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IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828

Vol. 2, No.5, October 2013

Fundamental Vs Technical Analysis


(NIFTY Trend Analysis)

Authors Name/s : Archana Mishra

Executive Assistant to COO


Granules India Limited
Hyderabad, Andhra Pradesh
India
archana.nitraipur@gmail.com
Fundamental vs. Technical is the most controversial Fundamental analysis is used mostly for Long term trading as
subject among all the investors and the analysts. This compared to technical analysis which is used for short term
paper does not favor a particular method for trading, but trading. But the charts reflect long term trends too and
clearly defines when Fundamental analysis should be done positional traders take their positions accordingly.
and when technical analysis to be done. The method would
also depend on the type of market one is investing in.

The first half of the paper suggests what factors should be


considered while trading. Also some basic concepts on type
of trading has been mentioned which helps in knowing the
mentality of the trader and thus his trading technique.
Lastly, the paper explains few technical patterns to trade
by taking NIFTY as an example.
\\\\
From the findings it can be said that no particular
technique for trading can be used in isolation. Technical
analysis can only result in short term gains but for large
gains, the fundamental study of industry and company
needs to be done.

Keywords-NIFTY; Fundamental analysis;Technical analysis ; Figure 1: Effectiveness of Fundamental Vs Technical


trend; buy; sell ; stop loss. Analysis
Abbreviations and Acronyms In trading terminology, short-term means swing trading
(days), intraday (hours) and micro trading (minutes).
Fast %K: Fast Stochastic Oscillator. Intermediate term is considered as duration between 7 months
and 1 year. While long term is considered from 1 year and
+DMI: Positive directional movement indicator. above.
-DMI: Negative directional movement indicator. It is my observation that patters on charts can be used to hold
ADX: Average Directional index position for a longer duration as well. Also traders can use
fundamental analysis for selecting the suitable stocks for
investment and thereafter tracking the charts to speculate or
I. INTRODUCTION take advantage of the arbitrage opportunity. Most often the
There always exists an ambiguity in the analyst’s mind fundamentals are reflected in charts via price movements.
concerning tracking the market. Which method to follow,
Fundamental or Technical? Though this question still remains
under grey area, the smart performers got the way out. The II. LITERATURE REVIEW
Fundamental analysts find the intrinsic value of the company , Much literature has been written on how fundamental analysis
but this value already gets reflected in the price movements of and technical analysis can fetch money to the investors.
the stocks (generally top performing stocks) i.e. the lowest Technical analysis can be defined as a method which predicts
price at which the selling or buying happens in an adverse the asset’s price with the help of historical information in the
situation is found to be the intrinsic value of that stock. form of trends and graphs (Roscoe & Howorth, 2009).

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IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 2, No.5, October 2013

