, and then sells or shorts, as the reversal is determined. This continues in progressively shorter cycles until the cycle completes and the main wave resurfaces. The caution to this is that much of the wave identification is taken in hindsight and disagreements arise between Elliott Wave technicians as to which cycle the market is in. 1.2 TOOLS OF TECHNICAL ANALYSIS: (Charting basics)

1.2.1 What Are Charts? A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as time series plots.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right. The price plot for IBM extends from January 1, 1999 to March 13, 2000.

Technicians, technical analysts and chartists use charts to analyze a wide array of securities and forecast future price movements. The word "securities" refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures or market indices. Any security with price data over a period of time can be used to form a chart for analysis. While technical analysts use charts almost exclusively, the use of charts is not limited to just technical analysis. Because charts provide an easy-to-read graphical representation of a security's price movement over a specific period of time, they can also be of great benefit to fundamental analysts. A graphical historical record makes it easy to spot the effect of key events on a security's price, its performance over a period of time and whether it's trading near its highs, near its lows, or in between. 1.2.2 How to Pick a Time Frame? The time frame used for forming a chart depends on the compression of the data: intraday, daily, weekly, monthly, quarterly or annual data. The less compressed the data is, the more detail is displayed.

Daily data is made up of intraday data that has been compressed to show each day as a single data point, or period. Weekly data is made up of daily data that has been compressed to show each week as a single data point. The difference in detail can be seen with the daily and weekly chart comparison above. 100 data points (or periods) on the daily chart is equal to the last 5 months of the weekly chart, which is shown by the data marked in the rectangle. The more the data is compressed, the longer the time frame possible for displaying the data. If the chart can

display 100 data points, a weekly chart will hold 100 weeks (almost 2 years). A daily chart that displays 100 days would represent about 5 months. There are about 20 trading days in a month and about 252 trading days in a year. The choice of data compression and time frame depends on the data available and your trading or investing style.

Traders usually concentrate on charts made up of daily and intraday data to forecast shortterm price movements. The shorter the time frame and the less compressed the data is, the more detail that is available. While long on detail, short-term charts can be volatile and contain a lot of noise. Large sudden price movements, wide high-low ranges and price gaps can affect volatility, which can distort the overall picture.

Investors usually focus on weekly and monthly charts to spot long-term trends and forecast long-term price movements. Because long-term charts (typically 1-4 years) cover a longer time frame with compressed data, price movements do not appear as extreme and there is often less noise.

Others might use a combination of long-term and short-term charts. Long-term charts are good for analyzing the large picture to get a broad perspective of the historical price action. Once the general picture is analyzed, a daily chart can be used to zoom in on the last few months.

1.3

TYPES OF CHARTS We will be explaining the construction of line, bar, candlestick and point & figure charts.

Although there are other methods available, these are 4 of the most popular methods for displaying price data. 1.3.1 Line Chart

Some investors and traders consider the closing level to be more important than the open, high or low. By paying attention to only the close, intraday swings can be ignored. Line charts are also used when open; high and low data points are not available. Sometimes only closing data are available for certain indices, thinly traded stocks and intraday prices. 1.3.2 Bar Chart Perhaps the most popular charting method is the bar chart. The high, low and close are required to form the price plot for each period of a bar chart. The high and low are represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar. On a daily chart, each bar represents the high, low and close for a particular day. Weekly charts would have a bar for each week based on Friday's close and the high and low for that week.

Bar charts can also be displayed using the open, high, low and close. The only difference is the addition of the open price, which is displayed as a short horizontal line extending to the left of the bar. Whether or not a bar chart includes the open depends on the data available.

1.3.3 Japanese Candlestick Chart Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For a candlestick chart, the open, high, low and close are all required. A daily candlestick is based on the open price, the intraday high and low, and the close. A weekly candlestick is based on Monday's open, the weekly high-low range and Friday's close.

Many traders and investors believe that candlestick charts are easy to read, especially the relationship between the open and the close. White (clear) candlesticks form when the close is higher than the open and black (solid) candlesticks form when the close is lower than the open. The white and black portion formed from the open and close is called the body (white body or black body). The lines above and below are called shadows and represent the high and low. 1.3.4 Point & Figure Chart The charting methods shown above, all, plot one data point for each period of time. No matter how much price movement, each day or week represented is one point, bar, or candlestick along the time scale. Even if the price is unchanged from day to day or week to week, a dot, bar, or candlestick is plotted to mark the price action. Contrary to this methodology, point & figure

Charts are based solely on price movement, and do not take time into consideration. There is an x-axis but it does not extend evenly across the chart.

