Chartered Market

Technician Level 1
AuthorsKirkpatrick, Charles D. and Dahlquist, Julie
R
Book NameTechnical Analysis - The Complete Resource
for Financial Market Technicians

Definition:
The art of Technical Analysis- for it is an ARTis to identify
Trend changes at an early stage and to
maintain an
Investment position until the weight of the
evidence indicates
That the trend has reversed..(page 9)

TREND LINESJoin Extreme Points

Higher Top and Higher Bottom also

called as Higher Highs and Higher
Lows

Lower Top and Lower Bottom also

called as Lower Highs and Lower
Lows

Trends develops from

Price and Price develops from
SUPPLY AND DEMAND

Example of Fruit market---Bhav Bhagwan Hai

Trend can be of varied Lengths, one hour trend, one

week trend, one month trend, one year trend, five year
trend and so on..

People look trends as per their requirements/trading

styles, or interest

But whatever may be the trend length, the method of

identifying the trend remains the same

This characteristics of trend to act same in any period

is called as FRACTAL nature of trends. Fractal means
trends are analyzed in the same way, in any time
frame(refer pg 15)

Check Trends of different time frames to get overview

Types of Trends:

Primary Trend measured in months or

years
Secondary or Intermediate Trend
measured in weeks or months
Short term Trend measured in days
Intraday Trend measured in minutes
or hours

Assumptions of Technical
Analysis: Pg 17

Price is determined by interaction of

demand and supply
Price discounts everything (Averages)
Prices are non random (Means Random
walk theory is false)
History repeats itself
Patterns are fractal
Emotions are affected by earlier Emotions
(ex- Bubbles and Panics, saw in 2007-08)

Father of Technical AnalysisMr. Charles Dow (18511992)

On July 3, 1884 Dow publishes first index,

total of 11 stocks, 9 railroads and 2 industrials
stocks
Later on focused more on Industrials
Later on May 26, 1896 launched DOW JONES
INDUSTRIAL AVERAGE (DJIA), in the Wall
Street Journal, which covered 12 stocks
DJIA now have 30 stocks (remains price
weighted)
Known for his Rail road average and
Industrials average (refer pg 26)

Chap 4 (pg 33.)

Random Walk Theory- Says Prices

are Random, and it opposes Technical's
Efficient Market Hypothesis
Everything is already priced in the
market, but no one can beat the
market
DRAWDOWNS- Period of successive
losses are referred as Drawdowns. For
example market is down 3%, 4% and
3% continuously 3 days or more than

Criticisms of Technical Analysis:

(Pg No 50 bottom)

Technical only for short term trader, and not

long term: This is false, as long term prices are
also developed by Peoples sentiments. Ex, HUL
head and shoulder, Satyam head and shoulder
Technical will fail if all investors practice it:
This is been around from more than 100 years, and
still going well. Even fundamental principles of
Diversification did not work in 2008 crises, when all
non correlated assets came down. Of course some
technical principles may not work after some time,
it has to be modified, but technical's have proved
to be working till date, with proper risk
management tools.
Most technical rules require subjective
judgment: Even fundamentals one analyst will
give buy and another sell or hold. So nothing can

Chapter 5, (pg. 57)

For using technical analysis, you need:

Easy access, Fungibility, sufficient
liquidity, and continuous trading
Fungibility means if an asset is traded
on 2 or more exchanges, you can buy
on 1 exchange and sell on another
(so if you buy in BSE, and sell in NSE,
its fine)
Read the rest of the theory about cash,
forwards, futures, options etc

Three types of players:

pg (68 bottom)

Informed Players- These players interpret new

information rationally and the market price is
adjusted to its equilibrium. Ex. Hedge fund
managers, Insiders, etc
Noise Players- It is a term given by Fisher Black
and means random activity around the equilibrium
price. These are also called as uninformed players
or public players, and most of the mutual fund
managers, pension fund managers or technical
analyst, or normal retail investors belong to this
category.
Liquidity Players- Who invests or sells huge
quantity may be due to need of funds, or due to
compulsion, ex LIC in India, or any big Mutual

How is market measured ?

Market is measured by Index, which gives

the overall view
Index may comprise of stocks from
various sectors, to highlight the overall
economy
Three major types of index construction:
Price
weighted
average,
Market
capitalization weighted average and
Equally weighted which is also called as
Unweighted average.