Academicians critic this method as no other information is a. Look for the Trend
required other than the price history of the asset. However First check whether the stock has an upward trend or
Menkhof (2010) observed that for a forecasting duration of downward trend. If the trend is upward then take a long
two weeks, technical analysis outperforms the fundamental position. If the trend is downward, then take a short position.
analysis. De Zwart et all (2009) observed that technical
analysis works well for short term trading while fundamental
analysis outperforms technical for long term trading. Zhu &
Zhou (2009) found that the rules of technical trading are
robust for modeling specifications and they outperform the
strategies of fundamental analysis.
Fundamental analysis utilizes the underlying asset information
to predict the future price movement of the very asset (Bodie
et al, 2008).
III. STATEMENT OF THE PROBLEM
Many investors trading in the secondary market and use either b. Look for the Indicators
Fundamental analysis or Technical analysis in isolation, to After analyzing the trend, look for indicators accordingly. If
forecast the future price movement of the underlying asset. the stock has an upward trend, then look for buying indicators
Also lots of critics have mentioned that technical analysis does such as hammer, morning star, morning star doji, bullish
not forecast the price move accurately for long term engulfing etc. If the stock has a downward trend, then look for
investment. sell signals such as hanging man, bearish engulfing, evening
This paper tries to bring forth a systematic way as to at what star, shooting star, shooting star doji etc.
stage the Fundamental analysis should be considered and at
what stage technical analysis proves to be the right method of
forecasting price movement. c. Look for Confirmation Candle
Also, few Technical analysis tools and patterns have been used If the candlestick chart is used, then after the indicator look for
to show that it can be used for long term benefits as well. confirmation candle to occur. For the buy indicator, the
confirmation candle should close higher than the high of the
IV. OBJECTIVE OF THE STUDY
indicator. While for the sell indicators, the confirmation candle
To determine a systematic way of trading using both
Fundamental and Technical Analysis. should close lower than the low of the indicator candle.
Specific Objectives
• Determining a systematic way of trading. d. Look for Volume
• Knowing different type of traders. The confirmation should always be followed by large
• Checking the validity of technical analysis by volume either at the indicator candle or the confirmation
analyzing NIFTY from 2005 to 2013. candle.
• Determine how to calculate future price with the help
of historical prices. e. Verify by using various trading tools
After getting positive indication of the trend from the
V. METHODOLOGY aforementioned steps, take the position (buy or sell) with stop
• Secondary research has been done to determine the loss below the low of confirmation candle for buy positions
different types of traders. and above the high of confirmation for sell positions. Keep the
• Candlesticks EOD (end of the day) chart has been target at 3 periods (for weak trend) or 5 periods (for strong
used to analyze the price movement of NIFTY from trends).
2005 to 2013. Few technical tools like Fast %K and
DMI have been used to forecast the future price.

VI. ANALYSIS AND INTERPRETATION B. TYPES OF TRADING.

A. ONE WAY OF DOING A SUCCESSFUL TRADING a. Scalping


It is advisable for any trader to look for the following Scalping is also known as micro trading. In this type of
indications before taking any position: technique, the traders seek for small profits. They look for buy
indicators (such as hammer, morning star, bullish engulfing
etc.) and sell indicators (such as hanging man, bearish
engulfing, evening star, shooting star, etc.) while avoiding any
unfavorable events happening. Liquidity is provided by them

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IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 2, No.5, October 2013

throughout the day. This trade lasts from seconds to minutes which in turn resulted in the rapid downward price movement.
and indeed requires great trading skills. But again as the world economy revived, NIFTY experienced
an uptrend for almost 2 years (Dec 2008 - Nov 2010),
b. Day Trading
downtrend for 1 year (Dec 2010-2011) and currently NIFTY is
This type of trading is similar to scalping where the positions in uptrend since a year (Jan 2012- Jan 2013).
are not held overnight, except that in day trading positions are Now if we join the two highs and the two lows and extend the
held from minutes to hours. This type of trading too requires trend line, we can expect that as NIFTY is maintaining the two
rapid trading skills and strong discipline. highs at the same level, it will try to achieve the same high in
2013 while support level will be at a higher price than the
c. Momentum Trading previous support level i.e. it will try to move along the
projected trend line. Its next support level can be expected
Here the trader identifies the breakout in the stock and take a
around INR 6338.50.
position at the beginning of the trend. The position is held
until the trend breaks. It includes holding position for several b. Trend over a period of 3 Years
hours to several days. Trend lines, Pivot and Fibonacci
retrenchment are the tools commonly used to check the
breakouts.
d. Swing Trading :
In this type of trading the position is taken for a longer period
(for few days to years). Most of the fundamental traders come
under this category as the company’s fundamental ratios do
not change instantly. This type of trading needs very polished
trading skills and patience. Positions can be taken in stages to
avoid huge losses.
C. NIFTY TREND ANALYSIS