The beauty of point & figure charts is their simplicity. Little or no price movement is deemed irrelevant and therefore not duplicated on the chart. Only price movements that exceed specified levels are recorded. This focus on price movement makes it easier to identify support and resistance levels, bullish breakouts and bearish breakdowns. This P&F article has a more detailed explanation of point & figure charts. 1.4 TREND LINES Technical analysis is built on the assumption that prices trend. Trend Lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. Many of the principles applicable to support and resistance levels can be applied to trend lines as well. 1.4.1. UPTREND

An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net-demand (demand less supply) is increasing even as the price rises. A rising price combined with increasing demand is very bullish, and shows a strong determination on the part of the buyers. As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent.

1.4.2 DOWN TREND A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.

1.4.3 SIDEWAYS TREND The sideways trend is also known as a trend less, ranging or flat market. Though similar to the other two types, the sideways trend shows no major difference in the price values between the beginning and the end of a specific time period. The sideways trend denotes market conditions in which prices may be moving back and forth between levels of support and resistance (covered next).

1.5

CHART PATTERNS When the price bar charts of several days are drawn close together, certain patterns

emerge. The patterns are used by technical analysts to identify trend reversals and predict the future movements of prices. The chart patterns may be classified as support and resistance, reversal patterns and continuation patterns. 1.5.1 SUPPORT AND RESISTANCE Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying.. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and

prevent

the

price

from

falling

below

support.

Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level. Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.

Calculating the support and resistance levels: All of the support and resistance levels are calculated off the pivot point. The pivot point is always the start of these calculations. The classic formulae shown below will allow you to calculate the most common support and resistance levels. Calculating Pivot Points The Classic Formulae PP=(HIGH+LOW+CLOSE)/3 S1=(2*PP)-HIGH S2=PP-RANGE S3=S2-RANGE R1=(2*PP)-LOW R2=PP+RANGE R3 = R2 + RANGE The classic calculation for the pivot point is pathetically simple. It's the average of the high, low, and close for the previous day. This classic formula uses the high, low and close from the pit traded session which is also commonly know as the Regular Trading Hours (RTH) session. This time period is used because when pivots were first created this is what the floor traders used. There are now many variations on this formula. All of the variations that I've seen involve an average of a set of prices that include a combination of yesterday's open/high/low/close and today's open. If you limit the input to those 5 figures then there will be a finite number of ways that you can calculate a pivot point based on all the permutations of those 5 figures that you can come up with. Support and resistance are like mirror images and have many common characteristics. 1.5.2 TREND REVERSAL PATTERNS

Price movements exhibit up trends and down trends. The trends reverse directions after a period of time. The reversals can be identified with the help of certain chart formations that typically occur during these trend reversals. Thus reversal patterns are chart formations that tend to signal a change in direction of the earlier trend.

1.5.2.1 HEAD AND SHOULDERS

A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline.

There is a chance that even after there is a break of the neckline that the trend may not reverse. A good validation of a reversal would be if the break is significant or if the neckline is tested and it turns from support to resistance. In addition, a trader should look and see if momentum was higher during the formation of the left shoulder compared to the right shoulder, as this would indicate that buying pressure is decreasing and a true reversal pattern is taking place. During a true head and shoulders reversal, the downward move can be expected to be equal to the distance from neckline to head.

Here is an example of a head and shoulders pattern on a daily chart using the CNET/ NASDAQ. 1.5.2.2 HEAD AND SHOULDER BOTTOM The Head and Shoulders bottom is referred to sometimes as an Inverse Head and Shoulders. The pattern shares many common characteristics with its comparable partner, but relies more heavily on volume patterns for confirmation.

As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower.

Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a neckline.

The price action forming both Head and Shoulders Top and Head and Shoulders Bottom patterns remains roughly the same, but reversed. The role of volume marks the biggest difference between the two. Generally speaking, volume plays a larger role in bottom formations than top formations. While an increase in volume on the neckline breakout for a Head and Shoulders Top is welcomed, it is absolutely required for a bottom.

1.5.2.3 DOUBLE TOP

The double top is a major reversal pattern that forms after an extended uptrend. As its name implies, the pattern is made up of two consecutive peaks that are roughly equal, with a moderate trough in-between.