Price weighted average- The average of daily

change in price is taken, and average is found out.
Then the average is compared with the previous
days average, and percentage change is seen.
Very easy to calculate, but the problem is that high
priced stock have more influence in index, than
low priced stock. Ex. Dow Jones Industrial Average
Market capitalization weighted average- In
this method, not only prices but also outstanding
shares is taken of. It is calculated by multiplying
prices in to number of outstanding shares, and
then average is taken. Ex- S&P 500, NYSE,
NASDAQ, etc
Also, some index follows Free Float market cap
method.

Free float means only those shares which are

traded in the market are taken in to calculation.
Those shares which are locked up with
promoters, or employees, etc are not counted as
they are not available for trading.
Hence, free float market cap is calculated by
multiplying price of share in to free float
outstanding shares.
However, even in this method stock with higher
market cap and higher prices affect the index
calculation inappropriately.
Equally Weighted Average- Take total
percentage change in each stock divided by total
no of stocks. Ex, Value line averages

Chapter 6 Dow Theory (Read it full)

Charles H. Dow is known as the Father of

Modern day Technical Analysis
He is the founder and first editor of the WALL
STREET Journal.
Charles Dow did not write Dow Theory. He
used to regularly write articles in his journal,
which later were organized and put together to
be stated as Dow Theory.
The term DOW THEORY was first used by A.C
Nelson in his writings.
Robert Rhea wrote a book on Dow theory and
wrote about 3 main hypothesis on Dow theory.

3 Hypothesis of Dow Theory:

The Primary Trend is inviolate: It

means that the primary or long term trend
cannot be manipulated. Though minor or
secondary trend may be manipulated,
Primary trend or long term trend cannot be
manipulated.
The averages discount everything: By
studying the average of the sector, one
can find out the possible future direction,
as it discounts everything.
Dow Theory is not infallible: It means
that Dow Theory works and it is not wrong.

Dow Theory Theorems:

Ideal market picture consists of Uptrend, Top,

Downtrend and Bottom.
Economic rationale should be used to explain stock
market action- For example two averages should
confirm each other.
Dow theory says that prices TREND. It is one of the
ways how technical analyst can profit. RIDE the TREND.
First one is Primary trend which can be big upward trend
or downward trend which is also known as Bull run or
Bear run.
Second one is Secondary Trend, or Secondary Reaction,
which is an important DECLINE in a primary bull market,
or RALLY in a primary bear market. These are from 3
weeks to as many months.
Final one is the minor movements which are daily
fluctuations and nothing much.

Dow
introduced
the
concept
of
CONFIRMATION. It means if you saw a
breakout in Industrials, it should be followed
by Breakout in Rail road average soon.
New modern day confirmation is seen by
looking at Standard & Poors 500 and Russell
2000. When these 2 indexes confirm each
other, it confirms the Primary Trend.
Volume must confirm the trend. Market in
downtrend must have high volumes when
goes down, and less volumes when rise.
Similarly, when market is in uptrend, it must
have high volumes when it goes up, and low
volumes when correct.

Criticisms of Dow Theory:

Delay in knowing Price Reversal:

Investor would act after rather than
before at market tops or bottoms, as
theory says that trend reversal not
confirmed unless confirmation comes.
Trends not defined: Different trends
do not have any definitive period
assigned, and so confusion. Its difficult
to determine trend, as sometimes
secondary trend beginning would look
like Primary trend beginning.

Chapter 8: Market Strength

MARKET MAI KITNA DUM HAI,
YA
KITNA GUM HAI

What is Oscillator ?

Oscillator are indicators shown at the bottom of the price

chart, which shows the overbought and oversold zone.

The oscillators moves mostly

overbought and oversold region.

So some oscillators have a particular range in which it

moves, and some are open ended.

Normally its time to sell once oscillator reaches

overbought region, and its time to buy when oscillator
reaches oversold region.

in

range

of

the

Concept of Divergence:

When the trend is not confirmed with the indicator or

oscillator, we call this as concept of Divergence.

If the price is going up, and the indicator is showing

downside, it is negative divergence, and it means the
price can reverse from top now.

If the price is going down, and the indicator is not

going down, it is positive divergence, and it means
the price can reverse from bottom now.

