Technical Analysis

Ranpreet Kaur

Ranpreet Kaur

Technical Analysis Introduction

Two major types of analysis for predicting the performance of a companys stock
fundamental technical

Technical
looks for peaks, bottoms, trends, patterns, and other factors affecting a stocks price movement makes a buy/sell decision based on those factors

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Explanation
Technical analysis is the attempt to forecast stock prices on the basis of market-derived data. Technical analysis is the science or skill of forecasting of the future movements of the price using the past movements and data. Technicians (also known as quantitative analysts or chartists) usually look at price, volume and psychological indicators over time. They are looking for trends and patterns in the data that 3 indicate future price movements.

What is Technical Analysis?

Method of evaluating securities by analyzing statistics generated by Market activity Past Prices Volume Not try to focus or measure intrinsic value Instead look for patterns and indicators on charts to determine future performance

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Assumptions/basic premises
Market prices-Demand and supply Demand and supply influenced by a variety of factors. Technicians believe that securities move in very predictable trends and patterns. Trends continue until something happens to change the trend(Shift in demand and Supply) Shift in demand and Supply can be detected with the help of charts of market actions. Until that change takes place, price levels are predictable. Due to Persistence of trends and patterns analysis of past data can be used to predict future.
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Difference between Fundamental and technical Analysis

Meaning Objectives and goals Prediction/Time horizon Value Movements Data Used Parties

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Applications
To predict market performance To analyze the trend To analyze the affect of demand and supply forces To make trading/investment decision To understand the affect of new information(flucuations)

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Charting the Market

Chartists use Dow theory ,bar charts, candlestick, or point and figure charts to look for patterns which may indicate future price movements. Basic Concepts Persistence of trends Relationship between volume and trends Support and resistance level(Rise/fall)

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Dow Theory
The Dow theory on stock price movement is a form of technical analysis. The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (1851 1902), journalist, founder and first editor of the Wall Street Journal and co-founder of Dow Jones and Company. Dow believed that the stock market as a whole was a reliable measure of overall business conditions within the economy and that by analyzing the overall market, one could accurately gauge those conditions and identify the direction of major market trends and the likely direction of individual stocks.
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Explanation
(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 few days, weeks to months . (3) The "short swing" or minor movement varies with opinion are random on day to day(daily Fluctuations)from hours to a month or more..

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Contin
Stock prices quickly incorporate new information as soon as it becomes available. Trends are confined by volume Trends exist until definitive signals prove that they have ended

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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 frame.

Line charts do not provide visual information of the trading range for the 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.

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Bar Charts
The bar chart expands on the line chart by adding several more key pieces of 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 dash The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. 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).
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The Bar Chart

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The Bar Chart (Continued)

Some of the most popular type of charts Advantage is that it show the high, low, open and close for each day

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The Bar Chart (Continued)

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Candle Stick Charting

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Candlestick Charts
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to period's trading range. The difference comes in the formation the bar chart, the candlestick also has a thin vertical line showing the of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. A major problem with the candlestick color configuration, however, is that different sites use different standards; therefore, it is important to understand the candlestick configuration used at the chart site you are working with. There are two 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 OR GREEN . 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 days 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. Ranpreet Kaur 19

Candle Stick Charting (Continued)

Been around for hundreds of years Often referred to as Japanese Candles because the Japanese would use them to analyze the price of rice contracts Similar to bar chart, but uses color to show if stock was up (green) or down (red) over the day More than 20 patterns are used by technicians for candlestick charting. Some of the most popular include the following.
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Candle Stick Charting (Continued)

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Candle Stick Charting (Continued)

Green is an example of a bullish pattern, the stock opened at (or near) its low and closed near its high Red is an example of a bearish pattern. The stock opened at (or near) its high and dropped substantially to close near its low
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Candle Stick Charting (Continued)

Top example is called a hammer and is a bullish pattern only if it occurs after the stock price has dropped for several days.
Theory is that pattern indicates a reversal

Bottom is an example of a star, typically indicating a reversal and/or indecision.

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Point and Figure Chart

Somewhat rare Plots day-to-day increases and declines in price. A rising stack of XXXXs represents increases A rising stack of OOOOs represents decreases. Typically used for intraday charting If used for multi-day study, only closing prices will be used

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Point and Figure Charts

The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the stock, which can distort traders' views of the price trends. These types of charts also try to neutralize Ranpreet Kaur has on chart analysis. 25 the skewing effect that time

Contin..
point and figure chart consists a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. On most charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock. The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signaling a trend change.
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Point and Figure Chart

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Point and Figure Chart (continued)

Helps to filter out less-significant price movements allowing analyst to focus on most important trends Used to keep track of emerging price patterns
No time dimension

Two attributes affecting the appearance of a point & figure chart

Box size Reversal amount
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Drawing Point & Figure Charts

Point & Figure charts are independent of time. An X represents an up move. An O represents a down move. The Box Size is the number of points needed to make an X or O. The Reversal is the price change needed to recognize a change in direction. Typically, P&F charts use a 1point box and a 3-point reversal.