Although there can be variations, the classic double top marks at least an intermediate change, if not long-term change, in trend from bullish to bearish. Many potential double tops can form along the way up, but until key support is broken, a reversal cannot be confirmed. 1.5.2.4 DOUBLE BOTTOM

The double bottom is a major reversal pattern that forms after an extended downtrend. As its name implies, the pattern is made up of two consecutive troughs that are roughly equal, with a moderate peak in-between.

A lth oug h the re can be var iati ons , the cla

ssic double bottom usually marks an intermediate or long-term change in trend. Many potential double bottoms can form along the way down, but until key resistance is broken, a reversal cannot be confirmed.

1.5.2.5 Triple Tops / Triple Bottoms In the typical triple top formation, each one of the heads is about the same size. A line of resistance can be drawn connecting the three tops. A neckline should be drawn connecting the support levels. After the third head, price falls below the neckline. The market may rebound for a short attempt at breaking back past the neckline only to be followed by the start of a new downward trend.

1.5.2.6 Rounded Tops/ Rounded Bottoms Another variation of the shape a top and bottom can take is one in which the reversal is "rounded". The rounded top formation forms when the market gradually yet steadily shifts from a bullish to bearish outlook while in the case of a rounded bottom, from bearish to bullish. The prices take on a bowl shaped pattern as the market slowly and casually changes from an upward to a downward trend.

1.5.3 CONTINUATION PATTERNS There are certain patterns which tend to provide a breathing space to the earlier sharp rise or fall and after the completion of these patterns, the price tends to move along the original trend. These patterns are formed during sideway movements of share prices and are called continuation patterns because they indicate a continuation of the trend prevailing before the formation of the pattern.

1.5.3.1 ASCENDING TRIANGLE The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. There are instances when ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. Regardless of where they form, ascending triangles are bullish patterns that ate accumulation.

1.5.3.2 DESCENDING TRIANGLE The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.

Because of its shape, the pattern can also be referred to as a right-angle triangle. Two or more comparable lows form a horizontal line at the bottom. Two or more declining peaks form a descending trend line above that converges with the horizontal line as it descends. If both lines were extended right, the descending trend line could act as the hypotenuse of a right triangle. If a perpendicular line were drawn extending up from the left end of the horizontal line, a right triangle would form.

1.5.3.3 SYMMETRIC TRINGLE A symmetrical triangle is indicative of a period of consolidation during an uptrend or a downtrend. The symmetrical triangle has a line of support that slopes upwards and a line of resistance that slopes downward. The triangle pattern yields to a breakout in the direction that corresponds with the trend beforehand, though not always.

1.5.3.4 FLAG, PENNANT Flags and Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move.

Flags are a type of short-term pause in the dynamic and progressive movement of a market trend. Flags are usually marked by a sharp, almost horizontal entry into the pattern. Flags are bound by parallel lines of support and resistance. The pattern is commonly followed by a sharp break back into the prevailing trend. Flags have a tendency to form slanted in the direction opposite to the major market trend they inhabit. On the right, is a flag that interrupts an uptrend. It is short lived, and there is a substantial breakout when price moves above the line of resistance. Below, is a flag pattern during a downtrend, which plays out in a long timeframe The consolidation phase lasts two months but does not turn into a new trend. The line of support is broken, ending the flag pattern and continuing the downtrend.

1.5.3.5 Rectangles A Rectangle is a period of consolidation within an existing trend where the price moves sideways, fluctuating between two horizontal lines before finally resuming its previous trended course. Such a pattern is not very significant to the trends future course a rectangle seldom accelerates the prevailing trend beyond its previous slope. Though not characteristic in determining any anomalous effects in the presiding trend, a rectangle pattern presents an opportunity to trade within, as one can open alternating positions as the price repeatedly bounces from support to resistance and back. A theoretical sketch of a rectangle in a downtrend and an uptrend is shown. An example is presented below. An uptrend that was started in September enters a period of consolidation in October. Price forms a rectangle pattern before the uptrend continues.

The rectangle indicates equal pressure being exercised by buyers and sellers and combat is indecisive until a breakout occurs. A rectangle therefore may be consolidation pattern or result in reversal.

One can predict the course of prices when a rectangle is being formed, but has to wait for the breakout. The breakout is definitely accompanied by a high volume. The measuring implication for a breakout is that prices should move out at least by a distance equal to the maximum distance between the boundaries of the rectangle.