You can also check volumes with the trend, whether

volumes showing upward strength when prices are
moving up and vice versa
.

Another
form
of
Reversal
is
called
Positive Reversal and
Negative Reversal as
said
by
Constance
Brown.
Positive
Reversal
occurs when the price is
not making new low,
but the oscillator makes
a new low (Bullish)
Negative
Reversal
occurs when the price is
not making new high,
but oscillator is making
new high (Bearish)

POSITIVE DIVERGENCE

Market Breadth Indicators

Advance means a stock have increased

today with respect to yesterdays close, or
today's closing is higher than previous days
close.
Decline means a stock have decreased
today with respect to yesterdays close, or
todays closing is lower than previous days
close.
Unchanged means the stock is at same
levels as yesterdays closing.
We will see various indicators which uses the
above points to measure the strength of the
market as a whole.

Concept of Double Negative Divergence

When you see 2 consecutive Negative breadth

divergences, with respect to market average, it is called
DOUBLE NEGATIVE divergence, according to James
Hughes.

BREADTH
DIFFERENCES
INDICATORS

The Breadth Line or Advance-Decline Line

Breadth Line is the cumulative sum of the advance

minus declines.
Suppose DAY 1, out of 100 we have 80 Advance and 20
Decline, Breadth line will start with 60. Next day suppose,
Advance is 90 and Decline is 10, we have 80. So, breadth line
will be formed by adding the previous 60 and 80 = 140.
So breadth line will increase when Advances are more than
Declines, and it will decrease when Declines are more than
Advances.
It can be used as a confirmation with the market averages or
index. If the index is rising, it should be confirmed with rise in
Breadth Line.
If suppose the advance decline line is falling, but the stock
market index/average is rising, it means that the rally is
being taken by only few stocks, and majority of stocks are
declining, so it shows a divergence.
Take only Breadth of operating stocks like Nifty50, Nifty 100,
BSE 100, etc

Advance Decline Line

Moving Average:

You have to calculate a certain day

moving average of both Index or
Market and Breadth Line.
Lets say you calculate a 30 day moving
average of both index and breadth line,
so if the index and breadth line are
above their moving averages, the
market is a buy, and vice versa.

Advance-Decline Line to its 32 week Simple

Moving Average (SMA)

Ned Davis research founded this concept in

US.
It uses a ratio of NYSE Advance Decline Line
to its 32 week SMA.
So, ratio is = NYSE ADV DEC LINE
32 WEEK SMA
When the ratio is greater than 1.04,
markets have gone up by 19.3% p.a
When the ratio is less than 0.97, markets
have declined by around 11.2% p.a

Haurlan Index

Used Daily advance minus declines data,

and on the data used EMA of various time
periods like 3 days, 20 days, 200 days.
3 days was used for minor trend, 20 days
for intermediate, and 200 day for primary
trend.
He had certain prefixed levels to buy and
sell.
It was + / - 200 for 20 day M.avg, and +/
- 550 for 200 day M.avg. So whenever
EMA crossed above the upper limit, buy
was generated, and vice versa.

Concept of Equity Line:

An equity line is the graph

which shows your profit and
loss made in trading.
When you make profits, the
percentage increase is shown
and the line goes up, and
vice versa
It starts with a zero line, that
is where you start trading,
and it would go up or down
depending
on
your
profitability of trades
It can be of any duration, 1
day, 5 day, 1 month, 12
months, etc
It shows the success of your
trading system, and below
zero line means you are in
loss.

PROFITABLE EQUITY LINE

McClellan Oscillator

Found by Sherman and Marian

McClellan in 1969.
It also uses data of Advance Decline.
After taking data, difference between 2
EMA is taken, that is 19 day and 39
day.
The oscillator moves from + 100/+150
and 100/-150, where the first one is
overbought, and second one is
oversold.

McClellan Ratio Adjusted Oscillator:

In the last oscillator we take only advance decline, so it

can be a influenced if number of issues traded is changed.
So, to take care of this problem, this ratio adjusted
oscillator was found.
Hence, this ratio is the advance decline divided by total
no issues.
This ratio is then multiplied by 1000 to make it easier to
read.
This is then smoothened with EMA of 19 and 39 days as
done in earlier one, with +/- 35 being the overbought and
oversold levels.
If the EMA crosses the oversold level from above, sell was
given, and if it crosses overbought from bottom, buy was
given, as McClellan observed that after reaching
overbought region, EMA can correct a bit and again break
the top, and buy gets generated.