a. Trend over a Period of 5 years

Figure 5: Trend of NIFTY from 2010-2013

From the past three years data of NIFTY (i.e. from 2010 to
2013), it can be seen that from over 01/04/2010 till
09/11/2010, NIFTY was in uptrend, from 12/11/2010 till
22/12/2011 it was in down trend and from 23/12/2011 till
27/12/2012 (today) it is half way the uptrend. The pattern is
still incomplete and NIFTY is expected to be in uptrend for
few more months.
Every country undergoes business cycle which comprises of
one uptrend and one downtrend. Here in case of nifty we can
see that the uptrend and downtrend are approximately of 1
year each. So, it can be expected that the current uptrend will
continue for in 2013.
Figure 4: Trend from 2005-2013 of NIFTY
D. LONG TERM TRADING TECHNIQUES
Before 2003, there was not any significant price movement in
NIFTY an only sideways movement persisted. As being a. Gap Down
depicted from the figure, the first uptrend existed for 5 years
(May 2003-Jan 2008).But the downtrend persisted only for 10
months (Jan 2008-Nov2008) with sharp price decline. This
price decline can be attributed to the global recession which
indeed affected India’s stock market immensely. It should also
be noted that the major chunk of price movement occurs due
to the activities of institutional investors as very meager
percentage of investment is done by the retail investors. So, in
the global recession these institutional investors were hit badly

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IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 2, No.5, October 2013

b. Trendline Breakout

Figure 6: Gap down approach


• Gap Down / up happens when the market opens
lower / higher than the previous day’s close. It is
expected that in few days, the gaps will be covered.
Figure 7: Trend line Breakout approach
But the time duration is not certain.
• In a Swing, two successive tops are joined and
• Buy position can be taken with stop loss and target extended to give Supply Line
being the low of the gap down candle. In this figure
we can see that a Bullish Engulfing is being formed • In a Swing, two Successive bottoms are joined and
with confirmation candle closing above the high of extended to give Demand Line.
the indicator (Bullish Engulfing candle).
• These two parallel lines form Trend lines. Third Test
• This is confirmed by FastK being 48.35 which of these lines is a confirmation.
indicates that buying will continue for some time.
• After two tops and two bottoms are formed, trade can
Also -DMI > +DMI but ADX is above 50 (i.e. 52.52)
be taken up from 3rd top with target as bottom of
which indicates a trend reversal condition and buying
trend line and vice versa.
will start shortly. Both the cases indicate a buying
condition. • If trend line breaks, it should move to the extent of
the pattern range in the direction of the breakout.
• Stop loss is taken 1 unit below the confirmation
candle i.e. INR 4853.24. Target is thus INR 5327.92. • In the current example of NIFTY, Target is calculated
as:

Target = width of the trend line at the breakout


= INR 255.67
So, the prices should move from INR 5509.26 (at the time of
breakout) by INR 255.67 i.e. to INR 5764.93.One can take
position in the direction of breakout (i.e. buy position) and set
Target at INR 5764.93.It can be noted that one should always
look at the buy-sell indicator accompanied with good volume,
FastK, DMI and so forth after identifying the pattern.

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IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 2, No.5, October 2013

c. Head and Shoulder Pattern

Figure 9: Head and Shoulder 2012-13


Here we can see a Head and Shoulder pattern being generated
Figure 8: Head and Shoulder approach from August 2012 but till Dec 2012 the last shoulder is yet to
• As being seen in the figure, this pattern generated consolidate. If the last shoulder consolidates at the neckline,
from Sept. 2011 till Jan 2010.Generally in the long then we can expect breakout at 3% in upward direction and
target price to be the height of the head from neckline.
term trends, the breakout happens at 3% above the
neckline.
E. SHORT TERM TRADING STRATEGIES
• In this case the neckline of the last shoulder was INR
4621.07. So 3% above it i.e. INR 4763.87 would be a. Triangle Breakout
the breakout. In this figure it is clearly visible that the
breakout did happen just around this price.

• Now after the breakout, move in the direction of


breakout and look for buy signals. In our case we can
see just below the breakout line, a morning star Doji
is formed. This is confirmed by a confirmation candle
which closes above the high of Doji. Also the volume
at the confirmation candle is high with +DMI > -DMI
and ADX reasonable enough to enter the market.

• The height of the head from the neckline is


considered as the target from the breakout point. Stop
loss should be 1 Point below the neckline of the last
shoulder.