By observing the graph, we can say that it is sideways movement. In rectangle we cannot predict the future movement. Until the break out occurs. We can observe high volume during the breakout.

The breakout from a rectangle is reliable as prices generally do not return to the rectangle. Even if the prices touch the boundary level, they generally do not penetrate the rectangle. So, it gives signal to sell or hold.

DATA ANALYSIS AND INTERPRETATION

Technical analysis: INFOSYS TECHNOLOGIES LTD., Infosys Technologies Limited is a multinational information technology services company headquartered in Bangalore, India. It is one of India's largest IT companies with 104,850 professionals (including subsidiaries) as of Mar 31, 2009. It has offices in 22 countries and development centers in India, China, Australia, UK, Canada and Japan. Infosys was founded on July 2, 1981 in Pune by N. R. Narayana Murthy and six others: Nandan Nilekani, N. S. Raghavan, Kris Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora, with Raghavan officially being the first employee of the company. Murthy started the company by borrowing INR 10,000 from his wife Sudha Murthy. The company was incorporated as "Infosys Consultants Pvt Ltd.", with Raghavan's house in Model Colony, north-central Pune as the registered office. In 1982, Infosys opened an office in Bangalore which soon became its headquarters. Infosys went public in 1993. Interestingly, Infosys IPO was undersubscribed but it was "bailed out" by US investment banker Morgan Stanley which picked up 13% of equity at the offer price of Rs. 95 per share. The share price surged to Rs. 8,100 by 1999 making it the costliest share on the market at the time. At that time, Infosys was among the 20 biggest companies by market capitalization on the Nasdaq well ahead of Adobe Systems, Novell and Lycos. According to Forbes magazine, since listing on the Bombay Stock Exchange till the year 2000, Infosys' sales and earnings compounded at more than 70% a year. In the year 2000, President of

the United States Bill Clinton complimented India on its achievements in high technology areas citing the example of Infosys. In 2001, it was rated Best Employer in India by Business Today. Infosys won the Global MAKE (Most Admired Knowledge Enterprises) award, for the years 2003, 2004 and 2005, being the only Indian company to win this award and is inducted into the Global Hall of Fame for the same. BusinessWeek reported that Infosys, along with Wipro and Tata accounted for nearly 80% of the [H-1B] visa petitions approved in 2007 for the top 10 participants in the program. In April 2009, Forbes rated Infosys among the 5 best performing companies in the software and services sector in the world. In 2009, Infosys was considered one of the BusinessWeek's 50 Most Innovative Companies. From December 2008 till April 2009, Infosys has fired over 2500 employees on account of bad performance. The company has been hit hard by lower revenue from a crisis hit European and North American market. On Aril 15, 2009 Infosys reported its first ever sequential fall in its revenue in a decade during the March 2009 quarter. [16] Infosys serves various industries through its Industrial Business Units (IBU), such as:

Banking & Capital Markets (BCM) Communications, Media and Entertainment (CME) Energy, Utilities and Services (EUS) Insurance, Healthcare and Life Sciences (IHL) Manufacturing (MFG) Retail, Consumer Product Goods and Logistics (RETL) New Markets and Services (NMS) : Non US and Non European markets, SaaS, Learning Services

India Business Unit (IND)

In addition to these, there are Horizontal Business Units (HBUs)

Consulting (CS) Enterprise Solutions (ES): ERP, CRM, HCM, SCM, BI/DW, BPM-EAI Infrastructure Management Services (IMS) Product Engineering and Validation Services (PEVS) Systems Integration (SI) Finacle : Core Banking Product

Moving Average Convergence and Divergence(MACD) MACD of Infosys

By the above graph buying opportunities can be identified when the MACD line crosses the Zero line from below. If MACD line moves above the zero line from below, the trend turned bullish and indicates a buying opportunity. In this graph we can find the buying opportunity is in the beginning of Feb & Aug 2012, when the MACD rises above the signal line, beginning of Feb & Aug this can be seen the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum, so it is time to buy and hold the shares of Infosys. By the above graph, selling opportunities can be identified when the MACD line crosses the Zero line from above. The chart depicts that this happened 4 times in the financial year. The MACD line Crosses the zero line is in the month of Feb,Apr,July,& Aug these were the selling opportunities in the Infosys stock scrip during the financial year 2011-2012. If the MACD line crosses the zero line from above, the trend can be considered to have bearish trend its indicates a selling opportunity. This we can see in the end of Apr12 and Aug 13. When the MACD falls below the signal line i.e. in Apr , it is a bearish signal, which indicates that it may be time to sell.

