TECHNICAL ANALYSIS

TECHNICAL ANALYSIS
There are two approaches to security analysis;
1. Fundamental
2. Technical
Technical analysis is a process of
identifying trend and trend reversals at earlier
stage to formulate the buying and selling strategy.
It is the study of market action for the purpose of
forecasting future price trends.
It will give information regarding the most
appropriate time to buy and to sell a share

A technical analysist believes that share

price is determined by the demand and
supply forces in the market
He concentrate on the movement of share
prices(examines the past share price
movements and make accurate prediction of
future share prices)
Technical analysis is the name given to
forecasting techniques that utilise historical
share price data
The rationale behind this analysis is that
share price behaviour repeats itself over
time and analysts attempt to derive methods
to predict this repetition

BASIC PRINCIPLES OF TECHNICAL ANALYSIS

The market value of security is related to

demand and supply factors in the market
There are both rational and irrational factors
which surround the demand and supply of
securities
Security prices behave in a manner that their
movement is continous in a particular
direction for some length of time
Trends in stock prices have been seen to
change according to the demand and supply
factors

The shifts of demand and supply can be

detected through charts prepared specially
to show market action
Patterns which is projected by charts record
price movements and these are used by the
analyst to make forecasts about the
movement of the share prices in future

TECHNICAL TOOLS

Dow theory

Bars and line charts(Price patterns)

Short selling

Volume of trading

Moving averages

Oscillators

Elliot wave theory

Breadth of the market

1.DOW THEORY

Technical analysis has its roots in the Dow

theory
It was formulated by Charles H Dow
The theory was presented in a series of
editorials in the Wall streey Journal in USA
during 1900 1902

Charles Dow formulated a hypothesis that the

stock market does not move on a random
basis but is influenced by three distinct
cyclical trends that guide its direction.
According to Dow theory,the market has
three movements and these movements are
simultaneous in nature. They are;
Primary movements(primary trend)
Secondary reactions(secondary trend)
Minor movements(minor trend)

Primary movement: It is the long range cycle that

carries the entire market up or down. This is the
long term trend in the market and is considered to
be more important movement which may last for
one or two years

Secondary reactions: It act as the restraining force

on the primary movement. These are in the
opposite direction to the primary movement and it
last only for a short while(3 weeks into 3 months)

Minor movements: These are the day to day

fluctuations in the market. These are not
significant and have no analytical value as they are
of short duration. Also known as oscillations

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Secondary trend

Primary trend

Days

2.PRICE CHARTS
Charting represents a key activity in technical
analysis because graphical representation is the
very basis of technical analysis. The security
prices are charted on each day. The important
four prices are charted they are highest
price,lowest price,opening price,closing price

Line chart(closing chart)

Bar chart
Japaneese candle stick chart(white,black and
Doji candle sticks)

3.PRICE PATTERNS

Support and resistance patterns:

Support occurs when share price is falling. It exists at a
considerable price and prevents further fall in the price level.
Resistance occurs when price moves upwards. It is exerted to
prevent the ongoing rise in the share price

Reversal patterns:

Head and shoulder formation

Inverse head and shoulder formation

Continuation patterns

Triangles

Flags

pennants

4.VOLUME OF TRADE
It is used as a technical indicator to find out
the direction of overall market. Technical
analyst used volume as an excellent method
of confirming the trend. Volume expands
along with the bull market and narrows down
in the bear market.
Large volume with rise in price indicates bull
market
Large volume with fall in price indicates bear
market

5.MOVING AVERAGE
Moving averages are used to study the movement
of the market as well as the individual scrip
price.
These are mathematical indicators of the
underlying trend of the price movement.
The moving average indicates the underlying trend
in the scrip. The period of average determines
the period of trend that is being identified. For
identifying short term trend,10 day to 30 day
moving averages are used,medium term 50 to
125 and for long term trend 200 day moving
averages are used

6.OSCILLATORS
These are the mathematical indicators calculated with the help of the
closing price data. They help to identify the overbought and oversold
conditions and also the possibility of trend reversals.They are
analyzed along with price charts. A technician will use oscillators
when the charts are not showing a definite trend in either direction.

Rate of change indicator

CURRENT PRICE

ROC = .

_ 1

PRICE n PERIOD AGO

Relative strength index (RSI) = 100 [100/1+RS]

AVERAGE GAIN PER DAY

RS = ..
AVERAGE LOSS PER DAY

7.SHORT SALES/SHORT
INTEREST
Short sales refers to the selling of shares in the
hope of purchasing it at a lower price in
future to make profits. This sellers are
known as short sellers usually bears.
The short positions of scripts are published in
the business newspapers. The volume of
short sales in the market can be used as a
market indicator.

6. MOMENTUM

Momentum is perhaps the simplest and easiest oscillator

to understand and use; it is the measurement of the speed
or velocity of price changes.
"Market momentum is measured by continually taking
price differences for a fixed time interval. To construct a
10-day momentum line, simply subtract the closing price
10 days ago from the last closing price. This positive or
negative value is then plotted around a zero line. The
formula for momentum is:
M = V Vx Where V is the latest price, Vx is the closing
price x number of days ago."
Momentum measures the rate of the rise or fall in stock
prices.

8.ELLIOT WAVE THEORY

Formulated by Ralph Elliot

It was formulated in 1934 after analysing 75
years of stock price movements and charts
He concluded from the study that the market
movement was quite orderly and followed a
pattern of waves.
The waves are the result of buying and
selling impulses emerging from the demand
and supply pressures on the market

Movement in a particular direction can be represented by

5 ditinct waves 3 impulse waves and 2
corrective(reaction) waves

This theory is based on the principle that action is

followed by reaction

It is used for predicting the future price changes and in

deciding the timing of investment

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3
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9. BREADTH OF THE MARKET

By comparing the number of shares which

advanced and the number of shares that
declined during a period, the trend of the
market can be ascertained
The cumulative difference between advances
and declines is called breadth of the market