X X X XO X XO XO O XO O X

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Using the Moving Average

Shows the average value of a securitys price over a period of time
Using compared or used in conjunction see discussion below)

The most commonly used averages are of 20,30,50, 100 and 200 days
The longer the time span, the less sensitive the moving average to daily price changes Moving averages are used to emphasize the direction of a trend and smooth out price and volume fluctuations (noise).
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Moving Average

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Moving Averages (Continued)

What do the different days mean?
20 days - choppy line. It isn't the most accurate, but is probably the most useful for short term traders. 30 day - similar to 20 day but provides a bit more certainty for the trend. 50 day - moving averages provide a much less volatile, smooth line. This can be used to detect somewhat longer term trends. 100 day - similar to the 50 day, it is less volatile, and one of the most widely used for long term trends. 200 day - even less volatile, more of a rolling chart or smooth line. It doesn't react to quick movements in the Ranpreet Kaurused. stock price therefore it is rarely

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Relative Strength Index (RSI)

A comparison between the days a stock finishes up against the days it finishes down. Based on the assumption that some securities rise rapidly during the bull phase but fall slowly during the bear phase. The shorter the number of days used to calculate the more volatile

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Example
Year Avg price of A 40 50 65 80 Avg Price of IT Industry 30 32 38 45 Avg price of mkt 200 210 230 280 Avg Avg A/Avg IT A/Avg Mkt 1.33 1.56 1.71 1.78 0.20 0.24 0.28 0.29 Avg It Ind/Avg Mkt 0.15 0.15 0.17 0.16

2008 2009 2010 2011

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Technical Indicators
Breath Indicators -The Advances-decline Line - New Highs and lows -Volume Sentiment Indicators -Short Interest ratio - Put/call Ratio -Trin Statistic - Open Interest in the futures and option Segments
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Systematic Investment Plan

Concept Systematic Investment Plan or commonly known as SIP is one of the important concept of investing. The concept of Systematic Investment plan is not new. Recurring deposits, Insurance Premium payments are also a form of Systematic Investment Plan. With respect to Mutual Funds, it is a regular/recurring investment in Mutual Fund Schemes. In general terms, Systematic Investment Plan means certain amount invested in a mutual fund scheme every month/every quarter. An SIP means commitment of investing a fixed amount every month. For example Mr X invest Rs 1000 every month in ABC Mutual Fund for a period of 15 years.
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Definition
It is defined as This is a plan where investors make regular, equal payments into a mutual fund. By using a systematic investment plan (SIP), investors are benefitting from the long-term advantages of rupee cost averaging and the convenience of saving regularly without taking any actions except the initial setup of the SIP.

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How an SIP works

Example-Let's say Investor investment is 1,000. When the Market price of shares fall, the investor benefits by purchasing more units; and is protected by purchasing less when the price rises. Thus the average cost of units is always closer to the lower end

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Example-Let's say Investor investment is 1,000.

Thus the average cost of units is always closer to the lower end Within six months, you would have 5,89.45 units by investing just 1,000 every month.
Date
Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1

NAV
10 10.5 11 9.5 9 11.5

Approx number of units you will get at 1000

100 95.23 90.90 105.26 111.11 86.95
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Benefits of Systematic Investment Plan

There are two major benefits of Systematic Investment Plan. 1) Financial Goal 2) Rupee Cost Averaging

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1) Financial Goal
Investors have financial goals and. It differ from person to person based on their income levels, requirement. It can be buying a car, a flat, a LED television etc. Example Mr X wants to buy a car after 3 years and the cost of the car is Rs 5,00,000. It means within a period of 36 months, he has to accumulate Rs 5,00,000 in order to buy the car. Every month if he invest Rs 12,500 in a Systematic investment plan ( Assuming a return of 8% per annum) he can accumulate Rs 5,04,567 at the end of 3rd year.

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2) Rupee Cost Averaging

Rupee Cost Averaging means investing a fixed sum at regular intervals. The concept behind this process of investing is fixed sum of money can be invested regularly and over time it averages out the costs.

From a Systematic Investment Plan perspective, If you have to buy units of a mutual fund by following rupee cost averaging, the fixed amount of money will fetch more units when the net asset value of the units are down and less units when the net asset value of the units are up.

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Contin..
Investors should not worry about the daily fluctuations and focus on long term returns. Rupee Cost Averaging take care of investment from the volatility of the market since it smoothen out ups and downs.

Generally discipline is a basic requirement to achieve any goal, similarly discipline in investing is very important. Through Systematic Investment Plan you can be disciplined and achieve your goals.

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