Relative Strength Index (RSI): RSI of Infosys

The above chart depicts the RSI or Relative Strength Index for different months starting from Jan 2012 to Dec 2012. When the RSI has crossed the 30 line from below to above and is rising, a buying opportunity is indicated, and we can see this signal is in the month of Apr 12 & Aug 12. The RSI line touches 30 line twice in the financial year 2011-12 its in the end of April and beginning of August, and its crossed 30 line twice in the month of May & August 2012 its indicating a buying opportunity. The RSI is always between 0 to 100. If the RSI crosses 70 then it is a strong sell signal and if it touches or crosses 30 then it is a strong buy signal. When it has crossed the 70 line from above to below and is falling, a sell signal is indicated. In this case it has touched 70 line Twice in calender year 2012 that is in Feb & Beginning of Oct2012 its indicating a selling opportunity.

Rate of Change Indicator (ROC): ROC of Infosys

When the ROC line is above the zero line, the price is rising its indicates a bullish trend. The upside crossing indicates a buying opportunity. The above chart depicts that, it was ideal to buy the shares of Infosys is in Feb,May,Aug,Sep&Dec.There are a lot of fluctuations in the ROC its implies that the market is volatile. When it is below the zero line, the price is falling its indicates a bearish trend. The greatest fall in the price is in the Apr, July, Oct, Dec 2012 and the highest peak in the price is in the end of Sep 2012. While down side crossing indicates a selling opportunity. In this case we can Sell the Infosys shares is in the beginning of Apr,Mid of july and end of October2012.

WIPRO LTD: Wipro Technologies (Western India Products Limited) is a corporation based in India. Wipro, was founded as a vegetable oil company, but since then has diversified into the information technology, consumer care, lighting, engineering and healthcare businesses. Wipro started as a vegetable oil company in 1947 from an old mill founded by Azim Premji's father. When his father died in 1966, Azim, a graduate in Electrical Engineering from Stanford University, took on the leadership of the company at the age 21. He repositioned it and transformed Wipro (Western India Vegetable Products Ltd) into a consumer goods company that produced hydrogenated cooking oils/fat company, laundry soap, wax and tin containers and later set up Wipro Fluid Power to manufacture hydraulic and pneumatic cylinders in 1975. At that time, it was valued at $2 million. In 1977, when IBM was asked to leave India, Wipro entered the information technology sector. In 1979, Wipro began developing its own computers and in 1981, started selling the finished product. This was the first in a string of products that would make Wipro one of India's first computer makers. The company licensed technology from Sentinel Computers in the United States and began building India's first mini-computers. Wipro hired managers who were computer savvy, and strong on business experience. In 1980 Wipro moved in software development and started developing customized software packages for their hardware customers. This expanded their IT business and subsequently invented the first Indian 8086 chip. Since 1992 Wipro began to grow its roots off shore in United States and by 2000 Wipro Ltd ADRs were listed on the New York Stock ExchangeThe company's revenue grew by 450% from 2002 to 2007. This success has led to higher salaries (wages have been growing by more than 14% per year since 2005), which puts pressure on the company's margins.

Wipro Technologies deals in following businesses

IT Services: Wipro provides complete range of IT Services to the organization. The range of services extends from Enterprise Application Services (CRM, ERP, e-Procurement and SCM) to e-Business solutions. Wipro's enterprise solutions serve a host of industries such as Energy and Utilities, Finance, Telecom, and Media and Entertainment.

Product Engineering Solutions: Wipro is the largest independent provider of R&D services in the world. Using "Extended Engineering" model for leveraging R&D investment and accessing new knowledge and experience across the globe, people and technical infrastructure, Wipro enables firms to introduce new products rapidly.

Technology Infrastructure Service: Wipro's Technology Infrastructure Services (TIS) is the largest Indian IT infrastructure service provider in terms of revenue, people and customers with more than 200 customers in US, Europe, Japan and over 650 customers in India.

Business Process Outsourcing: Wipro provides business process outsourcing services in areas Finance & Accounting, Procurement, HR Services, Loyalty Services and Knowledge Services. In 2002, Wipro acquiring Spectramind and became one of the largest BPO service players.