Figure 10: Triangle breakout approach

• Here we can see a descending triangle being formed


with breakout happening at almost 85% of the
triangle formation.

• It is always advisable to take positions in the


direction of the breakout. Breakout happened in the
downward direction and we can also see that just at
the top before the breakout, an evening star being
formed which is confirmed by the confirmation
candle closing lower than the low of the indicator

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IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 2, No.5, October 2013

(evening star).The position (short sell) position can as INR 5091.50 - INR 4600 = INR 491.5. Thus the
be taken after the confirmation candle. target would be INR 5583 (i.e. INR 5091.50 + INR
491.5 ).
• We can also see that the confirmation candle shows
good volume, Fastk shows that it is an overbought
c. Gann Buy
condition, which in turn indicates that the selling will
start in the coming days. Also we can see –DMI >
+DMI which is an indication of selling position and
ADX greater than 25 which shows that the trend is
good (not very strong).

• The stop loss can be kept 1 unit above the line of


triangle near the breakout position i.e. at INR
5271.57. The target for this position is the base of the
triangle.

Base of the Triangle = INR 5497.92- INR 5170.43


= INR 327.49
So, Nifty will move down by INR 327.49 from the
breakout position. So the target price is INR 4842.94.
It can be seen that the actual movement of NIFTY
just went slightly below this target price.
It can be noted that taking positions via technical
analysis do not assure no loss position but certainly it
minimizes the loss. Figure 12: Gann Buy approach
• Gann buy can be seen in long term and short term
trading.
b. ABC Pattern for Buy
• In this case a small Gann buy pattern can be seen. An
uptrend followed by a small 5 rest periods. The rest
period should have lower highs and lower lows.

• Breakout is considered when it closes above the


previous high after rest.

• Target can be kept trailing with stop loss.

Figure 11: ABC Pattern


• ABC pattern is also known as the reversal pattern.

• Buy Pattern ABC looks like ‘W’. It has a Bottom A,


Correction B, Retest Bottom C.

• In this pattern position is taken in the direction of the


breakout.The vertical height of the last leg of “W” is
considered as the target. The height can be calculated

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IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 2, No.5, October 2013

d. Flag breakout with a confirmation candle closing higher


than the high of the indicator.

• Stop loss is taken 1 unit lower than the lower


end of Flag i.e. INR 5213.86

• Target is considered as the height of the


rally i.e. INR 297.29 (INR 5459.03-INR
5131.74). So the prices are expected to reach
at least INR 5756.32.

VII. CONCLUSION
There cannot be a perfect way of trading. It all depends on the
individual’s comfort level in using the technical analysis tools,
or analyzing the fundamentals to take positions. MACD can be
used instead of DMI, RSI can be used instead of FastK, Pivot
points, Fibonacci Retracements etc can be used, but it is very
essential that any forced interpretation should not be done.
Also event study is very essential to do intraday trading. But
Figure 13: Flag Breakout Buy most of the retail traders either do not have enough time or
knowledge to take an informed decision .So, Technical charts
• Flag is a Continuation Swing Pattern. After comes handy in such cases as most of the events are already
a rally, flag is formed. Flag should have taken into consideration by the price movements.
lower high and lower lows.

• Breakout happens when it closes higher than


the previous high. Position (in this case buy)
is taken in the direction of the breakout. In
the figure we can observe that a Bullish
Engulfing is formed at the end of the flag,

REFERENCES
Yu-Hon Lui and David Mole (1998). The use of Fundamental
and Technical analysis by Foreign exchange dealers: Hongkong
evidence, Journal of International Money and Finance, 17 (1998) 535-545.
http://www.icharts.in/
http://www.moneycontrol.com/

AUTHORS PROFILE
I, pursued my B.tech from National Institute of
Technology, Raipur (Chhattishgarh),India. Post which I did PGDM
from Narsee Monjee Institute of Management Studies, Hyderabad,
Andhra Pradesh, India.My specializaion being Finance major and
Marketing as minor.
Currently am working in Granules India Limited as an executive
Assistant to Chief Operating Office.

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