McClellan Summation Index

It is calculated by taking summation of figures

got by earlier McClellan oscillator.
Here he observed the Overbought and oversold
region as 2000 to 0 levels, and 1000 acting as
neutral levels.
The same index when taken for McClellan Ratio
adjusted Index, they got +500 and -500 as
overbought and oversold regions respectively.
Failure to go above overbought shows, market is
topping, and reversal expected.

Plurality Index

It takes 25 day sum of the Absolute

figures of Advances Declines
Since it takes the absolute change, the
number is always positive.
Stock market have tendency to fall
rapidly and rise slowly, hence higher
Absolute number means market is
nearing bottom, and low number means
market is nearing top, and reversal may
follow soon.

Absolute Breadth Index

Just like McClellan uses Net difference between

advances and decline divided by total issues
traded, in Absolute Breadth Index, we take
Absolute Difference of Advance Decline
divided by total issues traded.
Hence, the index is always a positive number.

Unchanged Issues Index

It is the ratio of Unchanged stocks to total

number of stocks traded.
It just gives you an indication of directional
movement when the number of unchanged
declines, and nothing more.

BREADTH RATIOS

Advance Decline Ratio

This ratio is determined by dividing the

number of Advances / by number of
Declines.

Breath Thrust

A THRUST is a deviation which is huge,

from being a normal, and which signals a
beginning of a new trend.
According to Martin Zweig It is calculated
by taking moving average of No of
advances Divided by Total no of stocks, so
buy and sell signals are given when M.avg
crosses certain points up and down.

UP AND DOWN
VOLUME INDICATOR

The Arms Index

It is developed by Richard Arms, Jr.

It is also known as TRIN or MKDS.
It measures the relative volume in advancing stocks
versus declining stocks.
When huge volume in declining stocks occurs, markets
are near bottom or will see bottom soon, and good
volumes in advancing stocks is a healthy sign for
markets.
Arms index is calculated by two ratios, that is taking
advance/declines DIVIDED by up volume/down volume.
When ARMS index is high, it means no of advancing
stocks are with low volumes, and have no strength.
So Arms index above 1 is bearish signal, and below 1 is
bullish.

Ninety Percent
Downside Days (NPDD)

Ninety percent downside days occur

when on a particular day, the
percentage
of
downside
volume
exceeds the total of upside and
downside
volume
by
90%
and
percentage of downside points exceeds
the total of gained points and lost
points by 90%.

10 to 1 Up volume days and

9 to 1 Down volume days

Daily Upside volume is more than 10 times

downside volume in 10 to 1 Up Volume
Days
Daily Downside volume is more than 9
times the upside volume in 9 to 1 Down
Volume Days
After this both occurs, market normally is
up in the coming 6 months
Hence, this both indicator shows bottom is
around, and bounce can now be expected

NEW HIGH AND

NEW LOW
INDICATOR

New High Versus New

Lows

Very useful and easy to use indicator

Buy when number of new highs
exceeds number of new lows
Sell when number of new lows exceeds
number of new highs
They generally peak before the market
peaks, and can give you negative
divergence signals at the top

High Low Logic Index

It takes in to account lesser of the

following two ratios: The number of
weekly new highs to total issues OR
The number of weekly new lows to
total issues
Low index levels tend to suggest a
trending market
It means either a less number of new
highs or new lows are being registered

Hindenburg Omen

It signals a market reversal downside

and has various factors to be seen:
52 week highs and lows are greater
than 2.2% of total issues
McClellan oscillator is negative
New highs cannot be more than two
times the number of new lows
Confirmation occurs

USING
MOVING AVERAGES

One way is to see the number of stocks above

or below their 30 week moving averages
It says, that when the percentage of stocks
above their 30 week moving average, reaches
above 70% of the total stocks, the market is
overbought, and now ready for correction
In simple words, Out of 100 stocks, 70 stocks
are trading above their 30 day moving
average its time for correction
Similarly, Out of 100 stocks, when less than 30
stocks are below their 30 day moving average,
the market is at bottom, and now it may go
up.

The 80/60 Rule:

When the percentage of stocks above

30 day moving average is greater than
80%, and when it declines below 60%,
it is seen that it will go down to 30%
So, a serious decline is coming in
markets if this happens, and this have
been successful in the past.