Consulting Services: Wipro offers services in Business Consulting, Process Consulting, Quality Consulting, and Technology Consulting.

Moving Average Convergence and Divergence (MACD): MACD of Wipro

By the above graph buying opportunities can be identified when the MACD line crosses the Zero line from below. If MACD line moves above the zero line from below, the trend turned bullish and indicates a buying opportunity. In this graph we can find the buying opportunity is in the beginning of Feb,,Jun,Nov &, Mid of Aug2012, when the MACD rises above the signal line, beginning of Feb,,Jun,Nov &, Mid of Aug2012 this can be seen the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum, so it is time to buy and hold the shares of Wipro. By the above graph, selling opportunities can be identified when the MACD line crosses the Zero line from above. The chart depicts that this happened 4 times in the financial year. The MACD line Crosses the zero line is in the month of

End of Feb,Apr beginning of ,July,Oct & Dec these were the selling opportunities in the Wipro stock scrip during the calender year 2012. If the MACD line crosses the zero line from above, the trend can be considered to have bearish trend its indicates a selling opportunity. This we can see in the end of July Oct & Dec12. When the MACD falls below the signal line i.e. in Oct , it is a bearish signal, which indicates that it may be time to sell.

Relative Strength Index(RSI): RSI of Wipro.

The above chart depicts the RSI or Relative Strength Index for different months starting from Jan 2012 to Dec 2012. When the RSI has crossed the 30 line from below to above and is rising, a

buying opportunity is indicated, and we can see this signal is in the month of July & Oct end & Beginning of Aug 12. The RSI line touches 30 line thrice in the calendar year 2012 its in July Oct & Aug, and its crossed 30 line thrice in the month of July,Aug & Oct 2012 its indicating a buying opportunity. The RSI is always between 0 to 100. If the RSI crosses 70 then it is a strong sell signal and if it touches or crosses 30 then it is a strong buy signal. When it has crossed the 70 line from above to below and is falling, a sell signal is indicated. In this case it has touched 70 line Trice in calendar year 2012 that is in Feb,Sep and in beginning of Dec2012 its indicating a selling opportunity.

Rate of Change Indicator(ROC):

ROC of Wipro.

When the ROC line is above the zero line, the price is rising its indicates a bullish trend. The upside crossing indicates a buying opportunity. The above chart depicts that, it was ideal to buy the shares of Infosys is in Feb,May,Aug,Sep&Dec.There are a lot of fluctuations in the ROC its implies that the market is volatile. When it is below the zero line, the price is falling its indicates a bearish trend. The greatest fall in the price is in the Apr, July, Oct, Dec 2012 and the highest peak in the price is in the end of Sep 2012. While down side crossing indicates a selling opportunity. In this case we can Sell the Infosys shares is in the beginning of Apr,Mid of july and end of October2012.

TATA CONSULTANCY SERVICES LTD.,

Tata Consultancy Services Limited (TCS) is a software services and consulting company. It is India's largest provider of information technology and business process outsourcing services. The company is listed on the National Stock Exchange and Bombay Stock Exchange of India. TCS is part of one of India's largest and oldest conglomerates, the Tata Group, which has interests in areas such as energy, telecommunications, financial services, manufacturing, chemicals, engineering, materials, government and healthcare. Tata Consultancy Services was established in the year 1968. TCS is considered a pioneer in the Indian IT industry. Despite unfavorable government regulations, like the License Raj, the company succeeded in establishing the Indian IT Industry. It began as the "Tata Computer Centre", a division of the Tata Group, whose main business was to provide computer services to other group companies. F C Kohli was its first General Manager. The legendary JRD Tata was its first Chairman and was followed by luminaries such as Nani Palkhivala.

One of TCS' first assignments was to provide punch card services to a sister concern, Tata Steel (then TISCO). It later bagged the country's first software project, the Inter-Branch Reconciliation System (IBRS) for the Central Bank of India. It also provided bureau services to Unit Trust of India, thus becoming one of the first companies to offer BPO services. In the early 1970s, TCS started exporting its services. TCS's first international order came from Burroughs, one of the first business computer manufacturers. TCS was assigned to write code for the Burroughs machines for several US-based clients. This experience also helped TCS bag its first onsite project - the Institutional Group & Information Company (IGIC), a data centre for ten banks, which catered to two million customers in the US, assigned TCS the task of maintaining and upgrading its computer systems.

In 1981, TCS set up India's first software research and development center, the Tata Research Development and Design Center (TRDDC). The first client-dedicated offshore development center was set up for Compaq (then Tandem) in 1985.

In 1989, TCS delivered an electronic depository and trading system called SECOM for SIS SegaInterSettle, Switzerland. It was by far the most complex project undertaken by an Indian IT company. TCS followed this up with System X for the Canadian Depository System and also automated the Johannesburg Stock Exchange (JSE). TCS associated with a Swiss partner, TKS Teknosoft, which it later acquired..

In the early 1990s, the Indian IT outsourcing industry grew tremendously due to the Y2K bug and the launch of a unified European currency, Euro. TCS pioneered the factory model for Y2K conversion and developed software tools which automated the conversion process and enabled third-party developers and clients to make use of it.

In 1999, TCS saw outsourcing opportunity in E-Commerce and related solutions and set up its E-Business division with ten people. By 2004, E-Business was contributing half a billion dollars (US) to TCS.

In 2004, TCS became a publicly listed company, much later than its rivals, Infosys, Wipro and Satyam.During 2004, TCS ventured into a new area for an Indian IT services company - Bioinformatics.

Moving Average Convergence and Divergence(MACD): MACD of TCS

Relative Strength Index(RSI): RSI of TCS

Rate of Change Indicator(ROC):

ROC of TCS

 TECH MAHINDRA LTD.,

Tech Mahindra Ltd. (TechM) formerly known as Mahindra British Telecom (MBT) is an Indian Information Technology service provider company.[1] It is a joint venture between Mahindra & Mahindra Limited (M&M) and British Telecommunications plc (BT), UK with M&M(Mahindra and Mahindra) holding 44% and BT holding 39% of the equity. Tech Mahindra has its headquarters at Pune, India. Tech Mahindra has grown rapidly to become the 6th largest software exporter in India (Nasscom, 2007) and 2nd largest Telecom Software Provider in India (Voice & Data, 2007). It has more than 25000 employees. With its core strength in providing Telecom Solutions, Tech Mahindra provides a wide variety of services ranging from IT Strategy and Consulting to Systems Integration, Application

Development & Maintenance, BPO, Infrastructure Management and Product Engineering. Tech Mahindra is ISO 9001:2000 certified and is assessed at SEI-CMMi Level 5 and SEI-PCMMi Level 5. Tech Mahindra is also BS7799 certified across all development centers. Some of its largest clients are BT, AT&T, Alcatel-Lucent & O2. Significant portion of revenues comes from UK, but the company is aggressively expanding in other major economies like US, Continental Europe, ANZ, Canada & Middle East. Its executive management team consists of Vineet Nayyar (Managing Director & CEO), CP Gurnani (President, International Operations), Sanjay Kalra (President, Strategic Initiatives), Rakesh Soni (Chief Operating Officer) and L. Ravichandran (Executive Vice President and COO After the Satyam scandal of 2008-09, Tech Mahindra bid for Satyam Computer Services, and emerged as a top bidder with an offer of Rs 58 a share for a 31 per cent stake in the company, beating a strong rival Larsen & Toubro. After evaluating the bids, the governmentappointed board of Satyam Computer announced on 13 April 2009: "its Board of Directors has selected Venturbay Consultants Private Limited, a subsidiary controlled by Tech Mahindra Limited as the highest bidder to acquire a controlling stake in the Company, subject to the approval of the Hon'ble Company Law Board." Through a subsidiary, it has emerged victorious in Satyam sell-off, a company probably two times its size in number of people.

Tech Mahindra will be paying 17.6 billion Indian rupees (US$354 million) for a 31 percent stake in Satyam, through a preferential issue of equity. It will also acquire another 20 percent equity through a public offer to other Satyam shareholders.The move by Tech Mahindra to acquire a majority stake in Satyam may put off clients from outside the telecommunications industry, according to analysts. But some of Tech Mahindra's key managers have experience in other industries from their previous jobs, Nayyar said.