Chapter 9.
Temporal Patterns And Cycles

Mr. EDWARD DEWEY----FOUNDER OF CYCLES

Periods Longer than

Four Years

Kondratieff Waves, or KWaves

Nicolas Kondratieff, developed Kondratieff waves which
is a 50 to 60 year cycle
These waves arise due to change in innovation in
product, services, technology, new business forms
A new K wave in an economy results in next global
leadership of that economy
K waves may start with a big war
Each K wave effects the structure of the world economy,
e.g. Technology in US, and outsourcing in India which
leads to 60% GDP to service sector in India
Rise and fall of world powers depends on the K wave
After 1930 depression in US, 50-60 years hence comes
to 1980-90, so this should have been a downfall , but US
did well in late 1990s
So a concept of Double K waves came in to the picture,
which sees wave getting over by 2026 in USA

34 Year Historical Cycles

The 34 Year cycle is split in to 17 years each

First 17 years is dormancy, i.e. consolidation,
followed by next 17 years which is a bull run

Decennial Pattern

Edgar smith presented a concept of 10 year

cycle, which is also referred as 120 month cycle
Pattern which is seen every 10 years is called as
Decennial Pattern
He also found that years ending with 3, 7 and 10
are often down years (bears), and years ending
with 5, 8 and 9 are advancing years (bulls)
Fifth year advance, that is market going up in
years ending with 5, have been successful 100%
in last 100 years in US stock markets

Periods of
Four Years or Less

Four Year or Presidential Cycle

Wesley Mitchell founded 40 month cycle

period, which is approx 4 year cycle

He discovered that US economy suffered

recession every 4 years from 1796 to 1923

Today 4 year cycle, taken from price bottom

to price bottom, is widely accepted globally

All the cycles are measured from Bottom to

Bottom

Some analysts says that since the Presidential election

are every 4 years, the cycle is effected every 4 years

This is often therefore called as Presidential Cycle

The 4 year cycle is globally seen, and accepted

In the US Presidential Cycle, markets have rose in the

last 2 years of administration, and have been less bullish
in the first 2 years of President cycle

The reason may be that the Political party wants to be in

good light in its last 2 years of operations

Also the ruling party tries to stimulate the economy by

reducing interest rates, which again is boon for markets

Seasonal Patterns

Interest rates have seasonal tendency

Long term Interest Rates on bond market in US, have seen a

seasonal pattern

Interest Rates usually Decline in summer, and tend to Rise in

winter

In Oil, best performance months are July to September, and

weakest is usually October

Concept of Entry date/ Exit date trading, which means seasonal

entry can be made at particular date and exited at particular date,
example Paint stocks in India

SELL IN MAY AND GO AWAY, is famous seasonal tendency, which

says that you should sell your holdings from May to September,
and enter back in October till April

January Signals

January Barometer

January Barometer says that if the

market is up in January, the rest of the
year would be bullish

So, its said that As the Standard and

Poors goes in January, so goes the
year.

Normally all other global markets tend

to perform well, if Jan month is good.

January Effect

January Effect says that normally in

January small cap stocks tend to
outperform the market

It is said to get the tax benefits, investor

tend to sell stocks in Nov-Dec, and buy it
in Jan

EVENT TRADING

Event trading may be done on some news

announcement, results announcement, or
any holiday occurrence
There is a pattern called as Independence
Day Pattern
It is seen that stock market performance
is bullish 5 days before the Independence
day, and bearish 5 days after the
Independence day
However, 6th day is a strong market day
Also 2 weeks before the Thanks giving day
is positive

Chapter 10. Flow of Funds

More money or liquidity in market = Shares go

up
Less money or liquidity in market = Shares go
down as people sell shares to get liquidity
When Markets are not good, funds go in to
money market mutual fund, and when markets
are good funds flow from money market mutual
fund to stock markets
Hence its important to see how much funds are
available in money market mutual fund
If there is more money available in money
market mutual fund, it means markets may
move up in some time, and if there is less
money available in money market mutual
fund, it means market may decline as
liquidity is not available

Concept of Margin Debt- It is the amount of funds

that customers at brokerage houses borrow for
putting in to stock markets
It shows that lot of small people are borrowing funds
to put it in markets
It is said that when the margin debt increases
considerably, its time for market being at top, and
correction may come
Concept of Secondary offerings- It means the
company which is already listed comes out with more
issue of shares to the public, which means the total
no of outstanding shares would increase
So, when the secondary offering is done, the no of
shares in the market increase, so that means SUPPLY
increases, so when supply increase prices go down

LIQUID Assets- are those which can be sold

and converted in to cash easily, like stocks, U.S
Treasuries, bank deposits, money market mutual
fund, etc
And non liquid means those which cannot be
easily sold and converted in to cash easily like
real estate, pension funds, etc
When household liquidity is high, it is
good for stock markets and vice versa
Household may be corporates or government
So, a ratio of Liquid financial assets to
Total assets show how Liquid Households
are,
means
how
easily
can
their
investments can be converted in to cash
So higher liquid assets- good for markets

Money Supply
Measurement by
FED- It measures
the money supply
by taking in to
account M1 and M2
M1 has most liquid
assets in the
financial system
M2 has other less
liquid savings
assets

Most important to see is M2, as it

shows that how much money apart
from stock market is parked in this
liquid assets
When M2 is measured relative to the
total market value of stocks, it tells us
the percentage of money available
outside stock market
A high percentage means, there is
plenty money outside stock market,
which potentially can come in to stock
markets in coming times

Bank Loans- When demand for loans increases in an

economy, the interest rates may go up, as there is huge
demand for money
It is seen that when the interest rates rises, stock
market tends to decline
And when the interest rates declines, stock markets
tend to perform good
Long term interest rates and bond prices have inverse
relationship
When Long term interest rates rises, bond prices
fall, and when long term interest rates fall, bond
prices rises
When Long term interest rates increase, stock market
falls, and vice versa
When bond prices makes bottom, stock prices also do,
but bond prices give reversal at top before stock prices,
and this may be a good reversal sign

Money Velocity- The velocity of money

means how fast money turns over in the
economy
It is calculated by taking Personal
Income / M2
So, it shows that when personal income
to M2 goes down, it means the money is
now flowing towards stock markets and
vice versa
So, when it comes down, it means, less
money is blocked in M2 (savings
deposits) and now markets may move
up

Misery Index- Economist Arthur Okum

designed the Misery Index in 1960s when
inflation was a concern
Inflation
when
coupled
with
unemployment is known as Stagflation
So, Misery index is an universal index
which can be calculated by adding up the
countrys
inflation
and
unemployment rates together
This index is now modified to American
Misery Index, which also adds Interest
rates
along
with
Inflation
and
Unemployment to give better picture

The Federal Reserve system, also known as The

Fed is the independent federal organization that
determines and implements Monetary Policy for
United States
Fed has 3 tools to control money supply- a)
Changing the amount of reserves banks are
required to hold, b) Changing the discount
rate (repo), or c) Buying and selling US
Treasury and G sec through its open market
operations
The third tool is the most widely used by
Federal Reserve
When FED purchases T bills from markets, money
flows in to markets, and when FED sells T bills in
markets, money is sucked out and no liquidity is
available.
Hence markets tends to go up when FED buys

Federal Reserve Valuation Model

It is also called as Greenspan model

This model gives a general indication of what

the FED thinks about the markets, whether it
is overvalued or undervalued

It is a valuation model that determines

whether the stock market is too high or low
based on the stock market earnings yield
relative to yield on the ten year US note

Three Steps and a Stumble:

Developed by Technical Analyst Edson Gould to
check FED tightening credit.
It says that whenever the FED Reserve raises either
federal funds target rate, margin requirements or
reserve requirements three consecutive times
without a decline, the stock market is likely to suffer
a substantial or big setback
It means market is on verge of a top, and now
correction will be big
This rule have been successful as well
Similarly there is a concept called Two Tumbles
and a Jump, developed by Fosbacks
It looks for two consecutive declines in the rates,
and this means market would go up now

Banks borrow for short term and lend for

long term
So they want long term interest rates to
rise and short term interest rates to be
lower
When short term interest rates are higher
than the long term interest rates, the
yield curve becomes inverted
This inverted yield curve is not only bad
for banks, but also predicts markets
going down for the next 2 to 6 quarters

Chapter 11
onwards Kilpatrick
Part 2 PPT