The Companys subsidiaries include Tech Mahindra (Americas) Inc., Tech Mahindra GmbH, Tech Mahindra (Singapore) Pte. Ltd., Tech Mahindra (R & D Services) Ltd., Tech Mahindra (Thailand ) Ltd. and PT Tech Mahindra Indonesia. In January 2007, the Company acquired iPolicy Networks Private Limited (renamed iPolicy Networks Limited), which develops next generation, carrier-grade integrated network security solutions for enterprise and service providers. In July 2008, Tech Mahindra Limited announced that Tech Mahindra (R&D Services) Inc USA, a wholly owned subsidiary of the Company, had been merged with Tech Mahindra Americas Inc. USA, also a wholly owned subsidiary of the Company.

Tech Mahindra's global footprint spans 24 locations in 14 countries including 11 state-of-theart development centres and 13 sales offices in Americas, Europe, Middle-east, Africa and AsiaPacific.

Asia Pacific: Pune, Mumbai, Bengaluru, Noida, Kolkata, Chandigarh, Chennai, Hyderabad, Singapore, Sydney, Auckland, Bangkok, Taipei, Jakarta, Malaysia

Europe: Milton Keynes, Belfast, Munich, Dsseldorf, Rome, Brussels Americas: New Jersey, Georgia, Toronto, Texas, California Middle East & Africa: Dubai, Cairo,Tel Aviv, Kuwait

Moving Average Convergence and Divergence(MACD): MACD of Tech Mahindra.

1) Relative Strength Index(RSI): RSI of tech Mahindra

2) Rate of Change Indicator(ROC): ROC of tech Mahindra.

CHAPTER-8 FINDINGS The summary of findings relating to each company are given below, In the case of fundamental analysis, the following findings have been made. Infosys ltd:

As being very popular company in the industry its ratio analysis says its liquidity position is high compared to all other companies. Return on assets and EPS was increased for the financial year 2011-12. It is also a one of the unlevered firm in the industry. Wipro ltd:

As per the ratio analysis is concerned it says companys liquidity position is good and EPS also slightly increased. But ROE, P/E Ratio, Return on asset ratio, Receivable turnover ratio is less compare to the financial year 2010-11. Tata consultancy services :

As having a very good history and a very good name in the industry, company is operating well. As per the ratio analysis company having a very good liquidity position and its sales and EPS also in growth rate over the last five years. But ROE, Asset turnover ratio, Receivable turnover ratio is slightly less compared to last years. Tech Mahindra ltd:

According to the interpretation made on the company's financials it is noted that most of the ratio's are indicating good sign of growth, EPS is increasing year on year and hence fundamentally the stock has huge potential and one can buy the stock at current levels. Consolidation of Technical Analysis TECHNICAL INDICATOR BUY SIGNAL SELL SIGNAL

MACD

October and November2008

July 2008 May 2008 and End of March

RSI

October and July 2008 October and end of

2009 May, August and Beginning of November 2008

ROC Infosys Limited:

November 2008

As per the oscillators indication sell signals are more than the buy signals of Infosys limited, so it is advisable to the investors to sell their shares for making speculative profit.

Wipro Limited:

As per the oscillators indication of Wipro Limited Buy signals are more than Sell signals so it is preferable to investors to Buy new share form Wipro limited to get Good Avenue for better investment in share market.

Tata Consultancy Services: In case of TATA Consultancy Service the oscillators are indicating Sell signals more compared to Buy signals so it is advised to the shareholders to sell their shares in the market.

Tech Mahindra Limited: As per the oscillators indication of Tech Mahindra Limited Buy signals are more than Sell signals so it is preferable to investors to Buy new share form Tech Mahindra limited to have better investment opportunity in share market.

CONCLUSION: The objective behind taking over this project is to understand the performance IT stocks of selected companies. Both fundamental and technical analysis helps to identify the attractiveness of the stocks which in turn provides the information in advising the investor for making investment decision. Indian economy indicators like GDP, inflation are strongly influencing the growth and IT industry. In general, it is conclude from the results that the technical indicators can play a useful role in the timing of stock market entry and exits. By applying technical indicators, brokers or investors may enjoy substantial profits. Fundamentals of the company are necessary to judge the growth of the company as well has the government policies, like GDP, inflation, should be kept in mind before buying a stock.

 The varies ratio's EPS , Book Value of the company gives the detailed insight regarding Long term as well as Short term Growth of the company . From the overall observation Infosys, Wipro, TCS best for investment as these companies fundamentally and technically strong, these companies financial health and profitability is quite sound and technical indicators are quite encouraging, so in these companies investor can invest for long term. An investor can invest for long term gain lucrative profit from IT companies after through fundamental and technical analysis. But, simply not from whim.